Amcor PLC (AMCR) 2021 Q4 法說會逐字稿

Good day, and thank you for standing by, and welcome to the Amcor 2021 Full Year Results. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Tracey Whitehead, Head of Investor Relations. Please go ahead.

Thank you, operator, and thank you, everyone, for joining Amcor's full year call for fiscal 2021. Joining the call today is Ron Delia, Chief Executive Officer; and Michael Casamento, Chief Financial Officer.

At this time, I'll direct you to our website, amcor.com, under the Investors section, where you'll find our press release and presentation, which will be discussed on the call today. We'll also discuss non-GAAP financial measures, and related reconciliations can be found in the press release and presentation on our website.

Also a reminder that the call today includes some forward-looking statements, which remain subject to certain risks and uncertainties. Please refer to Amcor's SEC filings, including our statements on Form 10-K and 10-Q to review factors that could cause actual results to differ materially from what we're discussing today. (Operator Instructions)

With that, I'll turn it over to Ron.

Thanks, Tracey, and thanks, everyone, for joining us to discuss Amcor's fiscal 2021 full year results.

Joining me today, as Tracey mentioned, is Michael Casamento, Amcor's Chief Financial Officer. We'll begin with some prepared remarks, and then we'll open the line for Q&A.

We start every meeting at Amcor with safety and we'll begin there on Slide 3. Safety is the first and most important of our values and Amcor has been on a long-term journey towards our goal of no injuries. Our safety performance has shown continual improvement, including in the last 12 months, where our performance has been a real highlight. Across Amcor, we reduced the number of injuries by almost 25% compared to last year. All of our businesses reported fewer injuries. And over half of our sites have remained injury-free for at least 12 months.

Through a year where the pandemic continued to present operational challenges in many countries, our focus on safety was unwavering, and we're incredibly grateful that our people continue to be engaged and focused on staying healthy as well as safe. We're proud of our safety performance, which we believe is the best in our industry and the progress we've made over a number of years, but we're also convinced that our objective of no injuries is absolutely possible and we continue striving towards that goal.

We have 4 key messages today, which is set out on Slide 4. First, FY '21 was an outstanding year for Amcor on multiple dimensions. The operating environment remains highly dynamic, but our teams stayed fully focused on the key business drivers within our control, remained agile as conditions changed and demonstrated exceptional execution and consistency all year. Financial results exceeded our expectations as the year progressed. We ended the year with momentum and we expect another strong year in fiscal '22, which is the second key message.

Third, our recent performance in many ways is a result of the financial and strategic benefits from our 2019 acquisition of Bemis. Two years on, the integration is now essentially complete, the financial benefits are ahead of our expectations, and strategically, we're better positioned than ever with a stronger foundation for growth into the future. And lastly, we're capitalizing on that strong base by investing in a number of organic growth initiatives, which will maintain our momentum beyond fiscal '22 and for the long term.

Turning now to the financial highlights on Slide 5. FY '21 was an exceptional year financially for Amcor, with record earnings, exceptional margin management despite steep raw material cost increases and supply constraints and momentum building through the year. Organic sales growth was 2% and we exited the year in Q4 with sales 3% higher than the prior year. EBIT growth was 8% with the Flexibles and Rigid Packaging segments both delivering strong results, growing in several higher-value end markets and contributing to margin expansion. In fiscal '21, Amcor's EBIT margins increased 60 basis points to reach 12.6% for the year, which is a new high and an exceptional achievement in an environment where raw material price increases and supply disruptions continue to require an intense focus on securing availability as well as managing price recovery.

We estimate -- Bemis acquisition synergies were around $75 million, and as we close out the final integration activities, we expect to exceed the original synergy target by at least 10%. EPS increased 16% for the year and was ahead of guidance, which we're able to continuously increase through the year. And free cash flow of $1.1 billion was at the top of our expected range. Return on capital or return on average funds employed finished well above 15% at a time when our cost of capital is at an all-time low. And through the year, we returned $1.1 billion of cash to shareholders through share repurchases and higher dividends.

The key message here is that the fundamentals of our business continue to strengthen. Our teams around the world have demonstrated unwavering focus on executing against our strategy. And as a result, we've delivered another year of outstanding financial performance, with momentum continuing to build as we begin fiscal '22.

I'll turn it over now to Michael to provide some more detail on the financial results, and I'll finish up with some comments on growth and sustainability.

Thanks, Ron. Good morning and good evening, everyone.

I'll start with the Flexibles segment on Slide 6, which performed very well, delivering record sales, EBIT and EBIT margins for the year. Sales includes recovery of higher raw material costs, and as Ron mentioned earlier, these have continued to move higher during the quarter. Across the business, our response has been proactive and we have implemented price increases quickly. As a result, in the June quarter, net sales increased by more than $100 million, with the annual recovery run rate reaching more than $500 million as we exited the year.

