Q3 2024 Earnings Summary
- Amcor has seen significant improvement in volumes in its Flexibles segment between Q2 and Q3, particularly in priority categories like pet care, meat, and cheese, indicating a positive growth trend.
- Approximately 90% of Amcor's packaging portfolio is in recycle-ready structures, demonstrating its strong commitment to sustainability and positioning it favorably as industry targets shift.
- Amcor's Rigid Packaging business has returned to profit growth due to strategic strengthening and restructuring efforts, including footprint optimization and leveraging strong customer relationships, setting the stage for improved performance as volumes recover.
- The company is still experiencing negative volume performance in developed markets, with volumes down in North America and Europe compared to the prior year.
- Despite recent cost reductions, there is concern about the durability of variable cost efficiencies as volumes normalize, which could impact future margins.
- The Rigid Packaging segment, particularly in North America, continues to face challenges with lower volumes and soft consumer demand, and other substrates are recovering faster than plastics in the beverage market.
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Cost Savings and Operating Leverage
Q: How sustainable are the recent cost savings and operational efficiencies?
A: Management is pleased with the $130 million in cost reductions achieved in Q3, which included a $15 million benefit from the restructuring program. They are focusing on both operational cost flexing and structural cost reductions. Operational measures include eliminating shifts, reducing overtime, extended shutdowns, driving procurement savings, and tightly controlling discretionary spending. Structurally, they've announced seven plant closures and expect the restructuring program to deliver $50 million in EBIT benefit, with $35 million in FY '24 and $15 million into FY '25. While some costs may return as volumes normalize, they expect ongoing margin improvement due to these initiatives. -
Volume Improvements and Outlook
Q: Are the volume improvements in Q3 sustainable going forward?
A: Volumes improved significantly from Q2 to Q3, with Q2 down 10% and Q3 down 4% year-over-year. The improvement was due to destocking abating, better customer performance, and some unwind of unusually low December volumes. Management expects the positive momentum to carry into Q4, anticipating low single-digit volume declines mainly due to continued destocking in health care. They believe volumes will exit Q4 flat and see components of the improvement as sustainable. -
EPS Guidance and Q4 Expectations
Q: Given the strong Q3 performance, why isn't Q4 EPS guidance being upgraded?
A: Despite delivering EPS growth in Q3, management maintained their Q4 EPS growth expectation at mid-single digits. They increased full-year guidance to $0.685–$0.71, reflecting the improved Q3 performance. Q4 is expected to see sequential improvement in volumes and profit, but continued destocking in health care will hold back volume growth. Management feels confident in delivering within the guidance range but doesn't want to get ahead of themselves at this point. -
Strategic Positioning of Rigid Packaging
Q: How does management view the strategic position of the Rigid Packaging business?
A: Management believes Rigid Packaging is a strategically important and scalable business for Amcor. The portfolio includes North American beverage, Specialty Containers, Latin American operations, and closures. They have good industry positions and strong customer relationships, along with a strong sustainability profile in this segment. Recent restructuring and footprint optimization have strengthened the business, enabling it to return to profit growth despite a soft market. -
Interest Expense and Hedging Profile
Q: What's driving the lower net interest expense guidance, and what's the hedging profile?
A: Net interest expense guidance was reduced slightly to $310–$320 million due to better timing of cash flows and working capital improvements. The debt profile is about 70% fixed and 30% floating, with no maturities until mid-2025. Management does not expect a material change in interest expense going into FY '25 based on the current debt profile and forward interest rate curves. -
Sustainability Targets and Regulation Impact
Q: How are changes in sustainability targets and regulations affecting Amcor?
A: While some industry participants are adjusting their sustainability targets, Amcor remains committed to its goal of making 100% of packaging recyclable, reusable, or compostable by 2025. They have made significant progress, with roughly 90% of their packaging portfolio now in recycle-ready structures. Management welcomes regulatory developments like the EU's Packaging and Packaging Waste Regulation (PPWR), as they believe it creates an environment that drives the industry toward a circular economy for plastics. -
Below-the-Line Restructuring Charges
Q: When will the restructuring charges come to an end?
A: The restructuring program is about two-thirds complete, with $110 million spent out of the committed $170 million. Approximately $50–$60 million remains to be invested, and management expects to be most of the way through the program by the end of the calendar year. They are starting to see benefits from the restructuring, contributing $15 million in the quarter.
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