Amcor Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 16, 2021

There are 13 speakers on the call.

Operator

Good day and thank you for standing by and welcome to the Amkor 2021 Full Year Results. At this time, all participants are in a listen only mode. After the speakers' remarks, there will be a question and answer I would now like to hand the conference over to your speaker today, Tracy Whitehead, Head of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and thank you, everyone, for joining Amkor's full year call for fiscal 2021. Joining the call today is Ron DeLeo, Chief Executive Officer and Michael Cascimento, Chief Financial Officer. At this time, I'll direct you to our website, amkor. Under the Investors section, where you'll find a press release and presentation, which will be discussed on the call today. We'll also discuss non GAAP Financial measures and related reconciliations can be found in the press release and presentation on our website.

Speaker 1

Also a reminder that The call today includes some forward looking statements, which remain subject to certain risks and uncertainties. Please refer to Amkor's SEC filings, including our statements on Form 10 ks and 10 Q to review factors that could cause actual results to differ materially from what we're discussing today. During the question and answer session, we request that participants limit their questions to a maximum of 2 and then rejoin the queue for any follow-up. With that, I'll turn over

Speaker 2

Ron? Thanks, Traci, and thanks, everyone, for joining us to discuss Amkor's fiscal 2021 full year results. Joining me today, as Traci mentioned, is Michael Casamento, Amkor's Chief Financial Officer. We'll begin with some prepared remarks, and then we'll open the line for Q and A. We start every meeting at Amkor with safety and we'll begin there on Slide 3.

Speaker 2

Safety is the first and most important of our values and Amkor Has been on a long term journey towards our goal of no injuries. Our safety performance has shown continual improvement, including in the last 12 months where our performance has been a real highlight. Across Amkor, we reduced the number of injuries by almost 25% compared to last year. All of our businesses reported fewer injuries And over half of our sites have remained injury free for at least 12 months. Through a year where the pandemic continued to present operational challenges in many countries, Our focus on safety was unwavering, and we're incredibly grateful that our people continue to be engaged and focused on staying healthy as well as safe.

Speaker 2

We're proud of our safety performance, which we believe is the best in our industry and the progress we've made over a number of years, But we're also convinced that our objective of no injuries is absolutely possible and we continue striving towards that goal. We have 4 key messages today, which is set out on Slide 4. First, FY 'twenty one was an outstanding year for Amkor on multiple dimensions. The operating environment remains highly dynamic, but our teams stayed fully focused on the key business drivers within our control, Remained agile as conditions changed and demonstrated exceptional execution and consistency all year. Financial results exceeded our expectations as the year progressed.

Speaker 2

We ended the year with momentum and we expect another strong year in fiscal 2022, which is the second key message. 3rd, our recent performance in many ways is a result of the financial and strategic benefits from our 2019 acquisition of Bemis. 2 years on, the integration is now essentially complete. The financial benefits are ahead of our expectations and strategically we're better positioned than ever with a stronger foundation for growth into the future. And lastly, we're capitalizing on that strong base by investing in a number of organic growth initiatives, which will maintain our momentum beyond fiscal 'twenty two and for the long term.

Speaker 2

Turning now to the financial highlights on Slide 5. FY 'twenty one was an exceptional year financially for Amkor with record earnings, exceptional margin management despite steep raw material cost increases and supply constraints and momentum building through the year. Organic sales growth was 2% and we exited the year in Q4 with sales 3% higher than the prior year. EBIT growth was 8% with the Flexibles and Rigid Packaging segments both delivering strong results, growing in several higher value end markets and contributing to margin expansion. In fiscal 'twenty one, Amkor's EBIT margins increased 60 basis points to reach 12.6% for the year, which is a new high and an exceptional achievement in an environment where raw material price increases and supply disruptions Continue to require an intense focus on securing availability as well as managing price recovery.

Speaker 2

We estimate Themis acquisition synergies were around $75,000,000 and as we close out the final integration activities, we expect to exceed the original synergy target by at least 10%. EPS increased 16% for the year and was ahead of guidance, which we're able to continuously increase through the year. And free cash flow of $1,100,000,000 was at the top of our expected range. Return on capital or return on average funds employed finished well above 15% at a time when our cost of capital is at an all time low. And through the year, we returned $1,100,000,000 of cash to shareholders through share repurchases and higher dividends.

Speaker 2

The key message here is that the fundamentals of our business continue to strengthen. Our teams around the world have demonstrated unearthing focus on executing against our strategy. And as a result, we've delivered another year of outstanding financial performance with momentum continuing to build as we begin fiscal 'twenty I'll turn it over now to Michael to provide some more detail on the financial results, and I'll finish up with some comments on growth and sustainability.

Speaker 3

Thanks, Ron. Good morning and good evening, everyone. I'll start with the Flexible segment on Slide 6, which performed very well, delivering record sales, EBIT

Speaker 4

and EBIT margins for the year.

Speaker 3

Sales includes recovery of higher raw for the year. Sales includes recovery of higher raw material costs. And as Ron mentioned earlier, these have continued to move higher during the quarter. Across the business, our response has been proactive, and we have implemented price increases quickly. As a result, in the June quarter, Net sales increased by more than $100,000,000 with the annual recovery run rate reaching more than $500,000,000 as we exited the year.

Speaker 3

From an earnings perspective and consistent with last quarter, the price cost impact has remained manageable given the diversity of materials we buy and the multiple regions in which we consume those materials. This is clearly evident in our margin performance, which continued expanding in Q4 and through the year. From a volume perspective, demand in many of our key high value end markets has remained consistently strong, including meat, coffee and pet food. However, this has been offset by double digit declines in North America medical volumes and European pharmaceutical volumes, driven by pure elective surgeries and lower prescription trends. From a geographic perspective, volume growth has been relatively broad based with good overall performance in emerging And while volumes in North America were higher than the prior year, along with Europe, this is where large parts of Our Healthcare business are located and growth in these regions is inclusive of those headwinds.

Speaker 3

Adjusted EBIT has grown 9% in constant currency terms, mainly reflecting volume growth, exceptional margin management with expansion delivered every quarter at around $65,000,000 of cost synergy benefits related to the Bemis acquisition. Turning to rigid packaging on Slide 7. In summary, the business has continued to deliver outstanding results, Driven by an increasing consumer demand in both North and Latin America. Sales growth included a 5% increase in volume as well as a 3% price mix benefit, including higher pricing to recover cost inflation in Latin America. In North America, Annual beverage volumes were 8% higher than last year and hot fill container volumes were up 13%, driven by rising consumer demand through the year, which resulted in capacity shortages and historically low inventory levels across the industry.