From an earnings perspective and consistent with last quarter, the price cost impact has remained manageable, given the diversity of materials we buy and the multiple regions in which we consume those materials. This is clearly evident in our margin performance, which continued expanding in Q4 and through the year. From a volume perspective, demand in many of our key high-value end markets has remained consistently strong including meat, coffee and pet food. However, this has been offset by double-digit declines in North America medical volumes and European pharmaceutical volumes, driven by fewer elective surgeries and lower prescription trends.

From a geographic perspective, volume growth has been relatively broad-based with good overall performance in emerging markets. And while volumes in North America were higher than the prior year, along with Europe, this is where large parts of our health care business are located and growth in these regions is inclusive of those headwinds.

Adjusted EBIT has grown 9% in constant currency terms, mainly reflecting volume growth, exceptional margin management with expansion delivered every quarter at around $65 million of cost synergy benefits related to the Bemis acquisition.

Turning to Rigid Packaging on Slide 7. In summary, the business has continued to deliver outstanding results, driven by an increasing consumer demand in both North and Latin America. Sales growth included a 5% increase in volume as well as a 3% price/mix benefit, including higher pricing to recover cost inflation in Latin America. In North America, annual beverage volumes were 8% higher than last year and hot fill container volumes were up 13%, driven by rising consumer demand through the year, which resulted in capacity shortages and historically low inventory levels across the industry.

Demand was particularly strong in hot fill categories, including sports drinks, ready-to-drink tea and juice. Year-to-date, specialty container volumes were higher than the prior period with growth in categories, including spirits, home and personal care, and this was partly offset by lower volumes in the health care segment. Volumes in Latin America were 5% higher than last year, with growth delivered in Brazil and Argentina, in particular.

EBIT growth of 8% reflects higher volumes and favorable mix across the business, and this was partly offset by higher labor and transportation costs in North America. These higher costs have been a direct result of capacity shortages and low inventories throughout our network, which introduced supply chain inefficiencies in the short term ahead of installing additional capacity.

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

Moving to Slide 8. Adjusted free cash flow of $1.1 billion was at the upper end of our expected range for the year and we finished the year strongly. Compared with last year, free cash flow benefited from the higher flow-through of higher earnings, and this was offset by a $100 million adverse impact from the timing of U.S. cash tax payments and a lower working capital benefit. Working capital has been an area we have been particularly focused on through the Bemis integration and is a real highlight. In total, since 2019, approximately $250 million of working capital has been released, and this has been a source of funds to cover synergy-related cash costs.

Capital expenditure increased in the current year as we have stepped up our organic investments in high-growth segments and geographies. Looking ahead, we have a broad range of attractive investment opportunities and expect to increase CapEx by a further 10% to 15% in fiscal 2022. Our financial profile is solid with leverage at 2.7x on a trailing 12-month EBITDA basis and is right in line with our expectations.

With strong annual cash flow and a strong balance sheet, the business has significant capacity and flexibility to invest in organic growth, execute M&A as well as return a substantial amount of cash to shareholders. In fiscal '21, total cash returned to shareholders in the form of dividends and share repurchases reached an impressive $1.1 billion.

Turning to Slide 9 and our outlook for the 2022 fiscal year. We expect comparable constant currency EPS growth of 7% to 11% for the full year. This excludes the effect of disposed businesses, which impact comparability, and an unfavorable currency impact of approximately $0.01 per share, assuming current exchange rates prevail for the remainder of the year. So on a reported basis, this results in an EPS guidance range of approximately $0.79 to $0.81 per share.

Free cash flow is expected to be $1.1 billion to $1.2 billion, up to 10% higher than fiscal 2021, even as we are accelerating capital investments to support organic growth. Growing cash flow enables us to continue paying a compelling and growing dividend and allocate cash to share purchases, which we expect will be around $400 million in fiscal '22 while retaining the flexibility to fund acquisitive growth when needed.

So with that, I'll hand it back to Ron.

Thanks, Michael.

I'll start with a few points to recap the Bemis acquisition on Slide 10. The all-stock acquisition of Bemis was completed in June 2019 and was the largest in Amcor's history. So 2 years in now, our integration efforts are essentially complete, and the outcomes are clearly exceeding our original expectations.

Firstly, from a financial perspective, the transaction unlocks substantial value through the realization of cost and cash flow synergies, which have materially strengthened Amcor's financial profile. More specifically, based on our fiscal '22 expectations over the 3-year period post-closing the acquisition, we will have outperformed the original cost synergy target of $180 million by at least 10%, and as Michael mentioned, the cash released from working capital over the last 2 years funded the cash costs to achieve those synergies.

Margins in our Flexibles segment will be more than 200 basis points higher than in fiscal 2019. EPS will be at least 35% higher or at least $0.21 per share. We will have repurchased approximately 25% of the shares issued to fund the acquisition. And the annual cash flow will be close to double Amcor's annual cash flow in the year prior to the acquisition.

