Business News

AMCOR ANNOUNCES INTERIM PROFIT RESULT FOR SIX MONTHS ENDED 31 DECEMBER 2010

Monday 21. February 2011 - Highlights

Profit after tax and before significant items of $267 million, up 55% The translation impact from the higher Australian dollar on profit after tax and before significant items was negative $49.5 million Earnings per share before significant items of 21.8 cents, up 39.7% Operating cash of $10.8 million Interim dividend of 17.0 cents per share Significant items, primarily relating to the acquisition of former Alcan Packaging businesses were an after tax expense of $41.3 million

Net debt and interest expense
Net debt increased from $3,044 million at 30 June 2010 to $3,241 million at 31 December 2010. Excluding the currency translation impact, net debt increased by $583 million to $3,627 million, predominately as a result of funds drawn down to finance the Ball Plastics Packaging Americas acquisition in September 2010.
Gearing, measured as net debt over net debt plus equity, was 45.9% at 31 December 2010. Interest expense was $105.0 million. Interest cover, measured as PBITDA to net interest, was 7.1 times. Operating cash flow was $10.8 million and, after the payment of dividends, free cash outflow was $206.5 million. Exchange Rate Sensitivity
For the first half of the 2011 financial year, the sensitivity of profit after tax to the movement in the Australian dollar due to the translation of overseas earnings into Australian dollars for reporting purposes was approximately $3.0 million for every one cent movement against the US dollar and $5.0 million for every one cent movement against the Euro.
The US dollar and Euro to Australian dollar exchange rates for the first half of the 2011 financial year averaged 94.7 cents and 71.5 cents respectively. The rates for the first half of the 2010 financial year averaged 86.3 cents and 59.8 cents. The total negative impact of the higher Australian dollar on the translation of profit after tax before significant items into Australian dollars for reporting purposes was approximately $49.5 million for the half year.
The profit after tax sensitivity for a one cent movement against the Euro is estimated to have increased to $6.0 million.
Synergies
Results for the current period include synergy benefits of approximately $51 million.
Overheads
The reduction in overheads and SG&A costs has continued to proceed as planned, with the targeted reductions substantially achieved in the first full year of ownership (1 February 2011).
Procurement
The procurement savings as outlined at the time of the acquisition have been realised. This initial phase predominately relates to harmonisation of purchasing costs across the two businesses. Having achieved price harmonisation, the procurement team is now focused on obtaining additional benefits related to leveraging increased spend and the ability to standardise specifications and optimise the supply chain.
Customer response
The response from customers has been positive, with the vast majority of customers working cooperatively with the relevant business group on strategic partnerships and entering into long term contractual agreements.
There have been a small number of instances where the business has elected to exit unprofitable commodity volume as part of this process. Although volumes are lower as a result of these decisions, there has been a minimal impact on earnings and as such, the customer dis-synergy is significantly lower than was factored into the synergy forecasts at the time of the acquisition.
Operational
An extensive review of the operating footprint has resulted in six announced plant closures, with three plants already closed. Within Flexibles’ operations, this includes one tobacco packaging plant in Malaysia where two sites were consolidated into one, one of the two Flexibles plants in Russia, one plant in Italy, one plant in Australia and one plant in the UK.
Synergy Summary
In aggregate, the synergies realised in the first year of ownership are consistent with the expectations outlined at the time of the acquisition. For the year ended 30 June 2011, synergy benefits will be in the range of A$100 to A$120 million, which is consistent with the guidance at the time of the full year results in August 2010.
The total synergy target remains at A$200 to A$250 million for the third full year of ownership. Given the appreciation of the Australian dollar of approximately 25% against the Euro since the time of the prospectus in August 2009, this effectively means there has been a substantial upgrade of synergies, expressed in local currency terms. This upgrade results from additional opportunities in procurement and better than expected customer dis-synergies.
The expected cost to achieve these synergies remains A$300 million.
Insurance events
Reporting for insurance events
Amcor has its own captive insurer. For reporting purposes, the captive resides within the Investments/Other segment.
