Orora Limited (ORA) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Orora Investor Call. [Operator Instructions] Please be advised that this conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. Brian Lowe. Thank you. Please go ahead.

Thank you, operator. Good morning and thank you, everybody, for joining today's call for the Orora Group half year results this morning. I'm joined by Stuart Hutton, our Chief Financial Officer. So now I'll provide you with an overview of the results for the first half of the year ending in December 31, 2019. And then I'll hand over to Stuart, who'll take you through some of the corporate cost, cash flow and balance sheet items. I'll then conclude with an update on Orora's divestment of the Australasian fiber business. We'll cover some items on our strategy, sustainability program and some perspectives on the outlook for the remainder of FY '20. And at the conclusion of the presentation, Stuart and I will be happy to take some questions from the group. On Slide 2, there's some important information I would like to cover before we get into any of the financial details. The financial results and position of the fiber business, as presented -- is presented as a held-for-sale business and discontinued operation within this presentation. Commentary regarding the consolidated income statement presents the continuing businesses. As a consequence, the financial results of the fiber business have been excluded from this presentation, and the comparative period has been restated to reflect the current period presentation. The consolidated balance sheet presents the fiber business as a disposal group held for sale. As a result, all of the assets and liabilities of the disposal group for the current period are presented on one line in the balance sheet as a Current Asset and Current Liability, respectively. The comparative period has not been restated to reflect current period presentation. As a result of the sale of fiber, Orora will now only have 2 segments, and that will be Australasia and North America. Corporate costs have been allocated to these segments, and comparative information has been restated to reflect this change. In addition, the lease accounting standard change came into effect on the 1st of July 2019 and has been applied since that date. Comparative information has not been restated. Throughout the call, if I refer or Stuart refers to underlying figures, we're excluding the impact of the lease standard. The impact of the lease accounting standard is also set out in Appendix A at the back of the presentation. So a lengthy disclaimer there, but a lot of moving parts in terms of changes in the business with the fiber sale and also the lease accounting. But we can work through any specific questions at the end of the call as well. So we'll turn to Slide 3, which is the half year results for our continuing businesses. As we communicated at the AGM, with the backdrop of challenging trading period, the NPAT was down by 13.3% on the prior corresponding period to $76.6 million. The Australasia continues to prove to be a robust business for us, with earnings up on the back of high can volumes, whereas earnings in North America were lower, with challenging market conditions persisting. Operationally, the business saw an EBIT decline by 4.1% through weaker earnings in North America from margin pressures and volume weakness, rising input costs and volume/mix in glass. This was partially offset by stronger can volumes, positive translational FX impact from U.S.-denominated earnings of $2.8 million on the prior corresponding period and the positive impact of lease accounting, with $9.2 million at EBIT level and $1.7 million at the NPAT level. The Board has declared an interim dividend of $0.065 per share partially franked to 30%, and the payout ratio is above our indicated payout ratio and reflects the continued confidence that the Board has in the outlook of the continuing businesses. Cash conversion was 72%, down marginally on the pcp but in line with management's expectations, reflecting the capital investment and inventory increases in the glass business as part of our G2 furnace rebuild, which is now underway. And working capital support Cans' volume growth, largely offset by the final benefit from the extended trading terms on aluminum imports. Return on average funds employed was 19.2%, down from 21.9% in the prior corresponding period. Slide 4 talks about safety, which is a very important piece for Orora and a key priority of mine, and something we've been working tirelessly on to drive our -- what we had in our FY '19 year results, where we had a recordable case frequency rate going up. We're really pleased to report that that now is reversed and heading in the right direction. We did have a slight increase in our lost time frequency rate, but it's encouraging to see that we're making progress across the business. We have completed our global independent review of safety practices, which has highlighted a number of areas where we have really good safety practice in the business, but it's also highlighted some opportunities for us to better prioritize and harmonize safety improvement actions, and that's what's underway at the moment. The implementation of a number of these recommendations will be taking place over the rest of this financial year and into FY '21. The focus remains on ensuring our people have access to best practice tools and processes, and we're committed to driving further improvement in Orora's safety performance. Turning now to Slide 5 and the Australasian highlights. Sales grew by 2.4% during the period to $412.2 million. Earnings were higher driven by higher can volumes, partially offset by softness in export wine, increased insurance costs and some other import costs. The Cans business was strong, with a trend of switching from other substrates continuing, growth in both mainstream and craft beer segments and increased volumes in other nonalcoholic beverages also are continuing. Glass volumes overall were in line with the prior corresponding period. But we had lower volumes in some wine segments, partially offset by continued market share gains in beer and increased volumes in other nonalcoholic beverage segments, such as Kombucha. EBIT was up by 1.8% for the half to $82.6 million. We are continuing to invest in our beverage business. And in the half, this included investment in new state-of-the-art digital proofing center at our Cans' Dandenong facility in Victoria, and this will materially improve the time taken to produce prototype designs, and do short runs for promotional products to support our customers who are increasingly seeking product customization, so a true