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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Okay. Good morning. Thanks everyone for joining us. I’m Ron Delia here to present Amcor's first half results for the 2019 financial year. And with me here today is Michael Casamento Amcor’s CFO.
As we do with all meetings at Amcor, we will start with safety and safety as you would've heard us talk about before, is our top priority at Amcor. We have one goal when it comes to safety and that’s no injuries. We’re not at no injuries yet but our safety performance was the highlight of the first half for our employees around the world. Through their commitment and passion for keeping each other safe, we were able to reduce the number of recordable injuries across Amcor by 20% compared to the first six months of fiscal 2018. And we are especially proud of this performance given we were able to stay focused and vigilant at a time when the risk of distraction was arguably higher and we know we won’t see reductions at this level every six months -- in every six month period. But we're determined to continue to drive improvements across the company until we reach that goal of no injuries.
Turning to Slide 6, and a summary of the first half. Our financial performance was in line with our expectations for the half. We had sales growth across the business and especially with multinational customers and healthcare packaging globally. And earnings growth was balanced across the Flexibles and Rigid Plastics segments with strong earnings growth in emerging markets of 9%.
Operating cash flow was also strong and 27% higher than last year. And with this good first half result, we are on track to deliver against the full year outlook we provided in August which we are reconfirming today. It's clear that our value proposition is resonating with customers, large and small.
In the first half, we opened a new plant in India to supply Unilever. We extended our already long-term partnership with Nespresso and we again saw growth with regional beverage customers in North America. And consumers and customers around the world are increasingly seeking sustainable packaging options and this is a great growth opportunity for Amcor.
As the industry leader we have a differentiated value proposition when it comes to sustainability and we are making real progress on a number of dimensions which I'll come back to later.
And finally, we’ve made significant progress over the last six months towards closing the Bemis transaction. We expect the deal to close in the second quarter of the 2019 calendar year and we're excited about the substantial opportunities this combination creates for Amcor and for our shareholders and I'll come back again on this topic later in the presentation.
Slide 7 shows the key financial metrics for the half. Sales were up across all of our businesses and 4.3% higher overall. And approximately 2% of that sales increase came from recoveries of higher raw material costs. And excluding the impact of those higher raw materials, margins for the company were in line with last year. EPS growth of 3.4% came from recently acquired businesses, organic sales growth, restructuring benefits and strong cost performance. And strong cash flow was supported by excellent performance on working capital and the balance sheet remains strong with leverage at 2.8 times. We’re very comfortable with our financial position and that will strengthen even further following the Bemis acquisition.
With these results and our confidence in the outlook for the business, the Board increased the interim dividend to 21.5 US cents per share.
Moving on to the Flexibles segment on Slide 8, Flexibles PBIT was modestly higher than the prior year in constant currency terms and in line with expectations. The PBIT growth reflects contributions from both recent acquisitions and organic growth. And operating cost performance was strong across the Group as was sales growth in our healthcare business.
Earnings growth in emerging markets was also higher than last year. These benefits were partly offset by the adverse impact from the normal time lag in recovering higher raw material costs
Now to the Flexibles outlook for the 2019 financial year on Slide 9. The Outlook has not changed from the guidance we provided in August 2018. In constant currency terms we're expecting the Flexibles segment to deliver solid PBIT growth in the 2019 financial year compared with PBIT of $835 million achieved in 2018. And this takes into account the following factors.
First, modest organic growth, which assumes no earnings impact related to movements in raw material costs. So this means we expect the adverse impact in H1 to reverse in H2. Second, net benefit from prior period acquisitions of approximately $10 million after deducting cost to integrate and achieve synergies. And lastly, incremental and final restructuring benefits related to initiatives announced in June 2016 of approximately $10 million.
Moving to Rigid Plastics on Slide 10. PBIT was 5.6% higher than the prior year in constant currency terms and the business benefited from volume growth in beverage end markets and a favorable product mix. There was a modest contribution from a good start to our restructuring initiatives and earnings from acquired businesses also increased benefiting from lower integration costs in the first half, which will now be incurred in the June half year.
In the North American beverage business overall volumes returned to growth and mix was strong. And in Latin America volumes were 1% higher than last year inclusive of lower volumes in Argentina where economic conditions have adversely impacted consumer demand. Excluding Argentina volumes were 6% higher than last year.
In terms of the outlook for Rigid Plastics on Slide 11. There is no change to our guidance, which we provided in August 2018 and we continue to expect the Rigid Plastics business to deliver solid PBIT growth in 2019 compared with the $312 million achieved in 2018 and this also takes into account a few factors.
First, modest organic growth. Second, net benefit from prior period acquisitions of approximately $5 million to $10 million after deducting costs to integrate and achieve synergies and approximately $5 million to $10 million of benefit from the restructuring initiatives.
With that, I'll hand it over to Michael to talk about the cash flow and balance sheet.
Thanks, Ron. Good morning. So operating cash flow for the period was strong at a 115 million and up 27% on prior year. This is after deducting spend of around US$28 million of integration and restructuring related costs which have been included in underlying PBITDA. Cash interest was 90 million with the increase mainly reflecting the impacts of higher debt costs in the USA.
