Amcor plc
Q4 2016 Earnings Call Transcript
Published:
- Ron Delia:
- Good morning, everyone and welcome to Amcor’s full year results conference call. This is Ron Delia, Amcor’s CEO. And with me today is Michael Casamento, Amcor’s CFO. As we do with all of our internal meetings at Amcor, I’d like to start with our safety performance. And whether we consider ourselves successful or not starts and ends with safety. And I think you’re probably aware we commit to an objective of no injuries and in the last 12 months, our lost time injury frequency rate was 0.56 and our recordable case frequency rate was 2.0 and in addition, at the end of June, over 59% of our sites went 12 months without a recordable case incident, which tells us that we can actually get to no injuries and we will get there. However, we just can’t be satisfied if we have a major incident. In this past year, we experienced a tragic event. We had a fatal accident at our plant in [indiscernible] France, involving a third-party contractor and since that time, we've had obviously a detailed investigation and all Amcor sites have implemented additional procedures to reduce the risks of similar incidents in the future. So it's clearly something that should never happen to any of our employees or anybody else who works at our sites, especially in a company aspiring to no injuries and it's another reminder of why safety has to remain our number one priority. Before we move into more detail on the financials, I'd like to just start with a few overview comments on slide 4. 2016 was a very good year for Amcor. The financial results that we delivered this morning were strong across all key metrics, which is an outstanding result, considering the challenging macroeconomic environment around the world. And importantly, our growth was balanced across several dimensions, which again demonstrates a defensiveness and resilience of our business portfolio. We had solid growth in both developed and emerging markets, a good mix of organic growth and growth from acquisitions and both the Flexibles and Rigid Plastics segments achieved higher results than the same period last year. The cash flow and balance sheet remains strong and this enabled us to deploy $1.2 billion of cash in order to create value for shareholders through dividends, share buyback and several acquisitions, which leaves us in a strong position to continue to invest for growth, which we expect to do in fiscal ‘17. The board declared a final dividend of $0.22 per share, $0.01 or about 5% higher than last year, which brings the annual dividend up to $0.41 per share and we completed a $500 million share buyback during the first half of the year. Beyond the financial results, we also made good progress on the priorities we outlined 12 months ago, which I'll talk more about later and importantly, we expect another strong year in 2017. Slide 5 shows the key financial information for the year, including the constant currency performance and I’d like to remind everybody that we report our results in US dollars, and unless otherwise stated, I’ll be referring to underlying earnings, which we believe is the best way to understand the true operating performance of the company and underlying earnings exclude amounts, which are detailed on slide 26 and relate mainly to our Venezuela operations and the restructuring initiatives in the Flexibles segment, both of which we announced in early June of this year. PBIT was up 7%, PAT was up 7.5%, both in constant currency terms. Bear in mind the strengthening of the US dollar against most currencies during the year resulted in an adverse impact. That impact was $51 million on PAT and we have additional information in the appendix on exchange rates and their impact on earnings and I’d encourage you to have a look at that information. Looking at the other key metrics, free cash flow was 311 million and return on funds employed improved by 130 basis points to 21.6%. In terms of the balance sheet, our interest cover was unchanged, 8.4 times, which was flat with the prior period and the other key metrics we look at is net debt to EBITDA, which was 2.6 times for the year. Michael will touch more on this shortly, but we remain very comfortable with the balance sheet and the ability to continue to fund future growth. So the key point from this slide is that Amcor delivered another strong result, and there has been continued improvement in each of the key performance metrics. On slide 6, we have a breakdown of our constant currency PBIT growth, which really demonstrates the balance of growth that I referred to earlier. Of the 7% PBIT growth, 4% was organic, and then acquisitions contributed 3%, net of the cost to achieve synergies, which is in line with the contribution we've seen from acquisitions in recent periods. Both segments delivered really solid growth with Flexibles at 7% and Rigid Plastics at 10%. And taking a view by market, developed markets grew 5% for the year and emerging markets grew 8%. So I come back to the defensiveness and resilience as key takeaways here. We’re really advantaged by our geographic diversification and it rises to the surface when the worlds has the number of macroeconomic challenges that it currently faces. With 200 plants in 43 countries, we’re not reliant on any one geography or any one end market for growth and from period to period our growth, the composition of our growth will vary. Turning to slide 7, the Flexibles segment had a solid year with constant currency PBIT growth of 7.2% and margins and returns remaining strong. The clear standout for the year in the Flexibles segment was tobacco packaging. The business benefited from stronger demand in Western Europe, ahead of new regulatory requirements on tobacco packaging in May of this year and we highlighted this at the first half result in February and we expected customer destocking to take place through the second half. And as it turned out, demand remains solid for most of the second half and the destocking only started to occur in the last 4 to 6 weeks. So we expect customers to continue to drawdown inventories through the first half of the 2017 financial year. Tobacco packaging demand across Eastern Europe, Asia and Latin America also remained strong, driven by underlying growth in those markets. Benefits from acquisitions and new business wins and these benefits were partly offset by weaker volumes and higher operating costs in the Americas. The balance of the Flexibles business benefited from solid organic growth in emerging markets, innovation driven product mix improvements, better operating efficiencies and contributions from acquisitions. By region, performance remains subdued in Western Europe and the medical segment in North America experienced some weakness, while collectively, the businesses in India, Indonesia, Singapore and Thailand delivered strong growth and the business in China is stable. Growth continue to be strong in Eastern Europe with the business winning new volumes from large multinational customers within the pet food and confectionery segments. And, importantly, we are investing