differentiator. Completion, on time and on budget of our new warehouse at Gawler, and this is to hold inventory on-site and further reduce off-site pallet storage and transportation costs. The project was completed on time and on budget in December 2019, with final commissioning of the autonomous pallet-stacking vehicles due by the end of Q3 this year. The investment is expected to deliver a return of approximately 15% by reducing cost of the off-site storage and cartage. These benefits will gradually come through in the second half of FY '20 with the full benefit to be achieved in FY '21. Preparation work for the rebuild of our second furnace at Gawler, which is scheduled to be completed in April 2020 is well underway. The total cost of this rebuild is approximately $50 million, and we've spent roughly half of that in the first half of FY '20, and the remainder will be spent in the second half of FY '20. And the return on average funds employed was 31.4% in Australasia, down very slightly from 31.6% in the prior corresponding period. Slide 6 shows an EBIT graph. You can have a look at the bridge between the previous period and the current period. And it shows that earnings growth consisted of $6.1 million of organic growth largely driven by increased can volumes, which was offset by input costs headwinds of $5.1 million, and that included increased insurance costs, and there was about $0.5 million positive impact attributed to lease accounting, so a relatively small amount within Australasia. Slide 7 is the North American highlights. It was a challenging half, no doubt, in our North American businesses, with tough market conditions we experienced in FY '19 continue in the first half of FY '20. While in U.S. dollar terms, sales grew by 10.5% to $974.1 million for the half, EBIT declined by 17.2% to $34.6 million. This is a result of generally lower volumes and margins in OPS and earnings reset in Orora Visual from the deferral of some major customer campaigns, some subdued trading conditions in the Packaging and Entertainment segments and the loss of several key sales representatives post the harmonization of our compensation structures, which happened at the start of the financial year. These, combined with some other factors, flowed through to the EBIT margin, which is lower at 3.6%, down 110 basis points from the prior comparative period. North American cash conversion has continued to improve and was 74% in the half, up from 58% in the prior corresponding period, while our RoAFE declined by 360 basis points to 11.7%, with lower earnings and the initial dilutionary impact of the Pollock acquisition. OPS delivered constant currency revenue growth of 14.5%, all from acquisitions with underlying revenues stable. This was largely a reflection of the challenging market conditions experienced across the OPS business. Pleasingly though, earnings momentum has started to improve throughout the half. The underlying EBIT for the first half of fiscal year '20 was higher than that in the second half of fiscal year '19 as the impact of the various improvement program initiatives gathered traction. Underlying EBIT margins in OPS declined to 3.5% from 5.1% in the prior corresponding period, which was stronger -- which was a stronger comparative period from an overall performance. But the margin was up on the second half of FY '19, which was 3.1%. So we are starting to see some margin improvement half-on-half. The margin decline compared to the prior corresponding period was the result of generally tough market conditions, the dilutionary impact of the Pollock acquisition as well as the impact of being unable to pass through some raw material increases, which is progressively happening from a price increase taking place in recent months. Margin has continued to steadily improve since the reset encountered in the second half of FY '19. In Orora Visual, as mentioned earlier, it was a disappointing trading period. That said, management is committed to the business and improvement programs are in train. A number of new sales representatives have been appointed, and good progress is made in Q2 on increasing revenue with existing customers, and several new accounts have now been on-boarded. The business continues to improve collaboration to drive efficiencies across all the sites in that business. While a number of improvement initiatives are already underway, there are further opportunities to drive profit growth and improved returns. The focus going forward will be on building management capability and driving execution. On Slide 8, we have a slide showing the underlying EBIT margins that are improving in the business. If we drill down and we look at the margin since the reset we had in the second half of FY '19 when we saw a decrease, so in response to the margin reset, OPS developed a comprehensive improvement program across all facets of the business, with a focus on volume growth, margin recovery, efficiency and cost reduction. While a number of initiatives have already been implemented and are delivering, activity is continuing and will take time to reach its full potential. Examples of some of the initiatives implemented thus far include the restructuring that removed over 100 roles from the business in Q1 FY '20; the introduction of an OPS-wide price increase, which is mainly focused on some of that cost recovery, there was a lag, and this was done late in Q2 and have an impact from Q3; gross margin improvement initiatives, leveraging the recent implemented ERP system to support decision-making on price, procurement and cost to serve; the in-sourcing of more corrugated volumes from the Orora Manufacturing division to improve utilization and, therefore, margins; and to improve customer service levels as a result of the ERP implementation, which has provided sales representatives with further capacity to target new business. Several new accounts have subsequently been on-boarded late in the calendar year 2019. Slide 9. Now if we look at the earnings bridge for North America, the U.S. businesses were both impacted by generally tough market conditions. Volumes and margins in OPS and the earnings reset in OV all contributed to lower earnings. This meant an overall contraction in EBIT of $7.2 million versus the pcp. This included an $8.7 million benefit from lease accounting. The positive impact from the weaker average Australian dollar was $2.8 million in the period. And going forward, a $0.01 movement in the A dollar versus the U.S. dollar on an annualized basis equates to approximately a $1.4 million foreign exchange translation gain on EBIT and about $600,000 at the NPAT level. Slide 10 is the Orora corporate piece, where I'll hand over to Stuart to cover.