Speaker 3

Demand was particularly strong in hot fill Including sports drinks, ready to drink tea and juice. Year to date, specialty container volumes were higher than the prior period, with growth in categories including spirits, home and personal care, and this was partly offset by lower volumes in the healthcare segment. Volumes in Latin America were 5% higher than last year with growth delivered in Brazil and Argentina in particular. EBIT growth of 8% reflects higher volumes and favorable mix across the business, and this was partly offset by higher labor and transportation costs in North America. These higher costs have been a direct result of capacity shortages and low inventories throughout our network, which introduced supply chain inefficiencies in the short term ahead of installing additional capacity.

Speaker 3

Rigid Containers continues to be one of the world's preferred packaging formats since it's recyclable, resealable and hygienic and has the lowest carbon footprint. As you'll see on the slide, this preference continues to be reflected over time with format share in a healthy growing market remaining consistent. Demand for recycled content is also rising rapidly and our use of recycled resin has doubled over the last 2 years. Looking forward, we expect this trend to accelerate further and are working with customers on a very active pipeline of new product launches incorporating high levels of recycled material. Moving to Slide 8.

Speaker 3

Adjusted free cash flow of $1,100,000,000 was at the upper end of our expected range for the year, and we finished the year strongly. Compared with last year, free cash flow benefited from the higher flow through of higher earnings, and this was offset by $100,000,000 adverse impact from the timing of U. S. Cash tax payments and a lowering working capital benefit. Working capital has been an area we have been particularly focused on through the Bemis integration and is a real highlight.

Speaker 3

In total, since 2019, approximately $250,000,000 of working capital has been released, and this has been a source of funds to cover synergy related cash costs. Capital expenditure increased in the current year as we have stepped up our organic investments in high growth segments and geographies. Looking ahead, we have a broad range of attractive investment opportunities and expect to increase CapEx by further 10% to 15% in fiscal 2022. Our financial profile is solid with leverage of 2.7 times on a trailing 12 month EBITDA basis and is really in line with our expectations. With strong annual cash flow and a strong balance sheet, the business has significant capacity and flexibility to invest in organic growth, Execute M and A as well as return a substantial amount of cash to shareholders.

Speaker 3

In fiscal 2021, total cash returned to shareholders in the form of dividends and Share repurchases reached an impressive $1,100,000,000 Turning to Slide 9 and our outlook for the 2022 fiscal year. We expect comparable constant currency EPS growth of 7% to 11% for the full year. This excludes the effect of disposed businesses, which impact comparability And an unfavorable currency impact of approximately $0.01 per share assuming current exchange rates prevail for the remainder of the year. So on a reported basis, this results in an EPS guidance range of approximately $0.79 to $0.81 per share. Free cash flow is expected to be $1,100,000,000 to $1,200,000,000 up to 10% higher than fiscal 2021, even as we are Accelerating capital investments to support organic growth.

Speaker 3

Growing cash flow enables us to continue paying a compelling and growing dividend And allocate cash to share purchases, which we expect will be around $400,000,000 in fiscal 2022, while retaining the flexibility and to fund acquisitive growth when needed. So with that, I'll

Speaker 2

hand back to Ron. Thanks, Michael. I'll start with a few points to recap the Bemis acquisition on Slide 10. The Allstock acquisition of Beam's was completed in June 2019 and was the largest in Amkor's history. So 2 years in now, our integration efforts are essentially complete and the outcomes are clearly exceeding our original expectations.

Speaker 2

Firstly, from a financial perspective, the transaction unlocked value through the realization of cost and cash flow synergies, which have materially strengthened Amkor's financial profile. More specifically based on our fiscal 'twenty two expectations over the 3 year period post closing the acquisition, We will have outperformed the original cost synergy target of $180,000,000 by at least 10%. And as Michael mentioned, the cash release from working capital over the last 2 years Funded the cash costs to achieve those synergies. Margins in our Flexible segment will be more than 200 basis points higher than in fiscal 2019. EPS will be at least 35% higher or at least $0.21 per share.

Speaker 2

We will have repurchased approximately 25% of the shares issued to fund the acquisition And the annual cash flow will be close to double Amkor's annual cash flow in the year prior to the acquisition. Strategically, Bemis was a perfect fit for Amkor. It was a pure play coming into what was already the world's largest global flexible packaging business. And putting these two companies together created the only truly global flexible packaging platform able to serve multinational customers around the world With an even stronger value proposition, especially in the most attractive end markets like healthcare and protein, where our participation has meaningfully increased. EMCOR is now the clear flexible packaging leader in every major geography with greater absolute and relative scale advantages, And we've strengthened our talent and capabilities, particularly in R and D, so we can support large and small customers with the broadest range of innovative and sustainable packaging solutions.

Speaker 2

Today, as a result of the Bemis acquisition, we're better positioned than ever with a strong foundation for growth looking forward. With that stronger foundation, we have a range of organic growth drivers that we're investing behind. And on Slide 11, we've highlighted a few. First, an increasing percentage of our sales are coming from the most attractive higher growth, higher value add segments where we have the best opportunities to differentiate, including Healthcare and Protein Packaging and Flexibles and the Hospital Products segment in Rigid's. Our Global Healthcare business is approaching $2,000,000,000 in sales across Medical Device and Pharmaceutical Packaging, segments that require unique capabilities that are not easy to replicate.

Speaker 2

We're investing to add both Capacity and capability with current projects underway in Malaysia and Ireland to highlight two examples. In protein and meat packaging, we have a great opportunity to leverage capabilities in high barrier films and our growing business in North America to the benefit of our other businesses around the world. In the hot fill rigid packaging segment, we have extensive intellectual property and product design capabilities, and we know how to partner with customers to help them drive growth through innovation. Given the sold out environment we're in and the growth outlook, we're adding capacity across our North American plant network. 2nd organic growth driver we're highlighting today is our leading emerging markets portfolio with over $3,000,000,000 in annual sales and a long history of profitable growth.

