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Michael John Casamento; Executive Vice President of Finance and Chief Financial Officer; Amcor PLC
Ronald Stephen Delia; MD, CEO & Executive Director; Amcor plc
Tracey Whitehead; Head of International Relations; Amcor PLC
Adam Samuelson; Equity Analyst; Goldman Sachs Group, Inc., Research Division
Antonio Longo; Analyst; JPMorgan Chase
Brook Campbell-Crawford; Head of Cyclical Industries Research; Barrenjoey Markets Pty Limited, Research Division
Cameron McDonald; MD and Head of Research; my
Daniel Kang; Research Analyst; CLSA Limited, Research Division
Ghansham Panjabi; Senior Research Analyst; Robert W. Baird
Jakob Çakarnis; Vice President, Equity Research; Jarden Australia Pty Limited, Research Division
John Purtell; Analyst; Macquarie Research
Keith Chau; Basic Industrial Analyst; MST Financial Services Pty Limited, Research Division
Michael Andrew Roxland; Research Analyst; Truist Securities, Inc. , Research Division
Richard Johnson; Equity Analyst; Jefferies LLC, Research Division
Samuel Seow; Vice-president; Citigroup Inc. , Research Division
Unidentified Analyst
Operator
Good afternoon. My name is Krista, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Amcor’s First Half and Second Quarter 2024 Results Conference Call. (Operator Instructions) Thank you.I would now like to turn the conference over to Tracey Whitehead, Head of Investor Relations. Tracey, you may begin your conference.
Tracey Whitehead
Thank you, operator, and thank you all for participating in Amcor’s first half and second quarter fiscal 2024 earnings call. Today we have Ron Delia, our president and CEO; and Michael Casamento, Chief Financial Officer. Before I go any further, let me point out a few things. On our website, amcor. com, in the Investors section, you will find today’s press release and presentation, which we will discuss on this call. Please note that we will also discuss non-GAAP monetary measures and similar reconciliations to be made in the press release and filing. Comments will also come with forward-looking statements based on management’s existing ideals and assumptions. The timing slide of today’s presentation lists several points that may cause the long-term effects to differ from existing estimates. And it’s conceivable to consult Amcor’s filings with the SEC, adding our filings on Forms 10-K and 10-Q for more details. Operator’s Instructions) On that note, Ron.
Ronald Esteban Delia
Thank you, Tracey, and thank you all for joining Michael and I today to discuss Amcor’s Q2 and FY24 results. We’ll start with some ready comments before moving on to the questions and answers. As Slide 3 shows, our focus on protection remains unwavering and our significant commitment to providing a safe and healthy work environment continues to be rewarded. 70% of our sites have had no injuries in the last 12 months or more, and we have seen a 17% relief in injuries compared to the first part of fiscal 2023. Safety is deeply ingrained in Amcor’s culture and is the number 1 priority for our global groups. Let’s move on to our key messages on Slide 4. First, our reported earnings on a constant basis for the second quarter and the first quarter were slightly better than the expectations we made in October. And improved running capital functionality helped drive a year-over-year build of more than $100 million in adjusted loose cash flow. Secondly, our financial functionality during the phase was supported by a strong and proactive approach to rate control. This helped us offset second quarter volumes that were consistent with lower-than-expected percentage issues. Our groups around the world continue to respond proactively by doing wonderful jobs by adopting new freight movements. Third, our first-half monetary functionality puts us on track to achieve our full-year guidance, which we reaffirmed today. Compared to the first part, we believe that the second quarter was the lowest point for earnings expansion and we continue to expect the adjusted EPS expansion trajectory to improve in the second part of the fiscal year. 24, particularly with a mid-digit adjusted lead expansion during the second half. fourth trimester. Our confidence is supported by our improved earnings leverage, as well as a number of known factors, which we will discuss in more detail later, that will provide earnings advantages throughout the second half of the year. exercise. Additionally, our volume trajectory sometimes improved throughout January, reinforcing our confidence that the second quarter marked the low point for volumes. Finally, we remain confident in our long-term price creation and expansion strategy and our ability to generate a strong earnings mix. expansion and a hot and developing dividend. The strength of our market positions, execution capabilities and consistent capital allocation frameworks continue to provide a compelling investment case for Amcor. Let’s move on to slide five for a summary of our monetary results. Organic sales at consistent exchange rates fell 8% during the quarter and 10% during the quarter. Price/mix advantages were around 1% in the first half and were strong in the second quarter, reflecting the moderation in inflation, which translated into relief in price movements for our groups. Volumes fell 9% in the first half and 10% in the December quarter. Second quarter volumes were slightly lower than our expectations for October, with the main difference being an acceleration in inventory reduction, specifically in December. Adjusted EBIT for the first half and December quarter was $709 million and $352 million, respectively, slightly above our expectations. On a comparable and consistent monetary basis, declines of approximately 6% in consistent periods reflect lower volumes, partly offset by the benefits of decisive and proactive cost movements taken across our businesses in reaction to the dynamics of market conversion. In total, our moves reduced prices by more than $200 million in the first half compared to last year, with relief of more than $130 million achieved in the second quarter. Adjusted EPS were $0. 313 and $0. 157, consistent with the percentage, respectively, and also slightly above our previous expectations. For either period, this would constitute 10% on a comparable basis, reflecting the decline in adjusted EBIT and the unfavorable upside effect in line with interest expense. Improving running capital remains a priority and helped generate flexible cash flow during the first part, long before the same constant period. last year and in line with our expectations. And we returned approximately $390 million of cash to shareholders in the first tranche through a combination of percentage buybacks and a growing dividend, which increased to $0. 12 five percent. Now I’ll turn it over to Michael to add a little more color to the monetary data. and our perspectives.
