Amcor’s pragmatic strategy gets big tick from market

Shares in Amcor leapt 5.5 per cent as the market learned just how skilful the global packaging giant has been in managing supply chain problems and rising inflation.

Amcor chief executive Ron Delia.

Shares in Amcor leapt 5.5 per cent on Thursday as the market learned just how skilful the global packaging giant has been in managing supply chain problems and rising inflation.

Amcor chief executive Ron Delia beamed into the Macquarie conference from Chicago, telling investors the platform for growth is better than it has ever been.

“We are as well placed as ever to deliver earnings per share growth and dividends in that 10 to 15 per cent range,” he said.

Amcor’s third-quarter sales growth is up 16 per cent, year on year, with quarterly net income rising slightly to $US269m ($373m). The company upped its full-year guidance at the bottom end of the earnings range.

Amcor is defensively right for the times: 95 per cent of its packaging is for consumer staples.

Delia says the product mix is now the company’s growth opportunity as it occupies the high-demand healthcare and protein space as well as pet food, premium coffee and hot beverages. For many folk these products could well sum up the last two years of lockdown.

Prices for the materials like aluminium, plastics and resins that Amcor needs to produce packaging have all been rising. Delia says the price increases Amcor is putting through to customers are quite substantial and so far the market has taken it.

“On an annualised basis, between one and one and a half-billion dollars so far we’ve got into the marketplace, but we haven’t seen any impact on demand as of yet,” says Delia. “If you listen to some of the public commentary of our major customers, they’re also not seeing the demand elasticity they might have expected.”

Delia says the next six months will be a watch and act on how inflation affects consumers. “We have general inflation hitting all the different cost items that we incur from labour, freight and energy. So weathering inflation, being out front of inflation would be probably first priority,” he said.

Supply chain issues have checked volume growth to around zero, but Delia expects to return to low single-digits. Where the Amcor team has been strategically pragmatic is in dealing with that supply chain risk.

“When we have been constrained on raw materials we have directed them to the highest value use. We have de-emphasised the bottom slice, some of the segments and parts of the market that are less profitable. So that’s really what’s driving your earnings growth this year,” he said.

Delia say the high-margin segments including medical instruments demand unique packaging, such as stand-up pouches that can be heated to high temperatures and yet opened by consumers. Technology offers further margin opportunity, he says.

Pragmatism also extends to how Delia is handling the West’s fallout over Russia. Amcor has three factories in Russia, and it closed its site in Kharkiv in Ukraine to protect employees just ahead of the invasion.

“Make no mistake about it. We are scaling down our operations. We also have 800 people working in those factories and we’ve got these multinational customers that we supply around the world and have relationships with.

“We certainly condemn the horrible actions and we see it first-hand from our team on the ground in the Ukraine. But we want to be orderly and measured as we wind down our operations and everything is on the table, as you could expect. And we are also trying to follow our customers’ lead to some extent,” he says.

Core to Amcor’s strategy has been acquisitions including the US business of Bemis in 2019. Delia says the company has the cashflow and balance sheet to do more but until the stimulus tide goes out, valuations are tricky.

“These peaks and troughs in some parts of the market make the real underlying demand of a business very hard to assess,” he says. In the meantime, Delia is stepping up capital expenditure for those high-margin organic growth opportunities.