Amcor Ltd. plans to make some dramatic changes to deal with escalating costs at some of its U.S. and Canadian plants. Some will close, and others will try to pass along their higher costs to customers.
The packaging company, based in Melbourne, Australia, made a series of proposals April 21 aimed at hiking profitability for its Amcor PET Packaging operation. The Manchester, Mich., unit had been hurt by cost increases in its bottle business and the effects of price erosion that have squeezed margins, Amcor officials said during a conference-call presentation of third-quarter financial results.
The company might be forced to pass higher prices to customers in those regions of North America where costs are the highest, said Amcor PET Packaging spokeswoman Shelley Steele. It is considering restructuring contracts and establishing differential pricing for products.
``We're facing a price squeeze,'' Steele said. ``Plants in certain regions ... just have higher operating costs. We're working on gaining the understanding, recognition and cooperation of our customers to maintain service where those plants are located.''
The situation is especially acute in the carbonated soft drink and water markets, Steele said.
The company plans to close some sites on the West Coast and in Canada during the next 12-18 months and streamline overhead at other facilities.
The PET Packaging division has 11 facilities in those targeted regions, including many smaller plants, she said. Amcor's PET bottle unit, which accounts for about 30 percent of total corporate sales, primarily is based in North America.
A majority of the consolidation will come in 2004, leading to annual savings of US$18.3 million (A$25 million), but at a cost of US$44 million to $52 million (A$60 million to $70 million) to restructure the plants.
Managing Director Russell Jones told Dow Jones Newswires the firm will shut three to five plants in North America, but he added that Amcor has not decided which plants will close.
Amcor is launching two other steps to improve the profitability of its PET container unit:
* Establishing long-term contracts that include mechanisms to recover cost increases that cannot be offset by productivity improvements. Those contracts will be applicable especially to the carbonated soft drink market, where volume growth is slowing and costs have increased rapidly.
* Establishing differential pricing for preforms and containers, with pricing adjusted to reflect regions with higher-cost, lower-volume plants.
It may be difficult to raise prices, said several analysts. The company's products are sold in a commodity market with low entry barriers and much competition. Customers easily can walk away to a competitor, said David Solomon, managing director of New York-based investment firm Goldsmith, Agio, Helms & Lynner LLC. ``That's the downside for a commodity,'' he said. ``Too many people are chasing after volume.''
Another analyst, who asked that his name not be used, contrasted Amcor's strategy to buying real estate.
``It's not like buying an apartment in New York for $2,000 a month, compared with buying one in Cleveland for $1,000,'' the analyst said. ``You're talking about a commodity-type product where it's not acceptable to pass costs on to customers.''
PET resin prices have not done Amcor any favors. PET costs have jumped 42 percent since December 2001 and about 15 percent since last December, said Chase Willett, a polyester market analyst with Chemical Market Associates Inc. in Houston.
However, few processors have had much luck passing those costs to customers, he said.
``Major beverage companies at the same time have difficulties pushing their prices downstream to retailers,'' Willett said. ``When was the last time you saw a price increase in carbonated soft drinks or bottled water? The costs are always competitive.''
Yet, Amcor has some leverage in its favor, especially in size, said Liley Mehta, packaging analyst for New York-based credit research film Standard & Poor's. While Mehta does not follow Amcor, she said that some blow molders have been able to gain price concessions by renegotiating long-term contracts.
``The more sales under contract, the better ability to pass through costs,'' she said.
Amcor's Steele said customers will have the choice of paying more to ship from a local plant or moving production to a more-distant facility to keep down prices.
``Some plants just aren't big enough to have the economies of scale to drive down costs,'' Steele said. ``We're talking to key customers and working with them.''
Amcor anticipates profit of between US$275 million and $290 million (A$375 million and $395 million) for fiscal 2004, ending June 30. The company recorded 2003 profit of US$316.7 million (A$431.4 million).
On the flexible packaging side, the company is continuing to reconfigure its plants in Europe and expects to close several more facilities. Amcor's flexible packaging unit has closed six plants during the past three years.
But not all plants are being downsized. Amcor also is completing a 40,000-square-foot expansion of its flexible film plant in Mundelein, Ill., said Amcor Flexibles spokeswoman Karen Allenstein. While the building expansion was completed in late January, the company is adding pouch- and bag-making equipment there now, she said.
The expansion will give Amcor about 180,000 square feet in Mundelein, the unit's North American headquarters. A new extrusion line slated at the facility for late 2004 will give the plant 15 lines, Allenstein said.