Michael John Casamento
Thanks, Ron, and hello, everyone. Beginning with the Flexibles segment on Slide 6. Year-to-date, net sales on a comparable constant currency basis were 8% lower, which largely reflects weaker volumes. Volumes were down 9%, mainly due to lower market and customer demand and accelerated destocking.In North America, first half net sales declined at high single-digit rates driven by lower volumes in categories, including meat, liquid beverage and health care, which more than offset growth in the condiments, snacks and confectionery categories.In Europe, net sales declined at low double-digit rates driven by lower volumes, partly offset by price/mix benefits. Volumes were lower in snacks, coffee, health care and in unconverted film and foil. This was partly offset by higher confectionary volumes.Across the Asian region, net sales were modestly higher than the prior year. Volume growth in Thailand, India and China helped offset lower volumes in the Southeast Asian health care business. In Latin America, net sales declined at high single-digit rates driven by lower volumes mainly in Chile and Mexico, partly offset by growth in Brazil.First half adjusted EBIT was 5% lower than last year on a comparable constant currency basis as a result of lower volumes, partly offset by favorable price/mix benefits and ongoing actions taken to lower costs increased productivity and strengthen operating cost performance. EBIT margin of 12.6% was comparable to prior year despite a 50-basis-point unfavorable comparison related to the sale of our Russian business last year.For the December quarter, reported sales were down 9% on a comparable constant currency basis, and price/mix was relatively neutral compared with last year. Volumes were down 10% in the quarter, reflecting continued soft market and customer demand. Destocking also continued through the quarter accelerating in the month of December and was particularly impactful in health care where volumes were lower than last year by double digits.In response to market dynamics, the business continued to take decisive cost actions, focusing on operating efficiencies and delivering procurement benefits, limiting discretionary spend and advancing structural cost reduction initiatives. This resulted in another quarter of strong performance, partly offsetting weaker volumes with adjusted EBIT declining 5% on a comparable constant currency basis.Turning to Rigid Packaging on Slide 7. Year-to-date net sales on a comparable constant currency basis were 8% lower, with price/mix contributing around 1%. Volumes were down 9% for the first half, with lower volumes in North America, partly offset by growth in Latin America. In North America, overall beverage volumes for the first half were 14% lower than last year, including a 13% reduction in hot fill beverage container volumes due to lower consumer and customer demand and elevated levels of destocking through the first half.In Latin America, volumes grew mid-single-digit rates with new business wins in Brazil, Peru and Colombia, partly offsetting lower volumes in Mexico. Adjusted EBIT was 9% lower than last year on a comparable basis, reflecting lower volumes, partly offset by price/mix benefits and favorable cost performance.For the December quarter, net sales were also down 10% on a comparable constant currency basis. Price/mix contributed around 2%, and volumes were down 12% for the quarter, reflecting lower volumes in North America, partly offset by new business wins, driving mid-single-digit growth in Latin America.Overall, North American beverage volumes were 19% lower for the quarter, reflecting a high single-digit decline from destocking as some of our customers took action to significantly reduce inventories in both hot fill and cold field categories. Volumes were also impacted in the high single-digit range by incrementally softer consumer and customer demand in Amcor’s key end markets.In addition, we had net new business wins in the hot fill category, which partly offset a loss in cold fill as we elected not to retain volumes that fell short of our profitability threshold. Second quarter adjusted EBIT declined by 12% and reflecting lower volumes, partly offset by benefits from continuing to proactively manage costs, including realizing labor savings by taking more plant shutdown days to better align capacity with market dynamics as well as driving procurement benefits.Moving to cash and the balance sheet on Slide 8. As Ron covered earlier, adjusted free cash flow for the half came in more than $100 million ahead of last year. With our teams continuing to make progress against our priority to reduce inventories and driving capital increments across the board.Our financial profile remains solid with leverage at 3.4x, broadly in line with the first quarter and where we expected it to be as we cycle through temporary increases in working capital and given trailing 12-month EBITDA now fully reflects the divestiture of our Russian business. Looking ahead, we continue to expect leverage will decrease to approximately 3x at the end of our fiscal year, supported by seasonally stronger earnings and cash flow in the second half.This brings me to our outlook on Slide 9. As Ron mentioned earlier, we are reaffirming our full year guidance for adjusted EPS of $0.67 to $0.71 per share. We continue to expect the underlying business to contribute organic earnings growth in the plus or minus low single-digit range, with share repurchases adding a benefit of approximately 2%, and favorable currency translation contributing a benefit of up to 2%. This is offset by a negative impact of approximately 3% related to the sale of our Russian business in December ’22, the impact of which was all in the first half.We also expect a negative impact of approximately 6% from higher interest and tax expense, which takes into account our estimate for full year net interest expense of between $315 million to $330 million, which is modestly lower than where we were forecasting last quarter. Our full year tax rate expectations are unchanged in the range of 18% to 20%.In relation to phasing, we believe that December quarter marks the low point in terms of Amcor’s earnings growth and volume declines. January volumes have improved following heavy customer destocking in December. And while we expect market dynamics to remain volatile in the near term, our volume trajectory is expected to continue to improve through the balance of the year. We anticipate Q3 volumes will be down in the mid-single-digit range, and expect fourth quarter volume declines in the low single-digit range.Taking into account offsetting benefits from cost reduction initiatives and a reduced headwind from higher interest costs compared with last year, we expect third quarter adjusted EPS to be down mid-single digits on a comparable constant currency basis. And for the fourth quarter, we expect adjusted EPS to increase by mid-single digits over the prior year. And Ron will talk through the factors that support this return to growth shortly.Adjusted free cash flow continues to trend better than last year as we expected and we are again reaffirming our guidance range of $850 million to $950 million for our fiscal ’24 full year, which will be up to $100 million higher compared with last year. Our plan to repurchase at least $70 million of Amcor shares in ’24 is unchanged, and we continue to pursue value-creating M&A opportunities.With that, I’ll hand back to Ron.