for growth with six acquisitions announced or completed during the year in addition to investments in two greenfield plants, one of which in Indonesia started up during the year and the other in the Philippines, which is beginning to ramp up as we speak. Slide 8 quickly recaps the recently announced restructuring investments we’re making in the Flexibles segment. Now, bear in mind this is a group of businesses with returns of almost 26%. So this restructuring is a proactive effort to take what is a very strong set of businesses and make them even stronger and better positioned, particularly in developed markets. And we typically do a modest amount of restructuring every year, but this is a more aggressive programmatic approach, which we developed over the course of 2016, and as expected, we have a fast start. We announced within a couple of weeks of our broader market announcement, several plant closures and since have announced closures in total of 4. One in Belgium, one in the UK, one in Australia and one in New Zealand. We've also announced a plant restructuring in the UK and the reorganization of our Flexibles business in Europe. There is no change to any of the numbers. None of the financials I noted on slide 8 here are any different from those that we announced in early June. We expect $40 million to $50 million of EBIT by the third year from these activities and that generates attractive return of 35% on the cash that we're investing. Looking at the outlook for 2017 financial year in the Flexibles segment on slide 9, in constant currency terms, the Flexibles segment is expected to deliver particularly strong PBIT growth in the 2017 year, compared with EUR681.2 million of EBIT achieved in 2016, and this outlook takes into account four factors. First, we expect modest organic growth, inclusive of the destocking impact in the tobacco packaging business in the first half. Second, we have an additional 11 months of acquired earnings from the Alusa acquisition. Now, you should note for the full year, the synergy benefits from Alusa will be offset by the integration costs, although while the costs in the first half will get the synergy benefits in the second half, but for the full year, those will wash. The third factor to take into account in terms of the outlook is modest growth from other recently acquired businesses, inclusive of the integration costs related to those transactions. And then finally, we expect restructuring benefits of approximately EUR9 million to EUR13 million will be delivered in the second half of the year. So in terms of the first and second half phasing, given the timing of the restructuring benefits, the integration costs, the timing of the synergy benefits related to Alusa and the timing of the inventory movements in tobacco packaging, overall growth is expected to be significantly weighted towards the second half of the year. And growth in the first half is expected to be moderate compared with the EUR321 million of PBIT we achieved in the first half of the 2016 year. Moving to slide 10, the Rigid Plastics business had an outstanding year with earnings up 10% versus the prior period and return on funds employed improving over 23%. Volumes for the North American beverage business, excluding the recent Encon acquisition, were 7.6% higher than last year and this was driven by above trend market growth, up 4% to 4.5%, which reflects the continued performance of the PET format in the market and the above segment growth that's been occurring for a number of years in PET containers. In addition to the market growth, the business benefited from market share gains secured mostly during the 2015 financial year and additional spot volumes in the first half of 2016. We continue to grow our position in the high-value diversified products business with earnings growth reflecting higher volumes and favorable product mix and we’re excited by the potential for Amcor in this business. In Latin America, the business performed very well during the year, given economic conditions were particularly challenging and volume growth for the year was 2.6%, but performance was mixed by country with strong growth in Brazil and Mexico, offset by a decline in Argentina and a 20% drop in volumes in Venezuela. Now, as we announced in June, economic conditions in Venezuela deteriorated with accelerating hyperinflation and the ability to access US dollars to pay for raw material imports becoming increasingly challenged and so we took a proactive accounting measure at that time, which resulted in a one-time charge, but had no impact on the underlying earnings during 2016. Now, we do expect PBIT in 2017 year in rigid plastics to be lower by 40 million as a result of this particular change. We are still operating the business in Venezuela, but any earnings generated in the local currency boulevards would be translated away to negligible amount and the important point here is that we’ve eliminated any financial exposure on the balance sheet to Venezuela. The situation is really complex and it’s very unique and we just don't see another country in our portfolio or in fact anywhere in the world that bears any resemblance to the set of circumstances in Venezuela. Now, finally, the Rigid Plastics business completed two acquisitions in North America during the year, which were the first in that business since 2010. First, the acquisition of Encon, which is a privately owned preform business will deliver considerable operating synergies in the North American beverage business and then the acquisition more recently of Plastic Moulders, which is a business in Canada that manufactures containers and closures for the food and home and personal care markets, builds on the position we have in diversified products. And we believe there are further opportunities to grow by acquisition in Rigid Plastics, particularly in diversified products and I’ll talk a little bit more about that shortly. Turning to the outlook for the 2017 financial year on slide 11, on a reported basis, PBIT in the Rigid Plastics segment will be lower versus the $352 million achieved in the 2016 year, but this outlook takes into account four key items, which I’ll run through. First, the Venezuela accounting change that I referred to earlier. For the year ended June 30, 2017, this will negatively impact earnings in the segment by 40 million. Of this amount, approximately 25 million will impact the December ’16 half, so the first half. Second factor is continued growth we expect in Latin America, excluding Venezuela, notwithstanding the challenging conditions in some countries. Third, we expect solid volume growth in North America, albeit at rates lower than those achieved in 2016, given timing of market share gains. And then fourth, we expect benefits from the Encon and Plastic Moulders acquisitions. So after the reset in earnings related to the business in Venezuela, the remaining businesses in the Rigid Plastics segment are expected to deliver solid PBIT growth in 2017, compared with 2016. With that, I'll hand over to Michael now to talk about the cash flow and the balance sheet.