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Yes. But before I cover some more of that detail, I would like to acknowledge and draw your attention to an announcement that was made today regarding Board succession, as outlined on Slide 10. Orora's inaugural Chairman, Chris Roberts, has announced his retirement from the Board effective today. And I think it was announced sometime last year that Chris' intention was to retire this year. Chris will be succeeded by Rob Sindel, who joined the Board in March of 2019. As part of the continued Board renewal, which included the appointment of Tom Gorman back in September 2019, John Pizzey, who has been a Director since Orora first listed back in December 2013, has also announced his retirement, which will be effective the 31st of May 2020. The Board will then consist of 5 nonexecutive directors as it did at demerger, which the Board sees as appropriate for the ongoing Orora business. And I'd certainly like to thank Chris for his outstanding stewardship of Orora since demerger and also acknowledge John's strong contribution to the company, also one of Orora's inaugural nonexecutive director. So now I'll pass it over to Stuart.

Great. Thanks, Brian, and good morning or good afternoon to all. I'll just take you through some of the other changes in terms of how corporate costs, et cetera, will be treated. So as Brian mentioned earlier, in a change from prior years where we had 3 segments as a result of the sale of -- of the pending sale of fiber completion of that transaction, Orora now only have 2 reporting segments: Australasia and North America. So going forward, corporate cost will be allocated to these continuing business segments on a consistent basis, with any specific items that will impact those allocations called out as appropriate. To assist in obviously comparing this year, so this half's start of the prior year figures have been restated, I suspect some of you on the call have already been able to work out the allocation to North America because it's simply the delta between last year and what we are now saying. In terms of underlying corporate costs themselves, they are broadly in line with the previous years. Once the sale of the fiber business is complete, we expect corporate costs to reduce and do not expect any stranded costs. I guess in terms of where we are right now, we're in a transition period, so this reset will come into effect from the start of FY '21. As the rest of this year, assuming completion happens, as Brian will talk about a bit later in terms of time, we still got some -- a fair bit of work to do to transition and affect that transaction. Perhaps on -- even though it's a legacy issue, and while it remains complex, it's important just to let everyone know that the decommissioning of the Petrie site is progressing as expected. Approximately $10 million was spent on decommissioning in the half with a similar level of expenditure likely in the second half. And in an overall sense, we are on track to complete that decommissioning, hopefully, towards the end of FY '21 or early FY '22, which is consistent with what we updated the market on -- at the end of last financial year. Turning to Slide 11 on cash flow. And I think at an overall sense, I mean the business is still -- well, we got some trading headwinds, which Brian has talked about. The increased earnings that we -- or the earnings that we have, we successfully converted those into cash, with operating cash flow at $127 million for the half. This was slightly down on the prior corresponding period by about 9%, but I'll talk about why shortly. Cash conversion was 72%, down from 75% in the prior period, with improved working capital largely offsetting -- or largely offset by capital expenditure on the G2 rebuild, which, as we know, is an event that happens every 5 years in the Orora calendar. Average working capital to sales is higher versus the pcp at about 8.4%, with the increase largely attributable to increased inventory during the year and OPS taking advantage of settlement discounts. Obviously, the benefit of settlement discounts outweighs the interest cost. In the half, we invested approximately $60 million to support organic capital projects and innovation. Most of that has to do with G2, which I'll talk about in a sec. The total CapEx invested represents approximately 160% of underlying depreciation, and that, to be clear, excludes amortization of lease assets and is a positive endorsement of the strength of the management's commitment to the continuing businesses. In terms of guidance for net CapEx in the second half, with the rebuild of G2 furnace and commissioning of the warehouse development of glass, capital expenditure, which is both base and growth, is expected to be approximately 150% (sic) [ 160% ] of underlying depreciation, which is expected to be approximately, to help you, about $80 million for FY '20. In terms of guidance for the year with the cash conversion. In light of the factors I just outlined, we expect it to be approximately around that 70% level for FY '20 in total. And I think -- and again, Brian will touch on a bit later, but we'll reassess appropriate cash conversion levels, et cetera, as part of our assessment of appropriate debt levels, et cetera as well beyond the completion of the fiber transaction. I'm on Slide 12 here, which is really just around the balance sheet and our debt position. And again, this is the only chart in here that obviously refers to group metrics because it is at a group level. This is established rather than just continuing businesses only. But again, it highlights a consistent theme that Orora still has a strong balance sheet, which again, despite the level of investment made in the first half, has us well positioned to invest in further growth as appropriate. At December, net debt increased to about -- just under $1 billion with leverage of 2.3x, up from 1.9x at June '19 and 1.8x at December 2018. The current leverage of 2.3x is well within our management -- our current management's target range of between 2 and 2.5x and provides us with the capacity to do what we need to do in the foreseeable future. Although at the moment, it's quite clear that the focus is on -- apart from here in the beverage part of the business in Australia, the focus in North America remains on dealing with improving the business. As a company, we remain committed to maintaining sensible debt levels and investment-grade credit metrics. And to this end, we have sufficient -- significant capacity and headroom in our facilities, with undrawn capacity of approximately $250 million and cash reserves of over $80 million at 31 December. Obviously, the net debt position will change positively on the completion of the fiber sale which, as I said, Brian will update you on shortly. At that time, as mentioned before, we will provide an update to the market any changes to our targeted debt levels and capital management arrangements. In terms of debt facilities, Orora refinanced one of its $50 million bilateral facilities, which is due to mature in July 2019. This is now due to mature in January 2022. This was renewed on similar commercial terms to the prior facility, and the average weighted life of Orora's facilities is currently 3.5 years. And just in closing, I mean our principal focus is to use our strong financial position to invest in acquisitions and organic growth opportunities that will generate future shareholder returns. But as I said, for now, our focus is really on organic activity here in Australia with completing the rebuild of the G2 furnace, but more importantly, North America addressing and continuing the journey on improving that business. So with that, I'll now hand over to Brian. I will hand back to Brian to give you an update on the fiber sales strategy and the perspectives for the remainder of FY '20. Thanks.