Strategically, Bemis was a perfect fit for Amcor. It was a pure play coming into what was already the world's largest global flexible packaging business. And putting these 2 companies together created the only truly global flexible packaging platform able to serve multinational customers around the world with an even stronger value proposition, especially in the most attractive end markets, like health care and protein, where our participation has meaningfully increased.

Amcor is now the clear flexible packaging leader in every major geography, with greater absolute and relative scale advantages. And we've strengthened our talent and capabilities, particularly in R&D, so we can support large and small customers with the broadest range of innovative and sustainable packaging solutions. Today, as a result of the Bemis acquisition, we're better positioned than ever with a strong foundation for growth looking forward.

With that stronger foundation, we have a range of organic growth drivers that we're investing behind, and on Slide 11, we've highlighted a few. First, an increasing percentage of our sales are coming from the most attractive higher-growth, higher value-add segments where we have the best opportunities to differentiate, including health care and protein packaging and flexibles and the hot fill product segment in rigids.

Our global health care business is approaching $2 billion in sales across medical device and pharmaceutical packaging, segments that require unique capabilities that are not easy to replicate. We're investing to add both capacity and capability with current projects underway in Malaysia and Ireland, to highlight 2 examples.

In protein and meat packaging, we have a great opportunity to leverage our capabilities in high barrier films and our growing business in North America to the benefit of our other businesses around the world. In the hot fill rigid packaging segment, we have extensive intellectual property and product design capabilities, and we know how to partner with customers to help them drive growth through innovation. Given the sold-out environment we're in and the growth outlook, we're adding capacity across our North American plant network.

Second organic growth driver we're highlighting today is our leading emerging markets portfolio with over $3 billion in annual sales and a long history of profitable growth. Again, we're investing behind the emerging market opportunity, including in the new greenfield plant in China that we highlighted on our last call.

And third, innovation and new product development will increasingly contribute to organic growth going forward. We've been investing in this area as well to extend our Global Innovation Center Network into Europe and China through the recently announced partnership with Michigan State University School of Packaging and with our entry into the corporate venturing space earlier this year.

And finally, the #1 organic growth driver for Amcor going forward, which cuts across the other 3 and really everything else we do, will be the increasing need for more sustainable packaging. We know there will always be a role for packaging for essential food and health care products, and so the ability to provide that packaging so that it meets all consumer needs and is more sustainable creates a unique opportunity for growth.

Slide 12 highlights sustainability a bit more. And as we take stock at the end of 1 financial year and start a new 1, we are particularly pleased with the progress we're making to accelerate responsible packaging through advances in package design, waste management infrastructure and consumer participation. Examples of recent progress on package design demonstrate the breadth of our product range across substrates with packaging that uses less material overall and more recycled content, eliminates problematic materials and has a better end-of-life profile.

In terms of materials, our use of recycled resin in rigid packaging has almost doubled over the last 2 years, and we expect to almost double again over the next 12 to 18 months. We've also announced our new AmSky platform, which eliminates PVC and has the potential to transform the sustainability profile of health care packaging, in particular. To improve end-of-life outcomes, we've commercialized several new recycle-ready product platforms, including the polymer-based AmLite and AmPrima and the paper-based Matrix product ranges, and we've entered into a new partnership to extend our offering of compostable solutions. Demand is growing for these new products and we'll be scaling up to capture the growth opportunity.

Making progress on waste management infrastructure and consumer participation will be equally important, and both require close collaboration with others across the value chain. We stepped up that collaboration over the past year through our partnership network, where Amcor is increasingly relied upon to safe and establish packaging design standards around the world, which can then inform infrastructure investment and consumer education to help keep packaging out of the environment. We'll talk more about our sustainability agenda following the publication of our annual sustainability report later this year.

Slide 13 is a slide we shared late last year at our investor briefing but it remains relevant today. And we believe the Amcor investment case is as strong now as ever and we set out the reasons why on this slide. Several of the points have already been made, but in simple terms, we generated significant and growing free cash flow every year. In fiscal '22, that free cash flow will be up to $1.2 billion. And that cash flow will comfortably support reinvestment in the business as well as M&A and regular share repurchases, which in turn drive strong EPS growth, and in addition, we'll continue to pay an attractive and growing dividend. We also believe that momentum matters and momentum has been building in Amcor, which is clear from our recent performance and outlook comments and the expectations we have for our fiscal 2022 year.

Finally, on Slide 14, a quick recap of our key messages from today. Amcor had an outstanding year in FY '21. We believe momentum is building and we expect another strong year in FY '22. The Bemis integration is essentially complete, and we've summarized the outcomes today, which have exceeded our expectations. And finally, we now look forward to capitalizing on a range of organic growth drivers, and we're investing in the business to make that happen.

