Amcor Australasia is the most diverse of the Group’s business units and supplies a broad range of packaging items. Its products include corrugated boxes, cartons and folding cartons, aluminium cans for beverages, flexible packaging, plastic and metal closures, glass wine bottles, multiwall sacks, paper, cartonboard and paper recycling. It has 60 plants throughout Australia and New Zealand and approximately 5,600 co-workers and as of 6 October 2008, new headquarters in Hawthorn, Victoria (Australia).

Amcor Australasia had a mixed year with solid improvement in earnings in the glass and flexibles operations offset by lower earnings in the beverage can and fibre businesses. Profit before interest and tax and before significant items (PBIT), on a continuing business basis, decreased 2.7% to $188.5 million.

The Food Can and Aerosol business was sold on 31 October 2007. For the 2006/07 year, these businesses contributed $28.2 million and for the four months to October 2007 contributed $7.5 million in PBIT.

Returns for the continuing operations, measured as PBIT over average funds employed, decreased from 11.2% to 10.8%.

Cash significant items were $56.9 million and predominantly related to the turnaround plan in the fibre packaging business.

Base capital expenditure was $20.8 million. This comprised gross expenditure of $117.4 million and proceeds from disposals, excluding the sale of the Food Can and Aerosol business, of $96.6 million. There was growth capital expenditure of $21.7 million.

Working capital movement, on a continuing business basis was a $16.8 million reduction from June 2007 to June 2008.

The operating cash flow for the year was $251.6 million.

Corrugated

The corrugated business experienced a challenging year with earnings negatively impacted by higher input costs and operating inefficiencies at the corrugated plants.

The corrugated business has undertaken a substantial turnaround program, which commenced in August 2006 and was completed during the second half of 2007/08.

The program included the closure of four plants, headcount reduction of 450 people, the implementation of a new SAP IT system and the relocation of equipment to other sites. During the first half of the 2007/08 year, the impact of machinery and volume relocations resulted in reduced service performance and lower operating efficiencies at some of the plants. The business also experienced additional overtime costs, increased transportation costs and outside warehousing expenses.

Reduced service levels resulted in delivery in full and on time (DIFOT) falling to unacceptable levels with a consequent loss of volume predominantly with smaller customers. In late 2007, the decision was taken to focus, as a priority, on improving DIFOT. Since that time there has been steady improvement, with the average DIFOT increasing from 81% for the October to December period to an average for the last three months of 95%.

To achieve these improved DIFOT levels, the operations initially incurred additional expenses and higher levels of working capital. As the plants improved their manufacturing efficiencies through the second half of the year, they have begun to reduce overtime and lower operating costs. The current year has commenced with this improving trend continuing.

Price Increases

Over the past three years, there have been significant input cost increases in the corrugated operations, including wastepaper which is up by more than 50%, and for starch, energy and freight, which are all up by between 15% and 20%. In aggregate, these increases total more than $70 million.

Increasing input costs need to be offset by either value engineering initiatives to reduce operating costs, price increases or a combination of the two. The magnitude of the cost increases to be recovered represents a 12% increase in selling prices.

The business announced in August 2008, that unless specific value engineering opportunities can be identified, such as light weighting, SKU rationalisation or improved logistics, selling prices will increase by 12% to all customers. This increase will be adjusted where there have been previous price increases by way of general price increases to uncontracted customers or CPI type clauses to contracted customers.

These selling price increases will be implemented as soon as possible after individual customers are notified.

Across Amcor, the recovery of input cost increases has been an important principle in ensuring margins and returns are maintained in a more inflationary environment. It is critical that this approach is applied to the corrugated operations including a willingness to forego unprofitable volumes.

Without these increases, earnings for the corrugated business in 2008/09 would be substantially lower. The exact timing of the selling price increases or the benefits of the value engineering initiatives across the customer base will determine the earnings outcome for the 2008/09 year.

Volumes

Volumes in the corrugated operations were 4% lower. This was due to a number of factors:

• Weaker demand in the agricultural produce sector due to adverse crop conditions;
• Manufacturing relocating offshore;
• Retailers sourcing offshore;
• Market share loss with small customers; and
• Generally weaker overall demand.

The business lost market share with smaller customers in the first half of the year, during a period of unacceptable delivery performance. However, as delivery and service improved, volumes and market share stabilised. The New Zealand business had stronger volumes in the second half with an improved kiwifruit season and new contracts in the meat sector.

New Recycled Paper Mill

In February 2008, Amcor announced it was investing a net $230 million in a new recycled paper mill to be located at Botany, NSW.

