Pact Group Holdings Ltd (PGH) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Pact Group's 2020 Half Yearly Results Briefing. I'm Sanjay Dayal, the Chief Executive Officer of Pact Group. I'm joined today by Richard Betts, our Chief Financial Officer. Today, I'll provide you with an overview of our half yearly results before handing to Richard to take you through the financials. I will then return to talk to you about our new company vision and strategy. We'll be pleased to take questions at the close of the presentation. Turning to Slide 4 and an overview of our half year. At a headline level, the group reported a statutory net profit after tax of $35 million. This includes a gain from significant items after tax of $2 million. EBITDA, excluding AASB 16 impact, was up 2% at $113 million. The Board determined not to pay an interim dividend, with cash to be retained to fund strategic initiatives and reduce debt. Our Australian packaging business had a difficult period from a demand perspective in the half year. We have been focusing on the fundamentals in this business, improving safety, quality, delivery, price and cost. In addition, we are reinvesting in our assets to make these more competitive and reliable. This has led to improvements, though much more needs to be done. Demand in Contract Manufacturing was also challenging, with customer destocking having a significant impact on volume. Pleasingly, demand in other parts of our business was good, particularly in our offshore operations and our pooling business. Margins have improved and our balance sheet was stronger. Leverage reduced to 2.9x. This is a great result, arising out of disciplined balance sheet management and strong operating cash flows in what is seasonally a more challenging period for working capital. In the period, we commissioned growth initiatives in our pooling and reuse platforms. Crate pooling services into the ALDI fresh produce supply chain commenced in August. These operations have performed incredibly well during the period. Volumes and earnings have been in line with expectation, and customer feedback has been outstanding. We expanded our reuse operations to support a major contract win in the U.S.A. Services commenced in January, in line with expectations. We completed a review of our strategy in December. I'm very excited to share the outcomes of this review and our new company vision later in this presentation. Moving to safety performance on Slide 5. It is pleasing to see a further improvement in safety in the period. There has been an ongoing focus on processes and systems in safe behaviors and training for our people. In addition, we are ensuring active involvement of the leadership team to set standards and drive improvement across the workflow. Yet, we still have room for improvement, and this remains a key priority. No injuries are ever acceptable and zero harm must be our goal. With those opening remarks, I will now hand over to Richard to run through the financials in more detail. I will then return to talk to you about our strategy and outlook. Richard?