With that, operator, we'll conclude our opening remarks and we'd like to open the line for questions.

(Operator Instructions) Our first question coming from the line of Anthony Pettinari with Citi.

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

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

Okay. And then you obviously have a large global footprint. Is it possible to say how the Delta variant has impacted demand, if at all, across the regions that you operate in? And is there anything sort of anticipated in fiscal '22 guidance from that perspective?

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

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

This is actually Matt Krueger sitting for Ghansham. I guess I just wanted to start out with, given several moving pieces, including some unusual volume comps and things like that, can you outline what your budgeted volume growth by segment and/or by region might look like for fiscal '22? And then just given that we're halfway through August already, can you talk about how some of the sales in key segments or end markets have trended to kick off the year here?

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

I think also, if you look back over time, we've typically grown kind of mid- to high single digits in emerging markets and kind of low single digits in developed markets, which is consistent with consumption patterns in those different parts of the world.

And then from an end market perspective, we're pleased with the performance in some of the higher value-add segments where we're really pushing, typically protein, pet food, coffee, the things where there's more differentiation. Health care would typically be at the top of that list. Obviously, we're weathering a bit of a blip because of COVID at the moment, but that's kind of how we think about getting to that low single-digit expectation over time on the top line.

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

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

And then, of course, we build capabilities over the many years of getting that raw material passed through. So from where we sit today, we're really pleased with how we dealt with some of the spikes in '21. As we said in the remarks, we recovered over $100 million in Flexibles in Q4 alone and exited the year on an annualized basis, that was about $500 million in those prices, so more to come.

The price lag cost was manageable as it was in Q3 so we haven't called that out specifically. And really the evidence around that is through our margins. So you can see that our margins continued to expand in Q4 and, in fact, expanded in every quarter throughout the year. So when we put all that together, we're really pleased with where we've gotten to on that front. And our teams are really, really -- we built capability in that space to make sure that we get that passed through efficiently. And then on the...

Yes. And as far as the outlook in terms of the commodities, I mean, as Michael said, we're pretty diversified so it's always a little bit of a mixed bag. But generally speaking, we see things moderating and possibly, the increase is abating over the next quarter or 2. As you pointed out, Matt, the supply availability of certain materials is probably the bigger issue potentially. At the moment, we have not taken any downtime, to answer your question specifically.

But there are certain materials, particularly some of the specialty grades that are ensured supply and that are on allocation. And that's been quite disruptive, and it consumes a lot of management time just to ensure that we're getting access. I think we've done a good job of that by virtue of our scale and relationships we have and the breadth of the supply base we have, but that is as big an issue as the price inflation.

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

So the first thing I wanted to understand a little bit is as we think about that 7% to 11% EPS growth for next year, what are the key, I guess, drivers of that besides the buybacks and the synergies? How should we think about it by segment and if it's more price cost recovery-driven or volume-driven, things like that?

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

And obviously, to get to the upper end, we'd see some better revenue in the top line, perhaps a stronger recovery in health care. And that's the opposite in terms of the lower end of the range. Maybe some further raw material headwinds could drive the lower end of the range, but that's really the makeup of the components in that guidance.

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

So yes, so we've said the adjusted cash flow is going to be $1.1 billion to $1.2 billion. Again, a range there, which obviously, depending on the earnings, will impact that. Working capital potentially could move around depending on headwinds from raw materials, but those are the key items there. We haven't called out specifically interest and tax. I think you can expect that they'd be similar to where we are this year. If there was something unusual to call out there, we'd call it out for you.

Obviously, we're going to have higher earnings so the tax absolute will be higher but otherwise within that range. And then we're looking to invest more on the CapEx front, as I spoke to in my notes, and that's really to support organic growth into the future in several opportunities that we've got on hand today.

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

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

It's a good question because it's across the category. So hot fill container is typically used in ready-to-drink teas or certain premium segments of the juice market, and of course, isotonics, sports drinks, and those categories collectively are all growing pretty rapidly. And most of the participants and brand owners in those categories are enjoying that growth.

And it pretty much is a combination of the drivers you mentioned, Kyle. There's, I think, increased distribution and availability in multipack formats. There's probably a bit more at-home consumption, but there's also a lot of new product launches and a lot of rejuvenation of legacy brands and also just extensions or introductions of new ones. So there's a lot happening in that space. A lot is oriented towards healthier and better-for-you type line extensions or new products. And so there's just a lot of activity there.

And that's a segment where there really is only one packaging format. I mean, it's a PET set of segments that resealability, lightweight on-the-go consumption, it all kind of fits together with the value proposition of the plastic containers. So it's all coming together. The volume growth has been strong. We've seen strong volume growth in the past. We sort of expect at some point you get back towards mid-single digits. But for now, the industry is enjoying strong growth and essentially a sold-out environment.