- Michael Casamento:
- Thanks, Ron. So looking at the cash flow on slide 12, you can see that the cash flow for the year was strong with operating cash flow up 1.7% to 791 million. This included working capital benefits which we measure through the average working capital to sales ratio. This metric has been incrementally worked down over many years and averaged 8.3% for the current year. Amcor puts considerable effort into monitoring, measuring and managing working capital and this year, all the businesses did an excellent job against objectives. Growth capital expenditure was 349 million, with the increase on last year reflecting the spend on Greenfield plants. Total cash restructuring, integration and transaction spend was around 32 million and this includes the Flexible restructuring initiatives that Ron spoke about earlier, and therefore reflects the normal kind of restructuring we would undertake and we will continue to undertake each year. Together, this makes the overall spend on capital and restructuring, 381 million, which compares with our depreciation and amortization charge of 354 million. As we continue on slide 13, we see free cash flow after the payment of dividends, up 4.3% to 311 million. As Ron mentioned, good cash generation has enabled a final dividend of $0.22 per share to be declared, which is higher than the final dividend of last year as well as completing the outstanding portion of the 500 million buyback. Spend on acquisitions was a fraction under the 500 million. This is approximately 100 million lower than the aggregated acquisition cost announced during the year and this difference reflects the debt acquired with the Alusa acquisition. It's also worth highlighting here the cash adjustment that relates to Venezuela. In instance, this reflects the impact of applying a floating exchange rate, which is almost 50 times weaker than the fixed rate previously used to convert the Boulevard cash on hand at period end. In getting quickly immersed in a lot of accounting detail and complexity when it comes to Venezuela, there is some further detail in the appendix slides, which map out the impact on equity and net assets which you can refer to. But the key message is that as we announced in early June, there is no residual financial exposure on the balance sheet in relation to Venezuela. Net debt has increased since last year, mainly reflecting the additional funds drawn to finance acquisitions and complete the buyback as well as a reduction in cash on hand. So overall, the cache performance of the business has remained very strong. As we look ahead to the 2017 financial year, we expect free cash flow after the payment of dividends to be in the range of 150 million 250 million. Now, this is 50 million lower than we’d normally expect and reflects the higher restructuring costs in the Flexibles segment to be paid out next year. This restructuring cash spend is likely to be first half weighted and as a result, we expect operating cash flow will now exceed $50 million in the first half. Moving to slide 14, we’ve presented a snapshot of the balance sheet and the debt profile. Today, the balance sheet of the business remains strong and as Ron mentioned, this is despite the business deploying 1.2 billion of cash to create value for shareholders through the payment of dividends, completion of the share buyback and the acquisitions during the year. The two main ratios we look at with regard to financial health, leverage and interest cover, remain within our normal management range. Given the cash flow profile across the first and second half I just referred to, leverage from a report basis is expected to be higher at the end of the first half in FY17. That being said, Amcor remains very well positioned with the capacity and flexibility to pursue additional growth opportunities and take advantage of the low interest rate environment with the benefits from the recent investments we have made flowing into future cash flows. In terms of financing costs, we expect net interest for the 2017 financial year to be in the range of 185 million to 195 million, taking into account current exchange rates. This is around 15% higher than the charge in FY16 and reflects marginally higher interest costs, along with higher average debt levels. Guidance in relation to net interest cost is detailed on slide 31 in the appendix, which also includes detail on a number of other items such as the effective tax rate. In relation to our debt profile, we continue to be in a very comfortable position. We have an investment-grade rating and access to diverse sources of funds, including a robust commercial paper program, which is fully backed up by committed long-term bank facilities. During the year, we refinanced two significant bank facilities and completed our first issue into the US 144A bond market, with $600 million ten-year bond. Demand for the Amcor credit was exceptionally strong and we’ve been able to lengthen the average tenure of our debt at competitive fixed coupon rates. The next refinancing is in December 2016 when we have $275 million private placement borrowing. We have an excellent debt maturity profile, appropriate mix of fixed and floating debt and we're comfortable with the mix of currencies. So, in summary, the key message from me this morning is that the business remains very well positioned. Cash generation remains strong and our balance sheet provides the flexibility to continue to grow organically and by acquisition as well as paying dividends. So with that, I will hand back over to Ron.
