Amcor Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2021

There are 14 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Amkor First Quarter 2022 Without further ado, I would like to welcome your host for today, Ms. Tracey Whitehead, Head of Investor Relations, the floor is yours.

Speaker 1

Thank you, operator, and welcome everyone to Amkor's Also a reminder that the call today includes some forward looking statements, which remain subject to certain risks and uncertainties. And what we're discussing today. During the first and last session, once again, we request that participants limit their questions to the right to be answered and we rejoin the

Speaker 2

Okay. Thanks, everyone, for joining us to discuss Amkor's fiscal 2022 First Quarter Results. Joining me today is Michael Cascimento, Amkor's Chief Financial Officer, and we'll begin with some brief prepared remarks and then open the line for Q and A. We start with safety because it's the first and most important of our values and the highest priority for every one of our 46,000 people around the world. And Amkor has been on a long term journey towards our goal of no injuries and our safety performance remains a real highlight.

Speaker 2

Across the group, we reduced the number of injuries by 16% compared to the prior year and 62% of our sites have remained injury free for at least 12 months. As we continue to make strong progress, it reinforces our conviction that an objective of no injuries is absolutely possible And we continue striving towards that goal. We have 4 key messages today listed here on Slide 4. 1st, Amkor is navigating well through challenging external conditions that we highlighted in August. And like the rest of our industry, including our customers and suppliers, We're experiencing unprecedented complexity across the supply chain, but we're performing well and we remain on track to deliver on our expectations for the year.

Speaker 2

We're able to say that confidently because we're leveraging our scale and global reach. We're relying on the capabilities and experience of our management teams And we're maintaining an unwavering focus on the right priorities, in particular security of supply for our customers, recovery of higher input costs and Managing the Sales Mix. The second message today is that Amkor delivered a solid Q1. While sales were tempered By supply chain challenges in some parts of the business, we delivered another solid quarter of double digit earnings growth, which was in line with our expectations. 3rd, we're reaffirming fiscal 'twenty two guidance and we remain on track to meet the fiscal 'twenty two earnings growth and cash flow objectives that we provided in August.

Speaker 2

And finally, we've built a strong foundation over the last several years and today Amkor is better positioned strategically than ever. In addition to delivering against short term priorities, we remain focused on our long term strategy and track record of growth and value creation. Turning to the financial highlights on Slide 5. The business delivered a solid start to the fiscal year. Our 10% reported net sales growth Includes approximately $285,000,000 of price increases related to the pass through of higher raw material costs.

Speaker 2

We're incredibly proud of the way our teams have continued to successfully steer us through this environment of ongoing inflation, achieving significant recovery over the last several quarters And we'll continue to manage this dynamic going forward. Excluding this pass through impact, organic sales grew 1%. In this environment, we're maintaining focus on our long term strategy of optimizing mix, and it's clear that volume performance in both segments would have been higher in an unconstrained environment. Overall, EBIT increased 7% in comparable constant currency terms, which was right in line with expectations. The Flexibles segment had a strong quarter, generating earnings growth of 8%, driven by favorable mix and outstanding management of costs.

Speaker 2

In Rigid Packaging, the business in North America experienced a particularly challenging environment, including elevated demand combined with full capacity utilization and constraints of critical inputs, which resulted in operating inefficiencies and higher costs. Net income and EPS were Both up at double digit rates, increasing by 10% 12%, respectively. And our financial profile remains strong. We increased cash returns to shareholders during the quarter, including repurchases of $64,000,000 of shares and the Board declared an increased quarterly dividend of $1.2 per share. So the key message here is that the business remains focused and continues to execute well.

Speaker 2

And with that, I'll hand over to Michael.

Speaker 3

Thanks, Ron. Hi, everyone. Turning to Slide 6. The Flexibles business performed very well during the period, delivering growth in high value end markets, Executing well to recover inflation and demonstrating strong cost performance. Reported sales growth of 10% includes recovery of Higher raw material costs, which increased through the quarter.

Speaker 3

Actions we have taken to pass through Those higher costs drove sales up by approximately $210,000,000 which on an annual basis is well over $800,000,000 and represented growth of 9% in the quarter compared with last year. The overall price cost impact was unfavorable, but has remained manageable given the diversity of materials we'll buy, The multiple regions in which we consume those materials and the implementation of inflation driven pricing actions. This is once again evident And our margins, which remained at a level equal to the prior year, despite the impact of higher raw material costs and related pricing recovery. Excluding the raw material impact, organic revenue growth of 1% was driven by favorable price mix of approximately 2%. Consistent with our long term strategy, the business has remained focused on mix with continued growth in higher value end markets, including pet food, premium coffee and Medical.

Speaker 3

This growth more than offset the sales impact of lower volumes in segments such as Home and Personal Care and across Southeast Asia. In addition, shortages of certain raw materials, including aluminum and especially resins, had a dampening effect on volume performance In some categories, including healthcare and protein related products. Adjusted EBIT was up 8% in comparable constant currency terms for the quarter And reflects the favorable mix, strong productivity and cost improvements. Turning to the Rigid Packaging business on Slide 7. We delivered reported sales growth of 13%, reflecting the pass through of higher raw material costs.

Speaker 3

Comparable constant currency sales growth of 1% was driven by Higher overall volumes. In North America, beverage volumes were marginally ahead of the same period last year. Hospital beverage container volumes were 1% lower against the Strong comparative period of double digit growth and higher demand in juice categories was offset by lower sports drinks volumes. Specialty container volumes were lower against the prior year, which benefited from strong volumes in the Home and Personal Care category. In Latin America, Double digit volume growth reflects strong performance in Argentina, Brazil and Colombia, and earnings were higher in the region.

Speaker 3

In constant currency terms, segment earnings were adversely impacted by inefficiencies and higher costs in North America, result. Resulting from unprecedented industry wide supply chain complexity and disruptions. Overall demand remained elevated and increasingly volatile in

Speaker 2

the beverage segment. At the

Speaker 3

same time, the business continued to operate at full capacity and we cut historically low levels of inventory. This coupled with further inflation and Shortages for key inputs including PET and certain specialty resins resulted in operating efficiencies and higher costs in order to service customer demand. While we expect these dynamics to persist in the Q2, we anticipate current challenges will improve through the second half of fiscal twenty twenty two. Moving to cash and the balance sheet on Slide 8. As a reminder, our cash flow is seasonally weaker in the first half of the fiscal year.

