Amcor/AMC

Amcor (big packaging company) out overnight, with the Q2 result.

A touch ahead of consensus, at the adjusted EPS line, which despite the markets’ displeasure has been the case for the last few quarters (see the below graph, actual EPS vs estimate).

Amcor pulled the cost-out lever quite hard, which has led to some efficiency gains, although not nearly enough to offset the broader earnings pressures from customer destocking, and the exit from Russia. You can see how divergent from trend the current earnings run rate is.

Cashflows remain good, which is just as well given the gearing. ND/EBITDA is flagged to reduce to 3x by the 4th quarter, from 3.4x currently.

It would be nice to see it get a wriggle on (the degearing) rather than relying on ordinary organic degearing, i.e. by not buying back shares, just now. We’ve put that view to management, and, they respectfully took our feedback on board and carried on with what they were doing.

The key bit in the result is the below; they are through the worst of it (the destocking) and are now cycling easy comps, in a world where the US looks to be accelerating, a touch (e.g. the RGDP growth rate is up, even as NGDP growth rate is down, with RGDP being the one that matters for volume based businesses like Amcor).

Turning to the Q&A call.

Here’s Ron (CEO) calling out the expected low point has now passed. Assuming that’s correct, it is (somewhat self-evidentally) very positive.

With volumes looking better in January.

On the point of volumes, note that Packaging corp (different company, they make corrugated boxes, but from the same sector) with a sizeable uplift in activity, which corroborates the AMC view on customer demand.

The forecast improvement in earnings, from this 2nd quarter trough, is not from a bounce back in demand. That is a pretty consistent message, from mgmt, for the past couple quarters.

Nor is it dependant on improved promotional activity (discounting) from Amcor’s customers, to move product, to the end consumer, which came up later in the Q&A set.

The recovery is rather forecast to come from factors more directly under Amcor’s control, on the cost out side, and things that are somewhat reasonable to assume, such as a moderation in destocking (management of customer inventory levels), and the operating leverage that AMC has to any stabilisation in volumes.

If there is an improvement in the external demand picture (e.g. this acceleration that we’ve seen in US real GDP, or the comments from Packaging Corp referred to above) then Amcor should do quite well.

Amcor trades at 12x forward earnings, much less than that of the overall market, and, given the strong historical track record, we suspect will emerge from the current period of weakness a much stronger business.

We’ve seen the era of COVID, inflation, and tight labour markets, has required/beget/triggered productivity initiatives across the supply chain, across production, across procurement, that are now paying dividends, and it is entirely possible the past 18 months of unpleasantness ultimately proves a net benefit to AMC’s operating model.

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