The captive collects annual premiums from Amcor’s business groups, and assumes specific risks relating to property damage, business interruption and liability claims. To reduce the exposure to Amcor some of that risk is passed on to third party reinsurers. The maximum liability for any Amcor property loss event is $25 million and the maximum aggregate liability in any 12 month policy period is $50 million. In most years, the captive makes a small profit and currently has cash reserves of more than $80 million.
In the current period there have been a number of insurance events including the devastating floods across eastern Australia. Provided there are no further insurance claims on the captive for the balance of the year it is anticipated that the captive will report a loss for the year of between $15 and $25 million. Given the size and one-off nature of this event the loss in the captive insurer will be reported as a significant item in the Amcor full year results.
Impact of flooding across eastern Australia Captive insurer
The captive insurer has taken out comprehensive flood insurance with reinsurers. This insurance cover includes damage to property, plant and equipment as well as business interruption.
At this stage, the financial impact of the floods is not fully known. It is expected that the magnitude of losses will become clearer through the June 2011 half year as direct and indirect costs are assessed.
Under the terms of the reinsurance policies, the first $25 million of claims for any one event is borne by the captive insurer. Should total losses exceed this amount for any one event the excess will be borne by the reinsurers.
Australasia & Packaging Distribution business group
The captive provides insurance against flood loss to the Australasia and Packaging Distribution businesses. At this stage the only plant that has had material impact from the floods has been the corrugated site at Rocklea (a suburb of Brisbane). At this site, water entered the plant and there was a loss of inventory which is estimated to be around $10 million. Some of the plant and equipment was also damaged and the site was down for approximately four weeks. The cost of repairing the plant has been estimated to be around $10 million. Additionally, there are business interruption costs associated with having the plant closed for a period which have not been quantified at this stage. The volume of lost sales is unknown and any insurance recovery relating to lost sales will be included in the Australasian earnings.
Summary
Amcor has comprehensive flood insurance covering damage to property, plant and equipment and business interruption. As a result of recent flooding across eastern Australia, in the second half of the 2011 financial year it is expected that:
The captive insurer will report a loss for the year of between $15 to $25 million which will be classified as a significant item; and The Australasia & Packaging Distribution business will experience lower corrugated volumes, the magnitude of which is unknown at this stage. Second half earnings for Australasia and Packaging Distribution will be in line with the same period last year.
Significant Items
Significant items after tax for the six months ended 31 December 2010 was a net expense of $41.3 million, compared to an expense of $77.5 million for the corresponding period.
This amount included $7.7 million of after tax transaction and integration costs and $30.2 million of after tax costs to achieve synergies, both related to the acquisition of the former Alcan Packaging businesses. Refer to page 15 for further details.
Segmentals
During the half year, a detailed review of the corporate costs of the consolidated entity was undertaken and it was identified that $12.7 million (2009: $9.9 million) of the $35.7 million (2009: $33.8 million) total was properly attributable to the results of the operating segments and as such, has been allocated based on relevant cost and service drivers.
Capital management
In December 2010, a US$1.85 billion syndicated multi- currency revolving facility was arranged, with 14 participating banks representing a range of existing domestic and international lenders.
The facility comprised three tranches with maturities of two, three and four years and amounts of US$740 million, US$740 million and US$370 million respectively. Funds from this facility were used to refinance the US$1.25 billion global syndicated facility maturing June 2011, the remaining US$425 million acquisition facility maturing in August 2012 and for general corporate purposes.
Interim dividend
The Directors declared an unfranked interim dividend of 17.0 cents per share, up from 12.5 cents for the 2010 interim dividend and in line with 17.0 cents for the 2010 final dividend.
100% of the dividend is sourced from the Conduit Foreign Income Account. The ex-dividend date will be 28 February 2011, the record date will be 4 March 2011 and payment date will be 31 March 2011.
Flexibles
The Flexibles segment includes the Flexibles Europe & Americas, Flexibles Asia Pacific and Tobacco Packaging businesses.