- Ron Delia:
- Thanks, Michael. Slide 15 shows Amcor's shareholder value creation model, which many of you are familiar with. It's not changed. It's a simple way for investors to think about how Amcor can generate value over the long term. Slide 16 shows the components of total value created during the current year or during the past year, 2016. The dividend yield was in line with long-term expectations, long-term average, around 4%, and that’s based on annual dividend of AUD0.553 and a share price on July 1 of 2016 of AUD13.72. In constant currency terms, profit after tax grew 7.5% and as I mentioned earlier, we completed a $500 million buyback during the first half of 2016, which resulted in a reduction in the weighted average number of shares of around 3%. And the share buyback was an excellent use of cash and created a lot more value for shareholders in simply reducing debt considering interest rates at near record lows. So in total, shareholder value creation for the year was 15%, which is near the top end -- at the top end of the long-term range we talk about of 10% to 15%. Now just the next few minutes, I would like to recap on some of the thoughts I shared with you over the last 12 months, regarding the opportunities we’re prioritizing at this point in time. I’ll turn to slide 18. In August of last year and again in February, I described our current operating priorities and those include both building on the strong foundation that we have, but also accelerating our efforts in areas where we know we can improve. Now, those things that we consider are foundation are familiar to many of you that are listed here on the left-hand side of the chart, but we have focused portfolio leadership positions in many of our key markets. We've got a differentiated set of capabilities which we call the Amcor Way and we’re disciplined in terms of cash and capital deployment and of course we have a resilient shareholder value creation model. So none of that’s changing. Now, the areas where we have additional opportunity are listed on the right-hand side. And there are many ways we can make this business even stronger, particularly by generating our own growth, increasing our agility and the pace with which we adapt the organization and developing our people. And if we move quickly to slide 19, I will just provide some examples of the progress we’ve made in these areas. A simple message here is that we’ve been quite active over the last 12 months and we’re making solid progress. On growth for example, we’ve been successful in winning new business and winning some share in many parts of the company, Rigid Plastics in North America, Brazil and Mexico, and in the Bericap business, in tobacco packaging in Eastern Europe and the Philippines and Flexible Packaging in Singapore, the Philippines again and Russia. And we’ve also continued to invest in dedicated facilities to support our customers growth and these business wins and share gains are good examples of a strong value proposition and not growth for growth sake, and they demonstrate the trust that customers are placing with us. There is many more opportunities to continue this sort of growth and continue to partner with customers on investments and other opportunities in the future. I’ve mentioned we’ve broadened our acquisition growth; I’ll come back to that shortly. And in terms of being more agile and adapting more aggressively that’s what the flexibles restructuring initiative is all about. And finally on the talent side, there have been a number of changes to the team, the talent within the organization overall but really pleasing we had our highest ever employee engagement scores when we did the most recent survey towards the end of the 2016 year. So while we want to preserve and built on the strong foundation that we have there are actions here which are good examples of opportunities to move the business forward to even higher levels of performance. Just quickly on 20, in terms of recapping the acquisition activity, you can see quickly on the slide that the activities increased this past year, in fact there has been transactions in each of the businesses. We believe we have world-class processes here and capabilities and we’ve brought that expertise to bear across our entire portfolio. You’ll see again acquisitions in each business group and across four continents. And the key message here is our pipeline remains robust and we continue to see compelling opportunities and you should expect to see us be active again this year. Moving from our current operating priorities and just taking a slightly longer term view on slide 21, this describes how we're thinking about strategy and growth. From a financial perspective, the objective is clear; it’s defined in our shareholder value creation model, shareholder value of 10% and 15% every year. And our ability to deliver that value is a function of really two things, one our portfolio of businesses and two the capabilities that we can deploy across the company for the benefit of those businesses. And first, in terms of our portfolio, the business and the portfolio itself is quite focused, at this stage rigids, flexible packaging, tobacco packaging and we place a high priority on good industry structure and the ability to differentiate but the other thing that the businesses all have in common is significant growth opportunities at both organic and through acquisition. And then there are the capabilities that are important for each of these businesses and where we have potential competitive advantage and these would include things like commercial excellence, many of you would be familiar with our Value Plus program, our procurement capabilities, and our experienced integrating acquisitions. Another example would be our ability to collaborate globally across flexible packaging which is unique in the marketplace. Key message here is that there is significant growth potential in the existing portfolio