Orora Limited (ORA) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Orora Limited Investor Update Call. [Operator Instructions] I'd now like to hand the conference over to Mr. Brian Lowe. Thank you. Please go ahead.

Thank you, operator. Good morning, and thank you, everybody, for joining us today for the Orora Group Half Year Results Presentation. I'm joined by Shaun Hughes, our Chief Financial Officer, who joined us last October, and this will be Shaun's first results call with Orora. So welcome to Shaun. I'm really pleased to be able to bring you today a number of pieces of information. I'll cover an overview of the results for our half year ended 31st December 2020, and details about our new management team and the -- who are responsible for delivering against our strategic pillars. We've made some really good progress this half to delivering against those strategic priorities. I'll provide an update on our safety performance and our new 2024 Eco Targets as we position ourselves as a leading provider of sustainable packaging solutions. And I'll also take the opportunity to provide some background on the strategic direction of our OPS business in North America. I'll then hand over to Shaun, who will take you through the group and business unit financial results. And then we'll conclude with some perspectives and an outlook for FY '21, after which, we will be happy to take your questions. But before we start in any detail, please take note of the important information that we do have on Slide 2. I don't propose to read through that today, but please ensure that you do refer to that. Turning now to Slide 4 and the full year results for the continuing businesses. The group reported a solid set of financial results for the first half with all of the businesses reporting an increase in underlying EBIT. Group EBIT increased by 5.2% on a reported basis and 7.5% on a constant currency basis. The increase in group EBIT was driven by solid earnings growth in both Australasia and North America with EBIT up 4.2% and 6.7%, respectively. NPAT was up 18.9% to $91.1 million, whilst EPS increased 20% to $0.096 per share. The stronger first half earnings translated to a 13.8% increase in operating cash flow. And the Board have declared a final ordinary dividend of $0.065 per share unfranked and 100% sourced from Conduit Foreign Income Account. Turning to Slide 5 now. Pleasingly, our solid first half operating performance was driven by focused and solid improvement on execution to our strategic priorities within the businesses. And as I said earlier, all businesses reported an increase in underlying EBIT. In Australasia, higher earnings were driven by stronger volumes, particularly in the Cans and Closures businesses. Volume gains across all businesses were somewhat offset by an unfavorable mix in Cans and in Glass, and the impact of higher energy and insurance costs. The impact of COVID-19 and a weaker wine vintage was evident in the first half of '21 with an unfavorable mix shift, as I referred to in Cans and Glass volumes. This led to a negative EBIT impact in terms [ EBIT margin ], which was down 50 basis points to 19.5%. In North America, the businesses improved their operating and financial performance, increased by sales force effectiveness, which was leveraging our data insights and focused on customer account profitability, together with a stronger focus on cost control measures across all businesses. Pleasingly, these actions have delivered for our North American businesses a result that has stronger AUD as well as U.S. dollar earnings in both OPS and OV. Local currency U.S. dollar EBIT was up 12.7% to USD 39 million, and the EBIT margin expanded by 30 basis points to 3.9%. The impact of COVID-19 on our North American business was certainly materially greater than what we felt in Australasia. Whilst OPS returned to revenue growth, many retailers in North America remained closed or have restricted operations, and this has negatively impacted OV's revenue within the first half of FY '21. Now moving to safety on Slide 6. Despite the impact of COVID-19, we have made improvements to safety during the period. Continued strong focus on safety has delivered a reduction in our total recordable cases globally. However, we have seen a slight increase in our lost time frequency rate, which does reinforce the need to continue to focus on improvements in our safety, which remains a key priority for our business. We continue to drive safety improvements and invest in safety to improve performance within our 3-year targeted program. And as part of our ongoing COVID-19 response, we have implemented a digital system that will enhance and streamline the monitoring of COVID-19 incidents within our North American sites. And safety at Orora is also about mental as well as physical well-being, and we have implemented a number of programs to support our team members across the business. I'm now on Slide #7. And I thought I'd take a moment to acknowledge the positive contribution of our leadership team, and in particular, the newer members of our global executive team. In terms of the changes that have taken place during 2020, in January of 2020, Matt Wilson joined us in the role of Group General Manager of Strategy, and Matt has over 20 years of strategy, banking and advisory experience. In March, Bob Firenze commenced in the role of President of Orora Visual. And Bob has over 20 years experience in the North American packaging industry. Shaun Hughes joined us in October of 2020 as our new CFO, and Shaun has extensive finance experience with much of his career spent in ASX-listed companies, operating across multiple industries, geographies and functions. And most recently, in November, Frank Pennisi joined Orora as President of OPS. And Frank has extensive leadership