During the second half of the year we started to benefit from maturities of some relatively high cost fixed rate debt and expect interest costs to be lower in the second half relative to this first half.
As Ron mentioned, working capital performance was a highlight across all businesses. This has been a particular area of focus and we're very happy to see the benefits being realized.
Our average working capital to sales ratio reduced to 10% from 10.4% last year and from 10.6% at June 2018. The improvements were in a range of areas including payables and receivables. Spend on restructuring initiatives relates to larger-scale programs we've announced in prior years. And in line with our guidance from August, we expect full year free cash flow after capital expenditure and dividends to be in the range of 200 million to 300 million.
Looking at the balance sheet and debt profile, the key point on Slide 13 is that Amcor's balance sheet remains strong. Our primary objective for the balance sheet is to maintain an investment grade credit rating. To achieve this we consider a wide range of ratios with two of the main ones being leverage and interest cover. These two initiatives remain at robust levels and are in line with where we anticipated them to be at period end at 2.8 times and 6.8 times, respectively.
In terms of financing costs we expect net interest for the 2019 financial year to be in the range of 200 million to 210 million in constant currency terms with interest cost in the second half lower than the first half as I mentioned earlier.
We continue to be in a very comfortable position in relation to our debt profile with access to a diverse range of funding sources and a non-current debt maturity of five years, an appropriate combination of fixed and floating debt with a well balanced mix of currencies.
We are well advanced in our work to ensure funding arrangements for a larger combined company in place prior to the close of the Bemis transaction and this also takes into account Amcor’s next sizeable refinancings which are EUR550 million bond and USD750 million syndicated facility, both due in April 2019.
So in summary, the key message from me this morning's is that Amcor remains very well positioned with strong cash generation and balance sheet capacity for growth.
With that, I'll hand back over to Ron.
Thanks, Michael. For the next few minutes as I would normally do on these calls I will quickly recap on Amcor’s strategy and talk about the longer term growth potential we see for the company. And I'll start with Slide 15 which provides a recap of our strategy, which includes three elements: Starting with a focused portfolio of businesses; a set of differentiated capabilities; and our aspiration to be the leading global packaging company and winning for all of our key stakeholders.
The first element is our portfolio. We’ve chosen to play in segments, which share some important characteristics. First of all a focus on primary packaging for fast moving consumer products, good industry structure and an attractive relative growth outlook. And those criteria have led us to a focused portfolio today in four product segments: Flexible packaging, rigid containers, specialty cartons and closures. And we have leadership positions in most of these segments and multiple paths to winning by have another scale advantage or something unique to offer in the market. The second element of our strategy is the Amcor way, which is how we describe the differentiated capabilities we drive in a consistent way across Amcor. And these are the capabilities that we believe are the keys to winning in the packaging industry and developing them in a consistent way across our businesses is how we get leverage across our portfolio. And from this portfolio of businesses instead of differentiated capabilities we generate strong cash flow which we look to deploy in order to win for our shareholders.
And Slide 16 is a good way of depicting how we think about deploying that cash flow, it's essentially our capital allocation framework, which we’ve called our shareholder value creation model and it hasn't changed for a number years. And through paying dividends, growing the business organically, pursuing acquisitions or returning residual cash to shareholders, over time value creation has been consistent and remains strong and defensive.
Turning to Slide 17 and an update on our sustainability agenda which is quite extensive. One of the biggest opportunities we see for Amcor going forward comes from the increasing consumer interest around the world in more sustainable and environmentally-friendly packaging. And we believe packaging; especially primary packaging will always have a critical role in protecting and delivering food and healthcare products in a convenient and functional way. And there is a great opportunity for Amcor with our scale and innovation capabilities to create differentiated products to meet those consumer needs in an environmentally-friendly manner.
And one year ago, we became the first global packaging company to pledge to develop all of our packaging to be recyclable or reusable by 2025, to significantly increase our use of recycle materials and to work with others to drive greater recycling of packing around the world. And in October we took this commitment a step further by joining 250 other companies and governments and becoming a signatory to the new plastics economy global commitment and this puts us in a lockstep with even more of our existing and potential customers to achieve waste and pollution targets based on shared definitions and to report on progress annually.
And over the last 12 months in general around sustainability our momentum has been building. We’ve recently decided to allocate some resources and establish a sustainability center of excellence in Europe to advance our flexible packaging R&D efforts with dedicated technical and engineering resources, and we plan on doubling those staffing levels and adding innovation lab in the coming months.
A great deal of our efforts so far has been focused on product development, and we've introduced over the last several months a couple of new flexible packaging products called HeatFlex and Genesis which are fully recyclable. And with promising results we’re also trialing films with higher and higher levels of postconsumer recycled content. You can expect us to continue to be active on the product development front.
The demand for fully recyclable packaging is greater than ever, and we are partnering with our customers to fast-track commercialization of these innovations, and in some cases, looking into opportunities to co-invest in dedicated assets. And through our partnerships we are working towards industry wide standards for recyclability, supporting trials for curbside recycling of flexible packaging and contributing to public investments and community programs for recycling infrastructure.
It's a very exciting time in our sustainability journey. And as the industry leader, we see sustainable packaging as a unique opportunity to drive meaningful growth going forward, and we will take another significant step forward in this journey by combining with Bemis which brings together the two R&D leaders in our industry, and I'll provide now a quick update on that transaction.