Speaker 3

And for the current quarter, Adjusted free cash outflow of $242,000,000 compares with an outflow of $190,000,000 last year. The increased outflow mainly reflects higher uses of cash related to working capital with the adverse impact related to timing of higher raw material costs cycling through the business. We continue to maintain a strong focus on working capital performance and our rolling 12 months average working capital sales ratio at the end of September remains below 8%. As planned, capital expenditure is tracking higher than last year as we have stepped up organic investments in key high growth segments and geographies. And Amkor's financial profile remains solid with leverage of 2.9 times on a trailing 12 month EBITDA basis, which is in line with our expectations for this time of year.

Speaker 3

And cash returns to shareholders in the Q1 were higher than the prior year, which reflects 64,000,000 of share repurchases mentioned earlier and an increase in dividend per share. Taking us to the outlook on Slide 9. A solid Q1 of double digit EPS growth in line with our expectations enables us to reaffirm the 2022 guidance we outlined in August. We continue to expect adjusted EPS growth of 7% to 11% on a comparable constant currency basis, which represents an EPS guidance range Approximately $0.79 to $0.81 per share on a reported basis, assuming current exchange rates prevail for

Speaker 4

the balance of the year.

Speaker 3

Free cash flow is expected to be $1,100,000,000 to $1,200,000,000 and the growing cash flow enables us to continue to pay a compelling growing dividend and allocate cash to share repurchases, which we expect will be around $400,000,000 in fiscal 'twenty two, while retaining the flexibility to fund acquisitive growth when needed.

Speaker 2

So with that, I'll hand back to Ron. Okay. Thanks, Michael. Before closing and turning over to Q and A, I'd like to spend a few minutes on the longer term starting on Slide 10, Which summarizes the investment case for Amkor. Over the last several years, we've continued to execute against our strategy, strengthen our capabilities and And establish a stronger foundation for growth and value creation.

Speaker 2

And as a result, we believe Amkor is better positioned strategically and our investment case is as strong as ever. In simple terms, that investment case starts with our market positions. We're the global leader in most of our chosen segments with relative and absolute scale advantages in every region and significant exposure to attractive high value end markets across food, beverage and healthcare. We have a proven track record of consistent earnings growth and margin expansion, and we generate significant free cash flow every year, including between the $1,100,000,000 $1,200,000,000 in this 2022 fiscal year. With a strong balance sheet, debt cash flow provides substantial capacity to invest in the long term potential of our business And also to deliver a significant and growing amount of cash to shareholders.

Speaker 2

We use our shareholder value creation framework, which is shown here on Slide 11, to Describe how we allocate cash flow every year and how that translates into value for shareholders. Through the combination of reinvestment in the base business, M and A In share repurchases, we expect to generate 5% to 10% constant currency EPS growth each year. Our dividend has historically yielded around 4% continues to be especially compelling in such a low interest rate environment. But through economic and commodity cycles, the outcome of allocating capital in this way In line with the 10% to 15% you see here on this slide, and we're very well positioned to continue that trend. The strategic choices we've made guide how we prioritize investments back into the business, and we're investing now in several areas that will continue to drive long term organic growth, Those are highlighted on Slide 12.

Speaker 2

First, our business mix is increasingly oriented towards the most attractive segments, which offer greater potential for differentiation and Growth like healthcare, pet food, premium coffee and hot filled beverages. Our results this quarter provide strong evidence of how the considered choices we make every day Lead to these attractive segments representing an increasing percentage of our sales mix, which contributes to consistent margin expansion over time, Even while navigating complex environments like the one we're in now. 2nd, we continue to invest to expand our leading emerging market positions. We had another quarter of double digit growth in both China and India, for example, and we're actively investing in these markets where we Expect to see demand remain a tailwind for the foreseeable future. And third, we remain uniquely positioned to launch a steady stream of innovative new packaging solutions.

Speaker 2

We're investing in our innovation capabilities and network of global innovation centers so we can capitalize on what we believe is our greatest opportunity for growth and differentiation, And that is the demand for more sustainable packaging. Slide 13 highlights what we see as the 3 requirements for responsible packaging And we're seeing clear progress on each of the 3: package design, waste management infrastructure and consumer participation. In the past, we've highlighted examples of groundbreaking new product platforms like Amlite, AmPrima and AmSky, But we're also actively collaborating with others to develop solutions that address infrastructure and consumer participation. Most of these initiatives start Small, but all have the benefit of demonstrating working models that can be scaled and leveraged across markets and customers. In Colombia, as an example, we partnered with one of our key customers and others across the value chain to achieve a fully circular bottle to bottle solution results.

Speaker 2

To a structure which incorporates 30% chemically recycled material. And finally, an example which is already functioning at scale globally, We've worked with the global market leader for single serve premium coffee to increase the use of recycled aluminum, which is now at 80% for our core product line. In the next few weeks, we'll be releasing our 2021 sustainability report, which will describe our sustainability strategy and agenda more fully And we'll provide more data and case studies to illustrate the strong progress we've made over the last 12 months. And finally, on Slide 14, a summary for today. Amkor delivered a solid first quarter result in line with expectations as we navigated well through a challenging external environment.

Speaker 2

This leaves us on track to meet our 2022 fiscal year guidance. And looking further ahead, we're better positioned strategically than ever before with a strong foundation for continued growth and value creation. So with that, operator, we'll close our opening remarks and open the line for questions. Thanks.

Operator

And to rejoin the queue for any follow ups. Our first question comes from the line of Ghansham Panjabi of Baird. Please ask your question.

Speaker 5

Thank you. Good day, everybody. I guess, first off, maybe you can update your view Update us with your views on volumes for fiscal year 'twenty two. 1st quarter is obviously flat. You have tough comps as in bridges As well as the year unfolds, just curious as to how you think the rest of the quarters will evolve?

Speaker 5

And I guess I'm asking because a lot of your customers are going to be passing on Pretty significant price increases to consumers calendar year 'twenty two onwards and there is some level of elasticity in those Categories, at least historically. So I'm just curious as to what you have baked in for volumes.