experience gained across manufacturing, engineering, logistics and technology companies. And whilst I'm encouraged by the positive steps that we've taken this half, my executive team remains focused on building on this positive momentum throughout second half of '21 and well beyond. We'll now move to Slide 8. At our FY '20 results, I've presented the strategic pillars that we have established to support Orora in executing our objective to become a leading sustainable packaging solutions company. And our strategic pillars remain unchanged. And just as a reminder, these are really to optimize and grow through operational improvement and best-in-class execution, which has been a big focus of the business during the first half of FY '21. And it's also to enhance and expand our core products and services to strengthen our value proposition across our businesses and to enter new segments that are complementary to Orora's capability set. I'm now on Slide 9. I won't go into all the details covered in this slide as it also remains unchanged on what we showed you late in 2020. We remain committed to delivering and reporting progress against these strategic pillars and delivering on organic growth, meeting returns-focused hurdles and making appropriate investments whilst ensuring a disciplined approach towards capital management. This is what you can expect from me and from my executive team. Moving now to Slide 10. So the first half of FY '21, we made really good progress against our core strategies in each of the businesses and have good momentum to carry forward into the second half of the year. In Australasia, we continue to actively assess our future requirements to meet customer needs and the growth of Can demand particularly. Since the demerger, we've invested approximately $530 million of capital into Australasia. And you can expect us to continue to seek out expansion opportunities within our businesses here. Further expansion of our Cans capacity, our Slim line expansion at our Revesby site in New South Wales is well underway and is expected to commission in the fourth quarter of FY '21. And also pleasingly, our G2 rebuild of our furnace and our glass plant in Gawler was completed successfully during calendar year '20 and since then has operated very efficiently. We also continue to make investments to increase our recycled content in Glass, which is an important part of our sustainability agenda. We have commenced a preliminary assessment of international beverage footprint expansion, and we'll continue to evaluate potential ANZ adjacency opportunities. In North America, new leadership was installed in both OPS and OV during 2020. And in OPS, we have seen significant improvement and gained momentum in operating disciplines and in financial performance. Orora Visual has returned to profitability during the first half of FY '21, driven by a focused cost reduction program and improved execution in spite of a really tough retail trading condition in North America. The North American team remains focused on enhancing the business model with initiatives across both OPS and OV. Moving now to Slide 11. Each business unit has strategic priorities under our 3 strategic pillars, which are optimize and grow, enhance and expand, and enter new markets, as I have mentioned. In Australasia, we are committed to investing in our beverage business, both organically and inorganically. The organic focus will continue to pursue increased automation and more efficient practices as we look to further optimize, enhance and expand our high-quality domestic beverage business. And based on customer demand, we anticipate and are committed to bringing more capacity online. And in addition, we continue to explore the viability of potential offshore entry points and potential opportunities for adjacencies in our domestic markets in Australia and New Zealand. And within North America, our new management teams in both OPS and OV have been focused on business, operational improvements to drive profit improvement and build a solid foundation for growth. These improvements include volume growth, margin recovery and efficiency, cost reduction programs, which have all shown positive momentum during the first half of the year. Moving forward, our North American business will continue to be focused on proactively managing account profitability, enhancing sales force effectiveness and continuing to focus on cost control measures. These actions resulted in an increase in local currency earnings for both businesses during the year. We are also excited about the opportunities that further digitization of our North American business models will bring in the coming years with a number of initiatives expected to come online during 2021. And these include our new e-commerce platform at OPS. We have a robust road map for further enhancements planned for the years to come. And within OPS, product and targeted geographical expansion remains a focus area, with inorganic expansion, a consideration for us from calendar year 2022. And for Orora Visual, we will review the strategic direction by the end of calendar year 2021, clarifying how best to progress our profit improvement initiatives and the logical next steps. And this is beyond the immediate stabilization activities that the team have been focused on over the last 6 to 9 months. Moving to Slide 12. Orora has continued to build on its already strong credentials as a leading, sustainable packaging solutions company through improved environmental outcomes via our Eco Targets and focused on recycled content and recyclability of the packaging offered to our customers. Orora launched its new 5-year Eco Targets at the start of FY '21, covering reductions in CO2 emissions, waste to landfill and water use. The Eco Targets are ratios expressed