To quickly recap, we announced the all-stock transaction in August 2018, and we said at the time and we believe today that Amcor is a very strong company and a leader in its own right. But by combining with Bemis, we take a big step toward being the leading player in consumer packaging at a moment in time when the opportunities for a leading company have never been greater.
Putting the two companies together results in footprint, scale, talent and capability advantages to offer the most compelling value proposition to our customers and employees, and to deliver the most sustainable innovations for the environment.
From a strategic perspective, we believe the combination is highly compelling and feedback from a range of stakeholders indicates they would agree. The combined company will have the most comprehensive global footprint for flexible packaging and will have greater scale and resources in each key region around the world.
Our portfolio will benefit from increased exposure to attractive end markets and product segments, which can be transferred across regions and leveraged across that global footprint and there's the opportunity to merge the capabilities and talents from both companies to create the industry's best team and one that will be focused on delivering for our customers around the world.
The financial rationale is equally compelling with strong transaction metrics, a stronger financial profile for Amcor going forward, greater liquidity for investors and an all-stock structure, which is cash and tax-free for shareholders.
The transaction itself will deliver double-digit pro forma EPS accretion and returns well above Amcor's weighted average cost of capital by unlocking $180 million of cost synergies that would not have been available to either company independently. The teams from Amcor and Bemis continue to work together to further develop the cost synergy opportunities across general and administration costs, manufacturing footprint and procurement. And the synergies are expected to be delivered relatively evenly over the three-year period post close. And will drive significant earnings growth in the near term over and above normal organic growth. And any revenue synergies would represent additional upside to these metrics.
Amcor has had a great track record in delivering acquisition synergies and of course we aspire to outperform this target. And as we get closer and closer to the Bemis colleagues and business we see real opportunities to do just that.
Moving to Slide 22, Amcor's financial profile is strengthened going forward. Shareholders own an interest in a very well-positioned differentiated business generating $2.2 billion of EBITDA annually with higher margins through the delivery of the cost synergies and the potential to grow at higher rates given a stronger customer value proposition, complementary capabilities and increased exposure to attractive segments.
And Amcor will maintain an investment grade balance sheet with annual free cash flow exceeding $1 billion and will continue to pay a compelling and competitive dividend which will increase over time. Importantly, there will be immediate balance sheet capacity for further investment or share buybacks.
The transaction structure results in the stock being listed on two major exchanges, which creates a unique and advantaged outcome in terms of index participation. Given that Amcor’s shareholders will own 71% of the combined company and taking into account the geographic mix and the investment mandates of Amcor's shareholder base, the Australian listed shares will continue to be included in the S&P 200 Index with no significant change expected to our current index weighting.
We also expect the total market cap of the combined company to qualify for inclusion in the US S&P 500 Index. And this would mean the combined company would be well within the top 300 in that index which is the largest in the world. And as a result of the all-stock structure the transaction will close without the need for any shareholders to contribute cash and the share for share exchange will be tax-free.
Since the transaction was announced, we made significant progress towards closure, including setting up an integration management office to drive planning efforts leading up to the close of the transaction and oversee integration and synergy execution in the post closing period. This IMO has been staffed with about 20 full-time team members from both Amcor and Bemis and supported by several external advisors and joint development of detailed plans designed to enable a fast start to integration, including the delivery of synergy benefits is well underway.
And the process of securing required antitrust clearances and regulatory consents has been completed or is progressing in line with expectations. Clearance has been secured in all jurisdictions which are conditional to closure with the exception of Europe, the US and Brazil and in each of these regions discussions are at an advanced stage. In fact, we expect a decision to be announced by the European Commission in the coming days.
We continue to anticipate the deal will close in the second quarter of the 2019 calendar year and we look forward to building a strong future together with our new Bemis colleagues and customers.
In closing, we had a good start to the 2019 financial year. Our financial performance was in line with expectations and we are on track to deliver against an unchanged full year outlook.
We are also winning with customers in advancing our sustainability agenda every day and we’ve made significant progress towards closing the Bemis acquisition, all of which sets us up for a very promising future.
We're excited about the opportunities we see ahead and we believe the growth potential of Amcor remains substantial.
With that, I'm happy to take questions.
Hi Ron, Neeraj Shah here from Morgan Stanley. Could you maybe give us an update on price trends you're seeing across key input cost categories, in particular liquids which are harder for us to track?
Yes. Thanks, Niraj. The raw material front, which is most relevant for our Flexible Packaging segment we continue to see a modest headwind in the first half, so we had about a $5 million adverse PBIT impact. Now raw materials were flatter in the first quarter, started to decline late in the second quarter, in November, December and so we expected that negative $5 million impact was saw in the first half will be reversed in the second, so for the full year the income statement impact will be nil.
But your question about material trends, we did see oil obviously come off towards the end of calendar ‘18 and the resins and polymers come off as well, in some cases quite substantially. I would point out though that in some regions you also had an inverse currency movement which sort of neutralizes the benefits as you translate the costs, which are typically recorded in US dollars back to local currencies.
Looking forward, it’s always difficult to say we see signs that indexes are ticking up in the mid-single-digit across many the commodities, liquids would be no different, but not enough for us to change our outlook for the year, which is again no income statement impact. David?