Ronald Stephen Delia
Thanks Michael. Before opening the call for questions, I need to provide more insight into our outlook for the remainder of the year, as well as a reminder of the key elements that make up our long-term style for generating shareholder price. ’24. As I mentioned earlier and as highlighted on Slide 10, we are all aware of a number of key points that give us confidence that our earnings trajectory will improve in the second part of the fiscal year. First, situations requiring profits similar to the sale of our business in Russia are now completely behind us, eliminating an unfavorable basis of comparison that affected reported profits for the entire calendar year 2023. Second, although prices Of interest at the moment are As expected to be consistent with last year, the magnitude of the headwinds posed by the immediate rate increases over the past 18 months is beginning to diminish as we move into the rest of the year. Third, we are enjoying the benefits of structural load savings of $35 million right now, with another $15 million more to benefit in FY25. These savings are primarily similar to plant closures at as we optimize our global footprint. And fourth, earnings leverage has improved thanks to our commitment to taking proactive steps to align our charge design with conversion market dynamics. This includes getting rid of shifts meant to trim the workforce over time, managing purchasing, and keeping tight control on discretionary spending. In total, over the past 12 months we have reduced our workforce by more than 2,000 full-time employees, or approximately 5% of our workforce, and more than 1,000 of those discounts were eliminated during the first part of the year. From a beneficial point of view, current prices decreased by more than $200 million in the first part of FY24 compared to the previous period. And more than $100 million of that fee relief was delivered in the second quarter, nearly double the roughly $70 million delivered in the first quarter. The result has been and will continue to be the increased profit leverage we have achieved since the start of this financial year despite particularly reduced volumes. As Michael commented, we had a better start in January and we are confident that the second quarter marks the lowest point. for profit expansion and volume decline and with our overall trajectory, it is expected to improve as we move into the rest of the year. In summary, we are confident that positive earnings effects at various known points will lead to further momentum in the second part of the fiscal year. ’24, adding mid-single-digit earnings expansion in our fiscal fourth quarter. Importantly, we do not expect the customer to request that the environment improve and we will continue to be proactive in taking steps to ensure that our charge base and pricing methods reflect market situations. In this way, throughout the fiscal year, those known points will serve as vital building blocks to help restore the functionality of our business style. generating value for shareholders, through a combination of strong earnings expansion and an attractive, growing dividend, which recently returned 5%. The starting point for price creation will be business expansion. And over the past 10 years, we have averaged an 8% expansion in adjusted earnings in line with participation. As you can see on this slide, we have several factors driving margin growth expansion, and each of them provides significant long-term bullish opportunities. We will also continue to strengthen our ability to grow in those spaces by expanding capital expenditures over a consistent multi-year period and completing strategic mergers and acquisitions. As volumes normalize and improve, those spaces that sometimes develop faster and are more consistent with pricing will account for a greater proportion of sales. that contribute increasingly to profits. And as we return to a more normalized volume expansion environment, this combination of an improved mix and the proactive steps we have taken to optimize our charge base positions Amcor to once again generate strong earnings expansion, consistent with our long history. Slide 12, we are performing well in meeting the earnings and cash flow expectations we set for FY24. Our teams are being proactive as market dynamics evolve and focusing on controllables to remove prices additional, if any. We are targeting single-digit earnings expansion in the fourth quarter and our commitment to our long-term expansion and pricing strategy positions us well to execute our style of pricing for our shareholders when the volume environment normalizes. . Consistent with the initial remarks, we are now in a position to move on to the questions.
Operator
(Operator Instructions) The first comes from Baird’s Ghansham Punjabi lineage.
Ghansham Punjabi
I’m guessing, first of all, there’s the decline in volumes across the portfolio, which lately turns out to be around 6 quarters of negative volumes year-over-year. Obviously, you’re not alone, but there’s been a bit of discussion and your visitor has been talking all the way to stores about an increase in promotion spending. I’m just curious if you’re starting to see direct science on this. And if so, in which categories: food, beverages, customer staples, etc. ?
Ronald Esteban Delia
Yes. Listen, Ghansham, thanks for the question. Perhaps you would simply mention significant volume declines first and then return to your query about symptoms of promotions or more competitive sales activities by customers. First of all, I think that when there is overlap, we don’t really see any difference between each other. So that would be the first thing I would say. I think our overall decline of 10% in the quarter is about 2% worse than what we expected at the beginning of the quarter. So we weren’t expecting a very different result. Things played out according to initial expectations in October and November, where we were a little below single digits. In December we saw a really accelerated destocking, which explains the slow weakness that we more than compensated for to generate profits. So that’s the starting point. January, as we mentioned, was much better. We have noticed an improvement in the maximum of our activities compared to the first part. And that really supports our view that the second quarter was the lowest point and actually supports our expectations for the third and fourth quarters. And maybe just to go ahead and circle it a little bit in terms of looking at the decline factor, roughly some of our 10% decline, more or less in single digits, was similar to the impact on the market. It is a mix of customer demand, visitor composition and segments. And about a portion, or some other single-digit contribution, came from inventory reduction. And practically the same thing happens in the flexible and rigid packaging segments. By geography, emerging markets are sometimes stable. Asia is up slightly and Latin America is down slightly. But it was in the evolved markets where we were weak, with Europe being a little weaker than North America. And another way to think about it, to summarize it, is the 10% drop in the quarter, which exceeds 50%. The percentage of this decrease came from our global healthcare business and our North American beverage business, both of which experienced the largest stock reduction. So we had a focus on influencing those two parts of the company. On the other hand, there are categories developing in certain regions, confectionery in North America and Europe, condiments, cheeses and coffee in North America and Latin America, beverages in Latin America. So there are places where the business is developing. Now, coming to your point, i. e. about the symptoms of promotional activity or conversion pricing strategies, there is a lot of talk about it. As you point out, many clients tell us this, either publicly or privately. And we are seeing a small birth of this phenomenon in the market. But to be honest, we have not yet noticed this being a tailwind for our volume performance. And our outlook also does not suggest, mean or assume that we will see any markets gain advantage at this time. So let’s wait and see if the pendulum swings a bit between value and volume.
