Review of Operations Flexibles - Amcor Annual Report 2012

EarningsA$ million 2012 2011 Change (%)Sales revenue 2,872 2,836 1.3PBIT (1) 152.5 159.7 (4.5)Operating Margin (%) 5.3 5.6Average Funds Employed (AFE) 1,632 1,592 2.5PBIT/AFE (%) 9.3 10.0(1) Before significant items.Cash FlowA$ million 2012PBITDA 279.1Base Capital Expenditure (79.3)Movement in Working Capital (20.7)Significant items (38.2)Operating Cash Flow 140.9Growth capital expenditure (264.5)Below:Nigel GarrardPresident, Amcor Australasia andPackaging DistributionReview of OperationsAustralasia andPackaging DistributionAustralasia and Packaging Distribution isa diverse packaging business that includesthe fibre, glass, beverage can and recyclingoperations within Australia and NewZealand, and distribution and corrugatedmanufacturing sites in North America,Europe and Asia. The business employsapproximately 6,000 co-workers across139 sites. Products include corrugatedboxes, point of purchase displays, foldingcartons, paper, carton board, recyclingservices, aluminium beverage cans, plasticand metal closures, glass wine and beerbottles and multiwall sacks. The NorthAmerican distribution business unit is amajor supplier of packaging products andequipment, industrial and janitorial suppliesto businesses in the region.Australasia and Packaging Distributionachieved a PBIT of $152.5 million,4.5% lower than last year.Underlying earnings, for Australasia andPackaging Distribution, were flat comparedto last year after adjusting for the $7 millionprofit on asset sales in the prior year andthe impact of the higher Australian dollarwhen translating earnings of the US-basedPackaging Distribution business intoAustralian dollars.In Australasia, the business had a solidfirst half; however, in the second halfdifficult economic conditions andthe high Australian dollar negativelyimpacted volumes in some segments.Notwithstanding these impacts, second halfearnings were only marginally lower thanthe corresponding prior period. PackagingDistribution achieved solid underlyingearnings growth. This was a good resultgiven economic conditions in the USremained subdued.Returns, measured as PBIT over averagefunds employed, were 9.3% and operatingcash flow for the year was $140.9 million.Capital expenditure was $343.8 million,comprising $79.3 million for base capitalspending and $264.5 million for the newrecycled paper mill.Paper – Botany MillThe new recycled paper mill, located atBotany, New South Wales, is expected tocommence commissioning in September.Initially, it will run a limited number of papergrades and for a machine of this size theramp-up to full production is normallyaround 18 to 24 months. The machine isworld-class and will create a differentiatedcustomer value proposition by introducingto the Australian market higher qualityrecycled paper for use in the corrugatedbox market. It will also produce a broaderrange of lightweight papers, enabling thedevelopment of innovative new products.The new machine will deliver cost-reductionbenefits of approximately $50 million onceoperating at full speed and manufacturingthe full range of papers. There will also beadditional benefits, over time, due to theimproved paper quality and the abilityto bring new products to market. The netcapital cost, subject to outcomes relatingto excess land sales, is expected to beapproximately $300 million.The environmental credentials of the newmachine at Botany will assist customersin meeting or exceeding many of theirobligations under the Australian PackagingCovenant. The significantly improvedenvironmental impact includes a 34%reduction in energy usage, a 26% reductionin water usage and a 75% reduction inwaste to landfill.12

Corrugated and PaperVolumes in the corrugated box businesswere in line with the prior year and earningsin the integrated corrugated and paperoperations were flat. This was a solidperformance given the difficult economicconditions in Australia in the second halfof the year adversely impacted industrialvolumes. Over the past two years, thebusiness has modestly increased marketshare and, with the start-up of the newrecycled paper mill at Botany, is committedto maintaining its market share.The Australian corrugated box marketremains very competitive due to thecombination of a strong Australian dollarand lower international paper prices. Thebusiness is currently experiencing sellingprices that are unsatisfactory given costscontinue to increase, notably energy andlabour. The business needs increased sellingprices in the corrugated market to reflectthese higher costs.Cartons and CartonboardThe carton