Ron, can I ask two questions, the first question, you said 9% growth for emerging markets. I mean that’s a pretty top-down statement. Can you going to a bit of detail as to which areas are going well, which areas are still lagging? And probably the second question is on Slide 43. This is probably to Michael. It was a big uplift in contribution from rebates. Is that part of your working, I think is that $18 million contribution to earnings that was on that slide, is that a big part of you driving the customers harder, driving titles? Can you go through that as well too close?
Yes. Let me start with the emerging markets question. We had 9% EBIT growth in the emerging markets as you pointed out. That starting point, David would be that we had profit growth in all of them, so the big regions are Asia, Eastern Europe, Latin America, obviously, and we had proper growth in each of them. I would say the standout was Asia, we also had good sales growth in all three of those regions, but Asia has good sales growth, excellent cost performance in general. And similarly in Eastern Europe rate of growth was a little bit lower. Latin America grew as well. Now in Latin America, we have a business that spans across nine or 10 different countries, you always have some fits and starts across different individual markets. But generally we had growth in both Flexibles, rigid containers and specialty cartons business. So it really was pretty much across the board. I would say that Asian business was probably the highlight.
[Inaudible]
Yes, look in some of those markets as I referred to in the answer to Niraj’s question, you had raw materials come off but you had currency depreciate quite extensively as well. So we didn't necessarily see the benefit in the emerging markets from lower raws at the end of the second quarter that we may have seen elsewhere. Look we'll see going forward. We don't see anything that leads to change our outlook for the year.
On the rebates point, so you’re referring to Slide 43, thanks for that. Included in that line is actually the net settlement -- the legal claim net settlement, including in that line which we then back out from an [SI] perspective. So that’s really the key movement in that line and that relates to a legal settlement that we had.
So you back that out and from an other income perspective, then the net line, usually 58 versus the 47 in the prior year so in total we saw about 10 million increase in other income excluding the one-off. But offsetting that obviously below that we have got increased restructuring and integration costs during the period of about 10 million. So the net of those two I think was a minor gain of about $1 million.
Ron, just if we look at cash flow for the period, just sort of can you run through exactly what's the key drivers of that very strong performance, generally would expect a weaker first half performance there on the cash flow side? So are there any sort of key drivers of that? And then secondly just on sustainability, just where do you think you are currently at relative to your competitors in the packaging side? And not sort of look at more broadly than just we think Flexibles and Rigid Plastics, looking at other substrates and just where you’re positioned with key customers there?
Let me take that one first and then we can come back on the cash flow question. Look sustainability is just gaining steam externally but the momentum inside Amcor can't be understated. I mean it’s just -- it’s a great opportunity and we are leaning into it with our full weight. In terms of where we’re positioned the starting point for me is our customers, and there is not a senior-level of customer discussion that's taken place anywhere at Amcor that doesn't revolve around this topic or at least have it as a primary point of discussion. And it's very much in the spirit of partnership. Our customers realize that society and consumers are looking for better answers. And they also know that Amcor is likely to be able to have those solutions, right? So from a positioning expense in terms of the prominence that we have in the eyes of our customers as being able to help them, I couldn't say more for where we are at. We are in an excellent position. I've had numbers seen amuse myself for this is the predominant discussion. And you are seeing customers as I alluded to earlier, being much more open and willing and eager to commercialize things and to work through the product development and qualification process faster to get products to market because the consumer need and demand is there.
So I think within our sphere we are as well positioned and I would argue better positioned than anybody because we are seeing is the company that has a capability and the technology and the answers to help customers. If we go beyond our immediate sphere and think about packaging more broadly, we still see plastics taking share from other formats. In beverage last year in the United States, we still see plastic growth by units and we still see plastic take share in units versus metal and glass, and that trend has been continuing for many, many years. And I think the consumer recognizes the recyclability of a plastic container, part of the challenge is getting the consumer to actually recycle that container. But from a technical perspective, the product characteristics are such that it's fully recyclable and they enjoy all the other convenience that they are used to which is the receivability and the light weight. So we think that we are well-placed relative to our immediate peers and we would suggest relative to the whole packaging space and these substitutes that might be out there that the plastic containers and flexible packaging we make is really well-positioned. I mean we can talk more about specific actions we are taking, new product developments which we highlighted this morning and partnerships on recyclability, I would state that if there is a follow-up on the topic. The cash flow question?
Yes look in terms of the cash flow I mean it was -- we had really pleasing results in our working capital to sales ratio over the period and so we have got sustained improvements. So in that scenario we have been focused on. Obviously we have seen some increase in that area over the last couple of years with the acquisitions. We are now starting to see some benefits flow through there. And it was in -- across the board really that we certainly saw some improvement in managing our over dues on the receivable side and also on the payables since we’ve got some benefit there which is sustainable over the period and we continue to focus in this area and we’d hope that we can see some further improvement as we progress forwards.
Thanks, Ron. I am just wondering if you can talk us through the volume and mix performance in the Flexibles business. We saw a strong improvement in the Rigid Plastics business, but if you can talk us through your expectations going forward and the performance in the first half of volume and mix in the Flexibles division?