Thank you, Stuart. So we're on Page 14. On Slide 14, the fiber divestment. To recap, back to 10th of October 2019, we entered into a binding agreement to sell the Australasian fiber business to a wholly-owned subsidiary of Nippon Paper Industries for an enterprise value of $1.72 billion. The transaction includes Orora's fiber packaging, paper recycling, cartons, bags, functional coatings and what we termed our Aurora WRS Packaging Distribution businesses in both Australia and in New Zealand. Completion of the sale is expected to occur during the first quarter of this calendar year and is subject to some customary conditions, including regulatory approvals. As previously announced, following the completion of the fiber sale, Orora intends to return approximately $1.2 billion of the sale proceeds back to shareholders. We're currently working on a -- with the relevant tax bodies to determine the most effective way to do that. The options do include cash return, comprising of part capital return and a partially franked special dividend and an on-market buyback. So further details in relation to the timing and the nature of the capital management initiatives will be provided in due course. Once capital management plans are determined, these will require a shareholder approval at an extraordinary general meeting, and our aim at this stage is to return the majority of funds to shareholders by the end of this financial year. Moving now to Slide 15 and an overview of the path forward to outperformance for Orora. Given it's my first results since taking over as the Managing Director and CEO last October, I wanted to share an overview of the journey ahead as I see it today. Clearly, the first half has been challenging in North America, and an important focus for me is to be in work with the management teams in both OPS and OV to reset and rightsize the cost base of those businesses to match the market conditions. We've also developed a comprehensive business improvement program, which is well underway in OPS. And as mentioned earlier, we've seen these initiatives progressively gaining traction. While OV is a much smaller part of the equation in North America, OV has similarly established and implemented its own business improvement program. The clear priority in North America is to return to profit growth, and we expect the benefits of the business improvement programs to build through the second half of FY '20 and beyond. From my previous experience, including in fiber, I know that that's taken time for these initiatives to deliver. We remain positive on North America and see significant organic and inorganic potential in the region. And this is through leveraging the breadth of product offering, service and the nationwide distribution network Orora has built over many decades. Clearly, we have work to do to return to profit growth, and this continues to be the priority for me and for the North American management teams. I'm spending a lot of time on the ground in North America and will certainly continue to do so for the foreseeable future. And while a reset in North America is a key focus, with the sale of the fiber business imminent, Orora also has an important opportunity to assess and shape the strategic path ahead for the broader business. Like many sectors and businesses, Orora's external environment has evolved rapidly in the recent years, and this has brought both challenge and opportunity. We've spoken a lot this morning about the challenge, but we also see plenty of opportunity for Orora to leverage its competitive positions and point of difference to grow. And Orora is fortunate to be on the right side of trends in sustainable packaging, particularly in Australasia, and we believe we will continue to benefit from this as customers switch to sustainable glass and aluminum substrates. I'll touch on this further in a moment. A review of Orora's strategy is an important step on Orora's journey, and to assess and shape the future strategic direction of the business, so we can both assess how to optimize and grow the business. Orora's new group General Manager of Strategy commenced with us in January, and he will work with me and the broader leadership team to review all aspects of Orora's strategy. The primary focus of this will be on our continuing businesses and will include growth options. Our investment hurdle rates and capital management will also be reassessed to ensure that they are appropriate for driving long-term shareholder value. And I look forward to sharing further details of Orora's strategy in due course. As has been the case in demerger, Orora places a high value on the culture that we're developing since our organization. We believe it drives our performance and, ultimately, a competitive advantage. As such, Orora will also take this opportunity to shape its culture to ensure it meets the needs of the future of Orora businesses. This will include retaining the values that have underpinned our business, but at the same time, recognizing that the future of work is different, and that to thrive through change Orora must -- Orora needs in the next generation of culture. As we move forward, I want to emphasize that the hallmarks of Orora: safety, talent and our unrelenting customer focus, coupled with commitment to innovation, sustainability and financial discipline, remain key foundations and disciplines for our business. Moving to Slide 16, on sustainability. As I mentioned earlier, sustainability continues to be an important focus for Orora. By the end of 2019, Orora had met all of its 5-year EcoTargets on CO2 emissions, Waste to Landfill and Water Use. Since then, Orora has commenced work to implement the recommendations of the Task Force on Climate-Related Financial Discipline (sic) [ Task Force on Climate-Related Financial Disclosures ], or the TCFD, which is a little easier to say. And we intend to use the outcomes of this analysis to key -- as key inputs in the formulation of our new EcoTargets, which obviously will look different given where our business