Yahoo Finance Amcor plc (NYSE:AMCR) Q3 2024 Earnings Call Transcript
Amcor plc (NYSE:AMCR) Q3 2024 Earnings Call Transcript April 30, 2024
Amcor plc misses on earnings expectations. Reported EPS is $0.1299 EPS, expectations were $0.17. Amcor plc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by. My name is Jay and I will be your conference operator today. At this time, I would like to welcome everyone to the Amcor Third Quarter 2024 Results Call. [Operator Instructions] I would now like to turn the conference over to Tracey Whitehead, Head of Investor Relations. You may begin.
Tracey Whitehead: Thank you, operator and thank you everyone for joining Amcor’s fiscal 2023 third quarter earnings call. Joining today is Peter Konieczny, Interim Chief Executive Officer; and Michael Casamento, Chief Financial Officer. Before I hand over, a few items to note. On our website, amcor.com, under the Investors section, you’ll find today’s press release and presentation, which we will discuss on this call. Please be aware that we’ll also discuss non-GAAP financial measures and related reconciliations 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 second slide in today’s presentation lists several factors that could cause future results to be different than current estimates.
Reference can also be made Amcor’s SEC filings, including our statements on Form 10-K and 10-Q for further details. [Operator Instructions] With that, over to you, P.K.
Peter Konieczny: Thank you, Tracey and thank you to all who have joined us for today’s call. Prior to discussing our third quarter performance, I want to spend a few moments recognizing my predecessor, Ron Delia, and his many accomplishments at Amcor. In the last few years alone, Ron led us through the transformational acquisition and integration of Bemis, the largest acquisition in the company’s history, successfully and safely guided the business through a pandemic and made the difficult and correct decision to divest our business in Russia. And most recently, Ron directed our teams in navigating that particularly challenging economic period. I now will speak for the Board, our global management team and our employees around the world and thanking Ron for his leadership, guidance and dedication during his 18 years with Amcor and 9 years as CEO.
I’ve worked closely with Ron, our board and the other members of our executive team over many years to help shape and execute our strategy, and I am honored to take the leadership reigns in an interim capacity at this time. Today, Amcor is the established industry leader in our key markets and geographies, has world class talent and clearly differentiated commercial innovation capabilities, all providing us with multiple opportunities to capture high value growth. Importantly, the business is also well positioned to continue benefiting from the proactive steps taken by our leaders across the company to align the cost base with recent challenging market conditions. The results of those decisive actions were again evident in our third quarter financial performance as we showed strong earnings leverage across the business.
Third quarter year-over-year volume performance also improved on a sequential basis, and we expect this trend to continue driving stronger earnings growth as we close fiscal year ‘24. My role right now is to ensure we stay focused and on track and that we capitalize on the strong position we are in to maintain momentum and further accelerate earnings growth. It is a team effort and will drive success. And I am surrounded and supported by credible leaders and talented team players throughout our organization. As seen on Slide 3, my near-term priorities are simple. First, ensure Amcor continues to provide a safe and healthy work environment for our global workforce. Second, stay close to our key stakeholders, including our employees and customers and finish our 2024 fiscal year strongly.
After an improved third quarter performance, we are well positioned to do so and we’ve raised our full year guidance today. Third, build on the momentum we have worked hard to deliver across the business and as we work through our planning cycle for fiscal ‘25 set clear priorities to ensure our momentum continues. And fourth, provide stability for the business and keep our teams focused on delivering for all our stakeholders by reinforcing that. Our strategy has not changed, our agenda has not changed, and our priorities have not changed. Moving to Amcor’s Q3 performance, starting with safety on Slide 4. Our commitment to health and safety of our teams remains our number one priority, and we continue to focus on providing a safe and healthy work environment.
72% of our sites have been injury-free for the past 12 months or longer, and we experienced a 19% reduction in injuries compared to the first 9 months of fiscal ‘23. Safety is deeply embedded in Amcor’s culture and is a critical cornerstone of our success. Turning to our key messages for today on Slide 5. First, outperformance in the underlying business resulted in adjusted earnings per share for the third quarter that exceeded the expectations we set out in February. Our Flexibles and Rigid Packaging segment each delivered adjusted EBIT growth, leading to Amcor returning to year-over-year earnings growth a quarter sooner than we anticipated. Improved working capital performance through the year also resulted in a year-to-date increase in adjusted free cash flow.