While I'd say the performance going forward will be consistent with the performance in the first half, so we continue to guide to modest organic growth in both segments. Specifically as it relates to mix in Flexibles in the first half, we had very good growth in healthcare segments. Healthcare for us is both medical packaging and pharmaceutical packaging. We had good growth in the emerging markets, as I mentioned, and in some of the food categories, where the weakness in mix came about which we referenced particularly in Europe is just in some of the higher value-added categories, ready meals being one, culinary applications. These are not major, major segments, but the mix contribution that they made in the first half was negative.
Just a second question from me in terms of the Alusa’s performance, can you break that out or give some color in terms of how that performed in the half?
Look right on track that business has performed the way we expected it to this year. It certainly doesn't have the raw material headwinds that it had over the last 12, 15 months and I was saying in the comment before about the currency depreciation offsetting the decline in raw materials. It's certainly not wearing the same headwind. The underlying market in South America, it's a mixed bag. I wouldn't say they’ve generally improved all that much and that business has an exposure in Argentina, which is particularly depressed. But generally we’re happy with that business. We continue to win business from big multinational customers in particular on the ability to supply in South America and that's had benefits for us, not just in that region but also in Europe and in Asia, and in North America to some extent. So we’re happy with where that’s at.
Might take one from the phone here. We have Brook Campbell-Crawford from JP Morgan.
Firstly just on I believe there was some cost incurred in the first half to achieve synergies relating to recent acquisition. Generally would you help quantify what cost and where in the first half for this region and also what the expectation is in the second half '19?
Yes, Michael can provide the numbers there. But generally it's around $30 million of cost to achieve synergies and integration, which is on the slide on Page 43 that Michael went through before, that's first half experience, that’ll a bit more in the second half particularly in Rigid Plastics, but it started within the order of magnitude that we would expect on the back of the bolt-on deals that we've done recently.
And then also just on Bemis talks a lot about going after short run business particularly in North America. Just interested during this time if you thought of more today similar opportunity for Amcor in Europe or elsewhere across the globe? And if so, what sort of investments need to be made to drive it?
Yes, look, absolutely, that's a trend that's pervasive in all of the segments that we’re in which is shorter run work for our larger customers who are proliferating SKUs and launching new products at a rapid rate. And then also they tap into the smaller customer part of the market, that's a requirement. In the Flexibles business we're doing a lot of the same things, Bemis is doing. We have some business process changes we’ve made to be able to respond quicker. From an asset perspective, we've got some short run printing presses in Europe, some digital printing assets. None of these are really material and you'd know from this business that the incremental productive asset is just a several million dollars, it's not a big capital cost. So as we roll forward and refresh the asset base, increasingly the asset investments go towards machines that are geared towards that part of the market. I think that's the Flexibles side. The Rigid Plastics business we alluded to in the release today continues to see really, really strong growth in the regional beverage side of the market. So the smaller customers that are participating in maybe one part of the US market or one product category continue to grow quite well. We're winning with them, I think plastic is winning with them to the question we had earlier about format preferences. And so, we expect to see that going forward to continue.
Thanks, Ron. Just one more from me. I just wanted to revisit a comment made by the team last year just talking about the acquisition, allying for higher barrier films to be shipped sort of between countries. Just wondering if you could highlight which countries Amcor and Bemis currently manufactures these higher barrier films and if any benefit from this is included in the synergies area?
Yes. It’s a good question. Look I think first the easiest part is that there is no revenue synergy benefits included in any of the acquisition metrics that we’ve quoted today or previously, so that's potential source of upside. Look generally, our footprint -- our footprints are quite complementary, they’re the leader in North America and Brazil. We would be the leader in the other large regions in the world and both of us are seen as technology players with unique products, in Bemis' case high barrier films. We also are pretty well-regarded for higher films but we do a lot of foil-based packaging as well. And so the opportunity is to take the higher barrier films let's say that Bemis might be winning in North America, take those to Europe and Asia, and the rest of Latin America and similarly the products that we have in Europe that Bemis maybe doesn't have, the opportunities for us to take those from Europe to North America and to Brazil. So it's really a swap, it'll go both ways, but I think the key is that none of that potential opportunity is included in the deal metrics.
Hi, John Purtell from Macquarie, just had a couple of questions. Just sort of I think in a general sense, I mean this sort of feels like a rise of the headwinds that you’ve faced for the last 12 months in particular is starting to abate. Are there any -- and we're talking about the base business, are there any sort of additional headwinds or tailwinds that are sort of giving you particular focus at the moment?
No, I think -- look I think we talked enough about some of the issues that have kind of manifested themselves in the 12 month period. There were industry issues, whether it was raw material increases or volumes, right? I mean I think that we weren't immune to those industry issues, they’ve started to abate. I would say we talked about raw materials. We haven't seen is a real turn yet, we saw leveling off I would say and the $5 million dollar adverse impact in fact. In the first half we expect to get that back but not more at this stage.
In the beverage space, look we had a return to volume growth. I think some of that was cycling inventory destocking last year, I'm not sure the market has generally gotten all that much more robust, but I think the business has demonstrated it can generate growth particularly with the smaller customers that I referred to earlier.