is going to be different post the fiber sale. In addition to the EcoTargets, Orora undertakes and continues to participate in a number of sustainability initiatives. In North America, Orora has maintained a Sustainable Forestry Initiative certification for several of its North American sites. We have continued to expand our Supplier Assurance Framework program, which is designed to identify and mitigate human rights issues within the supply chain. Assessing human rights risk is now a standard procurement component when onboarding new suppliers. The Supplier Assurance Framework program is also an important part of addressing Orora's obligations as a statutory to the UN Global Compact as well as the requirements of the Australian federal government's legislation on modern slavery. We continue to focus on renewable energy initiatives across our sites, and in the half, have put in place 3 small-scale rooftop solar systems in our beverage locations. Following completion of the sale of the fiber business, Orora will retain the South Australian PPA to supply renewable energy to its remaining manufacturing operations on the Eastern seaboard. And while Orora's sustainability journey is ongoing, we're taking proactive actions to reduce emissions and waste and build a more sustainable business long term. So Slide 17. At Orora, we are certainly proud to be a leading manufacturer of sustainable packaging, and we'll continue to have this view, not only as a point of difference but drive it as a competitive advantage. We currently recycle approximately 80% of all the glass collected through South Australia's container deposit scheme, and this is used in our glass facility in Gawler in South Australia. And we're actively exploring opportunities to economically source recycled glass for Gawler from other states as they introduce these container deposit schemes. And at Cans business, Orora sources coils of aluminum that contain approximately 70% recycled aluminum to make these beverage cans. And during production, leftover aluminum is collected and sold back to the aluminum manufacturers where it is recycled. In North America, our corrugated board manufacturing by OPS contains approximately 70% recycled content, largely sourced from B9, our mill in Sydney. This supplier relationship will continue after the sale. Working closely with customers, Orora is continuing to design and develop innovative recycled packaging that appeals to consumers and is sustainable. Our clear intent is to be at the front of the curve on these initiatives. Turning to Slide 18. You can see what we've set out to do in terms of creating shareholder value during the period. While we don't shy away from the challenges we faced in North America, we continue to grow earnings in Australasia, and we're returning dividends to shareholders above our indicated payout range, and investing in growth capital and innovation across the group. We firmly believe and are committed to generating further shareholder value in the year ahead. Slide 19 will cover some perspectives for FY '20 and the rest of the year. Clear priorities for us are to continue to implement and improve the programs in North America. There's no doubt that that is a clear focus for our business; complete the rebuild of the G2 furnace in Gawler; and to complete the sale of the fiber business, including the capital management return to shareholders. In a trading sense, we are expecting continued challenging conditions in all markets in which Orora operates. The uncertainty in Australia has heightened with the severity of the ongoing drought and recent bushfires. The potential impact of the emerging coronavirus across both Australasia and North America only adds to that uncertainty. Our gross total Capex, that's base CapEx and growth CapEx, is expected to be 150% of depreciation, as Stuart mentioned, and this is to drive investing and completion of our new glass warehouse at Gawler and the G2 furnace rebuild that we mentioned. There will be an adverse earnings impact in the second half of the rebuild of approximately $8 million on our glass business. The North American businesses are both investing in digital platforms to enable improved interaction, efficiency and engagement with customers, which is something we're absolutely committed to. And as it has done consistently over recent years, in addition to pursuing organic growth and to offset ongoing input cost headwinds, the Australasian business will continue to identify and implement cost reduction activities, invest in asset upgrades, new capacity, new sites and utilize the Orora Global Innovation Fund Initiative. Orora has successfully secured new gas supply arrangements with multiple parties for 2 years. The anticipated net cost headwind of this gas arrangement has increases in the second half for us of approximately $1.5 million, with a further $1.5 million impacting the first half of FY '21. Insurance costs have also increased sharply. The estimated impact in the second half is a further $1 million. The focus for the North American business is to consolidate and deliver on the restructuring programs. This is to drive sales growth, margin improvement and improve cost efficiency. OPS will continue to integrate the Pollock business with a focus on delivering synergies as soon as practical. And in regards to outlook, and this is consistent with the outlook previously provided at the AGM in October 2019, Orora expects challenging market conditions to persist for the remainder of FY '20. These, coupled with the financial impact of the G2 rebuild in H2 and the time for the North American impact or -- improvement of the initiatives to be fully realized, we're expecting results from reported operating EBIT for the continuing operations to be lower in FY '20. Orora will continue to invest in efficiency, growth and innovation as well as integrate recent acquisitions and finalize the sale of the fiber business during that period. So thank you all for listening. We'll now open the line, operator, for some questions.