Got it, that's helpful. And then on Flexibles, in health care packaging, just given it's a higher-value product for you or mix for you, what's kind of the update there? Are you seeing a recovery in that end market? Or has it been kind of stalled now recently with some of the upticks of COVID cases and the hospitalization rates that we're seeing?

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

I'm not sure we're ready to say that we've turned the corner. We see evidence that things may be stabilizing a bit, notwithstanding the recent spike in cases. I'm not sure hospitalizations have followed suit. So I think we would hope that as we work our way through the fiscal year, that's an area that builds momentum through the 4 quarters of FY '22.

Got it. Appreciate the details and good luck in the next fiscal year.

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

Ron, just wanted to sort of step back and ask a bit of a bigger-picture question. It was a great job offsetting raw materials in this period. Just want to sort of understand how you see that ability being changed with the Bemis acquisition, obviously made you, if you like, the 1,000-pound gorilla, brought that scale in your purchasing. Has that fundamentally changed your ability to manage your resin and other input costs?

It's an interesting question. There's a couple of things that have changed. I mean, what Bemis would have brought is just greater diversification in the buy. So we got bigger obviously but -- and that helps. The relationships we have with the big suppliers are not unlike the relationships we have with big multinational customers. It definitely matters to be big on a global basis. And there's a lot of discussion about these regional markets or global markets. I think ultimately, we have some big global relationships and it's helpful.

So Bemis brought scale, it brought further diversification in the spend, and that's -- I'm sure it helped. But I think the other thing, Andrew, and you've covered us for a long time, I think the experience curve, we continue to go down and we've kind of learned over the years. And I've been around long enough to have been through probably 3 of these peaks in the last 10 years. And I think with every cyclical peak, like the one we've been going through, we get better and better in terms of the internal processes and capabilities to, first of all, measure what's happening and then take action and mitigate it. So it's probably a combination of Bemis and maybe just getting further down the experience curve that's kind of helped us through the cycle.

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

Look, I don't think you should see it as an either/or. I think what you're seeing with this result, we've been talking about the cash that the business has been out for a long time, and this is going into a fiscal year with line of sight to excess cash flow even after continuing to fund the dividend and continuing to actually fund more CapEx. As Michael pointed to, CapEx will pick up again in FY '22. Even after those 2 allocations of cash, the business will generate a substantial amount left over, and we go into the year with an expectation that we will have to, at least, buy back shares.

And if there was an acquisition that popped up, we would not hesitate for a second to either suspend the buyback or to fund the funding, which we would comfortably be able to do. So it's -- I think it's an and, Andrew, it's not an or.

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

So maybe following up on that last question and your response, Ron. Just thinking on the M&A front, if you think about the kind of growth potential beyond fiscal '22, obviously, there's some more Bemis synergies that you're capturing and annualizing as you roll into your fiscal '22 outlook. The size and scale of that Bemis opportunity was fairly unique and probably not going to be easy to replicate.

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

Yes. Look, it's a really good question at this point in time because we were absolutely resolute and focused on making the Bemis deal a success. And we know there's a little bit to do but it's essentially complete, which is why we provided a bit of a wrap-up today. You're right. From a pure-play perspective, there's not another $6 billion or $7 billion deal out there that's obvious. And we don't feel compelled to move outside of our product segment mix because we just think there's ample growth in the segments that we're in. So if we kind of constrain things or put some boundaries around the opportunity set, that does not limit us in any way.

I mean, generally speaking, if you go back over the last 10 years or so, the company has been pretty acquisitive. We're probably up to around 30 deals. And we've had a good track record of bringing synergies out on the cost side, in particular, getting some product benefits as well. So we'll continue to do that. I mean, I think there's no shortage of medium-sized deals in the packaging space. As you can see every week, there's another deal announced. And the good thing about being acquisitive and being big is that we're in the deal flow. So almost never a deal was happening that is at least not put in front of us, and we at least get the option to take a look or not. And that will be part of the formula going forward.

So the $400 million that we're allocating this year to buybacks, I mean, we have an equal amount each year that we'd be thinking about deploying in an ongoing sense for bolt-on M&A. And then obviously, if something bigger comes up, then we would love to have a crack at that, too.

Okay. And then maybe just following on the discussion on growth investments. Probably incremental color on some of the capacity adds within the growth CapEx. I think I heard a $500 million number referenced earlier, so $100 million, $150 million or so of growth capital, just where that's being directed and, more broadly, with some of the responsible packaging investment kind of opportunities you're pursuing, if those might be greater uses of capital moving forward.

Yes. No, it's a good question. I mean, we're going to be stepping up. We'll be about 4% of sales, which we think is a reasonable number to expect us to deploy each year. We've been a little bit lower than that because we've been focused on integrating Bemis, obviously, but we'll be at about 4%. That means another bit of a step-up next year, which is incorporated into the free cash flow guidance that Michael described.