Speaker 2

Again, we're investing behind the emerging market opportunity, including in the new greenfield plant in China that we highlighted on our last call. And 3rd, innovation and new product development will increasingly contribute to organic growth going forward. We've been investing in this area as well to extend our global innovation center into Europe and China through the recently announced partnership with Michigan State University School of Packaging and with our entry into the corporate venturing space earlier this year. And finally, the number one organic growth driver for Amcor going forward, which cuts across the other 3 and Really everything else we do will be the increasing need for more sustainable packaging. And we know there will always be a role for packaging for essential food and healthcare products.

Speaker 2

And so the ability to provide that packaging so that it meets all consumer needs and is more sustainable creates a unique opportunity for growth. Slide 12 highlights sustainability a bit more. And as we take stock at the end of 1 financial year and start a new one, We are particularly pleased with the progress we're making to accelerate responsible packaging through advances in package design, waste management infrastructure and consumer participation. Examples of recent progress on package design demonstrate the breadth of our product range across substrates With packaging that uses less material overall and more recycled content, eliminates problematic materials and has a better end of life profile. In terms of materials, our use of recycled resin in rigid packaging has almost doubled over the last 2 years, and we expect to almost double again over the next 12 to 18 months.

Speaker 2

We've also announced our new AmSky platform, which eliminates PVC and has the potential to transform the sustainability profile of Healthcare Packaging in particular. To improve end of life outcomes, we've commercialized several new recycle ready product platforms, including the polymer Amlite and Amprima and the paper based matrix product ranges, and we've entered into a new partnership to extend our offering of compostable solutions. Demand is growing for these new products and we'll be scaling up to capture the growth opportunity. Making progress We've managed infrastructure and consumer participation will be equally important and both require close collaboration with others across the value chain. We stepped up that collaboration over the past year through our partnership network where Amkor is increasingly relied upon to shape and establish packaging design standards around the world, which can then inform infrastructure investment and consumer education to help keep packaging out of the environment.

Speaker 2

We'll talk more about our sustainability agenda following the publication of our annual sustainability report later this year. Slide 13 is a slide we shared late last year in our investor briefing, but it remains relevant today. And we believe the Amkor investment case is as strong now as ever, and we set out the reasons why on this slide. Several of the points have already been made, but in simple terms, we generate Significant and growing free cash flow every year. In fiscal 'twenty two, that free cash flow will be up to $1,200,000,000 And that cash flow will comfortably support reinvestment in the business as well as M and A and regular share repurchases, which in turn drive strong EPS And in addition, we'll continue to pay an attractive and growing dividend.

Speaker 2

We also believe that momentum matters and momentum has been building at Amkor, which is clear from our recent performance and outlook comments and the expectations we have for our fiscal 2022 year. And finally, on Slide 14, A quick recap of our key messages from today. Amkor had an outstanding year in FY 'twenty one. We believe momentum is building and we expect another strong year in FY 'twenty two. The Bemis integration is essentially complete and we've summarized the outcomes today, which have exceeded our expectations.

Speaker 2

And finally, we now look forward Capitalizing on a range of organic growth drivers and we're investing in the business to make that happen. With that operator, we'll conclude our opening remarks and we'd like to open the lines for

Operator

Thank you. In the interest of time, we would like to remind participants to limit their questions to 2 and to rejoin the queue for any follow ups. Our first question comes from the line of Anthony Pettinari with Citi. Your line is open.

Speaker 3

Good evening.

Speaker 5

For the 2022 guidance, is there anything that you'd say about The cadence of earnings growth, whether you'd expect that to be more second half weighted or first half weighted, given you have a few moving pieces with Cost inflation and some volume comps that are maybe a bit unusual.

Speaker 3

Look, Adam, we've given the full year guidance there for you that 7% to 11%. Typically, our business is weighted Kind of 45% first half, 55% second half. We haven't given particular guidance by quarter, But I think that range, we're expecting to be within that as we head to the year and through the year.

Speaker 2

Okay. And then you obviously have

Speaker 5

a large global footprint. Is it possible to say how the Delta variant has impacted demand, if At all across the regions that you operate in? And is there anything sort of anticipated in fiscal 'twenty two guidance from perspective.

Speaker 2

Yes, Anthony, first of all, it's all incorporated in our guidance, our outlook on the top line, starting points for the outlook and the forecast For the coming year, it's really early to say. I think we would say that consumption and our demand other than in healthcare has more or less Normalized over the last several months, notwithstanding the pickup in positive test results that are coming from the Delta variant. So at this stage, we haven't really seen any kind of Dislocation resulting from COVID in the near term here.

Speaker 3

Okay, that's helpful. I'll turn it over.

Operator

We have our next question coming from the line of Ghansham Panjabi with Baird. Your line is open.

Speaker 6

Hi, good evening. This is actually Matt Krueger sitting for Ghansham.

Speaker 2

I guess Just wanted to

Speaker 6

start out with, given several moving pieces, including some unusual volume comps and things like that, Can you outline what your budgeted volume growth by segment and or by region might look like for fiscal 'twenty two? And then just given that we're halfway through August already, can you talk about how some of the sales in key segments or

Speaker 3

Look, typically, we'd expect low single digit growth on the top line. I mean, that's what you saw This year and if you look over history, that's typically what we see. So I think as we to give you any more details on that, I think The low single digit is where we would point to.

Speaker 2

I think also if you look back over time, We've typically grown kind of mid to high single digits in emerging markets and kind of low single digits in developed markets, which is consistent with Consumption patterns in those different parts of the world. And then from an end market perspective, we're pleased with the performance in some of the higher value add segments where we're really pushing Typically protein, pet food, coffee, the things where there's more differentiation. Healthcare would typically be at the top of that list. Obviously, we're weathering A bit of a blip because of COVID at the moment, but that's kind of how we think about getting to that low single digit expectation over time on the top

Speaker 6

line. Great. That's helpful. And then I just wanted to shift over to the raw material environment. Can you talk a bit about What type of headwind do you experience from higher raw material costs and potentially raw material shortages during the latest quarter and full year of 2021, Along with how those raw material trends are likely to impact your business as we move into 2022, Any detail on if you had issues procuring materials or if there was any downtime taken because of lack of supply would be

Speaker 3

Yes, sure. I'll take the financial piece, if you like. So the first thing is, as you know, in the industry, we pass through raw material Pricing to customers and on a contractual basis, so it's a timing issue more than anything on that front. The other point about EMCOR, obviously, we Broad and diverse range of raw materials and consumption around the globe. So you've got to take that into account as you look at our numbers through the year.