Speaker 2

Yes, it's a good question, Ghansham. Look, the guidance that we Just put out, remember, it's only 90 days because we're coming through the Q1. So our guidance is just from August and factors in Pretty much the volume growth that you would expect from us in any given year. We're sort of low single digits, little slower this Q1, But predominantly because of some of the constraints we have in the supply chain, we would expect through the rest of the year, those will abate over time. And as it relates to the pricing, we haven't historically seen a lot of elasticity in the demand for the products that we're providing packaging for considering that These are defensive consumer staples.

Speaker 2

On the food side, even the more premium products have been pretty resilient to price. There's been a lot of price taken already In many of those segments. And then obviously, on the healthcare side, it's probably even less so.

Speaker 5

Got it. And then in terms of the raw material shortages Just give us a bit more color in terms of which specific raw materials you had some constraints in, if I read that correctly. How are you managing also with labor issues in the U. S. And Europe?

Speaker 5

A lot of your peers have called that out. And do you see any residual impact on the Q2 as well? Thank you.

Speaker 2

Yes. Look, the labor has not been a major issue for us, certainly not from an inflationary perspective. There are times when labor is hard to come by. That's Definitely true. But more for us, it's been a supply situation on the raw material side that's been limiting.

Speaker 2

And it's predominantly been in some specialty resins that affect the flexibles business and also the specialty container part of rigid plastics. These are Presence that are not used in large quantities, but provide some particular feature barrier or otherwise that have been on particularly short supply and That's put us on allocation and we in turn have put customers in allocation in several segments across the business, including medical where we had a rebound And had some growth, but not as much as we could have had. So specialty resins is one area. In PET, which is a predominant raw material in our Rigid Packaging business, we've been searching for resin for much of the quarter, in fact, probably back into the Q4 of the last fiscal year as a number of our suppliers have had disruptions of a variety of different sorts and they've gone on force majeure. And then even for some of the aluminum grades that we use in pharmaceutical packaging, we've had limitations.

Speaker 2

And so again, we've had customers on allocation in the pharma space as well. So That's where we're seeing it now. I think there's reason to believe that there's relief in sight. Many of Specialty resins, we're starting to get some increased allocations. PEP over the next quarter or 2 should start to normalize as well, but certainly in the first quarter Provided a bit of a headwind.

Speaker 5

Very good. Thanks so much.

Operator

Your next Question comes from the line of Anthony Pettinier from Citi. Please ask your question.

Speaker 6

Good evening. Ron, you saw Europe Flexibles volumes down year over year. And I'm just wondering, was that driven by a tough comp or maybe some broader consumer weakness in the region. Just wondering if you could provide any more color on what you're seeing in Europe.

Speaker 2

Yes. Look, Anthony, That's driven fully by limitations on raw materials and us having to make choices. And so really the story in the Flexibles segment overall and Especially in Europe has been around proactively managing the mix and making choices to allocate materials that are on limited supply to the We saw that have an impact as I just described for Gantium in some of the more Attractive spaces that we're in, including pharma and some of the protein segments as well. And we just had to make some choices on what to do with the Material that was in scarce supply. So that's the predominant driver there.

Speaker 6

Okay. That's very helpful. And then we've Heard about some virgin resin taxes being considered in Europe. I think during the quarter, France issued some restrictions on plastic packaging for On fruits and vegetables, do you see any commercial impact from those taxes and maybe that restriction specifically? Just wondering if you could talk a little About the regulatory environment in Europe and maybe more broadly how you're positioned with ESG?

Speaker 2

Yes. Look, as it relates to the resin taxes, virgin resin reductions, etcetera, I think these dynamics which They're evolving in pretty rapid in a pretty rapid way, pretty dynamic environment. They just create opportunities. And in many cases, there's an opportunity for us to help take cost out of the customer's supply chain, inclusive of some of these potential taxes by taking weight out of the package or innovating around some of the materials of concern. So from an innovation perspective, This is generally favorable for Amkor.

Speaker 2

I think and generally speaking, as it relates to package design It's not regulations. We continue to have a seat at the table as those are debated and discussed, both as an individual company and also Through the industry associations that we're participating in.

Operator

The next question comes from the line of George Staphos of Bank of America. Your line is open.

Speaker 7

Yes, hi. This is Kashan Keeler on behalf of George Tsappos here. Just going back to your comments on the beverage business, given the low levels of inventory there, Can you just give us a sense as to when you might be able to have a better ability to rebuild inventories? Will that be as kind of the supply chain bottlenecks are resolved? And additionally, is there a need to take downtime in that business given you've been running full out?

Speaker 2

Yes. Look, thanks for the question. Let me Let me just step back and describe the situation in rigid packaging at large. And firstly, I would point out this is a North American set of circumstances. The Latin American business It's performed quite well with strong volume growth and higher earnings.

Speaker 2

In North America, we've got a unique set of circumstances. So firstly, the Demand has remained elevated for quite some time, particularly in the beverage space. That has led to a depletion of inventories. We've been running with Historically low inventories pretty much for the whole calendar year and we're running flat out at pretty much full capacity utilization, On top of which then we've had some supply disruptions as I just alluded to on the PET side, which is the primary input. So all of those things conspiring at once have led to some inefficiencies and therefore higher costs in the business.

Speaker 2

Now as we look forward, We see these conditions abating certainly through the second half. I think we're going to wear much of that continuing through Q2. But in the second half, We believe these will ease and that's for a few reasons. Firstly, we've got more capacity coming on stream and we've had capacity coming on through this calendar year as well, but it's been consumed Through the year, but there's more coming on stream as we've called out in previous calls. Secondly, we will start to build inventory now Through the fiscal Q2, the calendar Q4, that tends to be the low season where inventories get built and we will be building through this quarter.

Speaker 2

And then thirdly, on the raw material side, some of the dislocations there are easing. So the allocation levels that we are Living with from a PET perspective are starting to increase and some of the capacity upstream with the PET resin suppliers is starting to come back To more normal level. So we do see reasons to be optimistic, particularly around the second half, but we're going to wear these conditions now for the next few months for sure.

Speaker 7

Great, great. Thank you. And then just going back to the volume discussion as well, I guess, just as we look at Your medical exposure, and given non critical doctor visits are down, during COVID, can you give us a sense As to when you might expect to see more normal demand and volume patterns in that end market? Thanks.