and I just want to take a minute to describe two examples of that embedded growth. Slide 22 is the first example relates to flexible packaging in the Americas. This business became a stand-alone business group in June 2015 with the objective to increase focus and accelerate disciplined growth and the opportunity is pretty clear from looking at the slide. The flexible packaging is a huge market globally with about 25% of that in the Americas region that’s north and south. And Amcor is the global leader in flexible packaging but in this region, we are very underrepresented with less than 5% share and that includes the recent Alusa acquisition. For many of our global customers have a significant presence in this region and by expanding our footprint we differentiate and improve our value proposition as the only true global supplier which often makes us a partner of choice and creates the opportunity to grow our rates which exceed the market. Second example is on slide 23, which comes from Rigid Plastics and this is rigid plastic containers for non-beverage applications or diversified products as we have historically referred to it. Now in North America, this is a substantial market of over $10 billion and then in Latin America we’d another $3 billion or 4 billion to that pool. And in terms of end markets, you can see on the slide some examples on the right-hand side, covers a number of categories including food, health care, personal care, household products and our position in this market has advanced over the last six years to about $500 million in sales. Now both the Alcan and Ball acquisitions and the recent acquisition of Plastic Moulders brought growth in this space but they also substantially improved our capabilities and broadened our product offering to include a range of materials and manufacturing processes which have all helped us expand the adjustable market into new segments and provide further sources for potential differentiation. So we’ve come a long way here, but looking forward there is a very large and attractive opportunity set that lines up very well with our capabilities and value proposition. And we expect to drive organic growth going forward and in addition there is a rich pipeline of acquisition opportunities. In summary, just to close on slide 24, Amcor delivered a strong result for the 2016 financial year in a challenging macroeconomic environment which once again demonstrates the defensiveness and resilience of our portfolio of businesses and the range of opportunities we have to create shareholder value, all of which is underpinned by strong cash generation. We’ve made good progress against our priorities and we expect that momentum to continue, there are many more opportunities ahead of us and so we’re quite confident about the future. With that I'm happy to turn the line over for questions.
- Unidentified Analyst:
- [indiscernible] from UBS. Just a couple of questions on Latin America. Just volume growth at 2.6% including Venezuela, Ron can you give us a sense of what that volume growth was if you exclude Venezuela for the remaining businesses?
- Ron Delia:
- It was just short of 6%.
- Unidentified Analyst:
- And then just secondly, just on Alusa, if you could remind us of the end markets Alusa services and if you've seen any sort of consumer trends there to suggest that consumers are down trading and how that could potentially impact your business?
- Ron Delia:
- Alusa is the acquisition that we made this past year in South America, it’s the largest - it was the largest flexible packaging business in South America and has sales of just short of $400 million and plants in Chile, Argentina, Peru and Colombia. So it’s the largest player in that big reasonably well growing market. The end market segments are broad because it’s a big business, it has food business, it has personal care and healthcare and it’s actually quite a good business with good capabilities. We actually don't see any down trading of anything; we see a continued increasing of the sophistication of the packaging and Latin American and actually in fact across the emerging markets. So, what’s been really pleasing about that acquisition is that customer reaction to it which has been quite positive, or quite strong and is kind of validated the initial thesis which was this would help us provide a more global offering to our big multinational customers, so far we’re very pleased with what we've seen.
- Unidentified Analyst:
- Michael, it's [indiscernible]. You did outline earlier that the Venezuela write down was quite complex. Can you just sort of simplify that the impact that it had on the balance sheet and the cash flow?
- Ron Delia:
- Michael, you can handle that part. Can I just describe the way the business works? So, first of all in Venezuela we've been there for over 20 years and that we have a joint venture there and it’s a reasonably sized business, we have a big plant in Valencia [ph] and we have five on-site facilities around the country. And the issues in Venezuela are not Amcor issues, they are Venezuelan issues and what's going on there and what really accelerated in the second half is hyperinflation coupled with this inability to convert bolivars into US dollars. So, in hyperinflation, what happens is and what we experienced in the second half, prices go up like on an almost weekly basis and we have to be out in the marketplace raising prices and recovering those input costs that input cost inflation on a regular basis. And customers pay really quickly and order quickly because they know the price is going to go up. So what that leads to is a big buildup of cash as you're out there raising price, collecting more and more bolivars, selling your local obligations but then may be not able to convert those bolivars into hard currency to pay for imports. So that’s just sort of the way it works sort of qualitatively. Maybe Michael you can describe the financial impacts of all of that.
