Orora Limited (ORA) Earnings Call Transcript & Summary

[Operator Instructions] Your first question comes from the line of Brook Campbell-Crawford from JPMorgan.

Just had a question on OPS recent trends. You talked about stabilization and also some green shoots for volumes. Are you able to help us understand recent EBIT performance in, say, June and July? Have you got back to kind of growth there year-on-year for U.S. dollar EBIT or still posting negative comps?

We're comparable to the prior period now in June and July. So it's not just from a gross margin perspective, but from an absolute EBIT perspective, it's now comparable.

That's great. And then also just following your strategic review, you talked about having spent a lot of time looking at the industries and markets that you're operating. So specifically for North America, just given the last couple of years have been quite challenging for that business. Were you able to identify sort of key trends within the North American market, particularly for OPS? And any sort of structural issues there that might help explain the underperformance in recent years?

Well, we still certainly see the overall macro environment for our type of businesses in North America to be an attractive proposition. One of the key things that came out of the review is the need for us to continue to drive faster in terms of our digital capabilities, and that is also in reference to not just the base digital tools we use to operate our business, but certainly how we interact with our customers. So investing in e-commerce, self-service tools and e-marketing capability to service those customers, particularly at the small end of town as we've learned where we have higher cost to serve customers. We've got to find ways to reduce that cost to serve, but also find ways to attract and interact with them. So we're looking to accelerate some investment. We're not talking about huge dollars, but build programs that can help accelerate that capability within our business because we're coming from a fairly low base. And our work has clearly identified that, that would be quickly additive to that capability.

Okay. And last one for me. Just really interesting comment around expanding beverage into offshore markets out of ANZ. Could you please just elaborate on that plan? What country you're looking at? How far along are these plans and potential size of the investments that you'll look at?

I think I'd say that, that's very early days in the scope. Priority would be on what we've referenced about building from a complementary standpoint within Australasia. That would be priority 1. Evaluating options offshore for beverage is something where we will undertake the evaluation of. I wouldn't want to put a specific time frame on that. The North American focus is on improving the businesses we have there, but it's something we're going to have a good look at. And it's probably more realistic to say it's this time next year, where we could provide an update, is that something where we're going to be able to quantify as a real, live opportunity for us.

Your next question comes from the line of Richard Johnson from Jefferies.

Can I just start with the impairment charge that you've booked in '20? I'm just trying to understand all the IFR in total, what the split is between the restructuring costs and the asset impairment?

Yes. So Richard, so it's in -- actually and we summarized it here but help you in the stat accounts, if you can weigh through those, which I wouldn't [indiscernible]. Effectively, the restructuring and -- charge is about $31 million, this is before tax and [indiscernible], $106 million. So after tax, it's $22 million restructuring and $78 million in round numbers, impairment.

Okay. Perfect. And what...

And then...

Sorry?

The impairment was all Orora Visual. There's no impairment in OPS.

Right. Okay. And then your original investments in OV, I think, was about USD 250 million, correct?

That is correct.

Okay. Perfect. So what does that do to the D&A charge going forward?

Look, it's not going to -- because you know you can't extend these changes, it's ages ago. Goodwill is not depreciated or amortized. So it's not going to have a major impact.

Okay. Yes, no. Absolutely, silly me. So -- and then when I think about that then in the context of your commentary on CapEx and the 90% of depreciation, I'm just trying to understand or make sure I haven't misunderstood what you're saying. Because if we back out the [ 50 ] from Gawler last year, your CapEx is just shy of $70 million, your gross CapEx. But 90% of, call it, $80 million D&A is actually $71 million. So that's up year-on-year on a kind of like-for-like basis. Is that right, number one? And number two, why would that be the case?

Well, I think your math is right. I mean I think what we're saying is the sort of the stay in business CapEx is going to be, I would say, around $60 million to $70 million in a -- like as we talked about, the -- a rebid of the furnace in our cycle happens every 5 years. So if you do take that out, we would be back to whatever -- I think the numbers you talked about are about right, $70 million for the year. So we would see that's around about what we would see as a reasonable expectation for staying business capital in FY '21. And it may actually, in the current environment, because -- unless it's something that's compelling, where, as I said, we've adopted the cash is king mentality. There's a number of things we can do that do not require -- sorry, to improve business that do not require capital.

Right. Got it. And then given that you don't have a reline now for 5 years, presumably, that $60 million to $70 million is intact over that period, correct?

Yes.

Right. I think that's a good assumption.

Okay. Perfect. And then just one more for me. With your commentary on the domestic business, and obviously you've got the 6 coming back in from the reline. Is that more than offset by what you're thinking about in relation to the Glass volume or the negative mix that you'll have there again, and also the inefficiencies in Cans?

I wouldn't say more than offset, but I would say substantially eat into that gain that we would ordinarily get.

Perfect. And then sorry, just one more. The wash up from the AFP fell from a cash flow perspective. And you may have quantified it. If I missed it, I apologize. Can you just remind me what that will be in the current year? So what comes back to you?

