Today Amcor Limited (ASX: AMC) released its half-year FY19 results to the market with its revenue up slightly by 1.1% to USD $4.55 billion. However, net profit after tax was down 18.8% to USD $267.6 million. It increased its dividend a modest half a cent from USD 21cps to 21.5cps, or up 2.38%.
Amcor is a global packaging company. It develops and produces flexible packaging, rigid containers, specialty cartons, closures and services for food, beverage, pharmaceutical, medical device, home and personal care and other products.
Underlying Earnings and Constant Currency Growth
In both its media release and the investor presentation, Amcor made constant reference to underlying earnings and constant currency growth. Amcor reported its underlying profit after tax as being USD $328.5 million, up $60.9 million or 22.75% higher than its actual net profit after tax. Included in the adjustments for underlying earnings are:
- Segment restructuring
- Bemis transaction and integration costs
- Hyperinflation adjustment
- Net legal settlements
- Net monetary loss
- Tax on adjustment
Is This Right?
Given the company is heavily reliant on raw materials for production, how can fluctuating commodity prices be accounted for through a “Hyperinflation adjustment”?
Amcor also has a long track record of acquiring companies and integrating them, so how can costs related to the acquisition of companies such as Bemis through “Bemis transaction and integration costs” be excluded from underlying earnings?
Finally, how can the company adjust for actual foreign exchange rates realised by accounting for it on a constant currency basis? It is a global company and foreign exchange rates are a part of the business, which is going to fluctuate from year to year.
My View
I would argue that all of the adjustments to underlying earnings are normal in Amcor’s business and the company is doing a disservice to existing shareholders by putting so much focus on these metrics, instead of focusing on cash flow.
In my opinion, with management’s focus in the wrong place, combined with the fact the company sells commodity-like products, it is not a company I have an interest in owning in my share portfolio.
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