Speaker 3

Then of course, we build capabilities over the many years of getting that raw material passed through. So from where we sit today, we're really pleased with How we dealt with some of the spikes in 'twenty one. As we said in the remarks, we recovered over $100,000,000 in flexibles in Q4 Alone and exited the year on an annualized basis, that was about $500,000,000 in those prices, so more to come. The price lag cost was manageable as it was in Q3. So we haven't called that out specifically.

Speaker 3

And really the evidence around that is through our margins. So you can see that our margins continue to expand in Q4 and in fact expanding in every quarter throughout the year. So when we put all that together, we're really pleased with where we've gotten to on that front. And our teams are really, Really, we build capability in that space to make sure that we get that pass through efficiently. And then on the

Speaker 2

Yes. And as far as the outlook in terms of the commodities, I mean, as Michael said, we're pretty diversified. So it's always a little bit of a mixed bag. But generally speaking, We see things moderating and possibly the increase is abating over the next quarter or 2. As you pointed out, Matt, the supply availability of certain materials is probably the bigger issue potentially at the moment.

Speaker 2

We have not taken any downtime to answer your Specifically, but there are certain materials, particularly some of the specialty grades that are in short supply and that are on allocation. And that's been quite disruptive and it consumes a lot of management time just to ensure that we're getting access. I think we've done a good job of By virtue of our scale and relationships we have and the breadth of the supply base we have, but that is as big an issue as the price inflation.

Speaker 6

Great. That's helpful. That's it for me. Thanks.

Operator

We have our next question coming from the line of Salvator Tiano with Seaport Research. Your line is open.

Speaker 3

Yes. Hi, Ron and Michael.

Speaker 7

Thanks for taking the questions. So the first thing I wanted to understand a little bit is, as we think about that 7% to 11% EPS growth for next year. What are the key, I guess, drivers of that besides the Buybacks and the synergies. Yes, how should we think about it by segment and if it's more price cost recovery driven or volume driven,

Speaker 3

So I think I can start there for you, Salvatori. I mean, if you think about the growth of 7% to 11%, you're going to see around mid single digit from an organic standpoint is the first point. And then you've still got some benefits from the buybacks come through as well. It's more organic, so there's probably 1% to 2% there that's going to come through. And then obviously, we've got some synergies left to go, which will be low single digit.

Speaker 3

So that kind of explains to you the makeup The guidance and obviously to get to the upper end, we'd see some better revenue in the top line, perhaps a stronger recovery in Healthcare And that's the opposite in terms of the lower end of the range. Maybe some further raw material headwinds Could drive the lower end of the range, but that's really the makeup of the components in that guidance.

Speaker 7

Okay, great. And then I'm not sure if I missed it, but do you have any outlook with regard to some other items components of your EPS and free cash flow guidance like Interest expense, EPS, working capital expectations and also cash flows that you exclude from your adjusted Free cash flow guidance.

Speaker 3

So yes, so we've said the adjusted cash flow is going to be $1,100,000,000 to $1,200,000,000 Again, a range there, which Yes, obviously, depending on the earnings, it will impact that. Working capital potentially could move around depending on headwinds from raw materials, but That's the key items there. We haven't called out specifically interest and tax. I think you can expect that they'd be similar To where we are this year, if there was something unusual to call out there, we'd call it out for you. Obviously, we're going to have higher earnings, so the tax absolute will be higher, Otherwise, within that range.

Speaker 3

And then we're looking to invest more in the CapEx front, as I spoke to in my notes. And that's really to support Organic growth into the future in several opportunities that we've got on hand today. Okay, great. Thank you very much.

Operator

We have our next question coming from the line of Kyle White with Deutsche Bank. Your line is open.

Speaker 4

Hey, thanks for taking the question. Wanted to focus on rigid packaging for my first question. Hot fill volumes continue to see nice growth here. Can you provide a bit more details on what exactly is driving this? Is it still at home consumption with some of the large multi packs Growing or is it really just being driven by kind of the new product introductions and innovation that you're seeing in that market?

Speaker 2

It's a good question because it's across the category. So hot fill containers typically used in ready to drink teas or certain premium Segments of the juice market and course isotonic sports shrinks. And those categories collectively are growing pretty rapidly and most of the participants and brand owners in those categories Are enjoying that growth. And it pretty much is a combination of the drivers you mentioned, Kyle. There's, I think, increased distribution and availability in multipack formats.

Speaker 2

There's probably a bit more at home consumption, but there's also a lot of new product launches and a lot of rejuvenation of Legacy brands and also just extensions or introductions of new ones. So there's a lot happening in that space. A lot is oriented towards Healthier and better for you type line extensions or new products. And so there's just a lot of activity there. And that's a segment where There really is only one packaging format.

Speaker 2

I mean, it's a PET set of segments that Re sealability, lightweight, on the go consumption, it all kind of fits together with the value proposition of the plastic container. So it's all coming together. The volume growth has been strong. We've seen Strong volume growth in the past, we sort of expect at some point you get back towards mid single digits. But for now, the industry is enjoying strong growth and essentially a sold out environment.

Speaker 4

Got it. That's helpful. And then on flexibles, in healthcare packaging, just given you know it's a higher value product for you or mix for you, What's kind of the update there? Are you seeing a recovery in that end market? Or has it been kind of stalled now recently with kind of upticks COVID case with the hospitalization rates that we're seeing.

Speaker 2

I think it seems to have stabilized a bit. I'm not sure we're ready to call To say that it's turned the corner, these are segments and the predominant subsegments would be medical device packaging and pharma packaging. And we're More weighted towards pharmaceuticals in Europe and a little bit more weighted towards medical in North America. And these segments would be growing typically at mid single digits And have for several decades. And they offer great differentiation and therefore good margins.

Speaker 2

I'm not sure where we need to say that we've turned the corner. We see evidence that things may be stabilizing a bit, notwithstanding the recent spike in cases. I'm not sure hospitalizations have So I think we would hope that as we work our way through the fiscal year, that's an area that builds momentum through the 4 quarters of FY 'twenty 2.

Operator

We have our next question coming from the line of Andrew Scott with Morgan Stanley. Your line is open.