Thank you, Sanjay, and good morning, everyone. Turning now to the summary of financial results on Page 6. As Sanjay highlighted, the operating environment has been challenging. The group sales revenue for the half of $885 million represented a decrease of 3%. Growth was delivered in the Materials Handling and Pooling segment with strong growth from ALDI and 4 additional months of trading from TIC. However, challenging trading conditions weighed on demand in our Australian Packaging and Sustainability and Contract Manufacturing Services businesses. Group EBITDA of $113 million was 2% higher, excluding the impact of AASB 16. Earnings were improved in the Packaging and Sustainability and Materials Handling and Pooling segments. However, earnings in the Contract Manufacturing business were lower. EBIT was 3% higher and NPAT was 4% higher, excluding AASB 16 impacts. Operating cash was a pleasing result, well up on the prior period. The balance sheet has been well managed and working capital has improved. Gearing improved to 2.9x, down on 3.3x in the previous corresponding period. Pleasingly, gearing is back within our targeted range of less than 3x. As you can see, the company has applied AASB 16 for this reporting period. We have transitioned using the modified retrospective approach, and as such, our comparatives have not been restated. For this financial year, we will provide results on a consistent basis to FY '19 to assist in comparisons. In terms of impacts of AASB 16, I think these are reasonably transparent in our reporting and so I won't call them out here. As I'm sure you understand, the new accounting standard does not impact actual cash flow, only the presentation of the cash flow. As such, the changes do not impact our banking arrangements, with our business being assessed based on the covenants, excluding the impacts of AASB 16. Moving to Slide 7 and the segment results for Packaging and Sustainability. The packaging segment delivered EBITDA of $75 million, $1 million up on the prior year. Margins improved to 12.7%, with benefits delivered from efficiency and improved pricing. Efficiency delivered $6 million in earnings benefits in the period. This included benefits from network restructuring in the prior period, with annualized benefits of $13 million now delivered. The resin cost environment improved, and we have continued to recover some of the adverse pricing lags that impacted earnings in prior periods. Disappointingly, volumes were weaker, adversely impacting EBITDA by $10 million. Despite delivering growth in our offshore operations, with both New Zealand and Asia improved, underlying demand in our Australian packaging business continues to be challenging. In the industrial sectors, adverse macroeconomic impacts continued to weigh on demand. This included direct and indirect impacts from drought in Australia. Demand in our consumer sectors remained subdued, whilst volumes in the health and wellness sector were adversely impacted by customer destocking. Stabilizing volumes in our Australian business remains a key priority. Our new strategy outlines specific plans we will undertake to improve our competitiveness and stabilize volumes. Sanjay will talk you through this later in the presentation. Moving to Slide 8 and the Materials Handling and Pooling segment. Materials Handling and Pooling delivered EBITDA of $30 million, a 26% increase on the prior period. This included $6 million from an incremental 4 months trading from TIC. We also delivered strong growth in our pooling volumes with the start-up of services for ALDI. However, this was offset by the impact of fewer available bin projects and the impact of weaker retail demand in Australia for hanger reuse services. Overhead reduction initiatives undertaken in the prior year and ongoing focus on operational improvements contributed $2 million to earnings. The EBITDA margin of 18.9% was slightly down on the prior period due largely to product mix, with an increased contribution from TIC in the period. The business has continued to deliver operational efficiency to improve the underlying EBITDA margin. Moving to Slide 9 and the Contract Manufacturing segment. Contract Manufacturing reported EBITDA of $8 million, $4 million down on the prior period. Revenue was down 19%, illustrating very weak demand in the health and wellness sector due to customer destocking and lower demand in the home care and personal care categories impacted by customer offshoring that happened in FY '19. Raw material costs generally eased during the period, though the weakening AUD continued to adversely impact U.S.-denominated costs. Pricing was well controlled, and the business delivered efficiency improvements to minimize the impact of the reduced volumes. Turning now to cash management on Slide 10. We are pleased to report operating cash flow for the period of $71 million, excluding securitization, representing a cash conversion of 63%. Working capital was very well controlled despite the traditional seasonal demand we see in the first half. Capital expenditure was down due to lower spend on growth capital, including the Australian crate pooling business. Turning now to our balance sheet on Slide 11. Net debt at the end of the period was $667 million, an improvement of $71 million versus the previous corresponding period. This was an outstanding result, illustrating disciplined balance sheet management and strong operating cash flows. Gearing at the end of the period was 2.9x, within our targeted range of 3x. We have sufficient balance sheet capacity to support business needs. As I mentioned previously, the changes arising from AASB 16 do not impact our current banking arrangements, with our covenants grandfathered from AASB 16. The business will continue to measure itself on a pre-AASB 16 basis for the purpose of our existing facilities. That concludes my comments on the financials. I will now hand back to Sanjay.

