Packaging giant defies the odds

AMCOR chief executive Ken MacKenzie has managed to defy the odds and produce a record underlying profit. He has also delivered a 5.7 per cent lift in dividends despite a strong Australian dollar, a blowout in raw material costs, a big exposure to ailing Europe and the US, and a business that is classified as manufacturing.

By InvestSMART · 22 Aug 2012

By InvestSMART ·
22 Aug 2012

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MacKenzie expects profits in the global packaging giant to continue to swell in 2013 as the group moves into a new phase of its transformation, one that will be bankrolled by strong free cash flow.

Still, investors wanted more. The company's stock shed 6? to close at $7.66 as some switched out of defensive stocks while others were disappointed the company did not offer clearer guidance for 2013.

Part of investor concern is that the past three years of big profit expansion might be over as Amcor has already completed most of its cost-cutting plans and synergies from acquisitions.

In the past seven years Amcor has been repositioned into a lean, mean global packaging giant that has focused on lifting profit margins and achieving a stretch target of 15 per cent return on funds employed. The market notwithstanding yesterday's retreat and MacKenzie are quietly confident that free cash flow will more than double to $400 million or $500 million in the next two years. Geared up, these inflows will give the company more than $800 million to $1 billion a year to spend on increased dividends, acquisitions or share buybacks without affecting the group's investment-grade credit rating.

In the past year, Amcor has spent $350 million on five acquisitions aimed at expanding its global footprint and beefing up its packaging segments. These purchases, coupled with a decision to buy Alcan Packaging at the height of the global financial crisis when other companies where bunkered down, have helped the company achieve a record underlying profit for 2012.

Those results owe much to the synergy benefits flowing from the Alcan acquisition. The fact that most of the segments Amcor operates in are largely defensive, including healthcare, food and beverages, also played a role in the steady growth.

The successful merger of the $2.3 billion Alcan acquisition and the $US280 million Ball Plastics acquisition, which is largely completed and ahead of schedule by one year, have restored investor faith after a poor record of acquisitions during the 1990s and early 2000s, before the start of MacKenzie's reign in July 2005.

Expect emerging markets to continue to propel earnings growth, while the cashed-up cardboard king will also be in the hunt for more acquisitions to boost the bottom line.

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Frequently Asked Questions about this Article…

What drove Amcor's record underlying profit and who is leading the company?

Amcor delivered a record underlying profit under chief executive Ken MacKenzie. The results reflected synergy benefits from major acquisitions (notably the Alcan purchase), cost-cutting and margin improvements from a multi-year repositioning, and steady demand in largely defensive segments such as healthcare, food and beverages.

How much did Amcor increase its dividend and what helped the company maintain payouts?

Amcor lifted its dividend by 5.7% despite headwinds like a strong Australian dollar and higher raw material costs. Management says strong and growing free cash flow will bankroll future dividends, acquisitions or buybacks without harming the group's investment‑grade credit rating.

What role did acquisitions play in Amcor's recent performance and which deals were highlighted?

Acquisitions were central to Amcor's performance. The company spent about $350 million on five acquisitions in the past year, and earlier completed the $2.3 billion Alcan Packaging merger and the roughly US$280 million Ball Plastics deal. Those transactions delivered synergies that helped lift profits.

How much free cash flow is Amcor forecasting and what could the cash be used for?

Management expects free cash flow to more than double to about $400–$500 million in the next two years. Those inflows could translate to roughly $800 million–$1 billion a year available for increased dividends, further acquisitions or share buybacks while maintaining the group's investment‑grade rating.

Why did Amcor's share price fall after announcing the results?

Although results showed record profit and a dividend lift, some investors shifted out of defensive stocks and others were disappointed that the company did not provide clearer guidance for 2013. The stock fell about 6% to close at $7.66 as a result.

Are there risks investors should watch with Amcor?

Yes. The company faces short‑term pressures from a strong Australian dollar, blowouts in raw material costs and significant exposure to weak markets in Europe and the US. Investors are also mindful that much of the cost‑cutting and acquisition synergy work has already been completed, which could limit future profit expansion.

Which markets and product segments are supporting Amcor's earnings growth?

Amcor benefits from exposure to emerging markets, which are expected to continue propelling earnings growth. Many of its operating segments are defensive—healthcare, food and beverages and similar packaging markets—which helped steady growth during tougher conditions.

Has Amcor completed its transformation and what are the company's performance targets?

Over the past seven years Amcor has been repositioned into a lean global packaging group focused on lifting margins. The company targets a 15% return on funds employed and management is quietly confident that strong free cash flow and recent acquisitions position it to continue expanding profits, though past rapid profit gains may slow now that most cost‑cutting and synergies are in place.