The Flexibles segment had a strong first half with PBIT up 145.5% to €197.9 million. The half included a six month contribution from the former Alcan Packaging assets, as well as synergy benefits of approximately €32 million.
Returns measured as PBIT over average funds employed were 18.0%. This was an outstanding outcome given it was the first full six month of ownership period of the former Alcan Packaging assets.
The business continued to focus on working capital. The average working capital to sales for the period of 10.6% was pleasing given the former Alcan Packaging assets working capital to sales ratio was around 13% at the time of the acquisition.
Total capital expenditure was €48.2 million.
Raw material input costs
Raw material input costs continued to increase during the half. The business has been active in recovering these costs and by the end of the period, cost increases through to September had been largely recovered through higher selling prices.
Input costs for some raw materials continued to increase sharply in the December quarter. In particular, PET film prices increased by approximately 80% during the half with substantial increases in the second quarter. Actions commenced during the last quarter to recover these costs.
The lag in recovering raw material cost increases negatively impacted first half earnings by approximately €14 million. This impact includes amounts within the Europe and Americas and Asia Pacific businesses.
In the December 2009 half year there was a positive benefit from falling raw material costs of approximately €3 million for the legacy Amcor businesses, and for the former Alcan Packaging businesses, it is estimated the benefit was €4 million.
Raw material input costs continue to increase and although these will be recovered in the market there will be a lag in recovering these higher costs. Six weeks into the second half it is difficult to estimate the magnitude of this impact, however if current costs remain unchanged, for the balance of the second half it could be of a similar magnitude to the €14 million experienced in the first half.
Flexibles Europe and Americas
This business is organised as six operating units being a combination of technology and market focused units: Fresh, Dairy and Capsules, Snacks & Confectionery, Extrusion, Americas and Medical Europe, High Performance Laminates and High Performance Foil.
Volumes have been solid across all units reflecting both the defensive nature of the end markets, as well as generally stable economic conditions. The business has had continued success with the strategy to improve product mix in more technically demanding, high performance packaging and closures. Rising raw material costs have largely been passed through to customers although with some lag, including the negative impact of substantially higher PET film costs.
Earnings for the Flexibles Europe and Americas business are substantially higher than for the same period last year, predominantly due to the acquisition of the former Alcan Packaging operations and strong progress in realisation of synergies including procurement and SG&A cost reduction initiatives. These benefits more than offset the negative impact from the lag in recovery of higher raw materials costs.
There was a €3 million benefit from the net impact of the acquisitions of the Medical Flexibles and B-Pack Due businesses in July 2010 and October 2010 respectively, and the sale of the Tobepal business in September 2010.
The plant rationalisation program has commenced with closures announced for plants in Russia, the UK and Italy. The business is currently working with customers to relocate volumes to other sites, and where this is not a feasible option, to assist the customer in moving the volumes to other suppliers. For these three plants, the vast majority of profitable volume will be relocated to other Amcor sites.
There are likely to be further plant closures to be announced in 2011 as the business takes the opportunity to exit unprofitable commodity segments and to remove capacity.
The integration of B-Pack Due into the Americas and the Medical Europe business is progressing to plan.
Flexibles Asia Pacific
The Flexibles Asia Pacific business has leading positions in key markets within the region and significant growth opportunities. Strong relationships with large multinational customers along with Amcor’s technology, scale and financial strength provide the capability to support customer growth objectives in the world’s largest and fastest population growth region.
The Flexibles Asia Pacific business had a strong half year, with earnings and returns significantly higher than the same period last year. This is primarily due to the contribution from the former Alcan Packaging businesses, cost synergies and increased volumes. These benefits more than offset the negative impact of higher raw material costs.
The business in China consists of seven plants and holds market leading positions across China’s major regional centres. Earnings for the half were higher, driven by strong volume growth in the higher margin pharmaceutical end markets. The business primarily supports large customers, both local and international, and during the half was successful in increasing its share with these accounts.