Speaker 7

Thank you. Ron, just wanted to sort of step back and ask a bit of a bigger picture question. It was a great job offsetting raw materials in this period. Just want to sort of understand how you see that ability being changed with the Bemis acquisition. Obviously, maybe, If you like, the £1,000 Gorilla brought that scale in your purchasing.

Speaker 7

Has that fundamentally changed your ability to manage your resin input

Speaker 2

It's an interesting question. There's a couple of things that have changed. I mean, what Bemis would have It's just greater diversification in the buy. So we got bigger obviously, but and that helps. The relationships we have with the big suppliers Are not unlike the relationships we have with big multinational customers.

Speaker 2

It definitely matters to be big on a global basis. And there's a lot of discussion about are these regional markets or global markets. I think ultimately, we have some big global relationships and it's helpful. So Bemis brought scale, it brought further diversification in the spend, and that's I'm sure helped. But I think the other thing, Andrew, and you've covered us for a long time, I think the The experience curve, we continue to go down and we've kind of learned over the years and not been around long enough to have been through probably 3 of these peaks in the last 10 years.

Speaker 2

I think with every cyclical peak like the one we've been going through, we get better and better in terms of the internal processes and capabilities to, First of all, measure what's happening and then take action and mitigate it. So it's probably a combination of Bemis and maybe just getting further down the experience curve

Speaker 7

Understood. And I have covered you for a while and I know this is a question that You probably get sick of, but to what extent should we view the comment around the buyback as a reflection on maybe a lack of Attractive opportunities in the acquisition market at the moment?

Speaker 2

Look, I don't think you should see it as an eitheror. I think what you're seeing with this result, we've been talking about Cash that the business has been taught for a long time and this is going into a fiscal year with line of sight to Excess cash flow, even after continuing to fund the dividend and continuing to actually fund more CapEx, as Michael pointed to, CapEx will pick Again in FY 'twenty two, even after those two allocations of cash, the business will generate a substantial amount left over. And we go into the year with an expectation that we will have to lease buyback shares. And if there is an acquisition that popped up, we would not hesitate for a second to Either suspend the buyback or to find the funding, which we would comfortably be able to do. So it's an I think it's an and, Andrew, it's not an or.

Speaker 2

Very helpful. Thank you. Thanks.

Operator

We have our next question coming from the line of Adam Samuelson with Goldman Sachs. Your line is open.

Speaker 8

Hi. Yes, thank you. Good evening or good morning, everyone. So maybe Following up on that last question and your response, Tran, just thinking on the M and A front, If you think about the kind of growth potential beyond fiscal 2022, obviously, there's some more Bemis synergies that You're capturing and annualizing as you roll into your fiscal 'twenty two outlook. The size and Scale of that business opportunity was fairly unique and probably not going to be easy to replicate.

Speaker 8

And so I'm just trying to think about the ability or the confidence that you have to drive The inorganic growth and especially not just to buy the businesses, but to extract value from them at scale moving forward where It might be harder to find businesses of Bemis' size moving forward.

Speaker 2

Yes. Look, it's a really good question at this point in time because we were absolutely resolute and focused on making the Bemis deal a success. And We know there's a little bit to do, but it's essentially complete, which is why we provided a bit of a wrap up today. You're right, from a pure play There's not another $6,000,000,000 or $7,000,000,000 deal out there that's obvious. And we don't feel compelled to move outside of our product segment mix because we just think there's ample growth in the segments that we're in.

Speaker 2

So if we kind of constrain things or put some boundaries around The opportunity set, that does not limit us in any way. I mean, generally speaking, if you go back over the last 10 years or so, The company has been pretty acquisitive. We're probably up to around 30 deals and we've had a good track record of bringing synergies out On the cost side in particular, getting some product benefits as well. So we'll continue to do that. I mean, I think there's no shortage of medium sized Deals in the packaging space, as you can see every week there's another deal announced.

Speaker 2

And the good thing about being acquisitive and being big Is that we're in

Speaker 3

the deal flow.

Speaker 2

So almost never a deal is happening that is at least not put in front of us and we at least get the option to take a look Or not. And that will be part of the formula going forward. So the $400,000,000 that we're allocating this year to buybacks, I mean, we'd have an equal Each year that we'd be thinking about deploying in an ongoing sense for bolt on M and A. And then obviously, if something comes up, then we would love to have a crack at that too.

Speaker 8

Okay. And then maybe just following on the discussion on growth investments. Probably incremental color on Some of the capacity adds within the growth CapEx, I think I heard a $500,000,000 number referenced earlier, so $100,000,000 $150,000,000 or so of growth Just where that's being directed and more broadly, as we think about some of the responsible packaging investments kind of opportunities you're pursuing, if those might be Greater use of

Speaker 2

the capital moving forward. Yes. No, it's a good question. I mean, we're going to be stepping up. We'll be about 4% of sales, which we think is a A reasonable number to expect us to deploy each year.

Speaker 2

We've been a little bit lower than that because we've been focused on integrating Bemis, obviously, but we'll be at about 4%. That means another A bit of a step up. Next year, which is incorporated into the free cash flow guidance that Michael described. Look, anecdotally, some of the places that we're deploying cash, I highlighted We're putting some capacity in the hospital space in North America. Great use of capital, particularly when it's on-site, co located Within a customer premises, those are as good as it gets in terms of organic investments.

Speaker 2

We're investing in the medical space, Medical device packaging in Malaysia and in Ireland. We've got some capacity we're going to put in Malaysia For certain product categories that we typically export out of North America or Europe, and we're going to localize that, which opens up Just a whole another set of growth options for us. And in Ireland, we're going to get into a product line in medical that we hadn't been in before. And then from a sustainability perspective, we made a number of announcements over the last 6 to 12 months in new products. So we've talked about A couple of platforms like Amlite, which is a recyclable or ready to be recycled retort pouch, Which is unique.

Speaker 2

And the demand has just been outstanding. The product is sold out before it's even Barely getting launched and so we're going to add capacity in Europe for that. So those are just some examples, but that all fits within that roughly 4% of sales number that's embedded in Free cash flow guidance.

Speaker 7

All right, great. I appreciate

Speaker 3

the color. I'll pass it on. Thank you.

Operator

We have our next question coming from the line of George Tsakos. Your line is open.

Speaker 5

Thanks very much. Hi, guys. Congratulations on the end of the year and appreciate the rundown and the presentation today. Ron, I wanted to Segue off that last question and maybe go to Slide 12. If we can if you could for us Quantify or categorize the packages like Amlite, like the PVC film, free films, How much revenue do you think you're doing right now in terms of the responsible packaging product suite that you're offering your customers right now?

