Amcor profits constrained by material and restructuring costs

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Restructuring costs at Amcor's PET plastics and flexible packaging
divisions have contributed to a decline in first-half net profit,
though the Australia-based company expects an improvement in the
second half, despite the impact of higher raw material costs and a
regulatory investigation. Anthony Fletcher reports.

The firm, which is world's top manufacturer of plastic bottles, recorded a net profit of $190.1 million (€114.5m) after tax for the six months to the end of December, a fall of 11.4 per cent from last year. Before significant items, profit was up 6.2 per cent to $199.4 million after tax, in line with market expectations.

However, the company's performance was inevitably affected by losses of $35.6 million from 800 sackings and the closure of six factories in the PET and flexibles divisions, as the company struggled to reduce costs.

Growth in the North and Latin American PET packaging division was offset by a poor performance in Europe, where a cool summer led to weaker drink sales. The flexibles business however managed to lift pre-tax earnings by 13 per cent in the first half, despite higher materials costs, with the benefits of the costly restructuring programme expected to show up in the second half.

The root of Amcor's​ problems has been the ever-increasing cost of raw materials. The cost of natural gas and petroleum, the starting point for the production of many types of packaging resins, has increased consistently over the past 12 months. Oil-based resin used in plastic packaging has increased in price by seven per cent over the past six months, suggesting that the price increase trend is far from abating.

In addition the price of benzene, which is used to make styrene, has reached historically high levels. All this has had an inevitable knock-on effect on the operational costs of packaging manufacturers such as Amcor, with resin manufacturers passing these higher costs on.

For example, Chemical giant Nova increased the price of its styrene monomer by $0.10 per pound, the price of polystyrene resins by $0.12 per pound and the price of expandable polystyrene resins by $0.10 per pound from the middle of August 2004, in addition to all other previously announced price increases.

But Amcor is confident that it will be able to minimise the effect on earnings by passing on the bulk of the additional costs to customers. This is despite speculation the regulatory investigation of Amcor's involvement in a cardboard box cartel could weaken the company's bargaining position in contract negotiations.

The scandal, which involved former staff in Australia being suspected of involvement in an illegal operation to drive up box prices, has rocked the firm's share price and resulted in the removal of chief executive Russell Jones in December.

The corrugated box division accounted for about 9 per cent of the group's A$10.4 billion (€6bn) sales in fiscal 2004 and about 8 per cent of the group's A$831 million in operating profit. Amcor stock fell 7.8 per cent in December to a low of A$6.95 after its shares came off a trading halt.

The company claims that as these matters are the subject of pending court proceedings and current regulatory investigation, it is not in a position to answer any further questions on the matter. Emphasising the positive, new chief executive Chris Roberts said Amcor's primary objective remained to increase earnings by 20 per cent by the end of 2005-06, using only the existing asset base.

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