The first question we have is from the line of David Errington from Merrill Lynch.

Stu, can I ask a question on -- no surprise, North America? And I'm going to go through the numbers pretty slowly, so you can't accuse me of just throwing numbers at you. But I'm going to piece together the waterfalls of the last 3 periods, your first half year, your full year and then your first half previously. Now this year, in the half, your net contraction was $18.7 million. That's on Slide 9, $18.7 million. Now in the full year of '19, the contraction was $12.2 million for the full year. Now that's -- this is just off your press. So you contracted $12.2 million in North America for the full year of '19. That's excluding currency. This year, in the first half, you contracted $18.7 million. Now in the first half of '19, you grew by $3.2 million. So that means that your contraction in the second half was $15.4 million, excluding currency, excluding leases. And this half, you contracted $18.7 million. Now you've said in previous statements that the Pollock acquisition would contribute around $3 million in the second half of last year and would contribute around $8 million this first half. So if you put that basic math in from the acquisition, you've contracted this half, excluding Pollock, around $26.7 million, and you contracted in the second half by $18.4 million. So there's been a significant step-up this half in the contraction rate, excluding the acquisition. Now unless Pollock has come on board and been a bit of a miss and hasn't come on as what you planned, which obviously that's a point that I'd like you to address. But my question now is -- obviously, they're the numbers as you presented, they're statements, they're facts. That's done, that facts. Okay. The contraction rate is escalating, and you basically made comments that OPS is looking at stabilizing in the cost outs. If that's true, OV, the profit contribution must have just been wiped out. It must make no money in this half. It must have just gone to almost 0, almost loss-making. And that's the second part of the question. So can you come in and give us a little bit more detail behind what's happening in the North American business in terms of those numbers? Because it looks to me, even though you're trying to give us comfort, Brian tried to give us comfort that you're on top of it, it looks to me that the losses or the contraction in the earnings is escalating when you take into account those numbers and the acquisition of Pollock.

Thank you, David, for your learned work there. I'm not going to dispute any of that. We're not stepping away from the challenges we face in North America. I stepped through some of your commentary that -- and again, the delta you talked about are what they are. We're not stepping away from those. I think our view is, as we move forward in OPS, the first thing we had to do is, I guess, address that slide, in -- as you pointed out there. So I think the steps we've taken and the program that's in place, we are comfortable that that is taking shape. And if you look at that margin chart, which is Slide 8, we could see that the margins are moving in the right direction. But again, you may also recall in the prior corresponding period. So the first half of FY '19 was, in retrospect, a stronger period, so it was a pretty strong comp. So the delta against this half, against that half is obviously -- we flagged was going to look pretty bad, and it does. So that's not new news to us. On some of your other points, I mean we can step through some of the improvement initiatives in great detail. But what I'd say to you is where our -- we know that this program is delivering because in most regions inside OPS, we have seen improvement year-on-year. The major issues we have are in our larger market. And I think California, and Southern California specifically, seems to be an economy that is doing it tough. And for us, that has a double impact. It has an impact in the distribution business. And then because of our manufacturing footprint that largely is in place or in situ in that part of the U.S., we have a, if you like, a doubling of the impact. So that's what we have seen in this first half. Now again, we can see a way through that. As I said, because we know that the improvement programs that we've got are working in the other parts of the market. So we know it works, with just, I guess, execution-wise, the southern part of California has not been as laser-like as we would like.

Stuart, if you put the numbers in different way, put the numbers a different way, take out the acquisition of Pollock, and your underlying EBIT this half is down 50% pcp. So it's down 31%, with an $8 million contribution from Pollock, you're down 50%. So how can you say that your programs are working? This isn't a minor decline. This is a major skelping to your earnings.

Again, David, we're not -- as I said to you, if you go the --

In other words, why should we have confidence that you guys can stabilize this, let alone turn it around, when your first half is down 50% pcp? I mean the serious question has to be, why are you committing to this? Why don't you just say, look, take your losses and get out? Because the next one, how much is own goals compared to just market deterioration?

Very hard to separate that out. I mean let me go through some of your other questions because your comment on Visual is correct, so ...

So it's not making any money at all? Visual's just 0?

In an EBIT sense, in this half, Visual was effectively breakeven. That is correct. So that -- they had a very ordinary first quarter. They had a better second quarter, and they needed to. But that basically got us to a breakeven position.

So all that money you put into all those investments, that's gone, gone. Great.

Well, if you said, look at this period in isolation, I think you have to say, that's how the numbers look. But we -- again, this is about where to from here. So I think the building blocks from Q2 over Q1 are certainly encouraging. We've still got work to do. Again, we're not saying we're declaring victory here, David, but we can see opportunity. And again, I'd say, in that sense, you asked about what's own goals and what's market. I would say it's probably 50-50. I think yes, we referred to harmonizing the compensation plan for the sales force in OV. I think with hindsight, we would say that we didn't execute that as well as we could, and that has created some disruption certainly in the first quarter. But again, we've seen improvement in the second quarter. I think another element of your question was Pollock. I think the numbers you're talking about, I think, they, in our eyes, they're like an annualized number. So we're sort of 70% of those numbers. But -- and we're at or near that expectation. So Pollock, if you want to look for highlights, has been a more positive story than a negative story. But that doesn't -- I mean that doesn't shy away from the other points you're talking about, which is, we have got some -- we had some -- a pretty severe reset of the OPS business. But as I said to you, in all regions, apart from the Southwest, which is really Southern California, we are seeing positive progress from these initiatives that are in train.

