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

Ladies and gentlemen, welcome to the 2020 Annual General Meeting of your Company. My name is Raphael Geminder, and I'm delighted to address this meeting as your Chairman. With this being our first annual general meeting held online, I would like to welcome everyone listening online and remind everyone that the presentations being given today have been lodged with the ASX and are available on our website at www.pactgroup.com.au. I am pleased we can offer a service that ensures all our shareholders across diverse geographies have equal access. A recording of the proceedings of the meeting will be made available on the company's website. The notice of meeting was sent to shareholders and the ASX on the 14th of October 2020, and I will take the notice as being read. The company secretary informs me that we have a quorum present. I, therefore, declare this Annual General Meeting of Pact Group Holdings Limited open. I would now like to introduce your directors and some executives who joined me online today. Directors are Mr. Jonathan Ling, Ms. Lyndsey Cattermole, Ms. Carmen Chua, Mr. Ray Horsburgh and Mr. Michael Wachtel. We also have our Managing Director and Group Chief Executive Officer, Mr. Sanjay Dayal; and executives Mr. Richard Betts, our Chief Financial Officer; and Mr. Jonathon West, our General Counsel and Company Secretary. I would like to thank our directors and senior management for their efforts, strong focus, ongoing diligence and governance. Also in attendance is Glenn Carmody, who is our lead audit partner from Ernst & Young. He is available to answer any questions regarding the conduct of the audit and the preparation and content of the auditor's report. Ms. Christina Piccolo of Computershare, the company's share registry, is also with us today and will act as our returning officer. At the conclusion of today's meeting, Mr. Ray Horsburgh will retire from our Board. Ray has been on the Pact Board since 2015. He has been a great support to me and brought a wealth of knowledge and experience to Pact. On behalf of the Board, I'd like to thank Ray for his outstanding service to Pact and wish him the very best for the future. Questions can be submitted at any time. [Operator Instructions] Please note that while you can submit questions from now until the end of the meeting, I will address questions at the end of the meeting. Please also note that your questions may be moderated, or if we receive multiple questions on one topic, amalgamate it together. Finally, due to time constraints, we may run out of time to answer all your questions. If this happens, we will answer them in due course via e-mail or posting responses on our website. Voting will be conducted by way of a poll on all items of business. In order to provide you with enough time to vote, I will shortly open voting for all resolutions. The final results of the polls will be available later today on the ASX website and on our company website. If you are eligible to vote at this meeting, a new polling icon will appear. Selecting this icon will bring up a list of resolutions and present you with voting options. To cast your vote, simply select one of the options. There is no need to hit the Enter button as the vote is automatically recorded. You do, however, have the ability to change your vote up until the time I declare voting closed. I now declare voting open on all items of business. The polling icon will soon appear. Please submit your votes at any time. I will give you a warning before I move to close the voting. I'm holding open proxies in my capacity as Chairman, and it is my intention to vote all such proxies in favor of the resolutions. Any directed proxies that are not voted at the meeting will automatically default to me as Chairman of the meeting, and I'm required to vote those proxies as directed. Before we commence with the formal proceedings, I would like to reflect briefly on the company's performance over the past year. And I will then invite the CEO to provide an overview of the company's businesses, its products and brands and strategies for future growth and development. I would like to first speak to the tragic loss of one of our valued employees. I'm very saddened to report that a colleague in our New Zealand team died in a tragic accident in May. On behalf of the Board and the entire Pact family, I pass on our condolences to his family. FY '20 was a period of unprecedented challenges, including COVID-19, the devastating bushfires during the Australian summer and subdued underlying demand in some sectors in our Australian market. I am proud of how the Pact team responded to these challenges and the achievements of the company in the year. I would like to particularly commend management and all employees for the commitment they demonstrated in managing the impacts of COVID-19. The company swiftly developed a response plan focused on protecting the health and safety of our employees and our community as well as supporting our customers. The safe and efficient operation of our facilities across our diverse geographies was maintained, and the needs of our customers were supported. Against the challenging backdrop in the period, our net -- our