against production-related metrics as depicted on the slide. This was done to increase their relevance to Orora's business groups. At the half year, Orora is tracking well on achieving over our first year Eco Targets. And in regard to our all-employee culture pulse check, insights will be available to us at the end of March, and steps will be taken to implement what has been identified following that review. As stated at the full year results, Orora has secured 100% of the glass cullet that's generated from the Western Australian government's container deposit scheme. And this scheme has now been operational since October, and the glass cullet has been successfully transported to Gawler, and the facility is increasing the recycled content within the product. This increased use of cullet builds on Orora's existing use of cullet from the South Australian and New South Wales container deposit schemes. Orora has also reflected on its focus on human rights issues, and this has been related to -- in relation to the production of our Modern Slavery Statement in accord with the regulatory time frame and framework, and this report is currently undergoing Board approval. Now moving to Slide 14. We are conscious that there are varying degrees of understanding of our North American business and, in particular, the Orora Packaging Solutions business or OPS for short. So I did want to take the opportunity today to provide a little bit more color on the business and the industry in which it operates and also provide some insight into our strategy to firstly stabilize the business, which has been well underway, and then to grow the business into the future. From an industry perspective, OPS operates in a very large market. The North American packaging distribution market is estimated to be worth some $35 billion. And unlike Australia, B2B distributors like OPS play a significant and critical role in supply chains in North America. And this has given the breadth and depth of the economy and sheer number of companies that do transact every single day. A significant number of customers, particularly SMEs, value the service offering of distributors, given the distributors like OPS provide a one-stop shop for a variety of products, saving time and cost; have knowledgeable sales teams who can tailor products and services to specific customer needs; maintain networks of warehousing capacity to store products and ship quickly, which is often the same day to these customers; provide a wide range of value-added services such as design and engineering, kitting and customization of products; and provide the flexibility to customers smaller order quantities, helping them to manage their working capital. Turning specifically to the OPS business model on Page 15. It is important to understand that OPS is more than just a distributor of packaging products as it spans manufacturing as well as value-added services. The business is vertically integrated into corrugated packaging, operating 8 manufacturing sites in California and Texas, 2 of the largest economies in North America, as well as operations in Chicago. This vertical integration ensures surety of supply through our distribution arm and allows us greater flexibility to cater to customer requirements. Our distribution capabilities has a national reach, operating from 64 sites across the U.S., Canada and Mexico and is led by a highly experienced sales team with strong customer relationships. The value-added services in our business, such as engineering and design and fulfillment, are a competitive differentiator and provide heightened customer stickiness and higher-margin earnings. These are areas we are actively looking to expand over time. From a revenue breakdown perspective, the business has a strong presence in corrugate, which aligns with our sustainability goals, although, importantly, the product portfolio is agnostic and well-diversified beyond that, too. And from an end market perspective, the business provides products and services to a diverse range of largely defensive and growing end markets. Moving to our strategy for OPS, which is depicted on Slide 16. And as we reported, over the course of FY '19 and FY '20, the business experienced submarket and operating headwinds, which impacted the performance of the business. And over the course of the past 12 months, the root causes of these operational issues have been identified, with a range of operating initiatives now in place to stabilize the business performance and position the business for sustainable growth. And pleasingly, you can see from the results, the performance of OPS has significantly improved and is a credit to the focus and expertise of the entire OPS team for the outcomes today. Moving forward, the next phase of our strategy will focus on enhancement to the OPS business model, particularly through further digitization, starting with a new e-commerce platform expected to be online by the end of FY '21. Further enhancements are planned in the coming periods and will help transform how we go to market and create a further competitive differentiation. Our new OPS President, Frank Pennisi, is working hard with the team to prioritize growth initiatives to drive top line performance as well. And we will be proactively seeking to expand the reach of our business as well as enhance the market positions in higher-growth products and end markets over time. And as I touched on earlier, there's also a renewed focus on expanding our value-added services. We are genuinely excited about the platform we're building now in OPS and believe we are well placed to generate sustainable revenue and earnings growth in the business for many years to come. I'll now hand over to Shaun, who will take you through some of the group and regional financial results.