Yes. Well, I mean that process is -- that's still work in progress. So it's the whole completion account exercise. But I'd expect there be -- it's going to be most likely minor either way, in which we might get it back or we might debate it out to see how we go.

Your next question comes from the line of Larry Gandler from Crédit Suisse.

Two questions. So I gather that June and July, North American EBIT is flat, which is something of an improvement. Looking at some of the industry data and speaking to some of my industry network there, things seem more buoyant than flat. Containerboard stats are up in July, meaningfully, I think, 3%, 4%. And I've got to read your quote from one of my buddies. So my college roommate, who was a box -- he has an on-box business. He says supply chain lengths are longest he's ever seen. Businesses [indiscernible] and customers don't know how to plan. So things seem quite buoyant there. I'm just wondering why you guys are not seeing that sort of top line activity.

I think it's fair to say that depending on the specific product and the segment, there are some ups and downs. We had seen, and we did see in July some buoyancy in our fiber business and in our corrugated business. There's no misalignment there. So I think that is consistent. And that is true, a bit of turmoil in the general industry. There are still quite a few industry segments that are flaw and then I'll call that all require boxes. So overall, our revenue is still subdued. But our improved margin, gross margin that Stuart mentioned earlier and our cost controls and our improvements on cost to serve, what's helping offset that volume deficiency that we're still seeing in the mainstream distribution business. And our manufacturing business, certainly in July, was a little more buoyant than what we've seen in recent month. So it's not necessarily at odds. Whether that can continue, who knows? I mean there's a lot of inconsistency in terms of what's flowing through at the moment. So we wouldn't like to say that we're going to see that from now on in.

Okay. So the margin that you're seeing -- getting improvement, is that related to the forward buying of -- that you've agreed with its suppliers? Or is that something that might be more sustainable once those discounts move through cost of goods?

No. It's -- look, it's a widespread -- effort this, Larry. So it's a combination of -- look, there is a procurement lens toward as well. So that's an element. But most of this is actually about other -- being much more disciplined in our pricing to customers. So there's some genuine cost that we should be recovering, and there we are doing so. So there's an element of pricing. There's an element of procurement. There's also an element of just our cost to serve on our side, making sure that if -- like, for example, if a customer, I think whoever your buddy is, is on the money, that customers aren't that great at forecasting and -- but I think disrespect to customers. That's always been an issue. But what happens, especially in the U.S. because freight lines are pretty tight. So we miss a schedule or we have to do an urgent freight delivery because of something a customer has done. Perhaps, historically, we haven't been as disciplined as we should have been in recovering those costs, where we've tightened that right up. So if there is an urgent delivery that comes at a premium on freight, we recover that. Whereas I said in the past, we haven't been as disciplined as we could have been. So this effort around margin improvement is comprehensive. And the beauty that we -- or the power that we now have in terms of visibility means that sales reps and also managers can see what's happening effectively instantly because of the visibility we now have out of the system, which we haven't had previously. So that's all lining up to drive an improvement in gross margins. Now what we would like to see obviously we'd all like to see is some more volumes because that will give us the operating leverage. But in the first case, let's get the margin sorted. And also just address as best we can, our cost bar, which we are doing.

Okay. Great. That's clear. Now just turning to Glass, guys. So Visy agreed to purchase Owens business. And you guys purchased 80 -- procure 80% of the recycled glass in South Australia. But I think it's Visy that actually cleans and washes and produces the call it, and you guys purchased from Visy. To what extent is that recycle glass contract protected, and you'll be able to, ongoing, secure those glass volumes?

Well, we have a current arrangement in place with them. And we would hope and expect that they would continue to honor that as long as that's going to be required. And we've certainly had no indication from them that, that wouldn't be the case. And given that we have access to the glass from the source, under the CDS scheme in South Australia, if they weren't utilizing the capacity of that facility to sort their glass for us, they're really not going to use it for much else. So I think it's actually in their interest and ours to continue to supply that to us.

Well, wouldn't they want to use that glass for their own South Australian plan?

As I said, we have access under a contract with the CDS scheme in South Australia. So they are one step in between. So we have the glass that we can access and Visy play a role in, as you said, cleaning the glass before it comes to us. So if Visy decided they didn't want to do that, then they couldn't then do anything else with that capacity.

Okay. So your contract for supply is with the CDS team?

Correct.

Your next question comes from the line of John Purtell from Macquarie.

Just had a few questions. Look, just in terms of your improvement plan in North America, and [indiscernible] I know you just touched on some of the better visibility there on SAP now. But the question is, what do you think is different this time in North America versus restructuring efforts in the past? And that's probably more a reference to OV than OPS, but I appreciate you've had to constantly adjust the business to changing demand conditions. But obviously we've seen a few iterations of this in the past. So what's really sort of different this time?