converting business had a solidyear, with improved operating performanceand recovery of inflationary cost increases.Following the acquisition of a former CarterHolt Harvey plant in December 2010, thebusiness closed one of two sites in NewSouth Wales in June 2012. The benefitsfrom this restructuring are expected tobe evident in the 2012/13 year.The recycled cartonboard mill in Petrie,Queensland, produces board for internalrequirements as well as for both thedomestic and export markets. The mill istrade exposed and with the high Australiandollar there has been significant pressureon export selling prices. In the currentenvironment, increases in energy and laborcosts are not being recovered and this trendis expected to continue while the Australiandollar remains at current levels. The combinationof unrecovered higher costs and lowerexport selling prices will result in asubstantial reduction in earnings forthe current year.RigidsThe beverage can business had a solid year,with volumes 1% lower. There were cooland wet conditions in the key markets ofNew South Wales and Queensland oversummer and the business lost its share ofthe Schweppes contract, impacting volumesin the second half of the year. This loss ofvolume was partially offset by additionalbusiness from new and existing customers.There was also a full year contribution fromthe new can line in New Zealand.The glass operations had a solid year, withhigher earnings. This business continues tobe adversely affected by the high Australiandollar impacting export bottled wine volumes.Over the past 18 months, the business hassuccessfully offset this reduction in winebottle volumes by diversifying its productrange into beer and other non-wineproducts. Taking into account the closureof three furnaces by a major competitor,overall glass demand in Australia remainswell supplied. As a result, Amcor is unlikelyto pursue further growth capital expenditurein this segment for the foreseeable future.Packaging DistributionThe Packaging Distribution businessperformed well, with underlying US dollarearnings higher than last year. The resultwas positively impacted by incrementalgains in market share, earnings fromacquired businesses and excellentmanagement of costs. The businesshas successfully completed two smallacquisitions in the last two years.The Memphis-based Wurzburg businessincreased the scale of operations inthis important growth market, and theCalifornian-based Marfred Industriesleverages the extensive existing footprintin this market.OutlookGiven the uncertain outlook for theAustralian economy and the ongoingadverse impact of the high Australian dollar,earnings in the Australasian and PackagingDistribution business in the 2012/13 financialyear are expected to be in line with the2011/12 financial year.It is anticipated that the business will buildmomentum during the year as second halfearnings will benefit from the start-up ofthe new paper mill at Botany.Amcor Annual Report 2012 | 13

Recordable case frequency rate*Number of recordable cases per million hours workedLost time injury frequency rate*Number of full work days lost per million hours worked8.47.44.73.83. 35.14.1 4.03.12. 52. 2 2.4 1.9 1.61.20.9 0.8 0.72007 2008 2009 2010 2011 2012’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12*Frequency rates reported in charts above cover full-time employees and contractors.Review of OperationsSustainabilityAs a global leader in the packaging industry,Amcor has an important role to play increating a sustainable future.We believe in responsible packaging.Responsible packaging protects theresources invested in a product, andreduces waste across the supply chainand throughout the product’s life cycle.Responsible packaging delivers byprotecting, informing and performing:Responsible packaging protects by keepingproducts clean, fresh, safe and secure.It reduces waste by protecting productsand extending their shelf-life.Responsible packaging informs by sharinginformation with consumers about wherea product comes from and how to reduceits impact.Responsible packaging performs beyondits basic function to serve its own purpose,reinventing the way products can be used,stored, frozen, carried, handled, openedor heated.At Amcor, we have the expertise andtools to systematically evaluate packagingsustainability from a total life cycle perspectiveand recommend the optimal packagingsolution for our customers.Our approach to sustainabilityWe value social responsibility and ourapproach to sustainability recognises theinterests of our broad range of stakeholders.We address these interests via specificplans