Thanks, Brian, and good morning, everyone. I'll start with the group results before I cover the regional financial performance. I'm on Slide 18. And this slide summarizes our first half group underlying and statutory earnings. At a group level, in line with the strengthening of the Australian dollar, revenue was 1.2% lower, driven by a 3.5% Australian dollar reduction in North American sales. Importantly, though, local U.S. dollar revenue in North America was up 2% compared to the prior period. Net finance costs were down $13 million on the prior period to $14.4 million, primarily reflecting the reduction of net debt following the sale of Fibre in April 2020. Underlying NPAT and EPS were both up strongly in the half, with NPAT increasing 18.9% and EPS 20%, reflecting higher earnings and lower net finance costs. Our on-market buyback has progressed well, and this is reflected in our EPS growth, which has outpaced NPAT growth. On a statutory basis, there were 2 significant items in the first half that net out to a $6.3 million after-tax gain. Related to the Fibre sale, we completed the post-completion accounts processes and have recorded a $12.8 million after-tax gain in discontinued operations. We have also recorded additional decommissioning costs of $6.5 million after tax at the former Petrie mill site, following ongoing project review and a reassessment of estimated remediation requirements. The timeline for Petrie remains unchanged and is expected to be completed by December 2022. Turning to Slide 19. Australasia delivered sales revenue of $441.2 million, up 7% on the prior period. EBIT of $86.1 million was up 4.2% on the prior period, and I'll step through this more on the next slide. ROAFE was 340 basis points below the prior period, reflecting the impact of recent capital upgrades now in the asset base as a result of the G2 furnace upgrade and the new Gawler warehouse. Benefits of these investments will continue to flow in coming years. However, ROAFE is still a very solid 28%. Cash flow was strong in the half at $91.8 million, reflecting higher earnings and lower base CapEx, offset by a $17.7 million negative movement in working capital, reflecting increased receivables in line with higher sales, a one-off unwinding of extended terms related to a single supplier and partially offset by reduced inventory in Cans. Base CapEx of $10.4 million was lower than the prior period, given the second half weighting of the CapEx program in FY '21 and the G2 rebuild in the prior period of approximately $25 million. Cash flow conversion was strong at approximately 77%, and we expect that the Australian business will deliver cash conversion in excess of 70% for the full year. Turning to Slide 20. EBIT growth in Australasia was driven by strong volume growth in both Cans and Closures compared to the prior period. In Cans, the mix of product was skewed towards the grocery channel, supported by continued strength of at-home consumption. In Glass, despite the impact of a smaller 2020 wine vintage, total Glass tonnage was broadly in line with the prior period, with wine volumes slightly behind the prior period, offset by growth in beer and other beverage categories. Earnings margin was adversely impacted by this shift in mix in both Cans and Glass, together with the impacts of previously announced cost headwinds related to increased energy and insurance, $1.5 million and $0.75 million, respectively. Moving to Slide 21. In spite of the ongoing impacts of COVID-19 throughout North America, our business has performed well, with the first half results highlighting both the resilience of our business and the results of our profit-improvement initiatives. In local currency terms, revenue was up 2% to USD 993 million. EBIT increased 12.7% to USD 39 million. And ROAFE increased 370 bps to 15.4%. I'll step through this in more detail on the next slide. The OPS business improvement programs have continued to gain traction in the half with revenue up 2.8% and margins increasing by 0.5% to 4.6%. Importantly, while OV continues to experience challenging trading conditions in retail, cost-reduction initiatives and a shift in sales to defensive market segments has seen the business return to positive EBIT in the half. Operating cash flow increased 14.7% to $53 million, broadly in line with the improved earnings. Cash conversion was approximately 84%, up from 74% in the prior period, driven by improved working capital management. Slide 22. The call-out here is that North American EBIT, on a constant currency basis, has improved by 12.7%. On a reported basis, the EBIT margins have increased by 30 bps to 3.9%. As mentioned, the improvement in earnings was driven by the continued execution of our strategic improvement initiatives, including increased transparency and analysis of customer account profitability, enhanced sales force effectiveness and a stronger focus on cost control measures. These actions resulted in an increase in local currency earnings for both OPS and OV. The widespread closure of retailers across North America due to COVID-19 has continued. This had a direct impact on the OV business with a decline in revenues of approximately 6% on the prior period. Despite the lower revenue, OV earnings marginally improved compared to the prior period, driven by the continued focus on defensive end customers and the execution of cost control measures, which included the L.A. site closure and rightsizing of the cost base. Reported EBIT includes an Australian dollar FX translation impact of $3 million. Turning to Slide 23. Stronger earnings were converted into cash as forecast, with operating cash flow of $144.8 million, which was up 13.8% on the prior period. Cash conversion of 79% is higher than 72% reported in the prior period. However, it was in line with management's expectations given the phasing of the base CapEx programs in Australasia in FY '21. The main points to note include an increase in cash EBITDA broadly in line with lease-adjusted earnings; lower base CapEx of $21.4 million compared to the prior period of $50 million, which reflects the impact of the G2 build at Gawler of approximately $25 million in the period; and a second half phasing of base capital expenditure in Australasia. Gross CapEx comprising base and growth was $26.4 million in the half and was approximately 80% of underlying depreciation. Investments were made in working capital to support the increased sales, the early payment of payables in North America to capture settlement discounts and the unwind of extended terms of the supplier in Australia. And these were partially offset by a reduction in Cans inventory and paper in OPS. Excluding the impact of AASB 16 for leases, interest payments were $9 million, down $11.7 million on the prior period, principally as a result of lower net debt following the receipt of the Fibre sale proceeds in the second half of FY '20. Cash conversions for FY '21 is expected to be 70%. Slide 24 highlights Orora's strong balance sheet, which provides operating and strategic flexibility as we move forward. At the 31st of December, net bank debt decreased to $277 million with leverage at 0.9x, in line with June 2020 and down from 2.3x at December 2019. This small reduction in net debt was driven by stronger earnings, reduced base CapEx, receipts from the closeout of the Fibre completion accounts process that was flagged in FY '20, the timing of a tax refund and a $13 million FX benefit on U.S. debt. These inflows were largely offset by cash outflows resulting from the on-market share buyback, where we have now spent approximately $111 million since commencing in September last year. The buyback is now 44% complete with 42.7 million shares purchased at an average purchase price of $2.59. We expect to complete the on-market buyback prior to the 30th of June 2021. We have significant headroom in our facilities with undrawn capacity of approximately $595 million and cash reserves of over $80 million as at the 31st of December. In terms of our debt facilities, Orora has a $350 million syndicated facility maturing in April 2022. We have commenced a process to refinance this and expect to have this completed by June of this year. The average tenure of the group's facilities is 2.5 years. Our approach to capital will continue to be balanced and disciplined, and we remain committed to maintaining sensible debt levels and investment-grade credit metrics with our target leverage range between 2 and 2.5x EBITDA. Our principal focus is to use our strong financial position to invest in both organic and inorganic growth to generate future shareholder returns while returning funds to shareholders in the absence of immediate opportunities for growth. Turning to Slide 25. The Board has declared an unfranked dividend of $0.065 per share. This represents a payout ratio of 68% of underlying NPAT. This $0.065 dividend is in line with our first half '20 interim dividend and is $0.01 higher than the final FY '20 dividend. I'll now hand back to Brian.

