Australia | 10:30 AM
Amcor's September quarter volumes surprised to the upside but earnings disappointed on Middle East-driven cost increases.
- Amcor’s September quarter impresses on volumes but not earnings
- Iran war-based cost increases hurt
- Berry synergies should underpin 2027
- Cost impacts to be mitigated
By Greg Peel
Packaging company Amcor ((AMC)), reliant on the US for the bulk of its earnings, reported a disappointing result for the September quarter.
Adjusted earnings of US$0.95 per share was only slightly below consensus of US$0.955 and within the US$0.92–0.98 guidance range, however, analysts found the quality of the result was weak, with disappointing cash generation and softer underlying earnings.
Volume growth was a key highlight, with group volumes rising 1%. Growth was driven by a 1.5% increase in core volumes, partly offset by a low- to mid-single digit decline in non-core volumes.
Volume growth was broad-based across nearly all end-markets with strong growth in pet food, foodservice and beauty and wellness, partly offset by lower unconverted film volumes in North America.
Across regions, volumes increased in all geographies, led by emerging markets, especially China.
The Cost of War
Amcor has managed costs well through 2026, Macquarie suggests, and this has continued regarding volatile movements in resin prices (another Strait of Hormuz victim) but the company saw higher energy and distribution costs late in the September quarter with a larger impact evident in the December quarter to date.
North American freight/transport costs are mostly to blame. Amcor expects a part contractual recovery (albeit with a three-month lag) and has put through price increases to recover where it doesn't.
Between cost actions and price rises, management expects to catch up by end of December, hence energy and distribution costs are seen as a timing issue and not expected to impact 2027.
Macquarie assumes a modest residual impact in the first half of 2027.
Amcor is by no means alone in suffering freight impacts. At its recent September quarter result, rival packaging company Sonoco noted that "inflation hit operations harder than we expected" and freight service costs were up "mid-teens" with diesel costs up 75%.
It is due to these cost headwinds that Amcor has downgraded its earnings guidance range to US$1.70-1.80, down -5% from US$1.80-1.90 previously, for the period between July and December.
The company is changing its financial reporting in line with calendar years from January onwards, which turns the two quarters in between FY26 and 2027 a short transition period.
Management has reiterated its expectation for double-digit earnings growth in 2027.
Cash Flow and Debt Issues
For the September quarter, Amcor reported a substantial free cash outflow of -US$820m, reflecting weaker cash earnings but also a significant working capital headwind which management attributed to volatility in resin prices due to the Middle East conflict.
For comparison, Ord Minnett notes the working capital outflow was -US$1.1bn in the September quarter this year versus an outflow of -US$0.3bn during the same period last year.
The weak cash result has pushed net debt up to US$14.0bn from US$12.9bn over the quarter, and Amcor now expects leverage to finish calendar 2026 at 3.6x, compared with its previous 3.5–3.6x guidance.
Management expects leverage to fall to around 3x by the end of 2027, but this looks like a challenge to Ord Minnett’s given the company would need to generate over US$1bn in working capital inflows.
Challenging the balance sheet has been the cost of last year’s acquisition of peer Berry Global.
Management suggested at the time the acquisition “creates a broader more complete portfolio with scale and global breadth, brings together material science and innovation capabilities required to revolutionise product development, and enhances positions in attractive categories”.
Amcor realised US$60m of acquisition synergies during the September quarter from the Berry acquisition, comprising US$50m in earnings benefits and US$10m in financing synergies.
Management continues to expect US$130m of synergies in the remaining transition period in 2026 and reiterated its three-year target (to 30 June 2028) of US$650m.
Cumulative synergies have reached US$345m over the past 15 months, representing more than half of the target.
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