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Amcor: restructuring and rationlizing

Amcor executives spent much of the late 1990s restructuring and rationalizing the packaging company. In 1999, they began focusing on expanding Amcor in overseas markets. Now they are trying to make it…

Amcor executives spent much of the late 1990s restructuring and rationalizing the packaging company. In 1999, they began focusing on expanding Amcor in overseas markets. Now they are trying to make it a market leader in leading sectors of the global packaging industry. At the same time, Amcor“s managing director, Russell Jones, is positioning the company for what he believes is the inevitable consolidation of the packaging industry into fewer, larger participants. His strategy includes acquisitions and the development of new products. Jones“s biggest task is to extract more value from Amcor Flexibles Europe, the business that was created in April 2001 from the merger of Amcor“s European flexible packaging operation with two local companies. So far the stock market believes he can do it. Amcor became a pure packaging company in April 2000, when it spun off its paper business as the listed PaperlinX. In 1998, Jones set a target of lifting Amcor“s return on funds employed (Rofe) from 9.7 to 15%. In the six months to 31 December Rofe fell from 13.2 to 12.2%, following Amcor“s expansion during 2001, but Jones points out that it was still above the company“s weighted average cost of capital of 10.6%. He says that, if the cost of acquisitions and of setting up the new European business are excluded, the Rofe was 14.1%. If Amcor were not expanding, it could reach his 15% target in six to nine months. The merger of Amcor“s European flexible packaging business with the European companies Danisco Flexibles and Akerlund and Rausing created a company with a 15% share of the European flexible packaging market, which covers products such as foil sachets and the film wraps used for confectionery. Jones wants to lift that share to 20% in the next few years, and says competition regulators in Europe will not be concerned if it rises to 25%. Amcor owns 67% of the business, Danisco owns 25% and Akerlund and Rausing owns 8%. Amcor can move to 100% over one to three years. Amcor“s European division, which includes the flexible packaging business and the Amcor Rentsch tobacco packaging business, made a profit of US$ 43.6 million in the six months to December 31 on sales of US$ 1.2 billion. Profit more than doubled from $21 million in the previous corresponding period, but Rofe dropped from 10.1% to 7.1% as Amcor bedded down the merger. Jones wants each Amcor division to achieve a Rofe of 15% within three years, and says the European division is on track to achieve that. Closing four of Amcor Flexibles Europe“s 40 factories, and cutting its workforce from 6,600 to 5,750 this year, will help improve its return. (In the past three years, Jones has cut the number of Australians in senior Amcor roles overseas from 31 to six, bringing the rest back to Australia. He says that for Amcor to grow internationally, it must attract the best people in local markets and give them career paths.) Amcor Flexibles Europe will also acquire other companies. Flexible packaging is not difficult to make, so barriers to entry are low and there are many companies in the market. Amcor Flexibles Europe is the largest flexible-packaging business in Europe by revenue, but the top 14 companies account for only 65% of the market. Jones also plans to use technology to expand. Amcor has two research and development centres in Europe and one in Australia for flexible packaging, a centre in Europe and one in Australia for tobacco products, and centres in Australia and Canada for research into Pet technology. “Our objective over the next two years is to add to our current sales volume a range of products that come from research and development processes,” he says. “There will be extensions of existing products but the whole objective is to work hand-in-hand with customers to develop what they actually need.” Amcor“s total debt as a proportion of net debt plus equity stands at 148% and it has free cashflow of A$ 300 million a year. The company can comfortably make another acquisition thanks to a deal in May 2001 with the US company Kimberly-Clark that gave it a delayed sale, for A$ 775 million, of its 50% of Kimberly-Clark Australia, which makes disposable nappies, paper tissues and other consumer goods. Amcor has already sold 5% and can sell the rest in small lots, or the entire 45%, within the next 15 months, giving it cash for its next acquisition. Amcor earns 70% of its annual revenue overseas. Its Asian business, which makes cigarette packaging and corrugated and plastic packaging, had the best return on funds in the second half, followed by Australia. Australia is the only country where Amcor plans to be “all things to all people”, producing glass, corrugated boxes, shrink wrap and closures such as bottle caps. The company is building an US$ 148-million wine bottle plant in South Australia, which will start commercial production in July. Jones says Amcor already supplies wine companies with boxes, closures and cask cartons – which represent about 10% of the US$ 500 million that wine companies spend on packaging each year. The new factory will produce 200 million bottles a year.

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