Thanks, Richard. Well, it's my great pleasure to share with you today an overview of our strategy and the findings of our review, which we completed in December. We are obviously a little rushed for time, and I know you are all busy. But I hope in the following slides, I can give you a brief understanding of where we see Pact today, the changes in our industry and the opportunities of tomorrow. We will host a Strategy Day in March, where we will share more detailed information with you. Moving ahead to Slide 14 and the highlights of our review. In undertaking the review, I set the company a task of identifying what it had that made it special and delivered a sustainable competitive advantage. I wanted to define our aspiration, what it was that we could aspire to be if we used our special capabilities most effectively. And I wanted to set clear strategic priorities to provide the guide rails for our activity and develop plans that would support the evolution of the company. The review has achieved my ambitions. I'm incredibly pleased with the outcome. The review has enabled us to take time to examine what we are and the changing industry we are in, to assess both the risks and opportunities and align our strategy to this. Through the review, we have established an exciting vision and a basis for significant long-term value creation for our stakeholders. Moving to Slide 15. The plastic industry is changing rapidly. Plastic is an essential element of our modern life. It is critical for the food we eat, the water we drink, the cars we drive, modern medicine and more. As a packaging substrate, it is very efficient. It is low-cost and relatively easy to change in design. It works effectively to extend the shelf life of food, and by so doing, significantly reduces food waste. Relative to other substrates, it uses less energy to manufacture and has a lower carbon footprint. It is lightweight and easy to move through the supply chain. And importantly, it can be recycled. But community expectations are changing rapidly, with an increasing focus on sustainability and the environment. The ban on export of plastic waste to China and the elimination of plastic shopping bags from our supermarkets have contributed to heightened awareness of the need to improve plastic waste management practices. There is increasing demand for reusable and recyclable packaging and for recycled content. Sustainable supply chain solutions such as reuse and pooling are growing, and the waste processing industry is transforming as local processing solutions become urgent. There is government and industry-wide commitment to change. For packaging companies like Pact, this global sustainability theme presents a significant opportunity. Meaningful change requires working across the entire value chain. Companies which have the vision and capability to do this will be the winners. Moving to Slide 16. Plastic sustainability is not only a social and environmental need, it is an economic necessity. In response, a circular economy for plastics is developing. This economy creates the economic incentive to invest in sustainability. Realizing the full value of waste, however, requires a highly effective ecosystem. Government, industry and the community all need to work collaboratively. Moving to Slide 17. Pact has a special position in the circular economy, which will enable it to lead change in the industry and deliver sustainable competitive advantage. Pact has industry-leading packaging capability to improve plastics sustainability through product design and the scale to provide a meaningful offtake sink for recycled materials. We have the manufacturing and technical know-how to use recycling materials in the production process. We have the recycling capability, with over 20 years of experience to collaborate across the value chain to turn plastic waste into a valuable resource. We can lead the change needed to close the loop on plastics. And we have solutions through our reuse platforms that meet the growing need for alternatives to single-use packaging. With our existing scale and capability, we have a unique position, which will enable us to deliver a whole of value chain approach to change, in partnership with waste management companies and our customers. Together, we can achieve our sustainability ambitions. With this ability, we are well positioned to lead the circular economy. Let me now share with you our strategy on a page on Slide 18. What we have defined through the review is an exciting vision that establishes a clear direction for the company. Our vision is to lead the circular economy through reuse, recycling and packaging solutions, which clearly aligns our special capabilities to industry need. Our strategy sets out 3 core priorities for the company: one, strengthen our core by strengthening our balance sheet and improving the competitiveness of our core packaging business; two, expand reuse and recycling capability; and third, leverage regional scale. Here, I refer to our Asian business. Pact has a special position in closures with regional scale, deep category expertise and special technical capability that provides a competitive advantage in the region. Our strategy seeks to leverage this competitive advantage to win in closures. I'll speak to this later in the presentation. Delivery of these priorities represents a significant value-creation opportunity for the company, in addition to a significant step in delivering our own sustainability aspirations. The strategy targets delivery of top quartile shareholder returns and the company's sustainability promise of 30% recycled content across its portfolio by 2025. There are several enablers which are fundamental to the delivery of our strategy. A pivotal enabler is winning and a collaborative culture across the company. The strategy provides a clear direction and a rallying point for all employees. This common purpose has already enabled management to work more cohesively as one Pact. Developing and sourcing the talent to ensure the company has superior capability in each strategic priority will also be an important area of focus. We are driving the organization to be much more customer-focused, not only through behavior and practice, but also through organization structure, accountability and incentive programs. I am overwhelmed by the positive response and enthusiasm of every Pact employee in relation to our strategic direction and their role in delivering on our targets. I will now briefly take you through the 6 strategic priorities we have identified, the initiatives we have underway and the targets we aspire to achieve. Moving to Slide 19. Our first priority, focus our portfolio and strengthen the balance sheet. Our success will require focus and a strong balance sheet. To sharpen our focus, we will simplify our portfolio. We announced in January that we have commenced a sale process in respect to our Contract Manufacturing division. This process is ongoing. Proceeds from the sale will be used to pay down debt and strengthen our balance sheet. We will manage our balance sheet with discipline and focus on quality of returns. We have implemented a capital allocation framework to guide our investment and allocation decisions. I'll speak to this later in the presentation. Whilst M&A will remain an enabler for growth in the right circumstances, our focus over the strategy period will be on organic growth. Moving to Slide 20 and our second priority, turnaround and defend core packaging business in Australia and New Zealand. Our packaging platform is integral to the circular economy. Our packaging products provide the sink for recycled materials, giving value to recycling as we provide packaging solutions for our customers. It is, therefore, crucial we improve the competitiveness of our platform. Our strategy provides us with detailed plans and the funding