Ghansham Panjabi
Okay. Terrific. And just for my follow-up on that, on the health care destocking, is that just a function of having been destocked? Are you seeing it now versus a little bit later than the other categories? Or is there something unique to the time line associated with the health care destocking?
Ronald Esteban Delia
Yeah. Look, I think it’s a little unique. In reality, the markets have been weak, but the weakness in fitness care is actually a story of destocking, and it has been significant in both medical device packaging and pharmaceutical packaging. And this reduction in physical care stocks has been widespread and constant throughout the world. In fact, it is a story that spans several years. The healthcare sector adventure has taken several years, which is ironic because it is one of the most consistent sectors we have had in a long time, and we would expect this point of consistency to be recovered. But in the last few years, years, even going back to COVID, where we had really limited demand and then very strong demand upon reopening, but with severe supply constraints and shortages of raw curtains in products ranging from specialty sheets to resins and papers . So we’re coming off what would have been our FY22, which actually led to consumers stockpiling to secure a supply in our FY23. And we saw normal volume in FY23 when consumers really strengthened their source chains and de-risked their source chains through construction stock. We now have consumers with huge inventories and a diversity of products, from medical gloves to device packaging and pharmaceuticals. packaging, etc. And we started to see a destocking, which actually started in the first quarter. We reported this last quarter, but we accelerated especially in the second quarter. And we expect this to continue into the third quarter and possibly into the fourth quarter. So it’s a slightly later step. I think in other categories we have seen signs that the destocking has possibly eased and we are getting closer to the end of the beginning. I think in the realm of fitness this happened at a later stage.
Operator
Next up is JPMorgan’s Anthony Longo.
Antonio Longo
Just a quick inquiry about load savings. So, in the first part of the year, the volume is going down as you saw in the first part of the year and specifically in the last quarter, but I’d like to hear your feedback in January and beyond. But I just need to get an idea of what the long-term charge savings outlook will look like and how this environment of declining volumes with margin growth will continue to be managed. So far, is there anything else you can accomplish?
Michael John Casamento
Yes, sure. I’ll take that one, Anthony. So look, on the cost out, there’s two things that we’re really doing here. So the first is in response to the soften underlying volume demand. So on that front, we’ve clearly taken proactive and aggressive approaches to the cost flexing and really focusing down on productivity gains and discretionary spend. So for the first half, we took out more than $200 million in cost in relation to that, and it accelerated through the half. In the first quarter, it was about $70 million, in the second quarter, kind of $130 million. And we’re achieving that by taking out really flexing the cost base in relation to the volume and demand environment.So we’re able to take out entire shifts. We’re able to take out labor, reduce over time. We’re driving the procurement benefits, particularly in this low demand environment and really tightening up on the discretionary spend. So that will continue as we continue to flex through the volumes. But obviously, as volumes improve, some of that cost, and it’s difficult to say, but some of that cost will go back in as we build the shift patterns up. But we wouldn’t expect that to be linear. I think you’ll see us have better leverage there as we work through the second half because of the way we’ve learned to operate with some of that lower cost and improve the efficiencies there. So that’s really on the operating cost side.And then secondly, we are taking cost out structurally. So in parallel, we’re advancing the structural cost reduction initiatives that we’ve talked about on the back of the divested Russia earnings. That’s mainly plant closures, and it’s around up to 10 across the globe and in both segments. To date, we’ve announced 7 closures and 2 restructures. And recently, actually, 2 to 3 of those plants have closed. So we did start to see a little bit of benefit from that program as we exited the first half. But we’re right on track to deliver the $35 million benefit in the second half from that program and then a further $15 million in FY ’25. So really, that’s the approach we’ve taken to the cost-out agenda and part of it is structural and part of it’s ongoing.
Operator
The following is from George Staphos of Bank of America.
Unidentified Analyst
This is (inaudible) George’s house. So, from there, can you tell to what extent those savings in transience charges can in the end be converted into permanent, structural prices that are removed from the business?
Michael John Casamento
Look, it’s hard to say, as I just mentioned. What I can tell you is that things like purchases there will generate consistent and permanent savings. The constant prices we got rid of on the constant basis will be consistent with the constant ones. And the structural program is evidently made up of consistent and permanent savings that stand out from the activity. As for the flexibility of the charging base, again, it really depends on the volume. We believe that today we are much more effective. We have been able to act proactively to reduce the company’s overall workforce compared to last year. We have gotten rid of almost 2,000 heads from the company and about 1,000 since June. In total, this represents around 5% of the workforce. As volumes come back online, as I mentioned, we’ll have to develop some of that, but it won’t be linear. And we will manage this very closely. And we believe that today we have intelligent leverage and that we are more efficient. And so let’s see that we will continue to have influence as we move forward in this area. And in fact, that will contribute to the long-term margin gains that we typically get from 20 to 30 core issues per year in our business. So it deserves to see that process to contribute to it in the long term.
Unidentified Analyst
It is ok. They gave it to me. And I appreciate all the color in that and in the volumes. But I guess you said the volumes were a bit lower than you had anticipated. So what is it that in the end reassures you about the direction of the year?Is that charging component and some of the other points you talked about?
Ronald Esteban Delia
Yes. Look, there are several things. Firstly, in relation to volumes, we do not foresee a rebound in intake or any significant improvement in the market. But we expect the destocking to reduce as we move further down the segment. I mean, in fact, part of the stock reduction that we saw in December was a year-end optimization, which won’t be repeated, right? We will see continued stock reduction in the health and beverage sector in North America. But in other categories we are starting to see symptoms of a slowdown in inventory reduction. So that’s one thing. January was also much bigger. So we had a much better January compared to the first part from a volume perspective. And that’s what we think – we’re pretty confident in our ability to generate expansion – volume assumptions for the rest of the year. And then in terms of benefits, as Michael mentioned, let’s continue – we have a number of known benefits, which I mentioned in my opening comments, but it all starts with greater leverage on operating prices, because we have reduced many of the prices of the business and as volumes come back, we are not going to raise that charge one by one, more buildup and momentum on the structural charges side. Which, again, will expand at the moment thanks to the benefits related to factory closures and others. So there are several elements that give us confidence in the earnings improvement trajectory right now, but none of them have to do with genuine, dramatic improvement at the customer level.
