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 55 plants throughout Australia and New Zealand and approximately 5,400 co-workers and is headquartered in Hawthorn, Victoria (VIC) Australia.

AUSTRALASIA GROUP

Amcor Australasia had a difficult year with PBIT, on a continuing business basis, 39.9% lower at $113.2 million.

The main impact on earnings for the year was slowing economic conditions that adversely impacted volumes across nearly all divisions. This was particularly prevalent in the second half of the year and included a period of supply chain destocking. During the January to May period, sales were $60 million, or 6%, lower than for the same period last year. For the remaining seven months of the year sales were only 1% lower.

Across the market segments, there was considerably more weakness in those areas exposed to industrial markets, including flexibles and sacks into the building and construction industry, and corrugated boxes sold to a broad range of industrial customers. The combined impact of these factors on the full year earnings was approximately $25 million.

Other specific issues that negatively impacted earnings during the year included:

• Losses, from November 2008, on the export of old corrugated cartons (OCC) and recycled papers; and
• An adverse product mix in beverage can due to the introduction of new taxes on alcoholic RTD products.

The Australasian business has been proactive across all aspects of the operations in responding to the current economic downturn. This has included a 10% reduction in salaried staff which reduced operating costs on an annualised basis by approximately $15 million. This reduction has not impacted the core activities and was in the area of general administration. The benefit from this initiative was evident in the final quarter of the year with a full year benefit to come in 2009/10.

Returns for the continuing operations, measured as PBIT over average funds employed, decreased from 10.8% to 6.9%.

Cash significant items were $38.9 million and predominantly related to the turnaround plan in the fibre packaging business.

Base capital expenditure was a net inflow of $11.4 million. This comprised gross expenditure of $74.7 million and proceeds from disposals of $86.1 million. There was growth capital expenditure of $116 million relating to the new glass plant at Gawler (SA) and the recycled paper mill at Botany (NSW).

Working capital movement, on a continuing business basis, was a $36.2 million decrease for the 12 months to 30 June 2009.

The operating cash flow for the year was $248.6 million.

The Food Can and Aerosol business was sold on 31 October 2007. For the four months to October 2007 the business contributed $7.5 million in PBIT.

On 2 June 2008, the commodity film business located in Perth, Western Australia was sold for $35 million, resulting in a profit on sale for 2007/08 of $7.4 million, net of transaction costs. This business contributed $5 million in PBIT for the 2007/08 year. This business was not treated as a discontinued operation for accounting purposes.

CORRUGATED

The corrugated business has made substantial progress across a number of areas over the past two years following an extensive restructuring program between 2007 and 2008. The business has an improved manufacturing footprint and high levels of quality and service.

Volumes for the year were lower by 2.1%, due predominantly to weak volumes in the January to March period as a result of industry wide supply chain destocking. For the year, the market share remained stable.

The key issue for the business remains the under-recovery of substantial cost increases, particularly paper, starch and labour.

A 12% price increase to recover these costs was implemented for all customers in October 2008 and was successfully passed on to non-contracted customers. The business continues to work with contracted customers to implement this increase. However, it will take time to achieve full recovery given the duration of customer contracts.

RECYCLED PAPER AND OCC EXPORTS

The fibre business exports approximately 200,000 tonnes per annum of OCC and 100,000 tonnes per annum of recycled paper with selling prices generally reflecting the Asian spot market. In November 2008, these selling prices reduced substantially and the business exported both OCC and recycled paper into Asia at a loss through the balance of the financial year.

The procurement of OCC in the domestic market is typically via long term purchase agreements with price reset mechanisms that vary from spot adjustments to annual resets. This results in a lag in the lower OCC spot price being fully reflected in input costs for the business.

During the second half of the year, a number of strategies were implemented to reduce the input costs, including renegotiating contract prices and reducing tonnages purchased. For the full year, the business experienced a loss of approximately $20 million on the export of OCC and recycled paper.

BOTANY MILL

Over the past six months, the business has been seeking revised tenders for the design and construction work associated with the new recycled paper mill for Botany (NSW) and this process has impacted the project timetable, with completion due in calendar year 2011. Upon completion of final design engineering, the business will be able to fix a large component of the construction costs and these are expected to be more favourable than previous estimates.

The business is still considering proposals for the sale of the Fairfield (VIC) site but no decision has been made and any decision will be dependent on satisfactory terms being achieved.

FLEXIBLES

The flexibles business consists of four operating units: polyethylene, laminations, barrier films and multiwall sacks.

During the year, there was a substantial reduction in higher value-add products relating to the industrial and fresh food sectors. Although these volumes were replaced with new business, there was an adverse change in product mix which negatively impacted earnings.

RIGIDS

The beverage can business had a difficult year with a significant adverse change in the product mix.

Demand for RTD cans, which represented approximately 16% of the total volumes in the 2007/08 declined by 25% in 2008/09 due to the introduction of new taxes on a number of alcoholic RTD products.

Operational inefficiencies, following the installation and upgrading of equipment at the plant in Queensland, negatively impacted earnings in the first half. These issues have been resolved and plant operating efficiencies improved in the second half.

The reduction in RTD can volumes and plant inefficiencies resulted in earnings being approximately $12 million lower for the year. Of this amount, approximately $8 million is likely to be a permanent step change due to lower ongoing RTD volumes.

The glass wine bottle business had another solid year. The emphasis on quality, innovation and service continues to underpin earnings.

The new $150 million glass furnace is on schedule for start-up during the last quarter of the 2010 financial year. This furnace will support ongoing requirements in the wine bottle market and the returns are underpinned by long term customer supply agreements. Upon completion, the Gawler plant will have three furnaces and the production capacity will be 600 million wine bottles per year.

OUTLOOK

The Australasian business was significantly impacted by the economic environment in the 2008/09 year, particularly in the second half of the year. Although the business predominantly services the food and beverage sectors, there is an important industrial component in both the fibre and flexibles businesses.

For 2009/10, volumes are starting the year at a lower level than the start of the 2008/09 year and are likely to remain lower for at least the first half.

There should be a positive benefit from improved export prices for both OCC and recycled papers, compared to the second half of the 2008/09 year.

There will also be a full year benefit of price increases in the corrugated operations and reductions in selling, general and administration overhead costs. These benefits will be largely offset by contracted labour cost increases that will be difficult to recover via higher prices.

In aggregate, if economic conditions remain stable at current levels, earnings are expected to be higher due to the anticipated benefit from improved export paper and OCC prices.