Speaker 2

Yes. Look, I think let me comment on healthcare more generally. And healthcare for us is broadly speaking medical device packaging, which you alluded to, and then pharmaceutical Packaging as well. And both of those segments have been impacted through COVID and have had demand At much lower levels than we would historically see. We would typically see mid single digit growth each year in both of those segments.

Speaker 2

And it's these are 2 attractive segments, High margins, high levels of differentiation, lots of innovation. So they're about as good a place as you can play in flexible packaging. Medical is starting to come back a bit. Demand conditions improved in the Q1. We did see A bit of an uptick in some of the elective procedures that you referred to, which drive consumption of medical device packaging.

Speaker 2

So we saw some improvement through the quarter, but again, we were limited with some of the specialty resins that go into those products and we ended up having Having to put some customers on allocation and not capturing the full rebound in demand, we would only anticipate demand to continue to build and get back to more normalized levels And some of the raw material challenges to ease, although we know we're not out of the woods yet on at least a couple of On the pharmaceutical side, we've seen a very, very modest improvement in demand, Not to the same extent as medical. And in particular, in that business in Europe, it's a predominantly foil based set of products. We've had some limitations on foil supply as well, which have held us back. But we would expect that over time as COVID Pharmaceutical consumption will return back to the levels it was pre pandemic as well. So we're pretty bullish on these two segments long term and there's just some, I guess another couple of periods here as we get back to normal.

Operator

The next question comes from the line of Jon Purtell of Macquarie. Please ask your question.

Speaker 2

Good evening, Ron and Michael. How are you? Good, John. Hey, John.

Speaker 4

Just had a couple of questions. Look, just in terms of raw materials, obviously, you had a much bigger sort of impact on your sales line this period in terms of pass through. You haven't called out any material impacts on earnings from At least on the flexible side. Can you just provide a bit

Speaker 2

of color around how you sort of

Speaker 4

manage raw materials overall through the quarter And any sort of nuances there to call out?

Speaker 3

Yes. Sure, John. It's Michael here. I can take that one for you. Yes.

Speaker 3

So look, we continue to see Raw materials increase in the quarter through the basket of currencies that we have kind of mid single digit, which was Probably a slightly slower increase than we've seen in the 1st 6 months of the calendar year, but albeit continue to increase. And as Ron mentioned in the early comments, the teams have been really focused, not only on securing supply for us and making We've got as much as we can to service customers, but also getting that raw material recovery through the marketplace. And we were really pleased with where we got to in the quarter. You might recall at the end of Q4 last year, we had $100,000,000 roughly flow through the sales line this Quarter all up around $280,000,000 with $210,000,000 of that in Flexibles. So pretty significant recovery.

Speaker 3

We did see some headwinds, particularly in flexibles from that. So But it was manageable. And outside of that, you saw that in our margins where Year on year, the Flexibles margins actually were maintained at 13%. So we were pretty pleased with that result because if you take the raw material recovery Out of the mix, margins in effect would have been about 100 basis points higher, so closer to 14% without that raw material recovery So, we're pretty pleased with where we got to in the quarter. We'd expect that there's still Further recovery to come, obviously.

Speaker 3

And in Q2, we are contemplating still some lag in that Price cost recovery as we work through the next quarter and the indices are Quite mixed. Some indices are suggesting that raw materials are perhaps tailing off a little and have reached their peak in other areas and certain geographies Around the world, still looking at some increases. So a little bit of a mixed position there as well, John. But that's all factored into our guidance range that we put out there for the full year.

Speaker 4

Got it. Thank you. And just a second question there. You might have touched on this earlier. Just can you remind us of The timing of the North American PET capacity expansion.

Speaker 4

And also more generally, what do you see as the potential for Now for the capacity expansion, say, on the flexible side, I know you sort of flagged a couple there in the last sort of year. But Particularly given that you're seeing pretty robust growth in emerging markets in Asia, for example.

Speaker 2

Yes. Look, on the PT side in North America, which supports the Rigid Packaging segment and the beverage sub segment within that, we've been adding capacity through the year. And We're going to continue that capacity through the 1st part of calendar 2022 so that we hit the high season next year, the high beverage season being Fiscal Q4 for us, 2nd calendar quarter, with materially more structural capacity than we had Over the past 12 months. So that's been an ongoing journey. We've got some capacity that's come on stream coming on stream this quarter and will continue in the next couple of quarters.

Speaker 2

As it relates to flexibles, we have flagged a number of investments, including a new plant in China, which is Midway through its construction. It's in the south of China in the Guangdong province, which is going to add capacity for the healthcare business there as well as Some of the other segments that we service in that area. We've been expanding and adding capacity on some of the sustainability platforms. There's more sustainable platforms that we've So we've talked about Amlite in the past and Amprima. We're putting capital to work in both of those for both of those products as two examples.

Speaker 2

So I'd say the flexibles capacity is targeted at those areas where we have the most differentiation, Predominantly in emerging markets and also the more sustainable structures.

Speaker 4

Got it. Thank you.

Operator

The next question comes from the line of Keith Chau of MST. Please state your question.

Speaker 8

Still having an issue in the next quarter, but certainly easing going into the second half. Just wondering what indications you're seeing from both supplies and customers As it relates to supply chain complexity that things will ease. We've talked about raw materials, but from the supply side, but can you talk about how your Customers are responding to some of the supply chain complexities as well?

Speaker 2

Yes. Well, they have the same issues As you can imagine, and in some cases, their businesses might be more labor intensive or energy intensive, and then they've got more acute impacts from those areas. And that has a ripple effect back up the chain. If the customers are not running their plants, we are limited in how much material we can ship. I think that particularly in North America, labor has been an issue.

Speaker 2

There's a lot of theories as to why that is, but our customers And Amcor, we're doing everything we can to keep our plants fully staffed. Transport at times has been a constraint as well. But we would expect that with investments that are being made, not by Amkor necessarily, but throughout the value chain and the supporting Industry is adjacent to it, but that eventually will subside. I mean, I don't think that We're going to adapt we're going to certainly adapt the supply chain to such pronounced shortages. I'm just not sure that's where this is all going to head.

Speaker 8

No, indeed. But are there any indications from your customers rather than supplies that their issues will ease by the second half?