So nothing on the horizon John, I think the business continues to be pretty resilient and defensive and once in a while you have a period like we had last year where there was a few things hitting the industry at once and you’re aware of it but we’re just focused on what we can control and we feel pretty good about the half and the outlook for the second half.
Just an add-on to that, just in terms of Latin American rigid so you’ve sort of mentioned volumes were up percent, what about in terms of EBIT sort of constant currency, other comment on, did that move in positive direction?
Yes. It was positive. It grew modestly and I think volume growth was 6% ex-Argentina and the business benefited from that, benefited from mix and benefited from good cost performance, so the earnings of that.
David Walker from Clime Capital. Hanging back to previous acquisitions, can you give us any summary metrics for the revenue synergies which were achieved and will it cost more to make and supply recyclable packaging?
Look the revenue synergies that have come I would describe qualitatively, I think the Alusa example is the best one where we’ve picked up a number of big -- first of all we don’t factor the revenue synergies into our return metrics. So Alusa is a best example, where prior to the Alusa acquisition, we were very much a healthcare focused flexible packaging business in the Americas. And we’ve talked about aspirations to do more and to be a broader player in that region. And I think that was well received but we weren’t really able to act on it. Once we closed that deal in Latin America it opened up a whole range of discussions with all of the usual suspects in terms of the large customers and you see the benefits indirectly. In some of the things that we announced today, so we opened a greenfield plan in India for Unilever. We've extended our partnership with Nespresso, and I wouldn't pin either of those developments specifically to Alusa but I would say that that deal reinforced the view in the eyes of those two customers that we are very compelling global partner. And I’m not sure that those two events happened without that deal I’m not sure but I think certainly there are global supply agreements we’ve put in place that have splendored on supply in South America, but provide benefits back in Europe and Asia to our legacy business. So that’s the kind of thing that we expect to see going forward with Bemis as well. I don’t quantify it because I think that we don't give ourselves a lot of credit for that in the transaction metrics anyway, but we know that the benefits are occurring. And sorry your second question?
[Indiscernible]
Look, I think at the end of the day it's going to cost what it would cost in the consumer world demand that that's a solution and scale benefits will accrue over time. At the moment recycled content tends to be more expensive but that's partially a function of the scale through the value chain or the supply chain. There's no technical reason why processing recycled input should cost more than processing virgin resin pellet, it's more the security of supply and the -- just the lack of capacity or lack of supply that’s out there which has held the economics back but the production processes should not be different.
Richard Johnson from CLSA. Ron I’ve got one but that’s easy, so to give you an opportunity to just continue with that. But when I think about the way the CPG companies that are addressing, say sort of seeing through these two elements still, one is recyclability which you’ve addressed; the two, they very clearly find the regions going out plastics, where they can. So I was just wondering, I mean in fact almost every day you see a product, which is being moved away or a company announcing their products being moved away from plastics. So to what extent or how much work have you done looking your portfolio that might be risk to that process?
Yes, it’s a good question. I mean first of all our efforts on the product development front are expansive. So recyclability we think and our customers would say is the likely best outcome for almost every category and every format. But our customers and Amcor in fact or Amcor like our customers are exploring a full range of solutions including compostability and biodegradability, bio-based materials and alike. We also talk to some of them from time-to-time about more fiber-based laminates. I think the reality Richard as you would understand I mean the barrier requirements that some of these products now demand, particularly if the functionality is to be preserved, are not going to be easily addressed by an alternative. And I think the customers know that, I think they have some very high-profile examples that they may see to point too. But I think generally speaking, the categories that we are supplying into are best served by plastics in most cases.
Do we make the some comments for Bemis as well? Because I know they’ve got a large beverage wrap business which are a lot of fiber-based as of now.
Yes, that’s an overwrap business. I would say if you think about the core of Bemis they have got some very high value-add films and structures for meat and proteins liquids which is very much like our high-performance business in Europe. Those are the areas where it's difficult to see substitutes in near term, particularly anything close to attractive cost.
And just a couple of for Mike if I may. Can you just run me through the drop in D&A please?
Yes, sure. I think the drop overall, that half of the drop is actually currency. So the net move was about 6 million, and that's really on the back of the restructuring programs we have dove over the last sort of while. There have been some cash and non-cash components to that. So part of that is a reduction in D&A.
How much sort of about roughly? I was just trying to understand, 7 million currency, that would be 7 of the 17 is in D&A which is kind of hard to understand?
The movement in D&A is 12.
And then movement on the constant currency basis?
6.
Yes, so half of that is currency, so net currency impact 6 or 7, your total currency impact was 17. So I am trying to understand why there is…?
In PBITDA it’s higher.
Okay. I’ll switch there. And then just on your Slide 43, which is incredibly helpful, can I just run through the large categories, so that’s asset sales, not the rebates, we'll come back to that, other and your restructuring costs. If I look at down the two years, can you just give me a feel for which divisions those offset?
It’s a mix across the board. Yes, I mean…
So sustainably that’s asset sales all in Flexibles, is that right?
There will be some in rigid.
And then just finally on next slide, when I think about how you are going to report your numbers under US GAAP, will those asset sales be from [civil] and if they’re not what would they be?
Say that again?
So could you book those asset sales under US GAAP?