Speaker 5

And And what do you think that's growing at? If you could put any numbers around that. And relatedly, is this scenario that could get I mean, the answer will be yes, obviously, but will you really think there's an opportunity for acquisitions to improve your performance here or you really don't need acquisitions, you've got the Technology in the market. So couple of questions to start.

Speaker 2

Yes, let me just go and answer the second part first. I mean, we do believe we have the best We also are humble enough to realize we don't have all the good ideas out there. And so if there is an acquisition that would add to our product portfolio, we would We do it. And it's one of the reasons why we're going to be much more active in the corporate venturing space. It's another it's also one of the drivers of the investment with Michigan State.

Speaker 2

So we're going to do much more in terms of external sourcing of, let's call it, good ideas and innovation to supplement what we do believe It's industry leading R and D. So that I'd say watch this space.

Speaker 3

As far

Speaker 2

as the sales into what we might describe as more Sustainable Packaging. If we think about it through the lens of what's recyclable, we'll just take that lens and we're not for a second suggesting that that's the only Answer here, but that tends to be the most readily available end of life solution. We've got 3 broad segments, 2 of which are fully recyclable. So much everything that we produce and sell in rigid packaging is recyclable. Everything we make in the carton segment is recyclable.

Speaker 2

That leaves the Flexible segment. And in that space, right now of the sales in the Flexible Packaging segment, About 60 percent -odd of what we're selling today is considered designed to be recycled. There's probably another 75% of our sales that could be. So there's 10% to 15% that could convert. It just requires Customers to adopt the different structure.

Speaker 2

And then you have additional platforms like Amlite and like Matrix and like Amprima, which helped move those numbers up in steps. None of them are going to move the needle on those metrics in a material way in any given year. But over time, the Percentage of our flexibles that is recyclable will start to increase as those products get take up. I'll stop there, but we're also acknowledging that's not End of the story, we've got to have the waste management infrastructure and the consumer has to participate as well too. But as far as the package design, that's about where we're at.

Speaker 5

Okay. Ron, I appreciate that. And then coming back to the Q4 and I recognize obviously Amkor likes to focus on the year to date results and the year results and you Good performance. It looked like in flexibles, there was a deceleration, actually a decline, You know, call it in the low single digit range in flexibles. Was that just purely healthcare and the continued Weak end markets for you this year, did anything else slow down for you at the end of the year as we're exiting and going into fiscal Thanks and good luck in the quarter.

Speaker 2

Yes. Thanks George. No, I mean, it's basically the same story that we've had in Flexibles the whole year, it's healthcare. Healthcare is a sizable business. If you Just think about it as between $1,500,000,000 to $1,000,000,000 in sales within that Flexibles portfolio and you think about The big North American Medical business and European Pharmaceutical business being down double digits, that takes What percentage points off of what you'd expect from a growth perspective, right?

Speaker 2

They should be growing mid single digits and they were down double digits. So that takes a meaningful Fight out of the overall segment growth.

Speaker 5

Thank you, Ron.

Speaker 2

Thanks, George.

Operator

We have our next question coming from the line of Richard Johnson with Jefferies. Your line is open.

Speaker 9

Thank you very much. Good morning, everybody. Ryan, our first question, I just wanted to ask about organic growth in the flexibles division.

Speaker 7

If I look at this over the

Speaker 9

last 2 years and absolute dollar change, all the growth comes from cost or efficiency lines. In fact, the mix of volume and price is negative. So that's obviously very impressive. So really my question is, how sustainable is that? How can you continue to drive organic growth simply through cost out or other efficiencies.

Speaker 9

And should we be worried about the fact that the mix of volume and price continues to be negative?

Speaker 2

Yes. Look, I mean, Richard, you've followed the company for a long time. The top line sales is growing kind of low single digits, actually 2% for a long period of time. Flexibles would normally be in that space. I think the last couple of years is a tough read through if you're talking about the long term trajectory of the business.

Speaker 2

And that being said, with that level of growth, we've been expanding margins for over a decade and the flexibles margins now being up over 14% From where they were 10 years ago or so, it's probably 6 or 7. I think it gives us some comfort that at that level of Relatively modest top line growth, which mirrors the end markets that we supply. We're continuing to grow profit and expand margins.

Speaker 9

Okay. Thank you. And then secondly, could you just run through the performance of the carton business in 2021 and particularly by region. I'm interested to get an understanding

Speaker 2

of what volumes are doing. Thanks. Yes. Look, the current business, which is about 8% or 9% of sales, had a very good year. The business had a good year on profit.

Speaker 2

Profit was up. Great job managing cost. And actually the volume performance is probably a little bit ahead of long term trend. That business from a volume It's likely to be flat to declining low single digits. Last year, it was close to flat on a volume perspective too.

Speaker 2

It's I mean by region, we start to get into some smaller parts of the business, but the bigger parts of Europe and the Americas would mirror the trends that I just described.

Operator

We have our next question coming from the line of John Purcell with Macquarie. Your line is open.

Speaker 3

Good evening, Rob and Michael.

Speaker 2

Hi, John. How are you?

Speaker 7

Just had a couple of questions. Look, the first one, Right, just in relation to CapEx and some of those increments there, can you remind us what your return targets are on that Incremental of that growth CapEx, obviously, you've had growth or return targets in the past. So how they've changed perhaps or not? And the second question for Michael. Just in terms of that free cash flow, dollars 1,100,000,000 what was the drag, if any, from Raw materials and higher sort

Speaker 3

of inventory there or impact on that. Thank you. Yes. Hey, John. Yes, I'll take my thoughts.

Speaker 3

I mean, in terms of Returns on CapEx, we really haven't changed the model there. I mean, it's a cash investment. We expect 20% return on those, so as a minimum. And Yes, that's typically what we work towards. So no real change there over the term.

Speaker 3

In respect to working capital, Yes, look, we saw some higher inventory during the period and some higher receivables as we started to That's through the system and then the offset was the payable. So from a year end perspective, it wasn't a meaningful impact, But there's probably still a little bit of that to flow through the system and it's more a timing issue than anything. But in the cash flow That we saw at the year end, we were pretty pleased with where we ended. It was a strong performance and we had a good finish in the year. And that's really on the back of The continued focus in working capital, particularly around things like debtors and overdues, we had really good performance there across the board.