The Thailand business has a long history of growth driven by innovation and high levels of quality and service. An important part of this growth has been supporting large multinational customers across the region. In the first half there was an improvement in product mix to higher value add products that was a key driver in achieving higher earnings. Given the three plants are operating at full capacity, a new press is being installed to support further growth and will be commissioned in March 2011.
The business unit that comprises the operations in Indonesia, Singapore and India had a solid half with all four plants having increased volumes and good management of costs.
Volumes in the Australia and New Zealand business were 6% higher than the same period last year, however the product mix was negatively impacted by weaker demand for some higher margin industrial products. The strategy to create four centres of excellence and leverage a wider range of technologies and supply locations within the region is progressing well and the closure of the plant at Regents Park, NSW is on track for completion by the end of calendar year 2011.
In December 2010 the business acquired Techni-Chem Australia, for A$7.5 million. Techni-Chem is a distribution company servicing a range of customers with primarily imported packaging products and has sales in excess of $30 million. This acquisition will allow the business to further expand its product offering by leveraging Techni-Chem’s importing expertise and consolidating its strong pharmaceutical customer base with the existing business.
Tobacco Packaging
The Tobacco Packaging business had a strong half year. Earnings were substantially higher than the first half last year due to the additional contribution from the former Alcan Packaging businesses, improved product mix and realisation of synergies.
In Western Europe, although volumes were broadly in line with last year, there has been a continued trend toward higher value-add products with new design features being added by most customers including varnishes, lacquering, embossing and foil stamping. The business has been successful in winning a substantial proportion of this new volume.
In Eastern Europe the introduction of health warnings is a positive for the business given its ability to manage the increased complexity that accompanies this change.
The integration of the former Alcan Packaging assets has proceeded extremely well with a key benefit being substantial improvements in operating performance through the sharing of best practice and leveraging of resources.
In North America the business had a strong half. Volumes were up on the prior year due to increased market share, significant promotional activity by customers and some new products introduced to the market.
In Asia the business rationalised the Malaysian operations from two sites to one and was successful in securing long term volume commitments with key customers.
Outlook
The following factors will influence earnings for the second half of the 2011 financial year: Realisation of further synergy benefits. For the year ending 30 June 2011, synergies are expected to add between €65 and €75 million to 2010 proforma PBIT of €333 million; A lag in recovering higher raw material costs that could be similar to the €14 million lag experienced in the first half if raw material costs remain at current levels for the balance of the half; Economic activity in various regions. At this stage, demand for the start of the second half of the year is broadly consistent with the first half; and The full year benefit of operating improvements. These are additional to cost synergy benefits and in the first half were approximately €15 million.
Given the substantial benefits from cost synergies, earnings are expected to be substantially higher in the second half of the year than they were in the second half of last year.
Rigid Plastics
Amcor Rigid Plastics had a strong half year with
PBIT up 23.2% to US$101.4 million.
For the Amcor legacy operations, volumes were 1.7% higher than the same period last year. Legacy custom container volumes were 19% higher and preforms and carbonated soft drink and water (CSDW) volumes were 4% lower than the previous half year.
Total volumes, including the recently acquired Ball Plastics Packaging Americas (Ball PPA) assets and the former Alcan Packaging assets, were 33% higher than last year.
Capital expenditure was US$85.5 million and in line with depreciation, including the expenditure required to upgrade the manufacturing base at the former Alcan Packaging operations.
Returns, measured as PBIT over average funds employed, were 11.4%.
North America
The North American business benefited from a warm summer with volumes ahead of the same period for 2009. Volumes for the half also included six months ownership of the Alcan Plastics business and five months ownership of Ball PPA.
The integration of the Ball PPA operations has proceeded well with volumes and earnings consistent with expectations. Earnings from Ball PPA for the five months of ownership were approximately US$11 million, but were partially offset by transitional costs of approximately US$2 million relating to project costs and administrative support services. These costs will not recur in the second half and the business should achieve earnings consistent with those disclosed at the time of the acquisition.