capacity to do this. We will improve competitiveness in 4 ways: Number one, we'll be more customer-centric. The business today is very diversified, with multiple sites, broad end-use segments and varied manufacturing technologies. We are now setting up a more manageable structure focused around customer segments with appropriate manufacturing platforms. Number two, we will deliver improvements in our core business fundamentals. We will focus on improving systems, processes and culture to support improved outcomes for safety, quality, delivery, price and cost. Thirdly, we will support this by increased investment in sustaining capital. The company has significantly underinvested in its core assets for several years. This has adversely impacted our competitiveness and our ability to win. Our strategy allows for sustaining capital to increase 320% over the next 5 years. We will leverage our technical and innovation capability and access to recycled raw materials to differentiate in the market. As I discussed earlier, our customer needs are changing rapidly. Our ability to deliver sustainable products and our access to recycled materials will position us to win. Rationalizing our manufacturing footprint through our journey will be required, though this will not be our only focus. Our customers and their needs must be our first priority. Turning to Slide 21. Our third priority, lead plastics recycling in Australia and New Zealand. Pact today is the largest recycler of post-industrial plastics in Australia and New Zealand, producing more than 30,000 tonnes of recycled materials annually. It has a strong and profitable business with deep industry and technical knowledge of plastic recycling. Pact is uniquely positioned to lead a whole of value chain approach to plastic recycling. It has a recycling platform to provide an offtake for plastic from waste industry participants. It has the innovation and manufacturing capability to use these materials to meet growing end customer demand for sustainable packaging and industrial products. We will leverage a special position in the value chain to lead the circular economy and expand recycling capacity in collaboration with government and waste industry participants. We are very excited to announce today a partnership that illustrates this collaboration. On to Slide 22. Today, Pact announced an exciting partnership with Cleanaway and Asahi. We have signed a Memorandum of Understanding to jointly develop local plastic recycling capability. The partnership would see the construction of a facility that will process up to 28,000 tonnes of plastic waste into recycled material for use in packaging for food and beverages. The cross-value chain collaboration uniquely combines the expertise of each participant. Cleanaway will provide available feedstock through its collection and sorting network; Pact will provide technical and packaging expertise; and Asahi and Pact will use the recycled pallets in their packaging products. This partnership illustrates what can be achieved when we work across the value chain. In my view, this is a game changer in developing a circular economy. Turning to Slide 23, our fourth priority, scale up reuse solutions. Our strategy has reconfirmed the huge opportunity we have in scaling up our positions in returnable produce crate pooling and garment hanger reuse. Both reuse platform represent a sustainable alternative to single-use packaging. Pact is a leading supplier of pooling services for returnable produce crates in Australia and New Zealand. We have world-class facilities and innovative asset tracking technology with capability to improve supply chain efficiency. This year, we significantly expanded our platform reach, commencing pooling services for ALDI fresh produce network. Our strategic focus going forward will be to increase penetration. We have identified potential to lift penetration rates in existing produce categories from the current 47% to 70%. In addition, we can expand the produce categories. We'll support and enter new fresh product loops, such as eggs and protein. In our garment hanger reuse business, we have a potential to expand further in offshore markets. We commenced supply to a major retailer in the U.S.A. last month, and we will expect to see volumes there ramp up over time. There are further offshore opportunities identified in the strategy process, which will remain our focus. Turning to Slide 24 and our fifth priority, differentiate in industrial and infrastructure sectors. Pact is a leading supplier of plastic infrastructure and industrial products. We manufacture a broad range of products in this space, including bins, noise walls, underground cable cover, telecommunication pits, pallets and crates. It is an attractive segment, supplying both government and private enterprise. Our strategy has identified that this segment has compelling opportunities for growth through leveraging our recycling capability to support government initiatives. Turning to Slide 25 and our sixth priority, grow Asian packaging platform. Pact has a special position in closures. We have regional scale with deep category expertise and special technical capability that provides a competitive advantage in the region. Our strategy has plans that will enable us to optimize our value chain through regional consolidation of our platform. We will transition supply to lowest-cost operations while targeting growth in fast-growing local markets. Management of our Australian, New Zealand and Asian closures businesses has already been centralized under the leadership of an experienced team based in Asia. This team will now drive the consolidation and growth of our platform. Turning to Slide 26 and our capital allocation model. To support our strategy, we have developed a capital allocation framework. This framework will promote discipline in all capital decisions and maintain a strong balance sheet. The framework establishes a capital allocation hierarchy. Available free cash flow is prioritized as follows: Number one, sustaining capital expenditure. We will set a benchmark of 70% of depreciation for spend here. Over the near term, this will be important in rebuilding the competitiveness of our packaging platform. Number two, growth capital and restructuring. Here, spend will be prioritized based on ROIC returns; three, debt reduction. We will manage our leverage below 3x; fourth, M&A that delivers strong shareholder returns. And finally, dividends. We remain committed to paying dividends at the appropriate time. Our target at a group level is to deliver ROIC of 15% sustainably over the long term. Turning to Slide 27 and our targets. We have set targets by which to measure our success. Our strategy time horizon is 5 years, and by 2025, we target delivery of, top quartile shareholder returns; ROIC above 15%, this compares to 11.1% for FY '19; a strong balance sheet with leverage below 3x; company's sustainability promise of 30% recycled content across its portfolio; a focused portfolio with investments and divestments clearly aligned to strategy; and finally, a return to payment of dividends as soon as appropriate. Turning to Slide 28 to summarize. While there are near-term challenges, I feel really excited about the future for Pact. We have a clear vision for the future. And when we combine capability, collaboration and strong leadership, we can deliver significant long-term value for all stakeholders. I look forward to sharing with you our wins and our successes as we go through this journey. Turning now to our outlook for FY '20 on Slide 30. Excluding Contract Manufacturing Services, the group expects EBITDA before significant items from its continuing operations for FY '20 to be generally in line with FY '19 on a comparable basis, subject to global economic conditions. That concludes today's presentation. We'll now take questions.