And I think to add to Stuart's point, when we look at the impact of those initiatives, we're starting to see, certainly, the gross margin level as well increases across really all those regions. So we are seeing it take hold. Yes, if there's some, right, clearly some revenue challenges we have in the southwest that we're also dealing with and have increased the focus and resources from a sales perspective to try and deal with it. It is a big hole, David, to deal with and dig out of where we're -- considering where we were going back a few periods ago. But we're confident that we've sort of hit bottom, and we're building out of that as opposed to -- we think it's still on the slide.

So thanks for your analysis. Well done.

Well, I don't like the analogy to the Gold Coast Suns, but it's probably been asked. But you know that joke, Stu.

I'm aware of that. Anyway. Now your points are well made, David. So it's not as though -- as I said, we're not certainly shying away from it. And for all those listening, we are certainly not shying away from it, and we've still got some work to do that we -- the opportunity is there.

And it is getting the appropriate or proportionate level of attention where those particular issues are.

We have the next question from the line of Owen Birrell from Goldman Sachs.

It's a tough act to follow there, but I'm also going to just sort of delve into the North American market. At the, I guess, the first quarter, the end of first quarter, you gave us a bit of an update on the market conditions there, saying that that first quarter was particularly tough. I'm just wondering if you can give us a sense on what the trading conditions were like in North America into the fourth quarter. And what you're seeing into this current sort of March quarter at the moment.

Yes. Look, if we're talking about we're getting help from the general economy or market, I think the answer to that is no. We're not really seeing any change in that. So then you -- I guess when you're not getting help from the market, us and our competitors are looking for opportunity certainly from a growth perspective, so you get an increased level of competition in certain parts. And as Stuart referred to, in the southwest, we've seen a bit of that also. So our focus is around where do we see that we can get or, overall, help ourselves in terms of growth. And we are starting to see some traction on the revenue line across a number of regions that we think will build on that. And the vast majority of the focus is on the self-help items to improve margin where we've either got customers or product lines that aren't delivering to expected levels, that we can manage that or work in a procurement angle and rebasing our structural costs, which we've spent a lot of time on in the latter part of calendar year '19. But we're not really seeing any indications at this point that we're going to get any help from the economy in the segments that we supply to.

Can I ask? So I'll just ask the question again. I guess the December quarter, was that -- was the decline you saw in the December quarter worse than what you saw in the September quarter?

No.

No, I think if you -- again, last -- I think, yes, when we talked about FY '19, if you took the average of what happened first half and second half of FY '19, I would say that was the real run rate. Because the first half, there was clearly in the customer land, there was a pipeline fill or a stocking activity underway. And then in the second half, that became a destocking activity. So that the -- perhaps the -- as I said, the first half was inflated and the second half was, you can argue, was deflated. So we -- I think from a run rate for -- certainly for OPS, it's probably the average of what was FY '19 was the number. So yes. And I think off the top of head, David (sic) [ Owen ], you'd had this number, but it's -- last year, I think it was about, in round numbers, I can't remember, but I think it was -- Brian, help me. It's about -- or North American total value [ in new business ] for the sake of this, OPS was around high 60s. That's the sort of run rate that the business -- we expect to get that business back to this year.

And can I ask, are you seeing that into the March quarter of this year? So is the rate of decline, has that actually turned positive for the March quarter? Or are we still expecting further contraction year-on-year for that March quarter?

Look, I think it's a bit early to call the March quarter at this point, Owen. But in a positive sense, January was -- this year was better than last year.

January last year [ was not good ].

And the other -- I guess the other question I have around the market is there seems to be a fair degree of disruption coming through into the full-service providers like yourself from more online-based platforms or import products. Do you have a sense of that rate of disruption? And is it getting any better or worse or stabilizing?

Look, I think where that's -- whether it has gained some traction is really at the base commodity end of products, which obviously are just pure buy-sell. And our business over the last several years has been morphing itself more to a solutions provider and value-add provider. So we're trying to play in a different market to that. So in terms of its impact on us, I think it's been quite minimal.

You would surely have to price match at that level of those commoditized products that you would supply in conjunction with your high value?

Yes. Look, if we're only supplying to a customer who only bought that one commodity, that may be the case. But a lot of cases, we supply quite a range of products to a customer. So it's offered as a broader suite. So you don't price match any individual item that they may be able to get in an isolated case.

Okay. And just as another question on OV. You mentioned the substantial sales departures that occurred during the period in that entertainment segment. Can you give me a sense of what proportion of sales entertainment represents or did at that point?

It's -- entertainment was about 10% of OV revenues.

And from what I remember, within the OV business, entertainment was seen as one of a sort of national platforms that was seen as a big growth opportunity for OV. I'm just wondering what went so wrong with your ability to retain those key sales staff there.

Well, I mean the entertainment segment referred to as more to, let's say, the movie entertainment segment as opposed to what will be broader customers that we would service on a national footprint. So it's probably quite isolated to one part of the business in one location. And given that these businesses were the amalgamation of a number of acquisitions that Orora has made, that we're on completely different commission structures. So they did have a different arrangements for a different location, and therefore, the impact potentially on those individuals in that segment was potentially greater than in some of the other locations. And let's just say it was disconnected to the growth and the profitability of the business.

Okay. And is there -- are you comfortable that there is no risk that you see subsequent departures in other regions because of similar commission structure changes?