What anecdotally some of the places that we're deploying cash, I highlighted a few. We're putting some capacity in the hospital space in North America. Great use of capital, particularly when it's on-site, co-located within a customer premises. Those are as good as it gets in terms of organic investments. We're investing in the medical space, medical device packaging in Malaysia and in Ireland. We've got some capacity we're going to put in Malaysia for a certain product category that we typically export out of North America or Europe, and we're going to localize that, which opens up just a whole another set of growth options for us. And in Ireland, we're going to get into a product line in medical that we hadn't been in before.

And then from a sustainability perspective, we made a number of announcements over the last 6 to 12 months in new products. So we've talked about a couple of platforms like AmLite, which is a recyclable or ready-to-be-recycled retort pouch, which is unique. And the demand has just been outstanding. The product is sold out before it's even barely been launched, and so we're going to add capacity in Europe for that. So those are just some examples, but that all fits within that roughly 4% of sales number that's embedded in our free cash flow guidance.

We have our next question coming from the line of George Staphos.

Congratulations on the end of the year, and I appreciate the rundown in the presentation today.

Ron, I wanted to segue off that last question and maybe go to Slide 12. If we can -- if you could, for us, quantify or categorize the packages like AmLite, like the PVC film -- free films. How much revenue do you think you're doing right now in terms of the responsible packaging product suite that you're offering your customers right now? And what do you think that's growing at, if you could put any numbers around that?

And relatedly, is this scenario that could get -- I mean, the answer will be yes, obviously, but where you really think there's an opportunity for acquisitions to improve your performance here, you really don't need acquisitions. You've got the best technology in the market. So couple of questions to start.

Yes. Let me just -- let me answer the second part first. I mean, we do believe we have the best technology in the marketplace. We also are humble enough to realize we don't have all the good ideas out there. And so if there's an acquisition that would add to our product portfolio, we would absolutely do it. And it's one of the reasons why we're going to be much more active in the corporate venturing space. It's another -- it's also one of the drivers of the investment with Michigan State. So we're going to do much more in terms of external sourcing of, let's call it, good ideas and innovation to supplement what we do believe is industry-leading R&D, so that I'd say watch this space.

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

That leaves the Flexibles segment. And in that space, right now, of the sales in the Flexible Packaging segment, about 60-odd percent of what we're selling today is considered designed to be recycled. There's probably another 75% of our sales that could be, so there's 10% to 15% that could convert. It just requires customers to adopt a different structure. And then you have additional platforms like AmLite, AmLite Matrix and like AmPrima, which help move those numbers up in steps. None of them are going to move that needle on those metrics in a material way in a given year, but over time, the percentage of our Flexibles that is recyclable will start to increase as those products get take-up.

I'll stop there, but we're also acknowledging that's not the end of the story. We've got to have the waste management infrastructure and the consumer has to participate as well, too. But as far as the package design, that's about where we're at.

Okay. Ron, I appreciate that. And then coming back to the fourth quarter, and I recognize, obviously, Amcor likes to focus on the year-to-date results and the year results and you had good performance. It looked like in Flexibles, there was a deceleration and actually a decline, call it, in the low single-digit range in Flexibles. Was that just purely health care and the continued weak end markets for you this year? Did anything else slow down for you at the end of the year as we're exiting and going into fiscal '22?

Yes. Thanks, George. No, I mean, it's basically the same story that we've had in Flexibles the whole year, it's health care. Health care is a sizable business, if you just think about it as between $1.5 billion and $2 billion in sales. Within that Flexibles portfolio and you think about the big North American medical business and European pharmaceutical business being down double digits, that takes a couple of percentage points off of what you'd expect from a growth perspective, right? They should be growing mid-single digits and they were down double digits. So that takes a meaningful bite out of the overall segment growth.

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

Ron, my first question, I just wanted to ask about organic growth in the Flexibles division. If I look at this over the last 2 years in absolute dollar change, all the growth comes from cost or efficiency lines. In fact, the mix of volume and price is negative. So that's obviously very impressive. So really, my question is, how sustainable is that? How can you continue to drive organic growth simply through cost out or other efficiencies? And should we be worried about the fact that the mix of volume and price continues to be negative?

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

And that being said, with that level of growth, we've been expanding margins for, I don't know, over a decade. And the Flexibles margins now being up over 14% from where they were 10 years ago or so at probably 6% or 7%, I think, gives us some comfort that at that level of relatively modest top line growth, which mirrors the end markets that we supply, we're continuing to grow profit and expand margins.

Okay. And then secondly, could you just run through the performance of the carton business in '21 and particularly by region? I'm interested to get an understanding of what volumes are doing.