- Michael Casamento:
- Sure. The financial impact was right down to net profit after tax of $348 million and that was really made up of two components, so that was made up of the net assets of the business, which was around $220 million and then the reversal of previous foreign exchange translation losses that were already sitting in equity, they got reversed and were written off as part of profit and loss. So as a result the net reduction in equity was $220 million.
- Unidentified Analyst:
- In the cash flow there is that $184 million adjustment, can you just run through what that relates to?
- Michael Casamento:
- So that basically relates to the bolivars, the cash that we have on hand in Venezuela, which we still have but in effect that - putting them at the exchange rate of today which is as I mentioned in the [indiscernible] 50 times greater than what we’ve been previously translating it. So in effect those bolivars on hand in Venezuela become zero in US dollars.
- Ron Delia:
- And you get all the bolivars because of the phenomenon I was describing which is you’re constantly raising price and collecting bolivars because the customers are paying as quickly as they can.
- John Patel:
- John Patel here from Macquarie, just had a couple of questions, one for Michael, just as far as the balance sheet goes. So obviously your historic target has been up to 2.75 times net debt to EBITDA, so you're running at 2.6 obviously free cash flow over time or would you say all things equal, but are you prepared to move above that historic target if the right acquisition comes along?
- Michael Casamento:
- That's a good question John, thanks. Look we are at 2.6 and obviously that’s partly due to the fact that we've invested for value creation for the shareholders, so we completed the buyback in the year which was another 220 million. We then invested 600 million in acquisitions and they certainly increased the debt, but the way the leverage works is you only get to take the trailing PPDA in terms of the calculation of a 2.6. so clearly as the benefits of those acquisitions come through in synergies and growth, and obviously combined with the flexibles restructuring program, we will see that leverage come back down, but as I said in my notes, look in the first half we are expecting leverage to be at the upper end of the range or even slightly ahead - above that. But me feel comfortable and that also we certainly are not impeded to grow, as Ron mentioned we’ve got opportunities in the pipeline and we will continue to grow through acquisition over the coming year.
- John Patel:
- And just second question on tobacco packaging which just continues to power along. It looked like the sort of pull forward and sort of I guess second half weakness that you were expecting didn’t manifest, so just dynamics around that. Also any demand impact post the European packaging tobacco directive there?
- Ron Delia:
- Well, all of this sales spike let’s say relates to the tobacco packaging directives. So for context, the European Commission put in place a new set of regulations on tobacco packaging, which went into effect in May of 2016 and that led to a stock build on the part of our customers that probably started back in October of last year. So we have about a quarter, three or four months of benefit in the first half of high volumes related to customers building stock ahead of that May implementation date. Now we expected there would be some unwinding of that, there will be some unwinding of that and we expected that to predominantly occur in the second half, what ended up happening was volumes remained really strong through May, through the first half of May even. And we started to see the inventories been drawn down and volumes come down in the second half of May and in June, and we're seeing that now. So we expect the destocking will occur in the first half. Why is that? Well, I think the implementation which was meant to be uniform across the European Union on one date has turned out to be staged and less than uniform, which means that there is probably still a third of the countries that will be subject to these regulations which have not yet proceeded with the implementation.
- Richard Johnson:
- Richard Johnson from Citi. Can I just follow up on that Ron, given that you had stock build in tobacco right through the year, does that mean the impact on the current year is actually exaggerated from what we thought it was going to be at the end of the first half given the starting point is higher?
- Ron Delia:
- In the first half we said that we had about EUR6 million of benefit from stock build which was really two factors, about EUR4 million of that was the tobacco packaging directive we just discussed and about EUR2 million was related to excise tax increases in Russia. Now those unwound as there was the tax increase went to effect in January and the EUR2 million unwound in the second half. What we saw was a further inventory build in the second half, so we would estimate all of - the total benefit in the fiscal year was probably EUR7 million or EUR8 million, so it did increase then from the benefit we enjoyed in the first-half.
- Richard Johnson:
- And then just in the Americas, for tobacco, I know that your shares dipped down a little bit, so is that what you're talking about when you talk about volumes down or was that the markets being slow as well?
- Ron Delia:
- No, we have a very, very high share in that business and he walked away from a small piece of outer cartons business which is essentially the carrier for lots of packs of cigarettes and in the US that’s essentially like a cereal box it’s cartons that anybody can print and rather than chase the price down we elected to give up a little bit of share in that space so that's what we are referring to.
- Richard Johnson:
- And then just on the domestic business on Australia New Zealand, the revenue numbers year-on-year change looks a bit odd, so you leave aside the currency difference I was just wondering if you could talk around what Australia has been doing?