Operator
The next one comes from Citi’s Sam Seow bloodline.
Samuel Seow
But he has talked about some of his volumes being lower than expected. I’m just thinking about your balance sheet, I’m not saying that’s going to happen, but I’m just looking to get a sense of what kind of fourth-quarter volumes would leave it out of its diversity for the total year, assuming all the other things are taken into account. They are the same.
Ronald Esteban Delia
Sam, are you here?
Samuel Seow
Yes. Can you hear me?
Ronald Esteban Delia
You broke there for a second. He interrupted directly on a component of his question, which deals with fourth-quarter volumes.
Samuel Seow
Just check around to get an idea of what kind of fourth-quarter volumes would leave you out of your diversity for the entire year, assuming all else being equal.
Michael John Casamento
You mean the indicative of $0. 67 to $0. 71, right, Sam?
Samuel Seow
No, no, that 3x leverage.
Ronald Esteban Delia
It is ok. Listen, we’re confident in the company’s cash flow trajectory in the second half of the year. Therefore, we are going to reduce our debt to about 3 times by the end of June. We are quite convinced that this is the way we are following here. In terms of volumes, expectations for volumes supporting EBIT expansion in the current part and EBITDA delivery in the current part are a half-digit decline in the third quarter and a small single-digit decline in the fourth quarter. There’s a little bit of total diversity around that. And the effect on EBITDA and therefore on debt is quite broad. Therefore, we do not expect volumes to be a major factor preventing us from achieving around 3 rounds until the end of June.
Samuel Seow
Okay. And I guess just following on — I mean, looking forward, generally, you have lower cash flow in the first half due to seasonality. I think if you do finish at that 3 turns like your guidance, would you expect to be outside of your range again in first half ’25? Is that the new norm now going forward?
Michael John Casamento
Look, I think just to answer your question on this point. If you take the existing scenario right now, it’s a pretty unique time because two points are literally impacting leverage right now. We’re at 3. 4x, which is precisely what we would expect at this time of year in this scenario. And this is really due to the divestment of activities in Russia. We are now reaping all the benefits in 12 months. So from now on we won’t do any more tricks with this. We are moving more toward a broader earnings and growth trajectory. This is approximately 0. 2 turns of leverage. And then the key point is really high levels of current capital. So we’ve seen higher working capital levels over the last 12 to 18 months. We have begun to achieve it. And the groups have done a smart job over the last 12 months of inventory, where we got rid of approximately $500 million of inventory from the system. And that, in fact, contributed to the advance of money in the first part of this year, where we are already 100 million dollars ahead of last year. But we are still affected. We don’t get the full benefits of this stock market relief because our debts are much smaller. So in this environment, where we have noticed weak demand and reduced stocks, our purchases have obviously decreased and therefore our debts have decreased. So we probably still have another $200 million to paint through cash advanced through current capital. And our goal, literally, is for current sales capital to be between 8 and 9% of current sales capital. And right now we are at 9. 8% in a consecutive 12-month period. So when you put those two together, the leverage at this time of year would normally be around 3x. And typically, in the current phase, the seasonality would take like a quarter turn of the leverage. So we’ll go back to that 2. 5 to 3x range. So if we look to the future, that’s where we hope to be on a more general baseline. But as I said, we live in a somewhat exclusive time. And from there we will be waiting for an improvement.
Operator
The next one comes from the lineage of Adam Samuelson of Goldman Sachs.
Adam Samuelson
So I guess the first question just going on the volume side and just thinking about some of the end markets. And Ron, you gave some good color in the prepared remarks. One of the areas where Amcor has been investing more aggressively has been in the protein space. Can you talk about kind of incremental business wins that you’re actually achieving there relative to maybe some end markets that are still pretty challenged on the red meat side, certainly in North America? And how much you can kind of grow in spite of that and take market share in that opportunity?
Ronald Esteban Delia
Well, yes, it’s a good question. And you’re right, the market has been challenged. And so if we think about meat across the Flexibles businesses, it’s been a mixed story. We’ve had meat declining in North America through the half. There’s soft market, there’s destocking in the meat space as well. But we’ve seen that stabilize more recently. So that would be one of those categories where we’re not calling an end to the destocking cycle, but we certainly see signs that it’s stabilizing a bit.Similarly, in Europe, we’ve seen a bit of a stabilization in meat volumes in the last couple of months. And in Latin America, we started to see some growth as well. So I think meat is, as a general category globally, meat is one that feels like is coming out the other end of the packaging cycle, at least for us or at least there’s some green shoots that give us some reasons for optimism would be the first point. Certainly, as we exited January as well, that would be the case.The second part of your question is a bigger picture question, and I think it’s going to be a little bit longer dated, which is around our aspirations to win share in this space. You’re aware that we made an equipment — a purchase of a machinery company less than 12 months ago, which should be a part of that total system solution that we’re going to market with. And we’re optimistic that we’ve got the right consumables, the right film structures and the right technical service staff to support the equipment offering. And we think over time, that’s going to be a winning combination and we’ll take share not just in North America but around the world. There’s not any evidence I can point to yet of that, Adam, because the near-term dynamics are well and truly overcompensating for any modest share pickup that we might be enjoying.
Adam Samuelson
It is ok. I like this color. And if I can ask you for a little follow-up. You have activity and presence in Argentina, whether for hoses or rigids on the beverage side. I think he’s cutting through all the inflation that takes into account the de- Val, however, he has talked about the volume environment in Argentina and how he anticipates it over the next few quarters, given what I think is quite a challenging client environment.
