Folding in the acquisitions

Now that the major acquisitions of the past year are completed, Amcor’s task is fairly straightforward. It must integrate each of the businesses and extract the identified synergy benefits. Thereafter, any rise in economic activity will provide the added boost of the operational leverage now built into the company.

Amcor’s full year profit for 2010 of $409.2 million (before significant items) was up 13.5% on the prior year. The higher Australian dollar cost the company about $58 million in the translation of its overseas earnings, but this is a fact of life as a large amount of Amcor’s business is now based overseas. The significant items were an expense of $226.2 million partly relating to transaction and integration costs ($108.2 million) and costs associated with achieving synergies ($53.4 million) – both as a consequence of the Alcan Packaging acquisition completed on 2 February 2010.

 

Amcor remains in a strong upward trend since March 2009. Since retracing to touch a low of $6.31 on August 26, Amcor managed to rebound strongly to break above the 50 period moving average (green line) at $6.55, which is bullish. Downside support is underpinned at both the uptrend line and the 200 period moving average (red line) at $6.25, whilst overhead resistance is located at the $7.04 level.

The weekly chart illustrates the strength of the uptrend since early 2009. Since finding support from both the 39 (green line) and 200 (red line) week moving averages, Amcor has successfully continued to surge higher. The bullish moving average cross recently formed bodes well for a boost of upside momentum, which could lead to a test of the April 2008 high of $7.32 over the broader term.




Amcor declared an unfranked final dividend of 17 cents per share, payable on 1 October 2010.

Operating cash flow increased from $419.6 million to $566.8 million. Members will recall that Amcor raised a significant amount of equity at the beginning of the year to pay for its biggest acquisition for some time – the US$1,948 million purchase of Alcan Packaging. The company raised A$1,611 million in new equity to fund the purchase while a further US$850 million of long term debt was raised in a private placement to optimise the balance sheet debt. Net debt now stands at $3,044 million as at 30 June 2010 putting the gearing ratio at 42.3%. Interest cover sits at 6.6 times. Both measures are reasonable.

Alcan progress

As we have mentioned in previous notes on Amcor (FAT469 and FAT475), Amcor acquired the Alcan Packaging business at a very good price and at an opportune time. Buying such a big asset under those circumstances is one thing, but incorporating the assets and extracting the additional benefits required time and expertise. It is in this regard that we now scrutinise Amcor and the progress card will tell us if the management is succeeding or not.

From the management discussion of the full year result, the early reports are good with a $17 million EBIT contribution from the synergies column in the second half of the year. For the 2011 year, Amcor said it is expecting synergy benefits between A$100-120 million, in line with its target.

As a reminder, Amcor is seeking to extract EBITDA synergies of A$200-250 million per annum within three years of completing the acquisition, and will spend $300 million as a once-off pre-tax restructuring cost to integrate the businesses.

Flexibles

Amcor has reorganised its business reporting lines. The Flexibles division now includes about 96 plants across 30 countries in Europe, America, and Asia Pacific as well as another 20 plants across 16 countries of the Tobacco Packaging business. On an annualised basis, these businesses generate approximately €3.3 billion and €785 million in sales.

In the 2010 year, Flexibles enjoyed a 45.9% lift in operating profit on a sales increase of 33.8% in Australian dollar terms. This was also a good increase in terms of return on funds employed which increased from 14.7% to 17.2%. Part of that improvement was due to lower working capital which decreased as a percentage of sales from 10.9% to 9.4%.

As the synergy benefits continue to come through in this division, Amcor is expecting a further €60-70 million to add to the full divisional outcome in 2011.

The food end markets are still being impacted by weak economic conditions, but the tobacco and healthcare end markets are more defensive in nature and should continue to perform well.

Rigid Plastics

This is another huge division incorporating 69 operations across 12 countries and generating about US$2.3 billion in annual sales, excluding the recent acquisition of Ball Plastics Packaging Americas (Ball PPA).

Volume growth was again fairly muted as the US economy struggles to get going. Volumes in the legacy Amcor businesses were 4.5% lower at 25.1 billion units. Even carbonated soft drink and water (CSDW) volumes were down 4.5%.

Once again though, Amcor’s focus in 2010 on reducing its operating costs delivered a good offset to the weak sales volumes, limiting the decline in operating profit to 12.3%. Lower working capital and a reduced capital expenditure program boosted cash flow to US$245.5 million.

A warmer US summer has helped to improve volumes on the same period last year. This division will also get a boost from the Alcan Pharmaceutical Plastics Packaging businesses, and 11 months contribution from the Ball PPA business.

Australasia and Packaging Distribution

These businesses were combined in May and include corrugated box, fibre, glass, beverage can and distribution operations.

The second half of the year was much better than the first with operating earnings up 56% on the prior comparable half year. In total, sales declined by 6.2% to A$2,800 million but good cost control and operational improvements lifted EBIT by 14.7% to $161.2 million.

Summary

Amcor’s 2010 result was good considering the difficult economic conditions most of its businesses faced during the period.

Combining a series of acquisitions, big and small, is no easy task and progress towards integrating these businesses and extracting the additional value from them is now the crucial yardstick for investors. To date, management is delivering on the targets but these are multi-year projects so enthusiasm must be tempered despite the good start.

Amcor’s strong focus on reducing its own operating costs throughout 2010 has already paid dividends with a good set of operating numbers across the various divisions. This work will pay off even more when economic activity lifts and the company gets some operating leverage as a consequence.

The balance sheet is not stretched and cash flow is in good shape so we are comfortable with Amcor’s financial state.

Amcor will remain in the Fat Prophets Portfolio.