[Operator Instructions] The first question comes from Owen Birrell with Goldman Sachs.

Just a few questions for me. Let me just start with the packaging space as we see that going forward. You mentioned the EBITDA in line with last year for the full year. Does that assume that the packaging EBITDA contracts into the second half if you've got growth coming through Materials Handling and the guidance with Contract Manufacturing?

Yes, Owen, you're correct. In the first half, we saw it roughly in line, but we are expecting a contraction, and that's coming on the back of -- we are seeing still some weaker sales. We've called out some of those macro factors that we've seen over the last few weeks that will have an impact on the business. But as we've talked, I think the main issue here is the reinvestment in our platform and the -- our strategy to put more funding in terms of improving the quality of that platform going forward. And that will take some time. But our strategy assumes that in this next 6 months, we are actually going to see a slightly weaker position in the second half.

And that's from an EBITDA perspective. Can we assume that the margins will improve? So revenue is going to fall by, I guess, a faster rate than the EBITDA?

Yes. Look, I mean obviously, our focus remains in terms of -- we've got 2 focuses here. One is improving the quality of our platform, which I just talked about. The other one is, we still remain committed to driving efficiency in this business, and you'll see that through our first half, and we expect those trends to continue into the second, that efficiency is a very important piece in terms of reacting to the reduction in sales. So we are very focused on improving the quality of the business and therefore, the margins in that packaging business and in fact, all of our businesses.

And just so I'm clear, the appropriate margin to compare the second half is the second half of '19?

Look, I think -- yes, I think so. But -- I mean obviously, we've seen improvement in the first half as well, and we continue to focus on an overall improvement. But I think given that there is a slight variation in terms of seasonal factors, comparing against the second half last year is the important measure.

Okay. And Materials Handling, CHEP announced a couple of days ago that they won the Coles contract. Just wondering what that means for you and the outlook and the opportunity for the Materials Handling business.

All right. Owen, in terms of Material Handling, the opportunities are big. As I've called out, there is a significant opportunity to have a greater penetration in this space. And we think from a strategy, we have seen lots of opportunities to grow that business. In terms of the CHEP, what you mentioned, we certainly did not -- I mean the price at which that contract was, we didn't want to chase that price. So that's why we didn't go for that, but there is enough opportunity within the space that we are in today over the next 5 years, which can actually give us a lot of additional revenue and profit.

Yes. I think that's the key thing. Just finishing out on that, Owen. We've invested in what we believe is technologically the most advanced platform in that space. We see that the opportunity for both substrate conversion, in terms of our existing customer base, remains very strong, and that will be our focus in terms of delivering value in the platform we've invested in.

And can I ask what the wash contracts for Coles is worth to you when it expires?

Look, it's not significant. I mean it's in the range of -- we're only -- it's a fee-for-service. As we've always said in the past, it's been more about our alignment in terms of providing the crates. So the downside to it is less than $1 million.

Okay. And just within that Materials Handling business, the TIC contract, you talked about the U.S. contract there. Just wondering when the U.S. contract is likely to be fully ramped up.

So that contract began on the first of January, in line with expectations. That will probably take us in a range of 2 to 3 months for it to be fully operational in terms of total volumes running through that contract. In terms of actually delivering full returns, I'd probably expect it to be another month or 2 after that. Obviously, very similar to the pooling business, where we've always taken the view of ensuring that we put more funding in initially to ensure that contract is fully functional and working from day 1. That will remain our priority in terms of this 6 months. But certainly, by the time we get to the end of this half, I would expect that we're running at full run rates on that contract, both from a volume and an operations perspective.