Ronald Stephen Delia
Yes. Look, maybe Michael can tell us about the accounting you referenced. But from a business point of view, the first thing I would say is that we have been working in Argentina since the mid-90s, that is, for more than 30 years. This is a business that provides around 2% of profit and around 2% of EBIT. And we have five factories there spread across the 2 segments, as you mentioned. And since we’ve been here for about 30 years, I guess we’ve been through a lot of economic cycles and crises. And the business is relatively local. And we maintained complete control over the business. Therefore, it remains an activity that has a more or less normal objective. But in terms of management, we continue to privilege location. It is necessarily a local business. There are no longer exports, but to the extent that something is imported in the form of raw materials, we continue to favor the localization of the main inputs. Perhaps most importantly, we continue to set prices ahead of inflation. This has been a characteristic of this sector in this country and continues to be so. Next, we will continue to focus on costs as we expect demand to continue to decline as consumers adapt to the new macroeconomic realities in this country. That’s a little bit about the business and how we run it. Michael, do you need to talk to us a little bit about the accounting that Adam alluded to?
Michael John Casamento
Yes. Yes. As for accounting, Adam, you evidently referred to the fact that Argentina has been designated as a hyperinflationary economy since 2018. So, systematically, since then, we’ve been, if there’s been a devaluation and we see that this has an effect on financial assets. we have on hand, and this is covered in the SI. We, this quarter there was a government replacement, clearly. And in December we saw a 55% devaluation. And you can see the chart of $34 million in profit and loss during the quarter in the SI tranche, and that’s really the result of that just in our financial assets and that followed the first quarter where there was a 20% devaluation. So that’s literally the remedy of accounting. This has been consistent since the beginning of 2018.
Operator
The next one comes from the lineage of Richard Johnson of Jefferies.
Richard Johnson
Thank you so much. Ron, I just wanted to ask you a question about Rigid Packaging and your current strategic vision for the company. I just wanted to see if you had noticed any drop in volume in the December quarter and in the past anything similar to the December quarter. , especially in hot filling, even if it adjusts to stock reduction. So I’m just interested in your attitude on where you think the company is currently.
Ronald Esteban Delia
Well, yeah, look, Richard, don’t forget to look at the volume drops at that time because you didn’t see them at that time. I mean, that’s just reality. This is a company that has been a smart business for a long time. It literally suffered from a volume perspective, at the same points as the rest of the business, right? So although with the top they have an effect. So, we’ve had some effects in the market that we would say are attributable to a high single-digit volume decline. This includes a 5-5% drop in customer demands in some segments that are important to us, perhaps an even larger drop as some customers lag the market. And all of this boils down to an upper single-digit impact on North American beverage volumes in general and hot fill, in particular, which we would attribute to the market impact. Then the biggest impact for us during the quarter was inventory reduction. And stock reduction is actually driven through several points, which act in opposite directions. First of all, historically in this industry, there are pre-stocks during our fiscal second and third quarters, before peak season, beverage season in North America. Historically there has been a slight buildup of stocks, but it is not going to go down this year. Therefore, this year there is no prior construction. And at the same time, we have clients, large clients, with very, very competitive equity relief targets. So instead of building, we reduce. And there was a significant acceleration in this stock relief activity in the month of December, which ultimately led to a single-digit peak impact on North American beverages overall, but a peak impact on hot beverage filling. And although we saw something modest in January, we believe we will continue to see a destocking effect in the third quarter. So that’s literally what’s going on there. This is unprecedented. We continue to believe in business. The company is well placed in terms of market stature. It operates in a fairly well structured market. It has cutting-edge technology. Its footprint is quite optimized. As part of the restructuring program, we got rid of some small factories, although it is quite well optimized. You just want to weather the storm. And that’s on the drinks side. And then let’s not say that outside of beverages we have a fairly large specialty packaging business that is almost like a hose business because of its exposure to the end market and that business has room to grow. And Latin America also continues to be a very smart market. business, adding in the first component and second quarter, where we also saw volume expansion and new businesses in Latin America. So it’s a portfolio of companies. In essence, this is a beverage sector in North America that gets a lot of attention, but we shouldn’t do it with other sectors either.
Operator
The next one comes from the lineage of Brook Campbell of Barrenjoey.
Brook Campbell Crawford
Can you just check what the point of volume expansion or decline was in January?And then, as a follow-up, there’s rarely a threat here to extrapolate volumes from January and for the rest of the quarter when there is a chance to get a head start in January because [Costco] fell behind on scheduled orders in December and it dragged on into January. So could it be that January is rarely a very smart indicator for the rest of the quarter?That’s the question.
Ronald Esteban Delia
Yes. We won’t give a number on January other than to say it was an improvement over December and an improvement, not everywhere, but in most parts of our business. We did have some parts of the business even that grew modestly. So that’s probably as much as I would say in terms of trying to dimension January.I understand the nature of your question and particularly the second part as to whether or not we’re being overly optimistic on the back of 1 month. It is 1 month, and we’re well aware that it’s 1 month. We are flagging that we will see continued destocking impacts in health care globally and in North American beverage. That no matter what happened in January, we know it will be the case certainly in Q3 and potentially into Q4. And we’re also not banking on any improvement in the consumer.So I think that we’re being relatively conservative and not reading too much into 1 month, but it is a month, and it does suggest as we sort of expected that the low point for us from a volume point of view and earnings growth as well was the second quarter.
Operator
The next one comes from the lineage of Jakob Cakarnis of Jarden Australia.
Jakob Çakarnis
I just need to rely on Brooks’ query. Obviously, December was a particularly weak month. Therefore, January’s improvement may not necessarily prompt you to increase. So I just need to set up some comments where you say you’re going to see a single-digit average volume drop in the third quarter and then a sub-single-digit drop in the fourth quarter. Can you just help us with the improvement comment from January, compared to the problem or negative you saw?the month of December in particular?