Speaker 2

Yes. Look, in many cases, our customers are adding capacity. And in the businesses that are more seasonal, they're also taking shutdowns and building inventories We're allowing inventory on the downstream side. Demand will continue to normalize to the extent that it's been volatile. We would expect it to continue to normalize.

Speaker 2

And on the upstream side, for the reasons I outlined, particularly in PET, we would expect more availability of material. Flexible is a little bit mixed And it's a bit of a story of individual materials, as I said, but there's more reasons for optimism than concern as it Relates to flexibles going forward as some of these materials ramp up and return to more normal production levels.

Speaker 8

Okay. Thank you. And then the second question just relates to your customer relationships. I mean, obviously, given these issues, you've had to put some customers on allocation. Do you expect there to be any issues with customer relationships going forward or any degree of permanency given some of these allocation issues that the business is seeing at the moment.

Speaker 8

What feedback have you had with customers in that respect?

Speaker 2

Well, Look, the worst thing for everybody is when we have to put customers on allocation, but I would say that there is just as many examples of us being able to use our scale And reach and capabilities to help customers out of a bind. I mean, we've got examples in back in the beverage business where Some of the resin is told by the customers they've been unable to secure enough supply. We are a net bigger buyer than any one customer, and we've been able to get Resin to keep some of those beverage customers supplied. We've got a couple of other examples in flexibles in the medical space. We've taken share At a customer in the medical device area by being able to supply material that our competitors could not supply.

Speaker 2

So I think that no one likes to be on allocation and certainly that's not where we want to be. But I think that the benefits we've been able to deliver For our customer base, because of some of the things that make us unique, have outweighed any of the constraints in the allocation impact.

Speaker 8

So it sounds like Ron that Amkor even though it has to by necessity for customers on allocation may in fact be doing better and Competitiveness?

Speaker 2

I think in some cases that would be true. We're competing head to head and using the exact same materials, then I think that we would Expect we have an advantage there.

Speaker 8

Okay. Thank you. Can I ask a quick question to Michael? Michael, your corporate costs were $10,000,000 lower than the PCP and $15,000,000 lower than the June quarter. Can you just give us an understanding of why that's the case?

Speaker 8

And with respect to the free cash flow guidance for the year, given the start to the year, can you give us a A sense of what the seasonality of cash flows will look like and what the risks are and whether you'd need to see raw materials prices come down to be able to get to that $1,100,000,000 to $1,200,000,000 guidance number? Thank you.

Speaker 3

Sure. So on the corporate Yes, there's definitely some phasing element in there. More so in the prior year in Q1, we had an insurance claim we had in Q1 last year, and that's really the key difference in the corporate costs. We'd expect by the half, the phasing there more normalized and to be more in line with the corporate cost position at the half last year. So That's kind of the impact on that front.

Speaker 3

And corporate costs, generally, the first half is lighter than the second half, just as we Sure, our provisions and accruals and things like employee incentives and the other, they tend to happen in the second half as we progress through the year. So that's really The key difference there from the June quarter. In relation to the cash flow and the seasonality, Yes. I mean, our cash flow is seasonally stronger in the second half, definitely, and that's really on the back of Several areas. Firstly, second half earnings are typically stronger and in particular Q4.

Speaker 3

So our Q4 earnings are our biggest quarter for the year and Typically, they're $100,000,000 more than any other quarter in EBITDA, so you're getting stronger cash flow there. From a working capital standpoint, we tend to build working capital as we head through the year getting into the summer period in Northern Hemisphere. And then you start to see some release of that as we head into the Q4 period. We clearly have A strong focus on working capital as we close out the year and we have some commercial terms that are favorable in the back half of the year. So When you put all that together, we've consistently delivered a stronger cash flow in the second half.

Speaker 3

And that's pretty Where we are today is right in line with where we expected to be. On the working capital front, we obviously had some headwind From the raw material pass through as that gets through the cycling of the business, but that's more a timing situation than anything and we expect that Improve as we head through the year. So from where we sit here today, the $1,100,000,000 to $1,200,000,000 outlook, We feel really confident in and that's we're in the normal cycle of the business cash flow seasonality.

Operator

The next question comes from the line of Kyle White of Deutsche Bank. Please ask your question.

Speaker 9

Hey, thanks for taking the question.

Speaker 2

Can you just talk about some

Speaker 9

of the moving parts with your outlook? And I realize it's still early days in terms of the fiscal year, But since you first gave it last quarter, cost inflation has gone up, supply chain issues have really ramped up. What would you say is going better than initial expectations to offset some of these These headwinds in order to maintain the outlook?

Speaker 3

Look, I can take that one. I mean, when we issued the outlook, That full year guidance, you recall, we did that back in August. And at that time, we contemplated a range of external factors, Including the continuing raw material inflation and general inflation, we were already experiencing Supply chain constraints and raw material shortages at that time and the demand was volatile. That was some of that was already factored into the guidance that we put out there back in August. As we said, Q1 actually was pretty well That was right where we expected to be and that gave us the confidence to reaffirm the guidance today around that 7% to 11% Comparable constant currency growth, and that's just taking into account that range of factors that we've talked about.

Speaker 3

So To be at the upper end of that range, we'd expect things like a quicker recovery in the healthcare and Medical and Pharmaceutical business that we've touched on during the call, perhaps quicker recovery in the raw material pricing or Abatement sooner than we're anticipating and perhaps less prolonged supply constraints. So that will get us to the upper end And the opposite is true for the lower end. If we see prolonged supply constraints further into the second half Then we anticipate, then that could get us to the lower end as to if raw materials continue to increase. That's all factored into our guidance that we gave back in August. And as I said, we are on track at the end of Q1, which gave us the confidence to reaffirm.

Speaker 9

Got it. That makes sense. And apologies to go back to rigid packaging, but just trying to understand, earnings down 15% year over year despite volumes being up. You touched on the supply chain issues quite a bit, but is it possible to break out how much of the earnings decline was driven by cost inflation that result. Is expected to kind of stay throughout the year versus the supply chain headwinds that you expect to kind of get better?

Speaker 9

Just trying to understand kind of the earnings cadence throughout the year for that segment?