Second, as I mentioned earlier, our third quarter volume trajectory improved significantly on a sequential basis as destocking abated across most end markets, and we experienced higher customer demand in several of our businesses. While this is clearly an encouraging and positive trend, our teams remain highly focused on continuing to control costs and this helped us deliver a third consecutive quarter of improved earnings leverage and a return to earnings growth. Third, our March quarter financial performance and expected further momentum in our fourth quarter gives us the confidence to increase our full year adjusted EPS guidance range to $0.685 to $0.71 per share and reaffirm our guidance for adjusted free cash flow between $850 million and $950 million for the fiscal year.
We believe we have turned the corner after a challenging calendar 2023, and we expect our sequential volume and earnings growth trajectories will continue to improve, which is supported by the demand trends experienced across the business in the first weeks of April. Finally, we remain confident in our capital allocation framework and strategy for long-term growth. We believe the strength of our market positions, our opportunities for investment and our execution capabilities, along with our commitment to a compelling and growing dividend, make a convincing investment case for Amcor. Moving to Slide 6 for a summary of our financial results. The first 9 months of fiscal ‘24 continued to reflect significant benefits from our proactive cost actions.
Three consecutive quarters of strong operating leverage helped offset the unfavorable impact of 7% lower sales – lower year-to-date sales, leading to a decline in adjusted EBIT of 3%. We believe we’ve reached an inflection point in the trajectory of earnings and volumes with our Q3 results, and we are pleased with our financial results in the March quarter. Better-than-anticipated demand trends and continued strong cost performance resulted in EBIT and earnings per share ahead of our expectations entering the quarter. The underlying business saw a return to profit growth in the third quarter with adjusted EBIT of 3% compared with last year. Volume trends improved as the broad-based destocking experienced in the December quarter abated and customer demand strengthened.
Our teams also continue to focus on cost reduction and productivity initiatives and delivered another quarter of outstanding results with approximately $130 million in total cost savings, including approximately $15 million of benefit from structural cost initiatives. These benefits, combined with improving volume trends, resulted in another quarter of improved earnings leverage. Interest and tax expects were modestly higher than the prior year, in line with our expectations and adjusted earnings per share of $0.178, grew by 1%. Q3 net sales were down 6% on a comparable constant currency basis, which primarily reflects overall volumes 4% lower than the prior year. This is predominantly related to expected ongoing weakness, including further destocking in healthcare categories and in the North American beverage business, which collectively represent approximately 3% of Amcor’s total sales.
Across the remaining 70% of our business, overall net volumes were relatively flat with last year, a significant improvement compared with the December quarter and the business delivered volume growth across several categories and geographies. Outside of healthcare, we believe destocking is now largely behind us. Price mix for Q3 had an unfavorable impact on sales of approximately 3%, which is a result of greater volume declines in high-margin healthcare categories, which we anticipated and called out last quarter. We continue to return significant cash to shareholders through a compelling and growing dividend and share repurchases, which totaled approximately $570 million through the first 9 months of the year. I’ll turn it over to Michael now to provide some further color on the financials and our outlook.
Michael Casamento: Thanks, PK, and hello, everyone. Beginning with the Flexibles segment on Slide 7 and focusing on our Q3 performance. Net sales for Q3 were down 6%, reflecting an unfavorable pricing impact of 4% and a 2% decline in overall volumes, which was a significant improvement of 8 percentage points compared with the December quarter. As we anticipated and called out last quarter, volumes for healthcare products remained weak and destocking continued, particularly in North America and Europe. In total, healthcare volumes were down double digits, and this had an unfavorable impact of approximately 3% on overall segment volumes and was the primary driver of the 4% unfavorable mix in the quarter. Across the balance of our flexibles portfolio, net volumes grew approximately 1% in the quarter, with growth in several end markets, including meat, pet food, cheese and unconverted film foil, and we also saw growth across a number of emerging markets.
Across North America and Europe, third quarter net sales decline a high-single-digit rates and favorably impacted by a mid-single-digit lower volumes and unfavorable price/mix related decline in healthcare categories. Excluding healthcare across these two regions, we saw mid-single volume growth in cheese and a strong sequential improvement in meat and pet care volumes, which were flat and up low-single digits for the quarter, respectively. Across the Asian region, net sales were modestly higher than the prior year. China grew volumes for the third consecutive quarter. And volume growth in Thailand, India and the Philippines also helped offset lower volumes in South East Asian healthcare business. In Latin America, the business delivered good volume growth in Brazil, Mexico and Peru.