Ronald Esteban Delia
Yes. It’s relative to the performance in the whole first half and in the second quarter and in December. So when we — we’re talking about improvements in January in most parts of the business, where that’s relative to the first half. That’s the first part.I think the other thing to keep in mind is as we work our way through the balance of the fiscal year, a couple of things will also underpin those growth assumptions that we’ve outlined. One is that we do expect outside of health care and North American beverage, we do expect the year-end destocking that we saw in December to not repeat. And some continued abatement or continued destocking runoff or reduction in much of the rest of the business. That’s the first thing.And the second thing is, particularly as we get to the fourth quarter, the prior period comp gets a little bit easier. Our volume challenges really started in Q4 of last fiscal year. And so as we get to Q4 this year, we’ve got the benefit of a comparative period, which wasn’t so strong.
Jakob Cakarnis
Just one more for Michael, if I may. In terms of the net interest forecast, obviously, which is a little bit lower than what you indicated, to what extent does that constitute forward curve movements and expectations of lower interest rates or lower interest rates or lower cash rates in the U. S. ?Is there a U. S. economy? For the rest of the year?
Michael John Casamento
Yes, right. So we have (as you saw, we slightly lowered our forecast across a diversity of $320) for interest from $320 million to $340 million, to $315 million to $330 million. It’s literally all about the curves ahead and rising interest rates turn out to be have peaked now, and we may see a rate cut at the end of our fiscal year. But really, it’s the slight improvement that’s really at the end of that future curve. And after taxes, they have an effect on third-class year-round is pretty minimal.
Operator
Next up is Cameron McDonald’s E
Cameron McDonald
Question for Mike, just in terms of — well, the tax rate and then the capital structure. So the tax rate sitting sort of around sort of under 19%. And where — what jurisdictions are you getting a tax benefit from given the corporate tax rate in most of your jurisdictions is in excess of certainly of that number, but in excess of sort of 20%?
Michael John Casamento
Look, I think we operate in a wide variety of countries around the world. And the most sensible thing is that the distribution of the source of income can be different depending on geography and location. The overall underlying functionality of the business may then change. So when you sum it all up for our business, our goal is an 18-20% tax rate. We’ve been around that 20% diversity for a long time. So it’s just the combination of profits, geographic distribution, and the underlying business functionality.
Ronald Esteban Delia
And the differences in the deductibility of other expenses by jurisdiction, right?This, of course, will have to be taken into account, in addition to the general tax rates of those jurisdictions.
Cameron McDonald
Okay. And then just in terms of the capital structure and your comments earlier about the balance sheet and the leverage. Part of the investment thesis has been EPS growth. A big chunk of that has been undertaken through share buybacks. What — how — what’s the sort of leverage ratio that we should be expecting before we would start to see a discussion around the buyback being reimplemented? Is it — do we have to get back down to sort of the mid-2s? I think the last time you had a buyback active was sort of 2.7x leverage.
Ronald Esteban Delia
Well, look, we’ve been buying back; Remember, those are buybacks and mergers and acquisitions is how we analyze the discretionary cash flow of the business. And we bought back over the last monetary year – we will have repurchased over 3 monetary years and acquired approximately $1. 2 billion. Therefore, we will have made more than a billion dollars in buybacks and we will have invested almost two hundred million dollars in investments and acquisitions. So, it’s essentially 3 years of discretionary money that is invested in the business. It’s a little lumpy. It’s not quite the same over the three-year period, but that’s what we did. I think from a leverage diversity perspective, we’ll most likely be between 2. 5 and 3 times. Obviously, we are comfortable with being above this figure, especially when there are intelligent reasons for it, as has been the case lately. And we will continue to compare equity control or buyout opportunities along with M&A opportunities in the future, and that includes now.
Operator
Next up is from Mike Roxland of Truist Securities.
Michael Andrew Roxland
Actually, just a query because a lot of topics have already been discussed here. Quick, about protein packaging, Ron. I know this was discussed earlier in reaction to a query, I think you discussed this, I think, in the last quarter. Can you simply describe if there are any nuances in your business, perhaps around equipment, for example, that would prevent you from competing with some of the. . . with a major player in the industry or with some of the. . . Are you deliberately participating in other parts of the market to avoid going toe-to-toe with some of the biggest players?And finally, where do you think you would like this business to be in terms of revenue?Let’s say, in five or ten years?
Ronald Esteban Delia
Yes. Look, that’s a wonderful question. The biggest challenge we face right now is the lack of installed base. So there is a large installed base that has a lot of legacy in the industry, given the way the industry has evolved over several decades. And from an appliance standpoint, we’re. . . well, first of all, I’d say we’re more open source. We buy fashion in an obvious way. That’s why we prioritize Fashion devices, but are more agnostic about the actual installation of the device. And we believe that we have wonderful films and we believe that the main basis of the festival here will ultimately be in the film. And this is what we aspire to do, expand the cinema sector, enabled and facilitated through a comprehensive service offering, which includes not only the machines but also the technical service that is so vital in this industry for consumers to help optimize. its operations. So this is a full formula solution that we are moving to market with now and we are starting to move to market for the first time. And how big is the company and what are our aspirations? I mean, look, I’m not going to go into details here, it’s already a big problem for us. It’s a difficult time to be asking a lot of companies as they overcome some of the stock drawdown and some weaknesses in the overall beef cycle – that is, the meat cycle, I deserve to say. But it is a business that we aim to grow to mid-to-higher numbers and achieve smart margins for the foreseeable future.
Operator
Your next question comes from the line of John Purtell from Macquarie.
John Purtel
Just a few questions, please. In terms of your second-part EPS consultant, previously, for the second part of the year, in the mid-digits, I think you talked about a single-digit decline in third-quarter EPS, with your expectations for the fourth quarter. up in single digits. So it turns out that the third-quarter representative is weaker. Does this reflect a starting point with a lower volume?