Just again on Materials Handling, the industrial opportunities that you've mentioned here, leveraging the recycled content that you have into more industrial products. I'm just wondering -- I mean you've got a pretty good position in industrial products anyway. Is this new opportunity just, I guess, replacing the existing set of customers? Or are you cannibalizing your existing business? Or is it actually incremental to that -- to the growth of that business?

I think there's a lot of focus of the government on recycled content in the infrastructure area. And we believe that with more recycled content, the chances of us winning business in this space is more. So that's really the message which we are giving. It's one of the initiatives which the government has got in terms of trying to have more recycled content, and we are right in that space. So it's not only a replacement, but also a new business in that space.

Is everyone else in the market doing this...

It allows to distinguish it from other substrates, Owen, such as concrete and the like.

Right. Right. I was going to say, are there any other providers of those sorts of industrial products using recycled content in the market at the moment?

Look, it's largely a space that has not been developed. Increasingly, given that it has that recycling capability and it also has the properties around low-cost light weight, increasingly, we're seeing opportunities develop in this space.

The next question comes from Annie Zhu with JPMorgan.

Just one for me. You noted that there will be more investment into the Asian packaging platform. Will this likely be acquisitions or organic CapEx?

You mean Asian?

Yes, yes. There is a lot of organic opportunity there. The markets are growing much, much more than the market in the ANZ space. And yes, it's primarily organic. We've got a very special technology when, I think, the Pact business were acquired from CSI, which is the business 2 years back, and the quality of the technology and the team that we got from there is quite special in the market. We see a lot of draw from customers wanting our products there, and the market is also growing much more rapidly than here. So most of what we are talking about will be organic growth in the Asian region.

The next question comes from Grant Slade with Morningstar.

First up in the Packaging and Sustainability segment, sales obviously contracted 5% in the half. Just wondering if you could provide any breakdown for the individual impacts of price, volume and mix for us?

Yes. Look, the reality is, in this space, Grant, it's all been a volume play. We've called out a very weak health and wellness sector, so -- which is basically as a result of customer destocking. We did also see -- and I think the challenges in that space are well known, but we don't see that from a long-term perspective as being a significant issue for the business. We have seen this before in terms of the channel, particularly in that health and wellness sector becoming full and then there's some contraction, and then we see it growing again. And we certainly would see that in the back half of calendar year '20, we'll see those volumes return. In terms of -- we did also see, as a result of some offshoring in FY '19, which we called out last year, we saw the impact of that in terms of our volume as well. I think the really pleasing piece in relation to the Contract Manufacturing business has been, whilst it's been a very challenging environment from a volume perspective, the team has done a lot of good work around options around automation and efficiency in that business, and I think when we do see volume return in -- particularly in that health and wellness sector, I think we're very well placed in terms of driving -- growing good volume and good EBITDA margins out of that business.

Okay. Great. So the lower dairy, food, beverage and health and wellness volumes you've called out, that's -- it's purely cyclical is what you're saying. Is that correct?

Sorry. So we called that out in the Packaging and Sustainability piece of our business. Those businesses, obviously, those are the areas where we have seen weakness in the first half, and I think with some of the macro factors, we've called that out as potentially being impacted again in the second half. But in our Contract Manufacturing business, that is -- the areas that we're dealing with, primarily around the health and wellness, and as I said, some offshoring in the household care business.

Sorry, I was -- that's the segment I was actually referring to, Richard, was the Packaging and Sustainability. I was asking about sales revenues being off to the segment by 5%, and the split of price, volume and mix. Is -- was it just volume that impacted the segment? Or was there a price or mix effects there? Presumably, you would have gotten -- some of that would be the effect of resins in the half, correct?

Yes. So if you go to that section, you can see that we did actually benefit in the period to the extent of about $5 million from an EBITDA perspective in relation to an improved resin environment. As we've called out previously, as we saw resin come down, we would expect to see benefits coming through to our P&L as we held on to some of the business -- or some of the price that we've lost in private produce sectors. In terms of the volume piece, the biggest, obviously, is the $10 million that we've called out in relation to volume which, as we said, is primarily as a result of a couple of things. There was a general weakness in the economy, that meant that volumes were down. But there was also some conversion to other substrates in terms of not so much plastic, but other substrates within the plastic industry where we have not invested in. And so much of what we've been dealing with in terms of the strategy and the reinvestment economics in the core packaging business is about aligning ourselves to our customer needs. And so basically, ensuring that we have the right investment for the right technologies that our customers are needing going forward.

The next question comes from Owen Birrell with Goldman Sachs.