Well, certainly, the big game in town in terms of revenue and size of our business and impact over time is OPS. And with that, as we set out, certainly the performance has stabilized, and we are seeing those green shoots that have been referenced in terms of some performance improvement and still a long way to go. And in the current climate, some challenges associated with that, but we are confident that we are on the right track and on the right path with that. So we will absolutely persist and believe we'll get a better outcome. For OV, we've had to make the tough decision in terms of consolidating our sites in Southern California. So that was announced earlier this calendar year and part of the restructuring charge that we've taken. And as a result of that, we now have also the teams sort of refocusing on specific market segments and customers, particularly in the current environment that are still operating. We have flexed the business to provide a signings. That's a lot of COVID-19-related signings that a lot of stores and businesses require because a lot of the traditional display promotional activity. Items that we would have season-to-season are really just not been campaigns that our customers are running. So there's no doubt COVID has had a bigger impact on OV, and we are dealing with that as a priority. But we are also refocusing in to make sure that as we come out of this, that we do have a team that is focused on segments where we know we can generate some value. And we also have -- this was just before COVID, we had upped our capacity and capability for fabric printing. So by putting a new line into New Jersey. And this is a fairly unique capability that Orora Visual has. So we actually have the broadest fabric printing capability for displays compared to any of our competitors. And then that actually, even in the current market, we're still getting a lot of inquiries and traction on. So look, it's probably the most complex of the businesses to deal with, even though it's not large from an overall revenue standpoint. But I think we've got the right focus in terms of ensuring that when we see some rebound in retail specifically, we'll be reasonably well-positioned.

Okay. And also, that slide in terms of gross margin and EBIT margin in North America, why the disconnect there sort of late in the period? Obviously those 2 have been in tandem. Is that just a lag effect?

Yes. That's the -- I mean, it's really the -- I mean, because obviously we haven't adjusted that for COVID-19, John. So in the last 3 or 4 months with -- in certainly in OPS, we've bought like -- gross margin percentages improving is positive, but you obviously keep the volumes to be there as well. So we did -- there's no doubt we got impacted in the second half on volumes. And because of the nature of -- yes, like it's a warehouse and people cost structure. So it's very difficult to compress that cost structure quickly. So while the volumes do fall somewhat immediately, our operating leverage is -- we're still sensitive to that in the -- in terms of facing volume headwinds. So I think what we've seen in the last couple of months is, I said, we've got the gross margin improvement is still there and continuing. And our volumes have certainly stabilized. So what we're seeing is our return on sales or our EBIT margin is actually now more in line with the improvement in the gross margin.

Got you. And last one, in terms of your return targets. Obviously you mentioned the change there for M&A. What about returns on organic growth capital? Is there any change there?

Not really. No. I mean we're still targeting similar range. Where we've got investments that we've got high confidence in and we should be generating strong returns than our 15-plus percent returns for those investments are absolutely what we want to hold our businesses to generate and beyond.

Okay. So no change there?

No.

[Operator Instructions] Our next question comes from the line of Nathan Reilly from UBS.

Just another question around the strategic review. Just wondering, did you consider a divestment of the North American operations? And if that was the case, what has supported the thinking in terms of the decision to optimize the business going forward?

I mean it's fair to say, having just divested the Australasian fiber business, our priority is not to then just go and look at divesting the rest of the businesses. But certainly, there's no doubt when looking forward, we need to look at the viability of turning the businesses around. And do we genuinely believe we have upside in terms of the profitability growth and trajectory of each of the 2 businesses in North America? And our conclusion is that we do. So our commitment and focus is clearly on making sure that we generate that improvement, and we believe that's the best way to generate more value for business and for shareholders is to extract that profitability improvement over the next few years.

Got it. And it looks like as a part of that, I think you've brought in some new senior management in North America. So I'm just curious to understand what sort of skill sets you brought into that business to help drive the turnaround? Have you brought in customer relationships there? Or you're focusing more on operational expertise?

Look, it's a combination of many things. We've certainly -- from a senior leadership perspective, we've put in a new senior leader, in fact, the President of Orora Visual is new from March this year. So we made a change at the most senior level early this year. And it was a very highly capable credential in our business who had done very well within OPS, and his region was the highest performing region. And he's already making some positive change there. We have replaced his role within OPS with an external person with some really good experience within the distribution arena. And again, bringing a different perspective with somebody who has some good industry experience. And we've also within our western region, which was the region where we were suffering from volume and some competitive pressures, particularly in the first half, we've put our highest potential individual within our business into lead that region. So we've made some internal appointments, and have also taken the opportunity to bring some additional skill sets in. We're in the final throes of appointing a new senior level position to lead our digital transformation journey as well. So even though we've got a road map and a lot of activities underway, somebody who has done this elsewhere can help accelerate that journey as well and support those activities. So we're specifically targeting someone who can bring that to Orora, and we're at the pointy end of being out to appoint someone in that as well.

There are no further questions at this time. I would like to hand the conference back to today's presenters. Please continue.

All right. Well, thank you, everybody, for your time today. Any further questions, we're either happy to answer those in individual discussions or through contact with us directly. So appreciate all of your time. We know there's a lot on this week and particularly today with a number of people reporting. So thanks again for your time and support. Thank you, operator.

You're welcome. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.