Yes. Look, the carton business, which is about 8% or 9% of sales, had a very good year. The business had a good year on profit. The profit was up. Great job managing cost. And actually, the volume performance is probably a little bit ahead of long-term trend. That business, from a volume perspective, is likely to be flat to declining low single digits. Last year, it was close to flat on a volume perspective, too. It's -- I mean, by region, we start to get into some smaller parts of the business but the bigger parts of Europe and the Americas would mirror the trends that I just described.

We have our next question coming from the line of John Purtell with Macquarie.

Just had a couple of questions. Look, the first one, Ron, just in relation to CapEx and some of those increments there. Can you remind us what your return targets are on that incremental or that growth CapEx? Obviously, you've had growth or return targets in the past, so how have they changed perhaps or not?

And the second question for Michael, just in terms of that free cash flow of $1.1 billion. What was the drag, if any, from raw materials and higher sort of inventory there or impact on that?

John, yes, I'll take both. I mean, in terms of returns on CapEx, we really haven't changed the model there. I mean, it's a cash investment. We expect 20% return on those so at a minimum, and that's typically what we work towards, so no real change there over the term. In respect to working capital, yes, look, we saw some higher inventory during the period and some higher receivables as we started to flush that through the system and then the offset with the payables.

So from a year-end perspective, it wasn't a meaningful impact but there's probably still a little bit of that to flow through the system, and it's more a timing issue than anything. But in the cash flow that we saw at the year end, we were pretty pleased with where we ended. It was a strong performance and we had a good finish in the year. And that's really on the back of the continued focus in working capital and particularly around things like debtors and overdues. We've had a really good performance there across the board. Just general inventory management has been strong, and we continue to manage with our suppliers as well. So overall, really pleased on the working capital front.

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

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

Well, listen, it's becoming more and more important, obviously, to our customers. A lot of what we use -- and maybe just to dimension the numbers, so across Amcor, Rigid Packaging would be the place where we're using the most recycled resin. We exited FY '21 converting about 10% recycled resin out of the total that we convert. And that number is growing in absolute tons, as you referred to, but also it's growing as a percentage of the resin that we convert. In that space, we're clearly the biggest buyer out there. And so we've been actively sourcing both from new entrants into the recycled resin space as well as some of the virgin resin providers that have gotten into PCR. So it's a pretty broad book that we're buying across.

And then in Flexibles, it is a little bit more challenging when you're trying to source polyolefins. And that's still pretty nascent. A lot of the material that we're using for food -- or for flexible packaging is coming from food-grade milk and water jugs and things and those are in scarce supply. That will change over time. Chemical recycling will be a contributor over time. We're active in more than a half a dozen different pilots and feasibility projects on chemical recycling around the world. That will be part of the mix, too. So I'd say watch the space, but so far, we've been able to satisfy our demand.

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

Yes. So the original number was $180 million, and that's the number that we're going to beat by about 10% or at least 10%. We talked at the time of the deal about 3 big sources: first, G&A overhead reductions. We estimated that would be about 40%. That's more or less tracked, maybe a little bit -- we're probably a little bit ahead of that number but it's been in that ballpark. Procurement, we said, would be another 40%. That's more or less in line.

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

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

A couple of questions, obviously. So my first question is, if I can do it by way of example, the question is, what are the top 3 opportunities to create organic earnings over the next, say, 3 years, call it FY '25? Here's an example of what I'm asking for. In Asia, you guys might be under-skewing in terms of your overall market share in medical and pharma packaging relative to your market share in other parts of the world.

So when you look at the size of the Asian market in medical packaging, is that an initiative Amcor might undertake? And how would they do it to grow out its earnings over the next 3 years? You might not look at it geography. You might look at it maybe pet food across the world. So can you dimensionalize those top 3 initiatives trying to look past short-term earnings?

Yes. It's a good question. I mean, you picked on 1 -- I'm not sure it makes the top 3. I'm going to elevate up on the top 3. But on the medical point in Asia, specifically, absolutely. I mean, we're actually doing that now and that's the investment in Malaysia that I referred to. We're putting capacity in that part of the world that enables us to be much more nimble and responsive to the local market demand, which is substantial. So that absolutely is part of it.

I mean, if I zoom out and I try to think thematically, one thing that comes to mind is broadening our participation in some of the higher value-add segments that we're deep in, in one region. So pet food, coffee, protein, these are segments that we have really strong positions in but it's uneven. So we might be particularly strong in Europe in one and a little bit weaker in North America. And so evening out that participation is going to be a big source of organic growth. As a region as a whole, I would say Asia, particularly China and India, and I would probably elevate up from medical and just say generally in the places we're choosing to play in those Asian -- high-growth Asian emerging markets, that would make the list.

And then I probably wouldn't rule out Rigid Packaging in North America, particularly as we continue to expand the health care -- or sorry, the hot fill franchise that we have and grow in the specialty container space, where there's technology and differentiation but also shared opportunities. So it's a good question, Larry. I'd sort of give you those 3 as certainly amongst the top 4 or 5 spaces.