Thanks, Shaun. I will now turn to perspectives for FY '21, which are covered on Slide 27, and I'll start with Australasia, where we will continue to identify and implement cost reduction initiatives, reinvest in asset upgrades and new capacity where it's appropriate. Cans volume is expected to remain strong. The 2020 wine vintage was certainly weaker, and exports are expected to remain subdued. And we expect industry wine bottle volumes to decline for the second half of fiscal year '21. We will work and are working very closely with our customers to understand the plan for the impact of China bottled wine exports, particularly in the second half of '21 and beyond. And we have a range of activities underway to find new homes for capacity that may be freed up based on that shortfall. Energy prices are expected to remain steady beyond the reset experienced in calendar 2020. A further increase in insurance costs of approximately $750,000 will impact the Australasian business in the second half of '21. The G2 rebuild that we referred to earlier has an expected gain in the second half of '21 of approximately $6 million, although we expect this to be more than offset by the volume softness that we've alluded to in the second half. In North America, the new management team remains focused on building on the improved performance delivered in the first half of '21. And the earnings improvement programs, sales growth, margin improvement and cost efficiency initiatives are the priority. Market conditions in North America continue to remain challenged with the future impacts of COVID-19 uncertain. California and Texas, which are the key markets that we operate in, represent 60% of our total North American revenue. And we also expect approximately $750,000 of insurance cost impact in the second half of our North American business. In respect to cash flow and CapEx, we continue to target group cash conversion greater than 70% in FY '21. Phasing of our Australasian base capital program is weighted to the second half of fiscal year '21. And FY [ '21 ] CapEx is expected to be approximately 90% of underlying depreciation if we exclude depreciation of leases. And in respect to capital, the FY '21 dividend is to be towards the top end of our targeted payout range. The current on-market buyback, as Shaun referred to, is expected to complete within FY '21. We will explore and continue to explore adjacent growth opportunities within Australia and New Zealand. And Orora will assess the strategy for our growth opportunities and the strategic direction for Orora Visual by the end of the calendar year '21. And M&A within our current North American business is not an immediate priority, particularly for the remainder of FY '21. Now I'll turn your attention to our outlook statement on Slide 28. Orora delivered solid operating performance in the first half of '21 with improved operating momentum and financial performance across all business units. Correspondingly, at a group level, Orora is forecasting higher earnings in FY '21 compared to the prior year. In Australasia, Orora expects second half of the FY '21 EBIT to be negatively impacted by lower wine bottle exports to China and the smaller 2020 wine vintage. Full year EBIT is expected to be broadly in line with that of the prior year. In North America, in a continuation of the improved operating and financial performance, Orora expects EBIT to be higher in the second half compared to FY '20, and we expect it to be higher for the full year. And this outlook, obviously, is subject to global and domestic economic conditions and any further adverse impact from COVID-19. So that concludes our presentation remarks. Thank you for listening to us today. Well, I'll now ask the operator to open the line for your questions. Please, operator.