Look there is a number of differences in US GAAP, I mean we are working our way through that obviously where we are restating history and what I can say is there are puts and takes in the US GAAP differences to IFRS but on a go forward basis we aren’t seeing any material impact to the underlying earnings of the business on a go forward basis from the conversion to US GAAP.
And then on the rebate number which you’ve partly addressed, can I just confirm that that’s a net number? Does that include the monies you have retained from Alusa or is that a net number? So what's the gross number, what's the gross rebate or gross settlement that you have got from settling these out?
The net sale component of that is 15.5 million.
And that includes the amount that you hadn’t paid out in the first place? You previously you said you had retained some funds …
Yes, net of the Alusa settlement and a number of other things, we are not disclosing the gross because it's confidential matter, just settlement with the private party.
And then just finally on Rigid Plastics and in North American beverages, can you just give me a feel for the run rate of growth goals that you exited the half please?
Yes. The growth has slowed for sure in the second quarter, we did have growth in the second quarter, but less than we had in the first quarter and that's primarily because the first quarter last year we had -- and this is in North America beverage that I'm referring to. The first quarter last year we had a really pronounced and rapid destocking particularly with one of our major customers. And so the growth rate or the decline rate last year was not indicative of the market and the growth rate this year benefited from cycling that destocking. I think the second quarter was more normalized from inventory perspective on we had modest growth, which I guess you could say is the exit run rate, which is why our outlook for the year hasn’t changed. We expect modest organic volume growth in that business for the year for the remainder of year.
Thank you. Scott Ryall from Rimor Equity Research. I was hoping to just touch on the sustainability angles as well. Could you -- just in terms of looking at recycle products in 5 to 10 years going forward how do you make sure that having you’re protected from an intellectual property perspective and I know your patents and those sorts of the things but can you just read about the contents in that recycled materially simpler and therefore the various trends that goes down?
Oh yes, that’s …
And I guess within that, could you just talk to sort of co-investments that you are making as well?
Yes, so I think it's a really good question. I mean intellectual property is going to be really important here precisely because it's not necessarily simpler, in fact it's actually harder you got to develop the material to do all the things that it does today for the consumer, which is preserve shelf life for a long period of time, provide ease of opening, provide the ability in many cases to cook the product in the package, provide aesthetically pleasing graphics, all of those things that the consumer has come to expect and demand, you need to then provide in a recyclable format which makes the technical challenge quite substantial and more IP intensive I would say. We've announced two products in the last couple of months which are good illustrations of that where we've taken in one case we've got a material called HeatFlex, which takes multi-layers in a traditional laminate down to one based film that provides the same sort of barriers with a similar look and feel. And it allows the product -- it allows for retort packaging so this is where the product is cooked inside the package at very high temperatures, it's quite demanding of the packaging material, and it is quite a bit of technology to get to a single layer material to substitute the qualities that have been previously provided by multiple layers, including foil, including metal. That would be one example we announced another one last week called Genesis, which is in all polyethylene formulation, again to substitute laminates made for multi-materials and both of those products that I mentioned are fully recyclable. So the technology requirement there is quite extensive and while the material mix might be “simpler” the technology in the science in the development of those products is actually quite a bit more intense.
While the co-investments -- look just in the event that we have an opportunity to supply at a very high volume any of these new innovations and a customer particularly benefits from that and like we've done over the years, there's an opportunity to co-invest where it's good for them to help ensure that we get the capacity in place and de-risk the investments for us, and it's a win-win, it's a best way for us to cement the partnership.
Does that include the [feedstock], as you've mentioned that's one of the cost effective way …?
Yes, there're other -- so the co-investments or potential co-investments I refer to are more in the converting assets, but we are investing and you could say co-investing in recycling partnerships in different parts of the world that our customers are also contributing to, among others. So we have a couple of partnerships in the US for curbside recycling both for rigid plastics but also flexible packaging and Amcor along with a number of others including our customers and governments and NGOs are contributing to some of those partnerships and you could then characterize that as a co-investment as well.
We have a question from Larry Gandler on the line.
Hi Ron, most of my questions asked but two remaining, one was on that curbside recycling, it sounds like it's a joint venture of some kind. I was wondering if you can talk about the scope of it and put some color behind that.
There's two Larry that we're referring to. One is the recycling partnership, which has been around for four or five years it's primarily rigids focused, it's essentially nonprofit, which brings together Amcor -- not just Amcor but converters, brand owners and alike to fund recycling infrastructure it's focused on some pilot cities in the United States now. The other one is around curbside recycling for flexible packaging and it's a organization -- the acronym is MRFF and basically it's trialing curbside recycling of Flexibles and helping invest in optical sorting at Murph’s to enable the recycling of flexible products through the same recycling streams as other -- as the other recyclables.
And my other question was on tobacco, it looks like you had sales growth in both USD and Euro exchange-rates, so I was wondering what's driving that, is it some of those new non-tobacco products and specialty cartons that are driving sales?
Yes, so couple of things Larry, it is the mix towards more of the heat not burn products, in some of the regions. Those are the alternative products that Phillip Morris and others have introduced, but also we’ve picked up some business in Asia and our customers performed pretty well in Asia as well as in Eastern Europe.
And what I meant by non-tobacco, I also meant really maybe non-tobacco like maybe toothpaste or?