Michael John Casamento
Look, overall, John, I guess we’d say we’ve actually held our guidance. So — and we — you’re right, we’ve guided to volumes mid-single digit down in Q3 and EPS down mid-single digit. And in Q4 we’re expecting trajectory to improve through the half on the volumes, volumes down low single digit. And just on the back of some of the things that Ron touched on earlier and also the earnings trajectory of our business typically in the seasonality in Q4 is our biggest quarter, that’s why we’re expecting mid-single-digit EPS growth in Q4.So really not a lot of change. I guess what we have seen is that the volume trajectory is perhaps a little softer than we previously anticipated. And that was really on the back of that destocking, particularly in health care and North American beverage, where we’re expecting that to continue through Q3 and perhaps into Q4. We are offsetting that with continued cost out and we have confidence in the underlying performance of the business with the structural initiatives that we’ve put in place and touch on already getting $35 million in the second half, the ongoing cost agenda and discretionary spend management. So not a lot of change really to our guidance overall. I think we — perhaps we did a little better in H1. But generally speaking we’re holding the range and we feel pretty good about the drivers behind that to deliver that $0.67 to $0.71 range.
John Purtel
And just for the moment, just take an interest in what you see from the consumer. Obviously, the elasticity of demand is a constant thing, and it turns out that consumer goods corporations continue to put pressure on prices.
Ronald Esteban Delia
Yeah. Look, I mean, the most productive proxy is probably the scanner knowledge that we’re looking for, and I’m sure you’re looking for that too. I mean, we still see a sometimes comfortable customer environment. And this applies to all products for which we supply packaging. In the United States, you still see general analytical knowledge that obviously has many nuances that you want to analyze. But sometimes speaking, it’s kind of a single-digit decline in the fourth calendar quarter that just passed. Europe may be slightly larger overall, but at a declining point there is still a lot of weakness and many modest declines. There are symptoms of decline in the industry in consolidated sectors of activity. What you’re seeing, at the margins, would possibly be a slight change, and possibly wouldn’t communicate much about it, however, you are seeing modest adjustments in some categories like puppy food and possibly even coffee, where you can also just see how They improve other formats. We are seeing it for sure; We believe we are seeing it in the beverage sector. In the case of convenience drinks, the cost of which we know has been the can, if you are looking to buy 12 or 24 cans or sets of a convenience drink, you will probably buy it in a can. and that has continued. So I think overall, John, the client environment is pretty comfortable. There are some reasons to be potentially positive if homeowners shift a bit between recovering value and maximizing volume, but we certainly don’t factor that into our assumptions about long-term volumes. But it will also be great if it happens.
Operator
The next one comes from CLSA’s Daniel Kang’s lineage.
Daniel Kang
You talked about a quarter of protein in January. Can you explain how you view inventory grades and the option to end inventory disposal in other product categories?
Ronald Esteban Delia
Yes. Look, I think when it comes to final settlement, break it down into a few categories. Firstly, we would say that the very sharp year-end stock draw we saw in December is unlikely to be repeated, with a few exceptions, or that we do not expect it to continue, unless globally in the manufacturing sector. health and fitness repeat. sector. North American drink. We know that in those 2 segments, for other reasons that we’ve basically discussed, we will see continued destocking through the third quarter and probably into the fourth quarter. Therefore, we do not expect a significant rebound in this sector. Outside of those two segments, other places where stock drawdowns accelerated in December, we don’t expect this situation to repeat itself. So, generally speaking, we expect that we will begin to emerge from the other end of this stock market cycle that we have been going through for several quarters. We see some symptoms of this. I have already mentioned that meat is one position that turns out to have stabilized, and high-quality coffee in Europe is another. So there are some reasons to be optimistic. But again, we’re not going to go overboard and point out that we have two vital spaces of the business, fitness and beverage, that we will continue to remove more stock from now on.
Operator
Your next question comes from the line of Keith Chau from MST Marquee.
Keith Chau
Just an extension of Daniel’s question about stock reduction and part of my ignorance, but how do we know what stock reduction is?What is the underlying trend in volumes?Can you quantify this in particular with the knowledge you see internally?Or is it based on conversations you have with customers that are a little difficult internally?Can you just give me a concept of how you figure out what underlies the client’s weaknesses?What is out-of-stock? What is cyclical?What is structural?
Ronald Esteban Delia
Yes. Look, it’s art or science. First of all, there are many discussions with consumers. And don’t forget that in some parts of the business we were even co-located with consumers. Therefore, there is a high degree of intimacy with the company’s visitors. And the starting point is the discussions and debates about joint plans that we have with our consumers around the world. So this is possibly the most important control. But we also try to triangulate knowledge. And what are we hunting? We’re looking at things in categories where there is scanner awareness, which is not the case across our entire portfolio and, in fact, not in healthcare. But in food, home, private care and places where there is smart retail scanner data, we are watching very closely. We also take a look at the effects of the scanner for individual clients, individual corporations and check if there is a difference between the general functionality of the marketplace and the functionality of our express clients. Then we take a look at our volumes and try to triangulate between those three knowledge points. to see what the difference is. Are there direct sales or not and are we seeing a relief or increase in stocks? That’s right, as if it were an approximation, but it is a fairly informed approach, either with direct contributions from visitors or with quantitative knowledge and contributions.
Keith Chau
It’s a wonderful color. And then just a little follow-up to this in January, and I appreciate that it’s just a month. But when you communicate about an improvement, are you communicating about a positive expansion in January or a less bad January compared to the last 6 months??
Ronald Esteban Delia
Listen, we’re talking about this in relation to the first part of the year. So it’s a little bit of both. But speaking of which, we’re talking about the comparison with the first part of the year. So we’re not talking about expansion in certain portions of the business, but we’re not talking about general expansion across the board. We are talking about an overall expansion, improvement compared to the first part of the year and probably the second quarter.
Operator
Ladies and gentlemen, this concludes our question-and-answer session. I will now turn the call back to Ron Delia for closing remarks.
Ronald Esteban Delia
Thank you, operator, and thank you all for joining today’s call. As you might expect, we are positive about our second part of the year. We believe the second quarter was the lowest point for us in terms of volume and earnings growth. , and the business will improve from there. So thank you for your interest in Amcor and we’ll get back to you next quarter.
Operator
This concludes the convening of today’s convention. Thank you for your participation, you can now log out.