- Ron Delia:
- Well, Australia had reasonable volumes in the year but poor mix, and so that offset and then in New Zealand we actually had excellent cost performance, but really weak volumes particularly in dairy. So collectively those businesses were more or less in line with the prior period.
- Richard Johnson:
- And then finally, if I think about your shareholder value creation model, you obviously got a lot of help from the buyback this year, you know is the organic growth that you’re seeing which is obviously very impressive at the moment plus the contribution of acquisitions given the step of sufficient offset that in the current year so you end up at roughly the same point?
- Ron Delia:
- Yes, I think so, I mean, if you think about that value creation model, we talk about the dividend yield, we talk about organic growth driven by capital investments and then we talk about the extra cash the business rates being put to work to generate a return and the primary objective is to grow the company. So we’d like to put that to work to do acquisitions, which is exactly what happened in 2016. When at times and if you look back we've been pretty systematic about this, at times when acquisitions weren't imminent or plentiful we bought back shares. And so the composition of that 10% to 15% will vary over time depending on how active we are able to be on the acquisition front. And so clearly we have been quite active in 2016 and we finished our last buyback and we are not announcing another one at this stage.
- Unidentified Analyst:
- [indiscernible]. Just a question of the working capital, we’ve seen that step down pretty consistently. Can you talk about the components that have driven that down and then also if you’re looking to the next couple of years what sort of improvement should be expect and again where it’s coming from. And finally, how much one off impacts are there on that as a result of acquisitions, so if there were no acquisitions, how much better would that number look?
- Ron Delia:
- As you said we've periodically over time really managed the working capital down to 8.3% and we give you a range typically we’d expect to be in the range of 8.5% to 9% and in the cash flow guidance we've giving you for next year I mean that's the range that we are looking at. In FY16, as I said we had good performance across all the businesses and it was across a number of areas, probably the main piece pieces was around payables and we had some good performance there, some of that structural and some of that is more timing, so we'd expect that to reverse in FY17 and that's why we give you the range of 8.5 to 9. But overall there are opportunities, there is always opportunities in working capital and something that we focus really hard on to drive the business and get the greatest return from our cash, so we feel pretty good about where we and we continue to work on that.
- Michael Casamento:
- It's probably fair to say almost every acquisition we do would be dilutive to that number.
- Ron Delia:
- And the one impact is, it’s hard for us to say and we won’t disclose it, but it tends to be - acquisitions tend to have much higher working capital concentration than our business has.
- Unidentified Analyst:
- I'm assuming tobacco inventory stuff would be way too small to see in that head good number?
- Ron Delia:
- [indiscernible].
- Keith Chau:
- Keith Chau from JPMorgan. Ron I just want to kind of reflect back on your comments on market share gains, obviously we discussed the market share opportunities in American flexible. The two businesses that stood out in FY16 were North American beverages and Asia tobacco. Would you be able to just give us an idea of what your market share is for each of those businesses at the moment and how big you think the opportunity is for those businesses if you continue down that market share gain route?
- Ron Delia:
- Listen I think it’s some probably better to describe the nature of the markets, so in North American beverage, the businesses really, you can think about it in two parts, one is a business that makes cold filled containers for water and soft drinks and dairy products and that sort of thing. And we are in a duopoly there with a private company called Plastipak we both have strong shares. In the other side of the business it’s a duopoly with Graham Packaging which is part of the Rank, the Reynolds Group and that's the business, that’s the part of the business that makes higher value-added containers for hot filled beverages and again both of us would have strong share. When we've taken share - one share in that space it’s been on the basis of a strong value proposition particularly around innovation, particularly on the hot filled side. We believe that we have the lightest weight containers in the marketplace, we continue to drive weights down that’s a key priority for our customers but we also continue to innovate on shapes, it’s one thing to take weight out of the container, it's not that to do it in an aesthetically pleasing design, which then had shelf impact. So we've been winning because of our capabilities are seen as better. If I flip across to tobacco, in Asia that market is still characterized in two parts, you've got a merchant supply market which means third party printers like Amcor and then you have in-house manufacturing of tobacco cartons which are still fairly prevalent in Asia. In the merchant part of the market we would be the market leader and we’ve got solid presence from Korea down through Southeast Asia and again our value proposition allowed us to pick up some business in the Philippines last year from one of the multinationals that had previously been operating their own print shop. And I think it's a done a demonstration of their recognition that we can do it in a way that’s probably a bit better than then they can given its a core business from us. So maybe it's a long explanation of the two markets, but I would say there is continued growth opportunities involved but they’re only going to be based on better mousetrap and a better value proposition, we're not trying to grow for the sake of it.
- Keith Chau:
- So you’re large competitors in North America beverage try to retaliate after a prolonged period of market share gains from Amcor?