Yes there's a little bit of that but that wouldn't have been a material driver of the increase, there's a modest increase from that.
Thanks.
Okay, thanks Larry. There are a couple of more on the phone here, Owen Birrell from Goldman.
Thanks Ron, just a quick one on the rigids performance, I noted that you talked to sort of good progress on initiatives and benefits of beverages, but we know that the margin is contracting. And you've only delivered I think somewhere around 5 million in terms of PBIT increase, I'm just wondering where are the trouble spots within that business that are pulling that backwards and what can be done about rectifying those?
Actually we're pretty pleased with the margin performance in that business, the raw materials went up quite substantially which inflates the revenue line and then to the detriment of the percentage margin, the percentage margin gets distorted quite a bit by that sales movement excluding that impact the margins expanded 20 basis points. And when we look at on a per 1,000 basis, which is how we run the business, you see good expansion of the average margin per 1,000. So we’re pretty pleased with where that business is that the mix improved with good hot-fill sales which is more value-added end of the beverage space and then, especially container business continued to grow as well. So we’re pretty happy with that business right.
And I just noticed that you spend around 40 million on restructuring activity within rigid, in a sense what are your payback period on that investment is and what sort of opportunity we’re seeing in terms investment going forward on the back of that?
Yes. The number that’s in the accounts is the accounting number, the cash that we’re going to invest is about 40 million to 45 million and the return we expect is about 40%, so it’s just a bit over two years of payback and it’s a combination of footprint work and overhead reductions that you'll see start to accelerate in the second half. We had a modest benefit in first half, we will see 5 million to 10 million for the full year as the initiatives pick up in the second half.
And just a second question for you, Michael on the working capital, very good performance 10% from the 10.4% in the pcp. Over the last decade it’s a bottomed out about 8.3% three years back, I’m just wondering is there any structural reason why kind of get back to those level or what do you say could be optimal level of working capital?
You are right. We were kind tracking in that 8.5% to 9% range for several years and then we did a couple of sizable acquisition the Alusa acquisition and Sonoco which were running a much higher working capital. So that's why you have seen the increase over the last couple of years. Now we are starting to get on top of that and starting to the working capital come down as we certainly are being pretty focused on it. So you’ve got to expect that we should be able to get back down to 9% over time. That clearly I think takes time right way through and we’re working really hard on that space.
We will go backwards with the Bemis transaction before we go forward as well. So we have two more on the phone, we have Grant Slade from Morningstar.
Just one from me, in Flexible you noted obviously strong growth in Asian volumes, which would I guess then imply that volumes into Europe and Americas were flat the perhaps negative. Just wondered if you could speak to why flexible volume is struggling so much in developed market? Thanks.
Yes, look I think that the developed markets volumes were more or less like flat, we talked about mix earlier. We had really good growth in the healthcare space in North America and Europe. We had good growth in a number the food categories but we also had softness in yogurt and ready meals and some of the other things that I referred to earlier. So I think that our growth mirrors the market, these are particularly in food, healthcare aside, but in food and personal care, you see market growth of 1% or 2% and that's typically what we see, typically we would be picking up share and winning business, but also sharing business at the same time, and so that nets out to low single-digit growth in any given period, there’s nothing really out of the ordinary about the last six months.
Okay we have more from Keith Chau, Evans and Partners.
Good afternoon Ron, I just want to circle back on the question around input cost. I think last June, I think the headwind last year was $43 million in FY '18 and in the first half of '19 of $5 million. So theoretically speaking even if input costs elevated Amcor should be able to cover the entire loss. Now the expectation going in the second half is only $5 million reversal. So maybe just a couple of questions. One is, does Amcor still expect to recover the entire $48 million headwind? And secondly, if that is the case what is the timing? Looking at some of the input costs and where that tracks over the past call it three to four months, thought that the tailwind should actually be greater than the headwind that was incurred in FY'18 and 1H '19?
Yes. It’s a good question, I mean the short answer is we will get all the $48 million back. Our guidance assumes that $5 million comes back in the second half. It is entirely dependent on the slope of the input costs and the price changes in the commodities and the inventory movements through our supply chain. If we look back six months we saw raw materials relatively flat for the first four months of this year. We saw polymer-based raw materials decline in November and December. And what we see going forward is a mixed bag. We see generally resin indices up between 3%, 4%, 5% across our portfolio and that's driven by a number of things including a number of planned and announced outages in the polyethylene space. So it’s difficult to forecast, but the starting point is that the business passes through all of the changes up and down. So we will get the remainder of the $48 million back beyond the second half if we don't get release from the commodity industries.
And then Ron may be if I -- the outlook for cost is up mid single-digits I'm assuming that’s on quite a low base that is after what is being quite a steep decline in the key costs including resin and aluminum. Is that correct?
Sorry steep -- I didn’t hear the -- after you said steep what was the question?
Yes, so what I'm assuming is that when you are talking about a mid single-digits increase in input cost, is that off the troughs levels of your input costs given how you steep the fall was being for both aluminum and resin?
Yes, off of current -- from the current point in time forward we look forward across the different published indices. You see mid single-digit increases from the end of first half.
I think if there are no further questions, we will close the call. Thank you.