Speaker 3

Just general inventory management It's been strong and we continue to manage with our supplies as well. So overall, really pleased on the working capital front.

Speaker 10

Got it. Thanks a lot.

Operator

We have our next question coming from the line of Anojja Shah with BMO Capital Markets. Your line is open.

Speaker 11

Hi, there. I wanted to ask about your sourcing of recycled resin. You're And then I think you said you're going to double it again over the next 18 months. And we hear from other companies that it's actually quite to source the amount of recycled resin that they would like to. What do you think that EMCOR is doing differently?

Speaker 3

Well, listen, it's becoming more

Speaker 2

and more important obviously to our customers. A lot of what we use and maybe just to dimension the numbers, so across Amkor, rigid Packaging would be the place where we're using the most recycled resin. We exited FY 'twenty one, Converting about 10% recycled resin out of the total that we convert and that number is growing in absolute tons as you referred to, but also it's growing as In that space, we're clearly the biggest buyer out there. And so we've been actively sourcing Both from new entrants into the recycled resin space as well as some of the virgin resin providers that have gotten into PCR. So it's a pretty broad book that we're buying across.

Speaker 2

And then in flexibles, it is a little bit more challenging when you're trying to source polyolefins And that's still pretty nascent. A lot of the material that we're using for food For flexible packaging, it's coming from food grade milk and water jugs and things and those are in scarce supply. That will change over time. Chemical We will be a contributor over time. We're active in more than a half a dozen different pilots on and feasibility Projects on chemical recycling around the world, that will be part of the mix too.

Speaker 2

So, I'd say watch the space, but we're so far we've been able to satisfy our demand.

Speaker 11

Great. That's very helpful. Thank you. And then my other question, you talked about exceeding the synergy target by at least 10%. Maybe you could just give a little more detail on where you're doing better than anticipated, just so we could get a little more granular around that at least 10%

Speaker 2

number. Yes. So the original number was $180,000,000 and that's the number that we're going to beat by about 10% or at least 10%. We talked at the time of the deal about 3 big sources. 1st, G and A overhead reductions.

Speaker 2

We estimated that would be about 40%. That's more or less tracked. Maybe a little bit we're probably a little bit ahead of that number, but it's been in that ballpark. Procurement, we said would be another 40%, that's

Speaker 4

more or

Speaker 2

less In line. And then footprint, at the time of the deal, we thought might be 20%. We found more footprint opportunities than we probably And so more of the outperformance proportionally will come from footprint, which means plant closures. So if you stand back from it, it's mostly The footprint plant closure side and a little bit on G and A, which is the source of the outperformance.

Speaker 11

Great. Thank you very much.

Speaker 2

Thanks.

Operator

We have our next question coming from the line of Larry Gandler with Credit Suisse. Your line is open.

Speaker 10

Thanks, everybody. Good day. A couple of questions, obviously. So my first question is, If I can do it by way of example, the question is, what are the top three opportunities to create organic Earnings over the next say 3 years, call it FY 'twenty five. Here's an example of what I'm asking for.

Speaker 10

In Asia, you guys might be under skewing in terms of your overall market share in medical and pharma packaging relative To your market share in other parts of the world. So when you look at the size of the Asian market, is that any medical packaging? Is that an initiative Amkor might undertake and how would they do it to grow out its earnings over the next 3 years? You might not look at geography, you might look at maybe pet food across the world. So can you dimensionalize those top three initiatives Trying to look past short term earnings.

Speaker 2

Yes. It's a good question. I mean, you picked on one. I'm not sure it makes the top 3. I'm going to elevate up on the top 3.

Speaker 2

But on the medical point in Asia specifically, absolutely, I mean, we're actually doing that now and that's the investment in Malaysia that I referred to. We're putting capacity in that part of Malaysia that I referred to, we're putting capacity in that part of the world that enables us to be much more nimble and responsive to the local market demand, which is substantial. So That absolutely is part of it. I mean, if I zoom out and I try to think thematically, one thing that comes to mind is Broadening our participation in some of the higher value add segments that we're deep in, in one region. So pet food, coffee, Protein, these are segments that we have really strong positions in, but it's uneven.

Speaker 2

So we might be particularly strong in Europe in 1 A little bit weaker in North America. And so evening out that participation is going to be a big source of organic growth. As a region as a whole, I would say Asia, particularly China and India, and I would probably elevate up For medical and just say generally in the places we're choosing to play in those Asian high growth Asian emerging markets, That would make the list. And then I probably wouldn't rule out rigid packaging in North America, Particularly as we continue to expand the healthcare sorry, the hospital franchise that we have and grow in the specialty container space where there's Technology and differentiation, but also share opportunities. So it's a good question, Larry.

Speaker 2

I'd sort of give you those 3 as It's certainly amongst the top

Speaker 10

4 or 5. Okay. I look forward to scoping those out maybe in the near future. And my second question pertains to Alliance and Plastic Waste. Excuse the criticism, but it feels like a bit of greenwashing here.

Speaker 10

Amcor has taken this executive committee position. And when you get on the website for Alliance and Plastic Waste, First of all, there's no set of accounts and it's supposed to be an organization that's well capitalized. But when you look at the projects, I think there was a project in India where they put

Speaker 5

some sort of filter in

Speaker 10

a river, Which ended up getting stolen. There is a couple of projects, one in India and Africa, where it's Highly manual intensive, doesn't require a lot of capital of collecting waste. This is an organization that's backed by 1,000,000,000 and the projects seem very small. I'm just wondering where you want to take that organization because as you say, we need the waste management infrastructure, particularly in emerging markets. And I've always had hoped that, that was going to be the organization that would drive it.

Speaker 2

Listen, Mike, I think it's an interesting observation. I mean, would say that, that of all the different partnerships and organizations that we're a part of has catalyzed the most actual funding By a long shot. And so I take on board some of those projects that have been launched are smaller. I think to contextualize it also, we have to keep in mind is a new organization essentially. It was started a couple of years ago.

Speaker 2

And then as soon as it stepped up with full time management, the pandemic kind of has slowed things down. But There is more capital that's been committed by the executive committee and the Board of that organization Anything else that we're associated with, it's real money. I mean, we write the check.

Speaker 10

That's what scares me. There's just no sales tax that we've seen anywhere.