Speaker 2

Look, Kyle, to keep it really simple, the earnings impact in the segment is really around the inefficiencies, Much more so than inflation. I mean, there are clearly inflationary pressures, but those will get recovered over time through pricing and the inefficiencies We'll sort themselves out as we've discussed. So it's probably 70% or 80% the supply chain constraints and 20% or 30% just the lag in Passing through pricing to cover the inflationary factors as well. Perfect. Sounds good.

Speaker 2

I'll turn it over.

Operator

The next question comes from the line of Anojja Shah from BMO Capital Management. Your line is open.

Speaker 10

Hi, everyone. I just wanted to ask about that North American Rigid Business as well. Do you think you're getting some benefit there from the tight

Speaker 2

Typically, the Substrates are not interchangeable and we don't really see customers going back and forth. The different package formats have different places through different distribution channels and so we Really don't see a whole lot of shifting. We have picked up some volume in a more permanent sense. We've gained Some share at the expense of glass is a good example. There's a picture in one of our slides of a big piece of business that we've won.

Speaker 2

And that business has gone from traditionally glass containers to PET containers for a couple of reasons. And it's all about the environmental footprint of the package. And they've gone all the way to 100% recycled material as the spec. And I think we won that business because of our ability to source that material That's more of a share shift that's related to a value proposition that's just different And provide some benefits to the consumer and to the customer in this case that the legacy container just couldn't. That's more Typical of what we would see in any kind of periodic shifts between one substrate or the next.

Speaker 10

Okay. Thank you. And then now with economies reopening, how do you just sort of estimate the shift The shift to more eating away from

Speaker 1

home, how do you

Speaker 10

think that's going to impact Amcor? I mean, it seems your medical portfolio benefited, some other businesses will The benefit, but you'll also have some businesses that don't. Could you estimate the net impact of that overall?

Speaker 2

I mean, look, over the last several quarters when we've tried to parse out the impact of COVID or the impacts of COVID, we really don't believe that it's had a material Back on our sales. I mean, we've had some segments that had been very depressed. Healthcare would be 1, others that had a little bit higher growth. And so if we go back over the last 15, 18 months, there's not much difference between the growth rates that we've And the growth rates that we would expect to experience going forward, it's kind of low single digits. This is also not a business that has a lot of exposure to food service Away from home consumption.

Speaker 2

So we benefited from that portfolio mix when foodservice was shut. And On the other hand, we're not going to benefit from a big rebound because we're not very levered to that channel.

Speaker 10

Okay, Great. Thank you very much.

Operator

You are next, Larry Gengler from Credit Suisse. Please ask your question.

Speaker 4

Hi. Thanks for taking my questions. Ron, I'd like to continue my questioning from the last quarter. I feel like I'm Having correspondence by snail mail. I asked you about your Major growth initiatives, you pointed to your 5 focus areas with protein as number 1 in your mind.

Speaker 4

And then We talked about the harmonization of protein sales between North America and Europe. So I've been looking at that, but still learning. And I'm just wondering, first, so can I just ask a list a short list of questions relating to that initiative? One is, as you expand your protein business in Europe, do you have that managed by a sort of single Person or area, is that an initiative that's encapsulated from a managerial point of view? 2nd, are there particular sub segments you're targeting there?

Speaker 4

I'm learning that proximity to customers is important for that business. So do you need new plants? And are there any products like an EVOH sort of based film that I'm not sure if you have or need? And how many years is it going to take to achieve the harmonization of sales between North America and Europe? So a list of questions there.

Speaker 4

But As I said, I want to delve into this growth opportunity. So if you can help me out.

Speaker 2

Yes. Okay. Look, it is one of the Biggest first opportunities we have, so I'm glad you asked the questions. I might just start by talking about the approach globally. Firstly, why we like this space and then The reason we like this space is because there is a lot of technology and a lot of material science required to package protein In a way that provides barrier protection and shelf life and also provides the consumer with an aesthetically Yes, pleasing option and something that stands out on the shelf.

Speaker 2

So there's a number of things required here. In some of these films, 9, 11 layers of different materials, all providing some sort of functionality and playing some sort of role. So this is a material science based segment for the most part. That's common across the segments. In some segments, there are some other things required as well to supplement it.

Speaker 2

So that's why we like the space. There's a lot to do there and there's a lot of value to be created for our customers as they provide value to their consumers. And it's also not a space that everybody can play in because of the technology requirements. And so there's a couple of global players Players that compete in around the globe in this area, but there's not a very long list. So that's where we like it.

Speaker 2

Now as far as how we're managing it internally, Our business is generally decentralized and a lot of the action happens on the ground in the different regions. But in this space, there is global Coordination occurring in a couple of ways. Firstly, the product development agenda is global already. So we're not developing one product For a certain application in North America and then doing something different in Europe, there's a global product development roadmap to support the protein space. And secondly, as it relates to capital, as we think about deploying capital in this space, we're going to do that in a coordinated way as well.

Speaker 2

And so we have a global capital plan To support the protein space. And maybe just a last point on as it relates to capital because you asked about plants. There's not any need that we can see for new factories per se. The material will ship. Proximity is always important to a certain extent, but these are high value products.

Speaker 2

So we don't anticipate new plants necessarily, but we will be expanding our Capacity in the conversion assets. Did I cover the list? Sorry.

Speaker 4

I'm not sure. Almost. Last one is used to do you think Closing the gap between Europe and North America in sort of sales, is that obviously going to be many years, is that a 10 year process or a 3 year process? With the sort of Well,

Speaker 2

look, the markets are different in structure. There's more national there's a collection of national markets in Europe versus a bit more of a homogeneous Backdrop in North America. So that creates a little bit more complexity, which means things evolve generally more slowly on that continent. Look, I think these are medium term growth opportunities. Protein would fall into the medium term bucket.

Speaker 2

And what does that mean? That's the So the 3 to 4 year range. And some of that is because the qualification periods are fairly lengthy. Some of it is because In certain sub segments, there's a system sell that's required, which creates a bit more lead time. And then there's just the pounding of the pavement and getting out in front of customers.

Speaker 2

I would say it's more of a medium term. It's not necessarily a this year thing, although this segment is growing for us and has actually right through the pandemic, we've had mid single digit growth in protein Around the world and some quarters higher than that. So it is growing. But before you see a step change, it will take a few years.

Speaker 4

Okay, great. And your growth comment just now that pertain to this most recent quarter?

