Amcor Flexibles is a market leader and one of the world’s largest suppliers of flexible and tobacco packaging. It has three operating divisions: Amcor Flexibles Food, Amcor Flexibles Healthcare and Amcor Rentsch. The business has 7,811 co-workers, 48 plants and supplies a wide range of products to the food, beverage and healthcare markets. These products include packaging for fresh foods such as meat, fish, bread, produce and dairy; processed foods such as confectionery, snack foods, coffee and ready meals, as well as high value-added medical applications, hospital supplies, pharmaceuticals and personal care products. In addition, it supplies tobacco packaging.

Amcor Flexibles had a mixed year, with profit before interest and tax and before significant items (PBIT) down 2.8% to €115.9 million. Both the Food and Healthcare businesses had solid earnings improvements, however earnings for the tobacco packaging operations were substantially lower.

Returns, measured as PBIT over average funds employed, remained at 13.2%.

The business made substantial improvement in the management of working capital, particularly in the Food Flexibles business. Working capital for the year reduced by €21.2 million. Average working capital to sales decreased from 13.2% in 2006/07 to 11.1% in 2007/08.

Base capital expenditure was €77.8 million. Growth capital spending was €36.5 million and included components of the €12 million investment in the new tobacco packaging plant in the Ukraine, €22 million for capacity expansions at the tobacco packaging plants in Russia and Poland and €30 million for the flexibles packaging plant in Poland.

Significant items were €68.5 million of which €45.3 million was cash. The operating cash flow was €76 million.

Food

Amcor Flexibles Food is a pan European business consisting of 23 plants in 12 countries, serving all major food market segments. The business also coordinates the wider strategy for flexible food packaging across other geographical regions.

Earnings for the year were up strongly as the business continued to lower its cost base, improve product mix and recover raw material cost increases in a timely manner. Volumes were 4.8% lower, due to a combination of the closure of two plants during the second half of 2006/07, the selective forgoing of unprofitable business and softer economic conditions in the second half. Margins and returns were higher benefiting from restructuring, increased selling prices, improved product mix and better plant operating efficiencies.

The working capital performance for the year was excellent with the average working capital to sales ratio reducing from 14.8% to 12.1%. A further reduction is anticipated in the current year that will contribute to improving the cash flow and increasing the returns.

During the year the business has actively recovered cost increases, commencing with a comprehensive program of price increases in January for raw materials and other inflationary costs. These increases were well accepted and, for the 2007/08 year, there was only a modest impact on earnings due to lags in obtaining full recovery of raw material costs.

Resin prices continued to increase through the second half of the year and further price increases were announced in July to recover these costs.

The short term outlook for raw material input costs is for stability at the current high levels. In the medium term, lower cost polymer capacity is scheduled to commence production and it is likely resin supplier margins will reduce at that time.

A key initiative for ongoing improvement is an extensive repositioning program being undertaken by the business, named ‘Flex 1’. The first phase of this program was the successful closure of two plants, one in the UK and one in Germany, during the 2006/07 year. These closures were achieved ahead of schedule with costs substantially below budget with more than 75% of the volumes retained and transferred to other sites.

In April 2007, the remaining components of the program were outlined with the main objectives being to:

• Strengthen market positions through better leveraging of technology and manufacturing capabilities;
• Increase weighting in lower cost regions, particularly in Southern and Eastern Europe;
• Improve alignment to customer needs and market trends; and
• Create a strong platform for innovation and continued growth.

The project will impact both the Food and Healthcare businesses and will deliver an estimated PBIT benefit of €30 million per annum, from the 2009/10 year, for an estimated net cash cost of €60 million. The overall headcount reduction, excluding divested sites, will be approximately 900. The program will reduce the number of manufacturing facilities in Europe by approximately 25%, with sites either closed or sold. The remaining plants will have greater scale and be more technologically focused.