Speaker 2

Well, like any NGO, Larry, sometimes at our industry association, it's not always this transparent. But the money that the Participants are putting into that organization will crystallize and will catalyze action. And there's good examples. And then the Project Stop in Indonesia It's a good pilot. There's one in the U.

Speaker 2

S. Now called First Star, which is small. And I think as the initiative gains steam, we'll have bigger, Bolder projects to point to, but for the early days, I'm pretty pleased with the way it's distributing its resources.

Speaker 3

Okay, good.

Speaker 10

Thanks for that, Brian.

Speaker 2

Thanks, Larry.

Operator

We have our next question coming from the line of Nathan Rolle with UBS. Your line is open.

Speaker 7

Yes. Hi, Ron. It's It's

Speaker 8

pretty clear that you're signaling the completion of

Speaker 7

the Bemis integration, which I

Speaker 8

guess gives you the bandwidth

Speaker 2

to go and pursue some

Speaker 8

of those smaller bolt on M

Speaker 7

and A opportunities. But just given we haven't seen you too active in that space for the last few years, can you just remind us of your bolt on M and A investment criteria, just in terms of return metrics, but also where you'd be comfortable taking leverage to? And also, where are you seeing the most attractive M and A opportunities right now?

Speaker 2

Yes. I would say Across our portfolio, there's going to be bolt on opportunities in pretty much throughout the business. If I had to put a priority list together, I would say Flexibles to reinforce some of the higher value end market segments that we're participating in or in Asia Would be near the top of the list. I think in rigid packaging, the specialty space in North America outside of beverage Well, it would be high on the list, so that would be from a product perspective. Returns are always going to be important.

Speaker 2

The company is Now generating 15% return on capital. So we need to be there or thereabouts as we think about investments. And I mean, from a leverage perspective, I wouldn't give you a number other than to say we're going to be an investment grade company, always have They are committed to that. But within that, we have ample capacity. If you think about the EBITDA now, the business Of over $2,000,000,000 One turn would make for a lot of firepower for M and A.

Speaker 2

So there's no constraint there.

Operator

Our next question coming from the line of Keith Chow with MST.

Speaker 12

So just a couple of follow-up On the adjusted free cash flow guidance, I take your point around a step up in CapEx, but obviously, the offsetting factor to FY 'twenty one with the Time of the tax payment. So, Michael, perhaps if

Speaker 2

I don't want to steer you

Speaker 12

in a direction, but certainly feels like the low end of that range It's probably unlikely and potentially getting more towards the top end. So I'm just wondering if you can provide us With a bit more detail on where you think at this point in time you'd be sitting with the net range, not seeing some of the moving parts?

Speaker 3

Yes. Look, Keith, as I said, the range is Aaron. It's a reasonably wide range, dollars 1,100,000,000 to $1,200,000,000 Obviously, factored in that is the earnings guidance range. So we've given a range here of 7% to 11%. So depending on where we end up in that range, we'll drive the cash flow as well.

Speaker 3

And look, the other key component is really the working I said earlier, we've had some raw material increases, which we managed pretty well into the end of FY 'twenty That can be a factor as we head into 'twenty two. There can be some movement there to the upside or the downside. But so that's really what's In the range, that said, we've managed working capital really well over the last 2 years, ticked intake and cash out on that front. And as we move forward, we think that that's going to be pretty stable. So I mean, they're the drivers within that range.

Speaker 4

Do you think, Michael,

Speaker 12

you can continue to improve that average Capital to sales ratio absent any other movements in raw material costs? I know you've done a particularly good job, particularly in FY 'twenty. Any more opportunity to come from that?

Speaker 3

Look, typically, we'd see the working capital. If you go back before the Bemis acquisition, the working capital kind of was in that 8% to 9 And for us, we feel that's pretty comfortable. When we did the acquisition, it jumped up to 10.7%, then we got it down to 9.5% and we're down at 8%. So I think we feel pretty comfortable about where we are today. So you shouldn't expect too much more to come out of the working capital to be relatively stable.

Speaker 12

Okay. Thank you. And then just a second question, and forgive me if I've missed this one. But I think your labor and transport costs called out for the rigid packaging business, in part due to the volumes growth that you're seeing within that business in North America. Is there an expectation for those labor and transportation

Speaker 3

The reason behind that was really we saw increases in demand, which and basically the capacity is full and in the industry capacity is full. So we didn't get a chance, An opportunity to build inventory in the quieter months leading up to the summer. And so as we what we experienced was increased Costs just to manage the supply chain. So we had shuttling costs, increased labor and the like. And that's ahead of installing new capacity.

Speaker 3

So we've touched on today that we are installing new capacity in that cocktail space particularly. So we'd expect over time, they should start to abate as we get that capacity come online.

Speaker 12

And is it possible, Michael, to give us a quantitative estimate of what that headwind was in the

Speaker 3

Yes, it was about it was a few million in the quarter.

Speaker 12

Okay. Okay, fantastic. Thanks very much.

Operator

We have our next question coming from the line of Cath Wyall with Rimor Equity Research. Your line is open.

Speaker 7

Hi there. Thank you. I just had one question for Ron. You made some comments in your prepared remarks about the need for waste management infrastructure To pick up, which is that's very, very clear. Do you think that Amcor will have to invest In this space, obviously, you're taking an alliance approach at the moment.

Speaker 7

But do you think in order to control The development of that infrastructure that you actually have to invest there? Thank you.

Speaker 2

Yes. Thanks, Scott. It's a good question. I mean, the short answer is No, I mean, we're going to be active in bringing responsible packaging to life in a number of different ways. But We'll also be and we'll have to be somewhat judicious and focused and disciplined about where we deploy our shareholders' capital.

Speaker 2

And we think the best use of the capital Is in developing packaging that is going to have a better end of life profile or uses more recycled material or less material in the first place? That's where most of our efforts will go. As far as waste management infrastructure, there's a number of different things and means to fund that, including extended producer Stability regimes, bottle deposits and things like that. And when those are properly designed, then we're very supportive of those and that can likely be part of the answer. But I don't envision us putting capital to work in that part of the value chain in any extensive basis other than maybe just some Pilots through a partnership or an alliance.

Speaker 7

Okay, great. Thank you. That's all I have.

Speaker 2

Thank you.

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Speaker 3

Thank you. Thank you.

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Earnings Conference Call
Amcor Q4 2021
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