Custom Beverage Containers and CSDW
In the custom beverage segment, volumes were 41% higher than the same period last year. For the legacy Amcor business, custom volumes were 28% higher with the balance of the increase due to a five month contribution from Ball PPA. The volume improvement in the legacy business was due to a combination of a warm summer, significant promotional activity by customers and some one-off volume gains due to competitors’ inability to supply.
Continued promotional activity by key customers and slightly better economic conditions resulted in custom volumes remaining strong through the December 2010 quarter.
CSDW volumes were 29% higher for the half, however for the legacy Amcor business volumes were 6% lower. This decline reflects the decision made some years ago to disinvest in this commodity segment as customers are increasingly moving to self manufacture in CSDW.
The integration of the Ball PPA operations has already resulted in reallocating volumes across plants to improve operating costs. There are further opportunities to improve operating costs through plant rationalisation and fixed cost reductions that will be implemented over the next 18 months.
Diversified Products
The Diversified Products segment consists of rigid plastic containers predominately for the alcoholic beverage, food, personal care / home care and pharmaceutical / healthcare markets. These end markets have been growing faster than GDP, due to the ongoing substitution from glass to plastic as well as the underlying higher growth rates for some of these segments.
The Diversified Products business unit is in the process of undergoing substantial change as a result of the acquisitions of the former Alcan Packaging and Ball PPA businesses. These acquisitions are complementary in terms of market segments, technologies and materials. In particular, there is an increased presence in the pharmaceutical and food markets as well as an entry into small wine bottles.
Sales revenue for this segment was US$210 million, 2.5 times higher than last year. Revenue for the legacy Amcor businesses was approximately 19% higher than the same period last year, with the remaining increase reflecting the additional contribution from the former Alcan Packaging and Ball PPA operations.
The business is implementing a substantial operational improvement program for the former Alcan Packaging assets. This consists of US$15 million in capital expenditure over the next 12 months to modernise the manufacturing base, lower operating costs and improve quality and service. The former Alcan Pharma Plastics Packaging business made only a modest contribution to earnings for the December 2010 half and over the next two years there is substantial upside potential for this business.
Latin America
The Latin American business had a solid half with earnings marginally lower.
Volumes were 4% higher, with a mixed performance across the region. Countries in the north were adversely impacted by poor weather resulting in lower volumes however this was offset by solid growth and market share gains with some key customers.
As a result, earnings performance was also mixed. The Brazilian business achieved solid earnings improvement while the operations in Mexico had lower earnings due to reduced volumes.
Bericap
The majority-owned joint venture, Bericap North America, is managed and reported within the Rigid Plastics segment. This business has plants in Ontario, Canada, and in the United States in California and South Carolina.
The Bericap operations had a strong half, with earnings higher than the same period last year. Volumes were strong from all three sites, and the business has increased market share.
Outlook
In the first six weeks of the second half, volumes in the North American market have continued to reflect the positive momentum seen in the December 2010 half. Earnings in the second half for the Rigid Plastics business are expected to be substantially higher than for the same period last year. The key drivers will be:
Six months earnings from the Ball PPA business; Operating improvements in the former Alcan Plastic Packaging business; and Higher volumes in custom containers, provided the current volume trend in the US continues for the balance of the half.
Australasia & Packaging Distribution
Australasia and Packaging Distribution achieved a 21.1% increase in PBIT to $99.8 million. This was a strong result given operating conditions were particularly difficult in Australia during the later part of the half.
The business had an outstanding performance in managing costs including lowering procurement costs and improving operating efficiencies. It also benefited from earnings of the former Alcan Packaging wine closures plant in South Australia. The positive impact of these initiatives more than offset the negative impact of a cool and wet summer and a stronger Australian dollar.
In the US, economic conditions improved slightly towards the end of the half which assisted the Packaging Distribution business in achieving a substantial improvement in earnings for the half.
Returns, measured as PBIT over average funds employed, increased from 10.5% to 11.9% reflecting the benefit of cost improvement initiatives undertaken across all divisions.
