Amcor plc

Economic and Market Conditions

As anticipated, market conditions have continued to remain challenging in the first half of fiscal year 2024, with softer customer demand and increased destocking in the second quarter, particularly in December, of fiscal year 2024. We also continue to be impacted by higher inflation in certain areas, such as labor costs. In addition, higher inflation, especially in Europe and the United States, has led central banks to rapidly raise interest rates to dampen inflation which has resulted in higher interest expense on our variable rate debt, particularly on U.S. dollar and Euro denominated debt in the first half of fiscal year 2024 compared to the same period in fiscal year 2023.

The underlying causes for the continued market volatility can be attributed to a variety of factors, such as the Russia-Ukraine and the Gaza-Israel conflicts and higher inflation in many economies, which have resulted in increased volatility in food and other markets and impacted global economies. In this context, we remain focused on taking price and cost actions to offset inflation, aligning our cost base with market dynamics, and managing working capital. Improved operating leverage, combined with known benefits in the second half of fiscal year 2024, which include the elimination of the earnings headwinds from the sale of the three manufacturing facilities in Russia ("Russian business"), a lower interest expense headwind, and the realization of structural cost reduction and productivity initiatives, is expected to result in improved earnings in the second half of fiscal year 2024. However, there is no assurance that we will meet our performance expectations or that ongoing geopolitical tensions and other factors will not negatively impact our financial results.

Russia-Ukraine Conflict / 2023 Restructuring Plan

Russia's invasion of Ukraine that began in February 2022 continues as of the date of the filing of this quarterly report. In advance of the invasion, we proactively suspended operations at our small manufacturing site in Ukraine. We also operated our Russian business until its sale on December 23, 2022, for net cash proceeds of $365 million. In addition, we repatriated approximately $65 million in cash held in Russia as part of the transaction. We recorded a pre-tax net gain on sale of $215 million. The carrying value of the Russian business had previously been impaired by $90 million in the quarter ended June 30, 2022.

On February 7, 2023, we announced that we expect to invest $110 million to $130 million of the sale proceeds from the Russian business in various cost savings initiatives to partly offset divested earnings from the Russian business (the "2023 Restructuring Plan" or the "Plan"). We expect total Plan cash and non-cash net expenses of approximately $230 million. Of the remaining cash received from the sale of the Russian business, we allocated $100 million to the repurchase of additional shares and the remainder was used to reduce debt.

As of December 31, 2023, we have initiated restructuring and related projects with an expected net cost of approximately $210 million, of which approximately $110 million is expected to result in net cash expenditures. From the initiation of the Plan until December 31, 2023, we have incurred $77 million in employee-related expenses, $25 million in fixed asset related expenses, $27 million in other restructuring, and $13 million in restructuring related expenses. The Plan has resulted in $49 million of cash outflows to date.

Management initiated other restructuring actions in the fourth quarter of fiscal year 2022 to help mitigate the impact of the Russian sale. Management expects to realize an annualized pre-tax benefit of approximately $50 million from structural cost reduction actions taken as a result of all Russia related restructuring by the end of fiscal year 2025.

For further information, refer to Note 5, "Restructuring," of Part I, "Item 1, Notes to Condensed Consolidated Financial Statements".

Highly Inflationary Accounting

We have subsidiaries in Argentina that historically had a functional currency of the Argentine Peso. As of June 30, 2018, the Argentine economy was designated as highly inflationary for accounting purposes. Accordingly, beginning July 1, 2018, we began reporting the financial results of our Argentine subsidiaries with a functional currency of the Argentine Peso at the functional currency of the parent, which is the U.S. dollar. Following the governmental election in the three months ended December 31, 2023, Argentina devalued the Argentine Peso by approximately 55% against the U.S. dollar. As a result, highly inflationary accounting in the three months ended December 31, 2023 and 2022 resulted in a negative impact on monetary assets of $34 million and $5 million, respectively, and $51 million and $13 million in the six months ended December 31, 2023 and 2022, respectively, in foreign currency transaction losses that were reflected in the unaudited condensed consolidated statements of income. Our operations in Argentina represented approximately 2% of our consolidated net sales and annual adjusted earnings before interest and tax in fiscal years 2023 and 2022.