[Operator Instructions] Our first question comes from Larry Gandler at Crédit Suisse.

Can you hear me?

Yes, Larry.

Excellent results. Look, a few questions from me. First question is, with regards to your outlook for Australasia, it seems quite conservative. I imagine Can volumes were the largest contributor of the strong performance in the first half. What's your view towards Can volume in the second half? Why would the -- I'm sorry about that, Brian. Why would the momentum ease up in the second half?

What we -- you are correct. We certainly saw strong Can volume in the first half, which was the primary driver of the revenue and the profitability growth. We would expect strong Can volume to continue in the second half. Can volume is generally weighted to the first half, particularly as the run-up into the summer period. So it will have a lesser of an impact as we go through relative to total beverage business in the second half, but we do expect that to remain strong. To your question about conservatism. Look, there are a lot of unknowns, particularly with the impact of the China exports. So probably, as you would all expect, we've taken a conservative view of the impact of that. We don't know yet what the redeployment opportunities look like for our customer base. We are working with them very closely, the timing of which there is some uncertainty around. So we have looked at the scenario where we will have virtually no products supplied through our customer base to China for the second half. We have a pipeline of opportunities that we're pursuing outside of what they are pursuing, which would be generally nonwine product for us to find alternate homes for that glass. And we would expect those to start to have some impact as we go into '22 and beyond, but limited opportunity to cover that off during the second half of FY '21.

Okay. I do have a couple more questions. That's pretty clear. Just clarification on that. China, for you, guys, in terms of glass exposure, would be no different than the industry. Say, 10% of industry exposure would be similar to you, guys?

Yes, that's a pretty good ballpark to use, Larry. Yes.

Okay. Great. Just in terms of the U.S. business, fantastic momentum there we're observing in terms of national box shipments. It sounds like you guys are participating. But it looks like costs are starting to rise, the paper companies are starting to take price increases. Are you absorbing those price increases, passing them on with these? What's the state of play there?

We have certainly seen those increases coming through, and we are passing those through to the market. And the ones that have come through to date, we have had full success in getting those through to the market. We would fully expect that to continue.

Okay. Great. Last question from me, Brian, is just on the U.S., you sort of mentioned international expansion in Cans. The U.S. is clearly a marketing short supply there. Is this -- since you've mentioned international expansion, is this something that's a concrete opportunity on your desk? Or are you just kind of looking at the industry?

Well, at this point, I would say we're looking at the broader industry. And when we say beverage, we mean bottled beverage, not just Cans or Cans specifically. And these are more medium- to longer-term opportunities that we're assessing. The immediate priority for us would be investment in organic growth opportunities and capacity expansions here in Australasia and building on the capabilities that we have in the existing business, particularly in OPS in North America. So it's a little bit more longer dated rather than something we've got imminent there, Larry.

Our next question comes from David Errington of Bank of America.