Capital expenditure was $83 million, comprising $40.9 million for base capital spending, $33 million for the recycled paper mill at Botany, New South Wales (NSW) and final payment of $9 million for the new glass furnace. Leighton Contractors were appointed construction contractors in January 2011 for the new recycled paper mill. Construction is expected to be substantially complete around the end of the 2011 calendar year, with commissioning taking place in the January to June 2012 period. The lightweight paper produced in the new mill will substantially improve Amcor’s value proposition to customers from both a sustainability and performance perspective.
Operating cash flow for the half year was $106.7 million.
Corrugated
Volumes in the corrugated business were 6% lower reflecting weaker demand across a range of end markets. Despite lower volumes, market share for the period remained stable.
Volumes in the fruit, produce and meat segments slowed considerably towards the end of the first half due to wet conditions in eastern Australia. In the industrial and wine segments, as a result of the higher Australian dollar, volumes were lower than the same period last year.
During the half, the business successfully renegotiated a three year Enterprise Bargaining Agreement for the corrugated sites. Ahead of final negotiations, inventories were built and warehoused at external locations as a contingency against possible industrial action. This resulted in additional costs of approximately $5 million in the current half year.
There were other cost pressures on the business during the half including further increases in energy, rising Corrugated Carton (OCC) prices and higher labour expenses. All these cost increases need to be recovered in the market place. The business successfully implemented 2% price increases to non-contracted customers in July 2010 and January 2011. Further price increases will be required to recover ongoing cost increases.
Contract customers generally have price increases linked to the Australian Consumer Price Index (CPI). Given the CPI has not increased substantially over the past 12 months, there has been an under recovery of cost increases for contract accounts during the current half.
Rigids
The wet and cold start to the Australian summer has negatively impacted beverage demand with volumes for the half 1.9% lower. This was partly offset by additional earnings from the former Alcan Packaging Wine Closures business, along with synergies realised as we integrate the asset with Amcor’s existing Closures operations. The new $33 million beverage can expansion in New Zealand is proceeding well with production expected to commence in June 2011.
The glass business had a satisfactory performance in a difficult environment. Commissioning of the new furnace continued through to November 2010 and as a result there was minimal contribution to earnings from the new furnace during the December 2010 half year. This new furnace produces lightweight bottles for both the beer and wine markets.
Packaging Distribution
This business, based in the US, had a strong half with US dollar earnings substantially higher than the first half last year. The result was positively impacted by improved volumes, excellent management of costs and also included a US$6 million profit from the sale and lease back of property.
General economic conditions remained relatively stable throughout most of the first half, however there was some improvement towards the end of the half.
Outlook
Earnings for the Australasia and Packaging Distribution business for the second half are expected to be in line with the same period last year.
The following factors will impact earnings for the second half: Lower volumes in the Australasian corrugated business across Eastern Australia due to the impact of adverse weather; Higher volumes in the glass business due to production from the new glass furnace; and Improved volume in Packaging Distribution provided economic activity in the US remains at current levels for the balance of the half.
Investments / Other
Investments / Other include corporate costs and equity accounted earnings from the 47.94% interest in the Hong Kong publicly listed company AMVIG Holdings Limited (AMVIG).
For the half year ended 31 December 2010, corporate costs were A$23.0 million (2009: A$24.0 million) and AMVIG earnings were $A17.1 million or S$21.5 million (2009: A$12.1 million or S$14.8 million).
AMVIG Holdings Limited
Amcor’s share of equity accounted earnings from the investment in AMVIG was higher than the same period last year as a result of increased ownership interest.
During the current period, Amcor acquired an additional 18.03 million shares in AMVIG at a cost of S$18.7 million, increasing our ownership interest from 45.99% to 47.94%. For the half year ended 31 December 2009, Amcor’s ownership interest was 38.95%. This subsequently increased to 45.99% during the June 2010 half year as a result of the repurchase and cancellation of shares associated with AMVIG’s divestment of the Brilliant Circle business.