and actions across five areas:Environment, Community, Workplace,Marketplace and Economy. Our disclosuresin these areas allow for benchmarkingagainst international standards and ourcorporate peers.Importantly, sustainability risks andopportunities are identified, assessed,prioritised and managed using ourEnterprise Risk Management (ERM)framework. Accordingly, a robust riskmanagement approach underpins oursustainability strategy.Details of Amcor’s sustainability activitiesand performance are included in this year’sSustainability Report (published on Amcor’swebsite: www.amcor.com). Following aresome of Amcor’s key highlights forsustainability for the 2011/12 year.RecognitionThis year, Amcor’s leading environmental,social and corporate governance practiceswere recognised at the prestigious AustralianSustainability Awards. The Awards are aninitiative of the Ethical Investor Magazine andare judged by Environmental, Social andGovernance (EGS) analysts, investors andfund managers.Amcor was also recognised in a reportreleased by the Association of CharteredCertified Accountants (Australia) for ouroverall integration of material non-financialconcerns into Company vision and strategy,management systems and risk managementframework. The report ranked Amcor thebest amongst the ASX50 companies fordemonstrating the interdependenciesbetween environmental and social matters,and financial performance.Amcor continues to be listed on global andregional market indices, including the DowJones Sustainability Asia Pacific Index; theCarbon Disclosure Leadership Index, MaterialsSector, Australia and New Zealand region;and the FTSE4Good index.14

EnvironmentRegularly setting and working towardsour EnviroAction reduction targets forgreenhouse gas emissions, waste tolandfill and water useEnviroAction is Amcor’s global environmentalimprovement program, designed to drivecontinuous improvement in the environmentalperformance of Amcor’s operations.The EnviroAction program sets short andlong term reduction targets for greenhousegas emissions, water use and waste to landfill.EnviroAction targetsGreenhouse gas (GHG) emissions• 10% reduction in GHG emissionsintensity from 2010/11 by 2015/16; and• 60% reduction in GHG emissionsintensity from 2005/06 by 2030.Waste to landfill• 50% reduction in waste to landfillintensity from 2010/11 by 2015/16; and• Zero waste to landfill is the long termobjective.Water consumption• 25% reduction in municipal waterconsumption intensity from 2010/11 by2015/16 (Amcor Australasia only); and• Other regions are implementing watermanagement plans.Each of the Amcor business groups implementsaction plans for achieving these targets anddriving continuous improvement. Detailedreporting and analysis of energy, GHG emissions,waste and water use at each Amcor site allowsAmcor businesses to prioritise projects.Regular communication amongst membersof Amcor’s Sustainability LeadershipCouncil facilitates sharing of best practiceinitiatives, tools and processes for reducingoperational impacts, and dissemination ofsustainability information across theentire Amcor Group.Implementing environmentalmanagement systems and continuouslyimproving environmental performanceat Amcor sitesAmcor maintains environmentalmanagement systems appropriate foreach site’s operations and for the countryin which the site is located. Typically,these are either ISO14001 compliantor equivalent.This year, our Flexible Packaging plant inSingen, Germany, was certified to theISO50001:2011 standard for energymanagement. Certification to this standardrecognises this site’s continuous improvementin energy efficiency and reducing energyconsumption.Environmental incidentsIn FY2011/12, there were no material reportednon-compliances with environmental lawsor regulations across the Amcor Group.Working with suppliers and customers toreduce environmental impacts throughoutour supply chains and the life cycle ofour productsWork continued this year on the developmentof corporate sustainability standards forAmcor suppliers. Amcor’s Flexibles Europe& Americas business continued theimplementation of supplier sustainabilityassessments in coordination with itsprocurement team, and this approach isbeing shared across the Amcor Group.Customers continue to seek our technicalexpertise and product developmentcapability to guide them on responsiblepackaging options for their products.Our work in this area is discussed in‘Marketplace’ below.WorkplaceWe recognise that our co-workers are ourmost valuable asset and the foundationof our success. We are committed toproviding a safe, rewarding and