Just a few follow-up questions from me. I just wanted to delve into that -- the partnership with Cleanaway and Asahi. You mentioned that it's going to produce 28 -- or it's going to process 28,000 tonnes of waste. First, I just wanted to understand how much of that is committed to Asahi in terms of the output product?

So approximately, we're looking to convert about 21,000 tonnes, and roughly about 50% of that volume would be committed to Asahi.

Essentially, so what you're saying is, you obviously got the opportunity there to sell recycled resins into third parties or -- for use for your other customers?

That's right.

And just wondering, that 28,000 tonnes capacity, is that -- that's the -- I'm just wondering what -- is there upside to that? Is there a future optionality within these -- the plans for this facility to expand that volume?

Absolutely. That could be our intention as well. I think -- I mean just to give you a -- illustrate that, I mean 28,000 tonnes, the recycle would be like 500 million bottles -- recycled bottles. So it's a pretty large number there. There is lots of opportunity we have thought of which -- to further expand this into various grades of plastic as well. Yes, so the answer is yes, but of course, first thing is to get this going.

And I think the reality is that where we've looked at placing the plant would -- has been deliberately designed the way, both in terms of meeting our customers' needs, but also in terms of ensuring that we're able to best capture any increases in volumes going forward.

Yes, I was going to ask you about that. Albury-Wodonga, I mean it's a -- it's pretty distant from mainly the end -- from the source of the waste and the end customer. I know it's very central. But what are your cost of logistics in terms of moving that -- the waste around to the location?

Look, the logic regarding Albury-Wodonga is that from a processing perspective, Asahi is based there, so it lines up well with their facility. But given that most likely, you'll be talking about Victoria moving to a CDS scheme at some point into the future, there's logic about placing a plant on the border between New South Wales and Victoria and being able to take advantage of what's coming through both of those schemes. So...

I was going to say, given the New South Wales government grant has provided, I'm assuming it's on the New South Wales' side of the border.

That would be a good assumption, Owen.

Can I ask what's the capital cost of the project? I see you're putting in $10 million, Cleanaway is putting in $10 million. Can you give us a sense of what the government grants were? And what the total cost of the project will be?

Look, we're talking about rough investment of between $25 million and $30 million.

Excellent. Okay. And then just, I guess, on the question of spend, you talked about increasing spend on sustaining capital. Can I just ask, within that packaging space, it's a pretty big increase in the capital spend. And I know you did say that the business had been sort of underspent on for a number of years. Can I ask, is there a bit of a drive by some change in the business mix that requires you to spend that more sustaining capital? And in terms of your definition of sustaining capital, does that involve not just obviously maintenance, but the capital required to maintain your customer contracts?

So maybe I can answer the first a bit, and then Richard. Yes, I mean, the way we are looking at the sustaining capital is we want to invest in platforms where we've been -- are the leaders, and we have something special to offer to the customers. And in packaging, you'll find that every 3 to 5 years, you do have new technology coming up, and we are -- for example, we are introducing a new clean room for one of our customers in the health sector. Similarly, we are planning to put in new platforms in various other segments as well. So yes, it works from the customer end. For me, that is what is it that the customer is looking for in the medium term, and then we will invest in that. So it's not just incremental, just trying to fix what may be a problematic machine, for example, and just putting a better machine, but actually having the platform, which is the most modern and something which is innovative and something which the customer values.

Would you kind of give us a sense of that -- of the $300 million that's sort of been committed there or you indicated there, how much of that is that technological innovation focus or R&D, for lack of better word?

Call it -- maybe I -- yes, maybe I'll give you an example of what we're talking about there. And in terms of our definition of sustenance capital, Owen, what we call out as sustenance is basically our investment in machines and the infrastructure that support those machines. So for example, you've got blow-fill technology, you've got in-line mold. We probably have -- there is some technology that we've not been the fastest innovator in the market, and we need to ensure that we're investing in those technologies. And part of it is to bring ourselves in line with what our customers' expectations are in terms of technology going forward. Some of it is just simply to improve the overall quality of the infrastructure and the machines that support the platform. But our definition from a sustenance perspective is that we've spoken about those machines and the infrastructure, things like the molds that are very specific to our customer, we see that as growth, and so supporting our customers from a growth perspective, we see that falls outside the definition of sustenance. And they're in with where we would expect a higher return. In terms of generating our 15% return across our portfolio, we see obviously that reinvesting from a sustenance perspective in the machines is not going to generate as stronger a return as it would in terms of the specifics around things like molds and the things that are absolutely customer -- individual customer-specific. And we've got to be much more focused in terms of ensuring that we have a quality of platform, and then -- we then drive value through alignment with the customers' needs in terms of the type of product that they need going forward. And so would very much form the definition around -- and that's why you'll see in terms of our sustenance spend, we're only talking about reinvesting 70% of depreciation because we see that we've got to make that differentiation between machines and infrastructure versus very customer-specific spend around molds and -- that go to meeting their individual need and making sure that we have different metrics around quality of returns for those different components of the capital spend.