Speaker 11

Yes. I think some of the And

Speaker 2

we're helping growth as well. Yes, no, absolutely. We were held back a little bit in this quarter by some of those barrier materials that you mentioned, but we are continuing to grow.

Speaker 4

Okay. Thanks, Ron.

Operator

The next question comes from the line of Adam Samuelson of Goldman Sachs. Please ask your question.

Speaker 2

Yes, thank you. Good evening, everyone. A lot of ground has been covered.

Speaker 9

I was hoping you could just help Where supply chain disruptions and logistics issues and material shortages did cause some lost sales? Can you quantify What you think the revenue impact of that was in the fiscal Q1?

Speaker 2

Yes, it's a good question. I think the best we can do is give you an estimate. We'd say it was a couple of percentage points overall and basically kept us from getting to the Growth rates that we would expect in this business, which is low single digits. In Flexibles, best we could estimate it probably was 1% to 2%. And again, that's in some of the segments we've already talked about, including medical where we did have good growth, but not as much as we would have liked, including protein and meat, Back to Larry's question, to name 2, and certainly in pharma.

Speaker 2

And then in rigid packaging, it's almost Hard to quantify, but there would have been at least 2% to 3% as we could estimate. And that probably doesn't take into account the full demand in beverage. And the beverage space in liquid refreshment beverages packaged in PET containers has continued to Just grow very, very well. And so that 2% to 3% is probably understating what the real demand is. That's probably a constrained view of demand as As our customers would express it.

Speaker 2

So I think put all that together, Adam, and we would say it's probably about 2%, low single digits, which is where the business typically It appears from a top line perspective.

Speaker 9

All right. That's helpful. And then there was an illusion in the press release that lower sales in Southeast Asia, Presuming that was related to some of the incremental COVID lockdowns that was happening there, but what was the Impact of that on the business or inflexible specifically?

Speaker 2

Yes. Look, that's exactly the Driver that you just mentioned, persistent lockdowns and stops and starts through that region, Indonesia and Thailand in particular, over the quarter. It's It's an important business for us. It's a growing business and most of our big global customers are there, but it's not a very large driver and I It would be behind the list of the raw material limitations and also just some home and personal care Comps that were tough to cycle. So I think that will normalize as well.

Speaker 2

That region has a lot of intrinsic growth And has demonstrated that over the years.

Speaker 12

Good evening, Ron. Good evening, Michael. I just wanted to follow-up on the PET issue for the rigid business. Can you just let us know the phasing of those supply issues as they relate to the end of the Q4 of fiscal 2021 and maybe how they are accentuated in the Q1 of fiscal 2022, please.

Speaker 2

Yes. Look, Jacob, they go back probably to the start of the calendar year And this is on the input side. This is on the upstream side. So first of all, demand is high up through the value chain, including on the resin producers. We had winter storms here in North America in, I think, in February, which led to some Plant outages and some plant damage and some of the shutdowns go back all the way to that period in time.

Speaker 2

And we were wearing some of that Through the end of the Q3 and Q4 of the fiscal year last year and then that's continued. We've had a couple of suppliers With real issues, one in particular in North America related to that winter storm and then taking some preventative downtime during hurricane season, Just a litany of issues leading to us being at less than 100% allocation. And we also had another supplier that we sourced from in South America and we So time source up in North America to supplement who had a plant go on fire in Brazil And take that plant down for quite some period of time. That actually happened in this most recent quarter. So in one way, shape or form, we've had Supply disruptions on the PET resin side from early in this calendar year.

Speaker 12

Okay. And then if we think about the dynamics then, clearly, by the time you comp the elevated activity by the second half, There's a clearer runway for you. Are you seeing higher commitments from your suppliers moving into the second half or even the back end of the second quarter?

Speaker 2

Yes, we're seeing a gradual increase in the output from upstream across the supply base, and I would say it's gradual. We're not off allocation. We're still not able to source all of the resin that we would like to source. We know that our customers, when they All resin or buy directly, we know that they also cannot get all of the resin that they would like and that's continued, but it does seem to be easing. And because we can point to the underlying drivers of the constraints, you can get some clarity on when that will start to come back on as these plants Get fixed up and come back to 100%.

Speaker 12

Appreciate the time, gents. Thank you.

Speaker 8

Thanks.

Operator

The next question comes from the line of Richard Johnson of Jefferies. Your line is open.

Speaker 13

Thanks very much. Ron, I was just wondering if you could talk a little bit about the challenges that are posed by Customer consolidation and what reminded me of this was the photograph you've used of BODYARMOR in the presentation. And I know in the past when challenger brands, which have always been a source of good growth for you, have been absorbed by the majors, the price volume issue or the price volume scales Kind of doesn't help you. So I was just sort of wondering how to think about that.

Speaker 2

Yes, look, we have broad exposure, as you would know, across the beverage And we've got a good track record of growing with some of the upstart brands, as you pointed out. It's not so much the upstarts, but also the regional players That generally good growth in pockets of the U. S. In particular, but maybe aren't national. We've been through it.

Speaker 2

It all goes in cycles. These brands need bottles. They need innovation and help with their branding. So there's always moving parts in terms of the Participation in the ownership structure, but at the end of the day, the market demand for the PET format and increasing innovations at lighter weights is still there.

Speaker 13

Great. That's helpful. Thanks. And then just one for Michael. Can you help me understand the adjustments you've made for property and other losses?

Speaker 13

Obviously, you disclosed that it's a That is a plant that was burned down in South Africa. I'm just trying to understand the number looks very high. Are those all trading losses? What I'm just trying to understand what it is, the 28,000,000

Speaker 3

So yes, Richard, I can help you with that one. So the plant actually in South Africa was burnt down So we had a full write off there. And that included inventory and Impairment of all the assets at the site as well as some redundancy requirements that we have to in that marketplace. So, that was really the cost with that. Obviously, against that, we put Some insurance recovery to date.

Speaker 3

So we've provided for some insurance recovery, and we continue to work with our insurers to get the balance of or to get further recovery against that loss. So, you'll see that progress over time as we get More indications of the level of recovery, but unfortunately, we lost the plant in the riots. And thankfully, We had no co workers injured, so that was a key item for us.

Speaker 13

Great. Thanks. And then just quickly, cash tax looks very low in the quarter. Is that Just a timing issue?