Q3 adjusted EBIT of $358 million, was 5% higher than last year on a comparable constant currency basis. Strong cost performance through the quarter, including from restructuring initiatives, combined with broadly improving demand trends, led to another quarter of strong earnings leverage, and EBIT margins increased by 170 basis points to 13.8%. Turning to Rigid Packaging on Slide 8. Q3 net sales were 8% lower on a comparable constant currency basis, mainly reflecting lower volumes. While overall volumes were down 8% for the quarter, this represents a meaningful improvement over the December quarter. In North America, overall beverage volumes continue to be impacted by soft consumer and customer demand in Amcor’s key end markets, along with some lingering destocking.
Total beverage volumes were down 11%, improving sequentially from the 19% decline we experienced in December quarter, which was impacted by significantly more destocking. Latin America volumes were in line with last year with growth in Brazil and Colombia, offset by weaker demand in Argentina. We are pleased to see the Rigid Packaging business return to earnings growth, with adjusted third quarter EBIT up modestly over last year. Strong earnings leverage resulting from a continued focus on cost reduction and productivity measures and the realization of benefits from restructuring initiatives more than offset lower volumes, leading to an 80 basis point increase in EBIT margins to 8.7% for the quarter. Moving to cash and the balance sheet on Slide 9.
Adjusted free cash flow for the first 9 months was approximately $100 million ahead of last year, mainly driven by improved working capital performance and successfully reducing inventory levels for the fifth consecutive quarter. Leverage at 3.4x is broadly in line with the first half and within the range of expected outcomes for the third quarter. As a reminder, the business is cycling through temporary increases in working capital, and trailing 12-month EBITDA remains at lower than historic levels, reflecting the divestiture of our Russian business in December 2022. 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 our fiscal fourth quarter.
This brings me to our outlook on Slide 10. As P.K. noted earlier, we are raising our full year guidance for adjusted EPS to $0.685 to $0.71 per share to reflect our performance in the underlying business in the third quarter and our expectation that volumes will continue to improve through the balance of the year. We also remain focused on controlling costs and expect to deliver further savings in Q4, including from our structural initiatives. For fiscal 2024, we continue to expect the underlying business to contribute organic earnings growth in the plus/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 negative impact of approximately 3% related to the sale of our Russian business in December 2022.
The impact of which was all in the first half. We also expect a negative impact of up to 6% from higher interest and tax expense, which takes into account our updated estimate for the full year net interest expense of between $310 million to $320 million. We are confident, we will build on our third quarter performance, and adjusted earnings per share for the fourth quarter is expected to grow over last year by mid-single digits on a comparable constant currency basis. And overall volumes in the fourth quarter are expected to be down in the low single-digit range, primarily due to ongoing destocking in healthcare categories and continued weak consumer and customer demand in North America beverage. We expect the volume improvement we experienced in the third quarter to continue as we progress through the fourth quarter, which will position us well as we enter fiscal 2025.
We have also reaffirmed our guidance range for adjusted free cash flow of $850 million to $950 million for the year. So with that, I’ll hand back to P.K.
Peter Konieczny: Thank you, Michael. In closing, on Slide 11, our Q3 financial results guidance for the balance of the fiscal year and our expectation that we will continue to build earnings momentum in fiscal ‘25 will highlight that Amcor is a very well-positioned business. Amcor’s industry leadership across the globe is well established. Our differentiated innovation capabilities are assisting the world’s best known brands and smaller companies in achieving their objectives to protect, preserve and promote their products while enabling them to meet the sustainability commitments they have made to the stakeholders. And Amcor’s talented employees around the world are capitalizing on growth opportunities in priority categories, emerging markets and through sustainable offerings while also continuing to closely focus on cost controls.
We’re confident we will continue to see positive momentum given the actions we have taken and continue to take across our operations to invest in growth, reduce cost and improve productivity. As I mentioned at the beginning of the call, my role right now is to ensure we stay focused and on track and that we capitalize on the strong position we are in to maintain momentum and further accelerate earnings growth. The continued safety of our goal will always be at the top of Amcor’s agenda. But a very close second for me right now is to keep our teams focused on delivering for all our stakeholders by reinforcing that our strategy, our agenda and our priorities have not changed. Our Q3 volume trajectory and financial performance underscores our confidence in stronger earnings growth momentum as the challenges we faced in calendar ‘23 are put further behind us.
We have raised our full year EPS guidance, and we anticipate delivering mid-single-digit earnings growth in Q4. Our performance in the first few weeks of April supports this expectation. And our commitments to our longer-term growth and value creation strategy gives us line of sight to a return to growth in line with our shareholder value creation model. Operator, we’re now ready to turn the line over to questions.
Operator: Thank you. [Operator Instructions] Your first question comes from the line of Ghansham Panjabi of Baird. Your line is open.
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