Can I ask you, do you have the operating cash flow to fund this? I mean essentially, this is, I guess, funded out of what you would have paid out as dividends. And now your balance sheet is in order the -- should I make the assumption that we're not -- probably not going to get dividends for quite a number of years, while this program is commenced?

Look, I mean, I think the way -- we've obviously announced that we are looking at the sale of Contract Manufacturing because we don't see that business as core to our platform going forward. That will free some cash up after the sale of that business. We -- what I will say, and I don't think that we have committed to anything in terms of timing of dividends, other than we are committing to returning the dividend. However, we'll be very disciplined around our timing of investment and making sure that, that aligns with the balance sheet metrics that we want to retain. So the speed in which we will do things will be determined by a number of factors, including realignment with the portfolio -- realigning of the portfolio to what is core going forward as well our dividend policy going forward.

And if I may just -- if I'd just add that certainly, returning to dividend is an important consideration for the Board. So it's certainly one of the things the Board seriously considers.

Okay. And can you provide any comment on the sale of Contract Manufacturing? What are the levels of interest that you've seen so far?

Look, we don't -- we won't comment on the actual process at this stage. What I can say is with -- the process is underway, we're very happy with the process to date, and that's all that needs to be said at this stage. But I'm just conscious, Owen, that you've asked quite a few questions, so I'm just...

That's fine.

[Operator Instructions] The next question comes from John Purtell with Macquarie Group.

Just picking up on some of the sustaining business spend. So just to clarify that the $300 million of sustaining capital over the next 5 years, that effectively represents 70% of your depreciation over that period?

That's correct.

Okay. Is the spend going to be broadly linear? And just to clarify sort of Owen's question there on -- just in terms of the target return that you're expecting. You're expecting or targeting 15% returns for the group. But I think you mentioned that this will be less than that because by its nature, there is some underinvestment catch-up. So just to clarify that.

Yes. So I mean the spend roughly is linear across the 5 years. And look, we're looking at a 15% return as basically being a blended rate. We've got to be very focused on generating good returns from our investment in customer-specific kit. But in terms of the underlying reinvestment in the portfolio, we recognize that the returns from there won't be as strong as 15%. But across the blended, we're expecting 15% return, and that's what we're aiming for.

And just in terms of Contract Manufacturing, it's always difficult to say an exact timing for an outcome. But is there a sense that -- in terms of indicative timing for an outcome on the sale process there for Contract Manufacturing?

No. Look at this stage, John, I think the process is well underway. We've got an internal timetable that we've set for ourselves. And I think as soon as there is anything more that's appropriate to say to the market in relation to that process, we'll do so.

And just in terms of -- last one, just in terms of, I suppose, how the half played out relative to your expectations. Obviously, we can see the sort of -- the drought, bushfires, et cetera, health and wellness sort of coming off. Just in terms of, I suppose, those factors, I mean you're expecting some of this to flow through. But it feels like that was a little worse in terms of some of the negatives, the extent of those?

Yes. Look, I think in terms of the half, John, that certainly, we obviously called out health and wellness. We said demand conditions were expected to be subdued. I think it's fair to say that the results were, in terms of the top line was a little bit weaker. I think what was really pleasing about our results and the things that we're really excited about was we always talked about how important driving efficiency into our business has been, and ensuring that we're reacting to whatever volume conditions are in front of us and driving margins up. We've done that. We've been able to ensure that some of the challenges we've had with resin as resin went up, we were able to see that we recovered some of that in the period. We've got -- the ALDI contract was started during the period. And we got much better focus around our cash management. So whilst, I guess, we were a little bit disappointed with the top line and some of the challenges in terms of the market conditions that we face, I think there's a lot of really exciting things in terms of what we saw in the business in the half, and that was delivered and shows up in our numbers.

I think there's a sense of -- there's a lot of discipline in the way that we conducted ourselves in the first half would be my sort of general overall take. And you can see that from the -- particularly the cash conversion.

There are no further questions at this time. That does conclude our conference for today. Thank you for participating.