Orora Limited (ORA) Earnings Call Transcript & Summary

Hello, and welcome to the Orora FY '23 Results Media Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce Orora's CEO, Mr. Brian Lowe.

Thank you, and good afternoon, everyone. Thanks for joining us for Orora's FY '23 Results Media Call. Firstly, I'll take you through an overview of our results for the group. Then I'll open up the line for any specific questions anybody may have. Certainly, I'm really pleased to share Orora has reported another solid increase in group earnings for FY '23, which again reflects the continued discipline of our team in the face of challenging global economic conditions. If I look at some of the financial highlights. Underlying group EBIT increased 12.3% on a reported basis to AUD 320.5 million, driven by a significant increase in our North American earnings up 23.9%. Revenue was up 4.9% on a reported basis to $4.3 billion, and underlying profit after tax was up 8.5% to AUD 203 million while underlying earnings per share increased 11.1% to AUD 0.241 per share. The group has declared a final ordinary dividend of AUD 0.09 per share, which represents an increase of 5.9% from FY '22, and this brings the total dividend for FY '23 to AUD 0.175 per share, a 6.1% increase on the prior year. And this solid set of results demonstrates the steadfast commitment to delivering on Orora's strategic priorities, while at the same time, responding to ongoing market pressures such as inflation and supply chain challenges. If we look at the performance of some of our regions, our OPS North American business delivered another strong earnings result in a challenging economic environment with EBIT up 15% on a local currency basis, to USD 112.6 million [indiscernible] and 23.9% on a reported basis. And this was driven mainly by our OPS distribution business, particularly the strong performances in Mexico and the Eastern United States, reflecting continued improvement in operating efficiency, cost to serve and sales force effectiveness as well as a better pricing discipline to manage those inflationary pressures. The decline in revenue reflects softer U.S. economic conditions and the broader North American manufacturing industry. Volume softness and the impact of some paper price deflation were partially offset by some price increases within the distribution. During FY '23, Orora digital operation were aligned under the Orora Packaging Solutions business. And pleasingly, this, along with the execution of the business optimization programs has delivered both earnings growth and mid-single-digit EBIT margin. Now turning to the Beverage business in Australasia. EBIT was in line with our expectations at 1.8% above the prior year at $153.3 million. And importantly, the business returned to earnings growth in the second half of the year with underlying EBIT up 8.5% versus the prior comparative period. And this underscores the resilience of the Beverage business with strong consumer demand for Cans offsetting some softness that we've seen in the Glass business. Revenue exceeded $1 billion in Australasia for the first time, up 14.1%. This was driven by 2.7% of net volume growth, 3.5% related to higher aluminum costs, which gets passed through to our customers and 7.9% from price increases and a positive product mix shift. Our Cans business grew sales volumes by approximately 10%, driven by growth across almost all formats, with the business delivering an impressive 5-year compound annual growth rate of 6.5%. Additionally, an improvement in product mix was underpinned by growing demand in carbonated soft drinks, craft beer and energy drinks and a preference shift towards cans. Pleasingly, revenue and earnings growth from new glass products, including the carbonated water, spirits and olive oil markets were all higher than the prior period. And if we look at our strategic priorities, we continue to make good progress over the preceding year. In North America, the Orora Packaging Solutions business has driven further improvement in the financial performance and operating discipline, which is reflected in the region's double-digit earnings growth. With pricing disciplines now firmly embedded, the OPS business is investing to drive long-term volume growth with 40 new sales team members recruited in financial year '23. In our Beverage business in Australasia, operational excellence, automation and lean manufacturing programs have led to productivity gains that have delivered strong volume growth in Cans. Now, Cans growth investments are also well advanced, and I'll talk a little bit about those shortly. In Glass, capacity continues to be redeployed in our categories. While our cullet beneficiation plant at Gawler in South Australia was a key deliverable for our sustainability commitments. If I turn now to our financial year '24 priorities. OPS will continue to optimize the business and position for growth by maintaining the strong momentum in managing customer account profitability and leveraging digital platform investments to streamline our processes further. Investment in the OPS sales force to drive long-term volume growth and earnings growth will remain a focus with the business targeting a further 50 new sales team members in FY '24. We also continue to actively assess OPS' manufacturing footprint and growth opportunities in North America as we look to expand our product and service offering, including sustainability-related offerings. For the Beverage business, additional capacity following the installation of a new approximately $80 million can line at Dandenong and the $30 million in ends capacity expansion of Ballarat enables our Beverage business to drive growth in Cans volume and optimize the production across the sites in financial year '24. Construction of a second, approximately $85 million canning line at Revesby in South Wales is progressing well and is anticipated to support sales growth in the second half of financial year '25. Product mix will continue to be optimized in Glass as the business diversifies its portfolio, and the Cans business will benefit from