Brian, I really enjoyed your presentation on OPS and what you're looking at or establishing what you're looking to do in optimizing, enhancing and expanding. To gain an understanding to what you've done to date in terms of optimizing, and you've obviously got some very good margin improvement there, can you go through a little bit more in detail as to what you actually mean by improving account profitability, enhancing -- getting efficiencies through harnessing data? Because, again, they're pretty broad buckets. And then you've got enhancing sales force effectiveness, which basically means rationalization. So I suppose the point of the question -- the first point of the question is, can you break out what the improvement has been through gross profit versus improvement to cost of doing business? What the sustainability of that is? In other words, I'd like to see it probably more from gross profit improvements because there's probably an element there of business improvement rather than just cost reduction, although there's a bit there. And then how that's going to lead into the next improvement in the enhanced bucket as to what you can build on that, as to what we can look forward in terms of dollars and cents in the next, say, 12 to 18 months?

Yes. A lot in your question there. Look, the first priority and where a lot of the improvement has come from is related to the account profitability improvement. And this stems from work we've really started over 12 months ago. And off the back of our SAP implementation and our business intelligence tools that we could hang off that, we really started to get better insights in terms of customer profitability down to a specific customer/SKU level, which we did not have before. So given we have north of 100,000 SKUs and 10,000-plus customers, we take some time or took some time, as you would expect, to start to go through that and really understand where do we make money, where don't we make money, put some disciplines in place, the rigor and cadence within the organization to start to address that and make inroads in ensuring that not only we address where we had underperforming parts of the business, but also as we bring new business online, we look at it through that lens and make sure that it is going to be a profitable business that comes into the stable rather than something we're going to go and address later. So we're still early, I would say, in that journey. So there's still opportunity ahead of us, and the teams are working really hard on that. So I think you should expect from us some continued focus. And we will, as a result of that, most likely have some churn within the business. So we'll look at customer churn. So whilst we will be moving the momentum towards growth and the sales force effectiveness is really starting to target those market segments and products where we know we can get a bigger bang for our buck, right, and focusing on these value-added areas. So I think it will be the blend of both, continuing to work on account profitability and starting to focus the sales organization on areas that we know we can get a higher return.

So it's just not cost cutting, it's -- you're just not cutting people, it's actual business improvement that you're actually doing this.

Correct.

Yes. Well, that's positive. In terms of -- yes, yes. And following into OV, is it the same strategy there? Or is it a little bit more of a blunt edge to that business?

It's fair to say during the first half, we did some cost-cutting. And that needed to happen given we suffered, based on the size of that business, a fairly substantial loss in the second half of FY '20. So therefore, some cost-cutting had to take place. And the team in the last several months, really, the second quarter of the year, have there been focused on starting to optimize what we have, pursue some revenue opportunities even within the very subdued retailer market. So we are behind year-on-year on revenue. But pleasingly, they have started to build some momentum in that area and are really focused on initiatives like pricing and estimating accuracy and those sorts of things that are really enhancing the capability within the business. But I think a big portion of the recovery, thus far, has been cost-cutting.

Yes. So you sound a lot more confident, Brian, or certainly Orora sounds a lot more confident that you've ruled the line under the U.S. business and now you can look forward to business improvement and earnings improvement in both businesses. That seems to be -- not putting words into your mouth, but that seems to be the message you're giving today?

Yes. I would say that's the case. And we'd certainly say we're further on the journey in OPS than we are on OV, and our confidence in OPS is stronger. OV, we've still got some work to do, but we're comfortable we're at least in the black now, and that was priority #1.

Our next question comes from Brook Campbell-Crawford at JPMorgan.

The first one is just on the Can business. Very strong growth outside of CSD there in the half, and you talked about that expected to continue. Just wondering if you won new customers or increased wallet share in your existing customers, aside of CSD that is, that's driving this growth? Or is it more just temporary market strength you're seeing there in the market?

It's not market share gain, to answer your question, it's our core business and our core customers, and we've seen continued shift from other formats into Cans. And certainly, the channels that people are buying products are more at-home consumption and grocery channel has driven an increase in Can demand. And based on the forward predictions from our customers, we expect reasonably steady demand to continue and to be able to grow off that base. We don't think we're going to see a slide backwards from where we now sit.