Look, we -- this is now going back to probably 7 months ago now. So there's been a lot of work done since then in terms of working with the teams and ensuring that we, in addition to adding new people into the organization to fill those spots, and we've done that in the majority of cases and are seeing some positive signs in terms of their relationships with those customers, we are absolutely staying close with the rest of the teams to manage that carefully. So we wouldn't expect this to be an ongoing or increasing risk in our business. It should be a diminishing risk.

We have the next question from the line of Richard Johnson from Jefferies.

Brian, sorry to flog a dead horse. But just -- I think I heard you say that you were committed to both the U.S. businesses, the OPS and OV. And I know obviously it's early days, so I kind of apologize for asking this question. But in relation to OV, I was just wondering kind of what you see as the attractiveness of that business, particularly when you think about the fact that it's really driven more than anything else by sales and marketing budgets rather than general economic activity, which is what would be the key driver of OPS. So there doesn't seem to me anyway to be much linkage between the 2. And it is not unreasonable to question whether sale of advertising and marketing-type businesses are better off sitting in an advertising or marketing-type business rather than a business whose DNA is completely different.

So certainly in terms of some of the processes and capabilities that the actual OV business has, when you look at the manufacturing sites of what we do, part of it is the point of display, part of it is supplying printing capabilities for a number of different industries. Now, we are quite a large supplier into the horticultural industry. We do all of the tags of the plants, for example, that go through Lowe's. They're a large retailer. So we have a number of different segments we supply that aren't just related on that sort of marketing budget. And the focus for us is about maximize the capability of that business over the next period of time. You're right. Many people will ask us, is that a logical thing for us to retain long term? I don't think that's something we're focused on at the minute. It's really just about making sure that we can get the business operating as effectively as it should be. We've put some capability across the country that has now given us the ability to support customers on the East Coast and West Coast of North America that our competitors do not have. And whether that's fabric printing capability or some other specific color matching capability, that is gaining some traction. So when we talk about the poor performance we've had, it is really isolated to one particular segment, which absolutely has hurt us. But more broadly, we still have confidence in the ability to grow and get some value out of that, and that's really the focus. So before we make any other assessment, we want to make sure that we get the most out of it.

Right. And can I assume that it's not going to require any incremental investments to get it where you want it to?

At the moment, our capacity that we've installed gives us quite a bit of capability to grow.

Okay. Perfect. And then if I just switch over to the domestic business, and I look at your waterfall chart and your organic growth of $6.1 million, does that understate the growth in Cans?

Yes. Rich, it's Stuart here. It's a net number. So I mean as we refer in terms of Glass, it was pretty stable in the period. So most of the growth was in Cans. So I wouldn't say understated, but that's -- if you -- again, depends on what assumptions you make on how big Cans or Glass is. But yes, that's sort of -- most of the growth was in can.

Okay. So if I just assume Glass was flat year-on-year, Cans was up $6 million. Correct?

We -- yes. That's in that bar. You got to think that some of those cost headwinds we've called out on the next bar are also attributable to -- some to Cans, some to Glass. I mean I think the way that closes. So it's not just Cans grew and Glass went backwards, okay? That's a little -- Glass -- I mean I think the other thing that's -- I mean there's no doubt Cans is growing, which is really positive. But with that growth there, we're having some, what I would describe as some operating inefficiencies, because we're effectively now rather -- in days gone by, we used to be able to take our plants down for scheduled maintenance. With the demand we have, we're effectively not able to do that. So what's happening now is we're effectively having to do the maintenance on the run, and that's creating some inefficiencies or some disruption to the manufacturing processes. So that -- some of that growth is being at the moment -- and it's up to us to fix because, clearly, we believe we can. But there's some inefficiencies that are in that cost headwinds number as well that relate to Cans.

Got it. Got it. That's great. So just to clarify then. I can assume that Glass did not go backwards?

No. No. Glass, as we said here, Glass earnings were back period-on-period. But as said, it's not that Cans was high and Glass go backwards.

Got it. Okay. Sorry. I missed that. And then how should I think about Glass going forward, particularly when I take into account, and this is obviously short term, but some of the commentary coming out from your major customers around export volume?

Look, I mean well, certainly, if we look at short term, I mean this year, doing a rebuild of G2, we've got the furnace out, so that constrained our capacity in the short term. So we're supplementing that through some import options to make sure that we balance that out. So I don't think it's a shortfall of demand versus what we can make. So where we've got some balancing that we will need to do. And I think we'll wait and see what they tell us about the impact of that. There's -- depending on the location of where they're going to be soft on imports, obviously, there's product that goes to -- into the U.S., product that goes into Asia and product that goes into Europe. So it really depends on who it is to how much impact that may have. I just say, I mean our Glass business, in holistically, generally oversold, and we supplement that oversupply and the peaks and troughs out of import to cover that off, to balance that out. So we've got a little bit of headroom to manage that.

Perfect. That's great, Brian. And then just finally, Stu, I should know this, I apologize, but the corporate cost saving that you think will flow through post the sale of fiber, can you quantify that or remind me what it is, please?

We're targeting sort of $4 million to $5 million.

Annualized?