motivatingenvironment to support co-workers inreaching their potential.Maintaining a safe workplace with theaim of achieving ‘No Injuries’Our five-year strategic plan for workplacesafety and environmental management requiresthat the following objectives are met:1. Build internal commitment to safetyand environmental management, anddemonstrate leadership across all levelsof the organisation;2. Establish and maintain a best practicegovernance framework;3. Build a performance culture of lineownership, co-worker involvementand systems integration; and4. Ensure co-workers are trained andengaged in identifying and eliminatingworkplace risks.All Amcor sites have annual action plansin place to support these objectives.We have a set of mandatory global standardsfor safety, environmental management andsecurity with which each of our sitesmust comply.Amcor Annual Report 2012 | 15

Review of OperationsSustainabilitycontinuedInternal audits are conducted at least annuallyand third party audits every three years tomeasure compliance against these standards.Amcor’s business groups are required toreport regularly to Amcor’s Board oncompliance with these standards andwith local legislation.Safety performanceThis year, we made significant progress inimproving the safety of our workplace andreducing injuries. Amcor’s safety performanceis measured using two criteria – Lost TimeInjury Frequency Rate (LTIFR) and RecordableCase Frequency Rate (RCFR). The lost timeinjury severity rate is also measured.Amcor’s LTIFR is measured by calculatingthe number of injuries resulting in at leastone full work day lost per million hoursworked. In the 2011/12 year, the LTIFR was0.7, corresponding to 56 cases across ourglobal business. This represents a 12.5%improvement, compared to the previousyear’s result of 0.8.Amcor’s RCFR is measured by calculatingthe combined total of medical treatmentcases and injuries resulting in at least one fullwork day per million hours worked. In the2011/12 year, the RCFR was 3.1, correspondingto 243 cases across our global business.This represents an improvement of 22.5%when compared to the previous year’sresult of 4.0.Amcor did not have any workplace fatalitiesduring the 2011/12 year.Fines and prosecutionsAmcor did not have any material fines orprosecutions for workplace safety violationsin the 2011/12 year.Engaging and developing our co-workersAlthough we have come a long way, werecognise that the journey of improvementnever stops and we must now build on thesuccess of The Amcor Way operatingmodel. By embedding and driving a cultureof Outperformance, we strive to achieveeven higher standards in everything we do.Our key areas of focus are:Employee engagementWe are committed to creating an inclusiveenvironment that supports high performance,engagement and passion to succeed.In March 2012, Amcor conducted a global,Group-wide engagement survey that wasconducted in 22 languages. The responserate to the survey was very high andfeedback from co-workers was verypositive. Overall Employee Engagementcompared well with general benchmarkdata available, with both our PerformanceExcellence Index (feedback on performancestandards within the Company) and efficientwork practices score at ‘best-in-class’ levelfor manufacturing organisations as determinedby external benchmarks.Performance managementAmcor’s talent management processesensure that co-workers have individual andteam goals and development plans. Amcorutilises these processes to continually workwith our co-workers to improve performanceand provide development opportunities.In April 2012, Amcor also introduced thenew Amcor Leadership Framework. Thisframework outlines the skills and competenciesrequired at all leadership levels to ensurethat Amcor achieves success in all itsobjectives. This framework is the foundationof leadership development at Amcor.Maintaining a diverse workforce andproviding equal opportunityAt Amcor, diversity means the positiverecognition of the differences individualsbring to the organisation and how thoseindividuals work together to capture thebenefits these differences bring to thebusiness. Amcor’s focus is on recruiting,retaining and developing local talent tomanage its businesses around the world,and on selecting from this broad talent poolfor its global leadership roles. Amcor strivesto achieve ‘Talent through Diversity’.Diversity is discussed further on page 48of the Corporate Governance Statement.MarketplaceUtilising our life cycle assessmentcapabilities to offer customers responsiblepackaging, and supporting our customers’sustainability objectivesAs a global leader in the packaging industry,Amcor has the product developmentcapability and technical know-how to drivesustainability throughout the supply chainand the packaging life cycle. Amcor workswith many of its customers to identify themost sustainable packaging option and tosupport their sustainability objectives.Life cycle assessments help customersmake data-based decisions aboutresponsible packaging that take intoaccount sustainability impacts of differentpackaging options throughout the valuechain and across the product life cycle.16