During the 2007/08 year there was substantial progress in this program. In the UK, the consolidation of two flexographic printing sites was completed with the closure of the site in Ilkeston and relocation of the volume to a nearby site at Evesham. The Evesham plant has doubled in size, delivering improved operating efficiencies and a lower cost base.

In film extrusion, the number of sites will be reduced from nine to three with new investment of €28 million to upgrade the remaining facilities, including a new nine layer extruder at the plant in Belgium. This will deliver substantial improvement to operating costs and result in a 40% decrease in the number of extrusion lines without reducing the overall manufacturing capacity. The business is also undertaking extensive resin rationalisation trials that will reduce complexity, increase run lengths and increase resin procurement leverage.

The first step in this program is the closure of the film extrusion operations at Lyngby in Denmark. The volumes from this plant have been transferred to other extrusion locations. The UK extrusion activities are being rationalised with the Ledbury extrusion operations being relocated to the extrusion plant at Ilkeston. The extrusion facilities at the plant in Barcelona will be closed and volumes relocated to the other sites.

In June 2008, the plants in Lund, Sweden and Somerset, UK were sold. These plants, with combined sales of €87 million, were primarily involved in the production of unprinted films for the meat and fish segments. These are commodity segments and the plants were located in high cost regions.

The business continues to expand its operations in Central and Eastern Europe to support the increasing number of multinational customers building capacity in the region. The plants in Russia and Poland continue to make solid progress with the Russian operations benefiting from the start up of the second press in the latter half of the year.

As part of this ongoing expansion in Eastern Europe the Polish Flexibles plant, which is currently co-located with the tobacco packaging plant, will be relocated to a new site at Lodz and the manufacturing capabilities substantially increased. The investment in this relocation and expansion is €25 million, with the new plant expected to be operational in April 2009.

This relocation enables the tobacco packaging plant to continue to expand using the floor space previously occupied by the flexibles operations.

The outlook for the food flexibles business is for solid improvement in earnings, driven predominantly by the benefits from the restructuring program, ongoing cost reduction in selling, general and admin (SG&A) and further cost reductions linked to the manufacturing excellence program. There is some evidence of reduced volumes in certain market segments and, should this continue for the balance of the year, it could dampen the expected strong improvement in earnings.

Healthcare

Amcor Flexibles Healthcare comprises flexible packaging activities in the Americas and Europe. Amcor Flexibles Healthcare is a global leader in flexible packaging for the medical, personal care and pharmaceutical markets. Headquartered in Chicago, USA, it employs over 2,200 co-workers at 16 manufacturing facilities in ten countries. In addition, the group coordinates strategy and commercial activity with Amcor’s healthcare flexible packaging activities in Asia.

The Healthcare business had a solid increase in earnings, despite being adversely effected by the weakening of the US dollar in relation to the Euro. This weakening resulted in a lowering of the US dollar earnings when translated into Euros and the reduction in margins for business exported from Europe into dollar-denominated buying regions.

In the Americas sales increased by 7%, expressed in US dollars. The business continues to improve the product mix, moving to more technically demanding structures focusing on enhanced protection, ease of use and high-quality graphics. The utilisation of the new gravure press continues to improve with substantial opportunities for additional volumes in the coming year.

In Europe, earnings were higher. Sales volumes however were lower, due primarily to exiting low margin standard products at an underperforming site. In addition, the region was adversely affected by sales made into dollar-denominated buying regions. Similar to the Americas, the ongoing focus on highperformance product growth and operational excellence resulted in improved earnings.

Although raw material costs increased during the year, they were successfully recovered with minimal impact on earnings. The business has comprehensive plans to recover increases in both raw materials and other inflationary costs in the 2008/09 year.

As part of the European footprint project jointly undertaken with Amcor Flexibles Food, the business is making significant investments at key extrusion sites. These investments will lead to more efficient plants with lower overhead costs and stronger technical capabilities. The benefits of these investments will begin to accrue in the 2008/09 financial year.