an ongoing preference shift from glass and plastics to cans formats. We also continue to explore potential opportunities to expand our Australasian Beverage business in attractive offshore markets. Across both OPS and Beverage our attention is firmly focused on sustaining the momentum we've built and continuing the disciplined execution of our strategic priorities. I mentioned our Cans growth investments earlier, I'd like to take a moment to talk about this exciting activity in the business. Our Cans capacity expansion is progressing really well. The committed $195 million investments reflect a strong customer-led outlook for Cans volume growth and, importantly, underpinned by long-term customer contracts. At the same time, our focus on innovation and investing in market-leading technologies continues across our business. Many of you will be aware that in July, we announced the first-to-market high-speed digital printing technology for our Cans business in Australasia, known as Helio by Orora, and this signifies a step change in Orora's leadership in can decoration. Velox is our Cans customers and their brands, the ultimate combination of high-speed digital printing and customized direct-to-shape packaging design and decoration. The technology enhances our customers' offering and is ideal for new products and promotional applications by providing greater flexibility in can design and decoration and the ability to offer smaller print runs has significantly reduced turnaround times. This $14 million investment complements our traditional high-speed offset decoration process and capitalizes on the current investments in our Cans expansion. The first digital printer will be installed at our Dandenong site in the second half of financial '24 and we'll have the capacity to deliver up to 100 million units per annum with an initial capacity of 35 million units in the first year as we ramp up production. Our investments in Cans capacity expansion and innovative technology affirms our leadership in cans production, design and decoration across Australasia. Now moving to progress on our sustainability agenda, which is what we call our promise to the future. In FY '23, we continue to make good progress on our sustainability goals under the pillars of circular economy, climate change and community. Orora is a proven leader in circular economy initiatives as we seek to maximize the recycled content of our manufactured products. This year, we reported an average of 38% recycled content in our manufactured glass products. This was in line with FY '22. However, pleasingly more than 30,000 tons of new cullet sources were developed during financial year '23 as we target 60% recycled content in glass package by 2025. Orora's aluminum cans business achieved 57% recycled content in line with FY '22. And in North America, we averaged 57% recycled content in the manufacture of corrugated board, up from 54% in FY '22. And as part of our climate change commitment, we signed a new foundational solar farm PPA with EPIC Energy for a 100% offtake from the newly constructed Mannum solar farm. And this will provide 35 megawatts of solar-generated electricity to our South Australian facilities from FY '24. Scope 1 and Scope 2 greenhouse gas emissions decreased by 4.8%, utilizing market-based factors for Scope 2 and 12.9% using location-based factors for Scope 2 from our FY '19 baseline. And we are targeting net zero Scope 1 and Scope 2 emissions by 2050 with a 40% reduction by 2035 and our commitment to an Australian-first oxyfuel furnace at Gawler will reduce the G3 furnace emissions by approximately 20%. Along with our executive leadership team, I am extremely proud of the great work being delivered in this very important area. Moving now to our outlook for FY '24. Whilst global economic conditions remain uncertain, the Orora Group earnings are expected to be higher in FY '24. In North America, further margin accretion through our account profitability program and a continued focus on cost management is expected to be largely offset by ongoing volume softness. In Australasia, continued strength in Cans, with incremental volume growth from recent investments is expected to offset the ongoing softness in Glass from lower commercial wine volumes. And this outlook remains subject to global and domestic economic conditions and currency fluctuations. So thank you for listening, and operator, we'll now open the line for questions.

[Operator Instructions] And our first question comes from of Wayne Robinson with PKN Packaging News.

Wayne Robinson, PKN Packaging News. Wine business is softening. Two questions there. Do you expect wine to be -- the primary wine market to reopen, anything on that? And secondly, do you have any indication of what -- to be pivoting glass bottles to other sectors?

On your first question, I wish I had better insights than others, but what I would say is most [ expected environment ] the direction is positive, certainly for what we've seen on other tariffs being removed, a lot of activity from the government and industry bodies working with China to reestablish a correct trading relationship specifically online. So we'd be confident that tariffs will be removed. The big question for us is really when that happens, and we don't really have any visibility, but we would be confident. But we're not sort of sitting around waiting for that to happen. And as we have done over the last several years, we have been progressively moving ourselves into other markets and maybe spirit bottle, carbonated water bottles, maybe olive oil bottles. So we've actively try to pursue new [ products ] traditionally with wine and beer and we'll continue to do that. But should the Chinese market open up, that will be a good thing for...

[Operator Instructions] And I'm showing no further questions. So with that, I'll hand the call back over to CEO, Mr. Brian Lowe for any closing remarks.

Great. Well, thank you all for listening today, and please reach out if you have any follow-up questions from us. Thanks. Have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.