- Ron Delia:
- I don't know that our market share gains have been prolonged, we had some share gains in 2015, which benefited the 2016 year, I think markets have been relatively stable. We don't see any retaliation because again the proposition that we've been offering has been different as opposed to just a commercial offering and so it’s a less of a - it’s not price competition that we’re competing in winning on. No questions on the phone? Any other question here from the room?
- Unidentified Analyst:
- It’s just a follow from what Keith was asking you Ron, just the margin in the beverages businesses or that rigid plastics business has benefited last few years because of some of the changes in the diversified segment of the business, just wondering has that - have those changes now been largely executed or is there a further sort of margin benefit you expect in the diversified segment?
- Ron Delia:
- It’s a good question, there are two things going on there in fairness, the margins in rigid plastics get somewhat flattered by lower raw materials costs. So if you look at the top line in rigids it's got about 200 million I think 190 million of sales of lower sales than we would have had with the same raw material prices in the prior year if that sense. So our sales growth has held back when resin prices are low but then the margins are enhanced because you’re dividing over a small number. But that aside the margins underlying or expanding and the diversified product space is generally a higher margin space, there is more opportunities to differentiate. This is a business that in some respect looks a little bit like flexible packaging because you produce containers in a variety of materials whereas the beverage businesses is a PET conversion business that's one type of plastic. And the diversified products business we convert not just PET but also polyethylene and polypropylene and multilayer structures which basically give the opportunity to differentiate and you differentiate through the barrier properties of those containers provide, the shapes, the decoration capabilities and one of our acquisitions last year Plastic Moulders in Toronto has in-mould labeling which is a fairly high end way of decorating a container with a mould, sorry a label that goes inside the mould and produces a very flat visual and so there is lots of different ways you can compete and win in that space. All of which then help you drive higher margins. So as that business grows, I would expect the margins the underlying margins in rigid plastics to continue to grow.
- Unidentified Analyst:
- Just a couple more, just the growth rate in the US was pretty high because of market share and those spot volumes what was that growth rate on an underlying basis or where do you see the market on an underlying basis?
- Ron Delia:
- Well, yeah. That's a good question. We would say the market, overall, our growth was 7.6%, right, so just short of 8. We would say the market growth last year was probably 4% to 4.5%. I'd say that's probably at least a percentage, maybe 1.5%, maybe even 2% higher than normal, but the market does grow every year. It certainly will grow circa 3% every year and that's because PET continues to take share from alternative packaging formats like aluminum cans and glass bottles. And it's also because the brand owners are pushing smaller sizes. So they're telling to sell as many units as they possibly can and they're less and less concerned about liters or gallons and all of that benefits the PET format.
- Unidentified Analyst:
- Okay. And just on that growth opportunity in Americas, Ron, that you pointed to in the slide, just interested to see what segment, I mean, North American Flexibles is a huge segment, just came to understand a bit more on which segment of the market you're interested in, is it the high barrier segment, similar to beamers and sealed arrow, is it more generic or general?
- Ron Delia:
- Look, we are going to be looking to growth in the spaces where we know we have something unique to offer. We've got some advantaged capabilities or technologies and that typically therefore generate higher margins and returns. So, similar to our business in Europe, we'll be interested in end markets that require multiple, multi-layer materials, high barrier, more sophisticated print, product features like easy openings, things like that. So that will be in the food space and as well as the personal care and pharmaceutical and medical spaces, so it's probably less of an end market distinction I would make as opposed to just more higher value added differentiated packaging.
- Unidentified Analyst:
- All right. Thanks very much.
- Unidentified Analyst:
- Ron, something that perhaps doesn’t get enough attention is the growth that you show in developed markets, and I suppose I've got two questions. One is really what was behind the step-up second half on first half and when you think about the macro backdrop, which is really the second question is really I mean, it feels top level, you're doing twice GDP in developed markets, if GDP is 2 to 3, you're doing 5 and a bit, which is pretty impressive. So I was wondering if you could just talk around some of the background to that.
- Ron Delia:
- Yes. I mean, look, I think, the numbers might be, might not be getting to a point where it will be hard to distinguish first half versus second half growth. It was similar growth, I would say, as I look at it for both halves. Listen, I think it's a combination of a couple of things we've spoken about, the fact that the PET segment in North America grows every year and that growth is at least at GDP. On top of which we then took some share. And then in tobacco packaging, in Western Europe, that's actually, that's extraordinary growth, but we know the reasons why that is. So look I would expect the business to grow at/or around GDP over time in the developed markets and the extent we can do better than that is just a function of how well we position our value proposition versus the other alternatives in the market.
- Unidentified Analyst:
- That's great. Thanks.
- Ron Delia:
- No questions on the phone still. Okay. All right. Well, we might leave it there. We might get kicked out actually. Lunch is coming in, but thanks, everybody for joining and appreciate the attention and support.
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