Speaker 3

Yes. You might recall last year, we had the CARES Act delays that we had a delay from the Prior year where we paid the tax in the Q1 last year. So that's really the movement year on year.

Speaker 13

Perfect. That's super helpful. Thanks very much.

Operator

The next question comes from the line of Salvator Tiano from Seaport Research. Please ask your question.

Speaker 11

Yes. Hi. Thanks for taking my questions. So firstly, on sustainability, a couple of clarifications. Firstly, Firstly, before there was a question about Europe and some new restrictions or some considerations about the future.

Speaker 11

But In the here and now, they did start, I think, in June or July, major markets, including France and Germany banning And the number of single use plastics are restricting them, essentially the pooping effect that directed from 2018. So did you see Any volume impact from these movements? And related to sustainability, before you mentioned protein, you like the complexity of the material science and Protein films, the multilayer, different types of materials there. But isn't this exactly what you're trying to change and simplify to make actually your films more Sustainable to get away from this structure?

Speaker 2

Yes, exactly, Salvator. That's a good question. I mentioned that in response to Larry's questions. It's not so much the number of layers, it's the composition of the layers. And we've got a number of innovations that are going to help us compete on the basis of Better products in the protein space.

Speaker 2

We launched one last year called EcoTite, which is a recycle ready PVC free shrink bag. So it becomes recyclable not because it eliminates multiple layers. In fact, on the contrary, we'll continue to have multiple layers, but they will all be of the same chemistry, So they're consistent with existing recycling streams. So that is a really important part of the protein opportunity for us is to innovate Again, the sustainability requirements that are now out there as compared to some of the legacy structures that hadn't had those Features in line. So that's that one.

Speaker 2

On the first point, look, any of these single use plastic bans that have been put in place around the world don't affect us Because they're predominantly focused on food service items, shopping carrier bags, not the primary packaging that we're making for consumer Food and Healthcare Products.

Speaker 4

Okay, perfect.

Speaker 3

And my second question is just trying

Speaker 11

to understand a little bit The demand profile in beverage, generally if I remember correctly, hot fuel has been driving the growth Last year, but now it was actually down in North America. So presumably, coal fuel was up. What is driving this change in the trend? Was it just the restrictions in the type of resins you needed? Or was it a different demand pattern here?

Speaker 2

Yes. No, absolutely. It's just the limitations in the supply chain. So the hot fill business is growing kind of low to mid single digits for a long time. It can be a little bit lumpy at times, but it's been a consistent grower over more than a decade.

Speaker 2

We would be the leader in that space By a long margin, we've got a lot of patents and a lot of intellectual property in that space. This period, volumes were down, I think, 1%, more or less flat. Bear in mind, last year in the comparable quarter, we had very, very strong growth and we have over the last Several years. Our volumes in that business in HFOTCO are almost 25% higher than they were 3 years ago. And so there's just a bit of a timing issue with the last 90 days, but that will continue to grow well for us going forward.

Speaker 2

Great. Thank you very

Operator

much. Our last question comes from the line Andrew Scott from Morgan Stanley, please ask your question.

Speaker 12

Hi, everyone. Thanks for taking the question. Just want to step back a bit of a bigger picture question. As long as I can remember, we've talked about a more direct mechanism for cost recovery in PET and a slower one where a lag in flexibles. If we roll forward to today, You've done the Beaumont deal.

Speaker 12

You've created the £1,000 gorilla. As you said, I think that's the case question. No one buys better than you. Is there a chance, given The supply chain backdrop, everyone's feeling it. Is there a chance as the industry leader to really lead the industry and change the way that you write your contract Flexibles business and take out some

Speaker 13

of that lag and make it a

Speaker 12

much more direct mechanism, if you like?

Speaker 2

It's a really good question. And I think the short answer is, as an industry leader, we certainly have a role to play. I think out of necessity, the lags are shortening. I think we've got contracts and structural mechanisms. We've also had to put surcharges out in certain places.

Speaker 2

We've also had to add, riders or surcharges for certain cost items that maybe traditionally have been covered. So Absolutely. I don't know that in Flexibles, you get to a monthly price change. It's a little bit complicated to even assess that at that But certainly, we're getting closer to quarterly on average. And we're going to continue to put prices up.

Speaker 2

As Michael said, we're Just on about $200,000,000 for the quarter in flexibles alone, almost $300,000,000 for the quarter overall. That's A run rate of $1,000,000,000 in price, and we're going to continue to put price up as the inflationary costs persist. And that's all part of just Maintaining our margins and maintaining the discipline that we've that you should come to expect from us.

Speaker 12

Okay, understood. And just a quick one. Just interested, over the period, how have you seen the recycled resin price behave? Obviously, it doesn't necessarily have The same input pressures, but I imagine it's tracked similarly as it's seen a premium sort of blow out or is it come Come in a little bit versus the main commodity resin?

Speaker 2

Firstly, I would say that we're continuing to increase the amount of recycled resin that we're So in rigid packaging, we ended last fiscal year at about 10% of the resin we converted was recycled. At the end of the Q1, we were closer to 13%. So that's a reasonable increase in a 90 day period. The pricing premium has actually expanded. It's somewhere between 30% 50% depending on the week and the month, and it's probably at the higher end of that range now.

Speaker 2

I think that it's in some ways linked to virgin, but I think it's almost decoupled from that, Andrew. I think it's more the supply versus the demand for result. And as it relates to rigid containers, which can be made from 100% recycled material, demand continues to strengthen As brand owners look to feature that as part of their marketing, and I mentioned one of the examples earlier where we took a bunch of share out of a glass format Straight to recycled PET. And a lot of that was on the basis of the brand owner marketing the container as made with 100% recycled material.

Operator

Ladies and gentlemen, this is all the time we have for Q's question and answer session. We will now conclude the question and answer session. I will now turn the call over back to Mr. Ron Della for closing remarks.

Speaker 2

Thanks, operator, and thanks for everyone On the call today, just to quickly summarize, we're navigating well in the environment that has created a lot of challenges. The Q1 in In line with our expectations and we're reaffirming guidance for the full year. And we continue to be excited about the future for growth and value creation from Amkor. So Thanks very much and we'll talk to you next quarter.

Operator

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

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Earnings Conference Call
Amcor Q1 2022
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