This machine will have a capacity of 345,000 tonnes per annum and be capable of producing paper grades from 80gsm to 200gsm. The ability to offer the lightest weight recycled papers in the Australian market will substantially enhance the value proposition to customers.

The paper machine will be supplied by Metso. The machine has an 18 month delivery lead time, including shipping, and is expected to arrive in Australia in December 2009. The engineering component of the project has been awarded to Poyry, the global leader in consulting and design engineering for the paper industry. A substantial component of the overall project costs has now been fixed and the expected net cost, after allowing for the sale of excess land at Fairfield in Victoria and Botany in NSW, remains at $230 million.

Construction of the new mill is expected to be completed by June 2010. Commissioning will take approximately three months enabling commercial production from October 2010.

Cartons

Amcor has an integrated carton business with recycled cartonboard manufactured at Petrie Mill in Queensland and five carton converting plants across Australasia.

The mill competes directly with foreign imports and the rising Australian dollar continues to have a negative impact on the cartonboard business. Input costs increased substantially during the year, and in June 2008, selling prices increased by 8%, in line with global trends.

The carton conversion business had a difficult year. Although volumes were strong, there was an adverse change to product mix and selling prices remained unacceptably low. The business passed on the 8% cost increase in cartonboard via price increases for finished cartons. This increase was for the small percentage of volumes that are non-contracted and, similar to the corrugated business, further price increases will be necessary to fully recover cost increases, particularly for contracted customers.

Flexibles

The flexibles business, which consists of four operating units: polyethylene, laminations, barrier films and multiwall sacks, had higher earnings with the benefits of recent capital expenditure contributing to improved operating performance. Sales were modestly lower due to reduced sales in industrial commodity films, as well as a softer market for lamination products.

In the polyethylene business, there was good performance at the plants in Queensland and Victoria supported by ongoing growth in a number of the key market segments. A new press is being installed at the plant in Moorabbin to meet this growing demand.

In the laminations business there has been considerable restructuring and capital investment over the past few years. The benefits from this program are expected to be realised via improved operating performance in the current year.

The business in New Zealand had a stronger year, due mainly to growth in exports and the closure of the loss-making site at East Tamaki. The majority of the sales from this site have been successfully transferred to plants in Australia. The barrier film business had a difficult year with the drought in Australia and New Zealand having a negative impact on volumes to the dairy industry.

On 2 June 2008, the commodity film business located in Perth, Western Australia (WA) was sold for $35 million, resulting in a profit on sale of $7.4 million, net of transaction costs. This business contributed $5 million in PBIT for the 2007/08 year.

Rigids

The beverage can business had a disappointing year with lower earnings. Improved earnings in the first half were offset by considerably lower earnings in the second half. Volumes in beverage cans for the year were flat with 2.5% growth in the first half offset by a 3% reduction in the second half. Lower volumes in the second half of the year were due to reduced volumes in multipak soft drinks and ready to drink alcoholic products.

The business has invested $30 million upgrading the end making capacity at Ballarat and installing additional capacity in Brisbane to produce new can sizes and designs, including slimline cans. The significant upgrade at the Brisbane facility has taken longer to complete than anticipated and the plant experienced operating inefficiencies during the second half. The business has now completed the upgrade and earnings are expected to recover in the current year.

The glass wine bottle business had another strong year primarily due to continued productivity improvement. Growth continued in the premium bottle segment, underpinned by product innovation and new product launches.

In May 2008, it was announced that a new $150 million glass furnace will be built at the existing Gawler (South Australia) facility, with a completion date during the first half of calendar 2010. This furnace will support the ongoing growth in the wine bottle market and the returns are underpinned by long term customer supply arrangements. Upon completion, the Gawler plant will have three furnaces and production capacity of 600 million wine bottles per year.

Since commencing operations in 2002, the glass bottle plant has consistently delivered high levels of quality, service and innovation.

Outlook

The outlook for the Australasian operations varies across each of the divisions:

• For the fibre business, the full year result will be dependent on the successful implementation of the announced 12% price increase to recover substantial cost increases. Given there will be year on year cost increases in 2008/09 it is unlikely the benefits from the price increase will be sufficient to offset the higher costs in the current year.
• The glass operation is expected to have another strong year. As the business was operating at full capacity in 2007/08, earnings are not expected to increase until the new furnace is commissioned in 2010.
• The beverage can business should achieve an increase in earnings underpinned by improved operating efficiency and the benefits from capital spending.
• The outlook for the flexibles business in Australasia is for stable earnings with improved operating performance offset by the lag in cost recovery.