The earnings outlook for the Healthcare business is for continuing improvement in the 2008/09 year due to the benefits from the flexibles restructuring in Europe, improved capacity utilisation of capital investments in the Americas and ongoing improvement in the product mix.

Tobacco Packaging

Amcor Rentsch has strategic leadership of Amcor’s global tobacco packaging business and operational responsibility for the plants in Europe. The business has seven plants focused on tobacco cartons.

Sales for the year were flat at €304.7 million. However, this figure includes the impact of closing the specialty carton plant in Switzerland in November 2007. Specialty cartons aside, sales in tobacco cartons were 4.3% higher.

The business had a difficult year with a number of adverse factors, negatively affecting the operations. Earnings were €8 million lower, comprising operational inefficiencies of €5 million and plant startup costs of €3 million.
In the second half of the year, the business returned to more normal trading conditions and earnings improved.

During the year, there was a significant shift in the business mix to more value-add products, especially in Russia and Eastern Europe. The key drivers for this were:

• Consumer preference moving to higher value brands with more value-adding features, including embossing and hot foil stamping;
• Introduction of Graphical Health Warnings (GHW); and
• Shorter run lengths due to an increased number of product lines.

This mix shift to higher value-add products is a long term positive for the business as it is well positioned to manage this complexity and has been successful in securing new business. In the short term however, there was a mismatch between appropriate manufacturing capacity and customer demand, resulting in overtrading for the first nine months of the 2007/08 year.

This was particularly acute in Eastern Europe and Russia and, during the first half of the year, the business outsourced production to third parties in Western Europe. Amcor Rentsch absorbed most of the additional costs for this manufacturing including substantial transportation costs.

At the same time, cigarette production in Western Europe increased, with a major customer transferring volumes from the US to Europe. The business was successful in obtaining a proportion of this increased volume.

Finally, demand in Eastern Europe and Russia continued to expand, and Amcor Rentsch was contracted for 100% supply of a product that experienced considerably stronger growth than anticipated.

In summary:

• The available machine hours across the tobacco packaging industry reduced due to increased complexity and additional cigarettes being manufactured in Western Europe.
• The business experienced strong growth in demand for more value-add products in Eastern Europe and Russia.
• There was higher than anticipated overall growth in Russia.

To address the capacity constraints in Eastern Europe and Russia, €22 million has been invested at the plants in Russia and Poland to increase capacity and enable additional value-add production.

In Russia, a new printing press and hot foil stamping machine have been installed. The new press will add capacity to meet the growing market demand, as well as improve the operating efficiency. The hot foil stamping machine has enabled production of more complex and innovative products.

In Poland, new offset capacity has been installed to meet growing demands for the value-add short run volumes and additional cutting and creasing equipment installed to improve manufacturing efficiency.

The new plant in the Ukraine commenced production in February 2008 and is supplying the local market.

The outlook for 2008/09 is for a substantial improvement in earnings and returns. The new capital investment at the plants in Poland and Russia will ensure volumes will not be outsourced to third parties. Production will be better balanced across the manufacturing footprint, reducing the number of changeovers and lowering transportation costs. The business will also be better equipped for the higher value-add products, particularly in Russia and Eastern Europe. The new plant in the Ukraine will make a positive contribution for the year. Finally, there will not be the €3 million expense for plant startups.

Strategically, tobacco packaging is an attractive market segment that has developed an excellent manufacturing footprint, focusing on value-add products.

Outlook

The outlook for the Flexibles business is for substantial improvement in the 2008/09 year, expressed in local currency terms.

The key drivers of this improvement are:

• Benefits from the European restructuring program;
• Recovery in the tobacco packaging earnings following a difficult 2007/08 year;
• Benefits from the new flexibles plant in Poland and the tobacco packaging plant in the Ukraine; and
• Continued product mix improvements, particularly in the Healthcare business.

Economic conditions in some countries are softening and this could impact demand in certain product segments or regions, particularly in the food flexibles business. Should this continue for the balance of the year, it could reduce the anticipated rate of improvement.