Okay. I look forward to scoping those out maybe in the near future. And my second question pertains to Alliance to End Plastic Waste. Excuse the criticism, but it feels like a bit of green-washing here. Amcor has taken this executive committee position. And when you get on the website for Alliance to End Plastic Waste, first of all, there's no set of accounts and it's supposed to be an organization that's well capitalized.

But when you look at the projects, I think there was a project in India where they put some sort of filter in a river, which ended up getting stolen. There is a couple of projects, one in India and Africa, where it's highly manual-intensive, doesn't require a lot of capital of collecting waste. This is an organization that's backed by billions, and the projects seem very small. I'm just wondering where you want to take that organization because as you say, we need the waste management infrastructure, particularly in emerging markets. And I've always had hope that, that was going to be the organization that would drive it.

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

Essentially, it was started a couple of years ago. And then as soon as it's staffed up with full-time management, the pandemic kind of has slowed things down. But there is more capital that's been committed by the executive committee and the Board of that organization than anything else that we're associated with. It's real money and we write the check.

That's what scares me is there's just no subaccounts that we've seen anywhere.

Well, like any NGO, Larry, sometimes or industry association, it's not always as transparent. But the money that the participants are putting into that organization will crystallize and will catalyze action. And there's good examples. I mean, the Project STOP in Indonesia is a good pilot. There's one in the U.S. now called First Star, which is small. And I think as the initiative gains steam, we'll have bigger, bolder projects to point to. But for the early days, I'm pretty pleased with the way it's distributing its resources.

We have our next question coming from the line of Nathan Reilly with UBS.

Ron, it's pretty clear that you're signaling the completion of the Bemis integration, which I guess gives you the bandwidth to pursue some of those smaller bolt-on M&A opportunities.

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

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

Returns are always going to be important. The company is now generating a 15% return on capital, so we need to be there or thereabouts as we think about investments. And I mean, from a leverage perspective, I wouldn't give you a number other than to say we're going to be an investment-grade company, always have been and are committed to that. But within that, we have ample capacity. If you think about the EBITDA now of the business of over $2 billion, 1 turn would make for a lot of firepower for M&A. So there's no constraint there.

We have our next question coming from the line of Keith Chau with MST.

So just a couple of follow-up questions. On the adjusted free cash flow guidance, I take your point around a step-up in CapEx, but obviously, the offsetting factor for FY '21 was that timing of the tax payment.

So Michael, perhaps if -- I don't want to steer you in the direction but certainly feels like the low end of that range is probably unlikely and potentially getting more towards the top end. So I'm just wondering if you can provide us with a bit more detail on where you think, at this point in time, you'd be sitting within that range notwithstanding some of the moving parts.

Yes. No, look, as I said, the range is there. It's a reasonably wide range, $1.1 billion to $1.2 billion. Obviously factored in that is the earnings guidance range, so we've given a range there of 7% to 11%. So depending on where we end up in that range, we'll drive the cash flow as well. And the other key component is really the working capital movement. As I said earlier, we've had some raw material increases, which we manage pretty well into the end of FY '21. That can be a factor as we head into '22. There can be some movement there to the upside or the downside. But -- so that's really what's in the range.

That said, we've managed working capital really well over the last 2 years, particularly in taking cash out on that front. And as we move forward, we think that, that's going to be pretty stable. So I mean, they are the drivers within that range.

Do you think, Michael, you can continue to improve that average working capital to sales ratio absent any other movements in raw material costs? I know you've done a particularly good job, particularly in FY '20. Any more opportunity to come from that?

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

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

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

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

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

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

We have our next question coming from the line of Scott Ryall with Rimor Equity Research.

I just had 1 question. So Ron, you made some comments in your prepared remarks about the need for waste management infrastructure investment to pick up, which is -- that's very, very clear. Do you think that Amcor will have to invest in this space? Obviously, you're taking an alliance approach at the moment. But do you think in order to control the development of that infrastructure, that you will actually have to invest there?

Yes. Thanks, Scott. It's a good question. I mean, the short answer is no. I mean, we're going to be active in bringing responsible packaging to life in a number of different ways. But we'll also be and will have to be somewhat judicious and focused and disciplined about where we deploy our shareholders' capital. And we think the best use of the capital is in developing packaging that is going to have a better end-of-life profile or uses more recycled material or less material in the first place. That's where most of our efforts will go.

As far as waste management infrastructure, there's a number of different things and means to fund that, including extended producer responsibility regimes, bottle deposits and things like that. And when those are properly designed, then we're very supportive of those and that can likely be part of the answer. But I don't envision us putting capital to work in that part of the value chain in any extensive basis other than maybe just some pilots through a partnership or an alliance.

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

Thank you.

Thank you.