During the 2011/12 year, Amcor completed855 life cycle assessments using ASSET,Amcor’s proprietary life cycle assessmentsoftware. This represents a 30% increasefrom the previous year. The number ofpackaging life cycle assessments in theASSET database is now over 3,000, makingit a valuable resource for Amcor andour customers.In 2012, the Carbon Trust certified that thecradle-to-gate greenhouse gas calculationtool in ASSET conforms to the requirementsof the GHG Protocol product standard andthe PAS2050:2008 standard.Demonstrating packaging sustainabilityleadership by promoting the role andbenefits of responsible packagingWe continued to participate in manyindustry forums, such as the SustainablePackaging Coalition and the ConsumerGoods Forum’s Global Packaging Project,where industry governance frameworksand standards are developed.Ensuring responsible and ethicalsourcing/procurementAmcor is a member of the Supplier EthicalData Exchange (SEDEX), a not-for-profitmembership organisation that enables thesharing of ethical performance informationbetween companies and their suppliers.During the 2011/12 year, we registered allof our manufacturing sites in the SEDEXdatabase. Of those sites, 47% havecompleted the SEDEX self-assessmentquestionnaire (SAQs) and the rest are in theprocess of doing so. Twenty-one customersrequested access to SEDEX information ofAmcor sites during the 2011/12 year.We also supported independent, third-partyaudits of the ethical performance of 16 Amcorsites. This represents a considerable increasefrom the six audits completed during theprevious year and is indicative of theincreased attention our major customersare placing on ethical sourcing.CommunityAs an employer, neighbour, customer andsupplier in 42 countries, Amcor strives tohave a positive impact in the communitiesin which we operate. Investing our packagingexpertise and capabilities, time, talent orfunds in our local communities allowsAmcor co-workers to live the Company’score value of Social Responsibility.Conducting open and constructivedialogue with our communitiesWe have established multiple opportunitiesfor engagement and dialogue with thecommunities in which we operate. Wereceive communications from the generalcommunity via telephone and our website,and we engage with local regulatory bodies.We also host community engagementactivities at many of our sites.Our B9 paper mill development in Botany,New South Wales, was a major area ofcommunity focus this year. Regular communityconsultation meetings were held and thecommunity was kept informed about theproject progress and impactson neighbours.Supporting local community projectsOn a global level, our long term relationshipwith the EarthWatch organisation saw 16Amcor co-workers participate in environmentalprojects in China, Costa Rica and the UK.Community requests for support (e.g. fromsporting clubs and special interest groups)are managed at the local site level withineach Amcor business group. We encourageAmcor co-workers to determine the bestway for Amcor to contribute to thecommunity in which they live and work.This support usually takes the form ofvolunteerism, financial support andcontributions of packaging.For example, the Amcor site in Novgorod,Russia, has a long term partnership withthe local community to collect and disposeof litter. The program includes co-workersvolunteering time as well as financial support.In 2011, co-workers collected 14m³ of litterduring the annual waste collection event –more than twice the amount collected inprevious years. The total volume of wastecollected since 2002 is more than 70m³.Utilising our packaging expertise toaddress social and environmental needsThe Food and Agriculture Organisation ofthe United Nations reported in May 2011that roughly one-third of the food producedin the world for human consumption eachyear is lost or wasted. We support ourcustomers by providing responsible packagingthat reduces waste throughout the supplychain and by protecting food and otherpackaged products until they arefully consumed.Amcor Annual Report 2012 | 17