That's clear. And the second question just around U.S. margins. Just wondering if you have any sort of medium-term target for that business. Is the target to kind of get back to the prior highs? And that would be the first part of the question. And second part would be just do you think there's any potential structural changes in the market now relative to when you previously had those higher margins, that would potentially make it more difficult to get back to sort of 5%-plus EBIT margins in that division?

Well, certainly, our target and our genuine belief is we can get back to those historical 5% return on sales numbers. And that is our aim. We believe we can progress towards that over the coming years. So we're not going to see an immediate jump to that next year, but we would progressively expect to work towards that. And no, we wouldn't see any structural shift within the broader industry that would hamper that. In fact, what I mentioned earlier in terms of our continued focus towards more value-added services and higher-margin potential industry is that we'll service as we look at growth opportunities. I think we will inch our way towards that regardless of what's happening in the broader industry.

Our next question comes from Craig Woolford at Citigroup.

Just a few questions. Just firstly, with regards to the cost performance in the Americas. North American business is obviously very good. Is there anything we should be mindful about some cost returning into the business if revenue trends continue to improve in the second half?

I would say, not particularly. We're very conscious of that, and the leaders of our respective businesses have been very conscious of that where we've taken cost out, but we don't have this yo-yo effect of taking particularly people cost out and then having to add it straight back in. And that's been part of the review process when we have made those changes. And I think we are comfortable that we've been able to reset the base. An example would be, we have, within the OPS business -- by force, have to go to a lot of remote working. So we still have some 2,000 people working remotely. As a result of that, it's enabled us to then have a lot of the support function, support multiple locations where we used to have some dedicated support by either distribution center or manufacturing center. So we're able to actually get some efficiency across that. So where we've taken some cost out, it's really by driving that overall efficiency. And that model we intend to keep ongoing. Our team are comfortable working on that -- or through that model, and we believe the efficiencies we can lock in as an example of how we're comfortable they won't creep back in.

Okay. With regards to your OPS business, more of a strategic question, I guess, are you seeing discussions with some of the customers about packaging demand growth? It's probably at odds with some of the environmental concerns out there. With COVID, there's been more concern and more protection around packaging for different products, particularly food items. Are you seeing an increase in demand in some of your subsegments of the customers?

Well, we're certainly seeing an increase in demand from an e-commerce perspective and a direct delivery perspective, which has driven overall packaging demand. So our manufacturing business has increased, we would say, in line with what we've seen in the box industry. And we think there's been a reset in that. So people won't necessarily revert back to going fully into bricks-and-mortar retailers when things settle back down. So I think there's been a shift, but more so in terms of how people get product sent to them as opposed to how product is necessarily base packed.

Understood. And I understand that the Can market is quite tight here in Australia. You called out the demand that you're seeing in beverages. Are you seeing any increase in import competition, particularly as the Australian dollar has strengthened over recent months?

No, no, that's not something that we see here in Australasia, and that is probably not something that we would expect to see. Most of the industry is pretty tapped out globally.

Our next question comes from Andrew Scott at Morgan Stanley.

Just a couple for me. Brian, first of all, just on the wine bottle impact. You've obviously called out a couple of factors there. I wonder if you could just sort of give us a bit more color sort of orders of magnitude between the vintage issue, which is, obviously, largely a one-off and the China restrictions, which is perhaps here to stay a little bit longer. Just anything to help us sort of size those 2 and sort of what you're putting into those expectations for a flat Aussie outcome year-on-year?

Look, it's actually hard to -- even for us, to break that down because a lot of what we supply to the broad customer base we're not really sure where it ends up. So what gets exported versus what goes domestically. So it is actually really difficult to break that down. But the smaller proportion of it would be in our second half. [ Outlook there ] would be from the domestic overall wine vintage impact and the majority of it would be from lower exports. So order of magnitude, certainly a greater -- far greater portion to the exports, but I can't give you an exact percentage. And as I said, there's multiple components of that for the future, what comes back from a domestic standpoint of wine vintage, what our customers, existing customers are able to find alternate homes for, which would flow into us from a positive perspective. And we are out there vigorously pursuing opportunities, and we've got quite a few in our pipeline, which would be nonwine opportunities. And some of those are import replacements. So it's not necessarily having to fight with our local competitor for additional volume, their import replacements that we believe would fit within our manufacturing capability. But again, you can't turn these around and start producing them and selling them in a fairly short space of time. So they're more going to have a positive impact in terms of covering off that and rebuilding the volume base as we get into '22 and beyond.