financial performance was pleasing. The group delivered revenue of $1.8 billion, in line with the prior year. EBITDA of $302 million was up 1% on the prior year on a comparable basis, and underlying NPAT was up 5%. Group operating cash flows was strong. Net debt reduced by $70 million, and balance sheet metrics were improved. The Board resumed dividends with a final dividend of $0.03 per share, franked to 65%. In the year, the company has driven business improvements, captured new growth opportunities and established a new and exciting vision for the group through a detailed strategic review. We have made excellent progress in the first stages of the execution of this strategy. Sanjay will provide you with further comments on these achievements shortly. Sustainability is central to our strategy. We are committed to protecting the environment and the world in which we live and strive to be recognized as the partner of choice for sustainable packaging solutions by our customers. By 2025, we target to reduce, reuse and recycle by eliminating all nonrecyclable packaging that we produce, having solutions to reduce, reuse and recycle all single-use secondary packaging and offering 30% recycled content across our entire packaging portfolio. We are actively collaborating with our customers and other stakeholders in product innovation and investments in new manufacturing technology to improve the sustainability of our packaging. Some of our key achievements in FY '20 include: we decreased consumption of polystyrene resin, our most significant nonrecyclable resin, and we are working closely with customers to transition products to alternative substrates. We have enabled the growth in our -- in use of returnable produce crates in Australia's supermarket supply chain through the expansion of our crate pooling operation, reducing single-use corrugated secondary packaging by more than 2,000 tonnes since 2019. We have increased the number of products we manufacture from recycled resin by 31% since 2019. We have won contracts in FY '20 to supply 3 Australian supermarket chains with recycled PET meat trays. And critically, we are establishing the recycling capability to provide recycled raw materials to promote the local circular economy. Sanjay will speak to some exciting projects we are undertaking in this area shortly. I'm proud of the progress we have made in our sustainability journey and reaffirm our commitment to becoming the #1 partner for sustainable choices in the packaging industry. Pact is Australia's most innovative packaging company. Our technical, design and engineering experts challenge conventional thinking and identifying new opportunities through insight-led innovation. We continue to receive prestigious industry awards and customer recognition for our innovative packaging solutions. We were thrilled to make The Australian Financial Review and BOSS Magazine's Most Innovative list for the eighth consecutive year. Pact ranked second on the Manufacturing & Consumers list and was a joint winner in a new category of Best Pandemic Pivot. Pact Group was recognized for its ability during the global pandemic to quickly pivot its operations at pace and scale to produce hand sanitizer. Pact's innovative Pandemic Pivot helps restore the nation's confidence that when international supply chains are severely disrupted, a local Australian manufacturer can step up and quickly transform its business model and operations to support the community. I will now hand over to our Managing Director and Group CEO, Sanjay Dayal.

Thank you, Mr. Chairman, and good morning, everyone. I'm delighted to be presenting to you today as the Chief Executive Officer of your company. Today, I will provide you with an update on Pact's performance over the last year and the progress we have made in executing our strategy, which is to lead the circular economy. Firstly, to safety, our #1 priority. As the Chairman mentioned, we are saddened by the death of one of our team members in a tragic incident at our Albany site in New Zealand. We have supported detailed investigation into the incident and are committed to preventing similar incidents in the future. Whilst our lost time injury frequency rate for FY '20 of 4.0 was improved on 4.7% in the prior year, we remain focused on driving continued improvement in our safety culture and processes. Turning to our financial performance for FY '20. As the Chairman indicated, we delivered solid financial performance in a period of significant market uncertainty. At a headline level, the group reported revenue of $1.8 billion; a statutory net profit after tax of $89 million; underlying NPAT of $81 million, up 5%; EBITDA of $302 million, up 1% on a comparable basis; free cash flow generated of $71 million, up 81% on a comparable basis; a reduction in net debt of $70 million; and an improvement in leverage to 3.6x; and the resumption of dividends, with the payment of a final dividend of $0.03, franked to 65%. Despite significant macro challenges in the period, we delivered improvements in our controllables and our balance sheet and captured new business opportunities. We delivered solid organic growth in our reuse platform and in the hygiene category in our Contract Manufacturing business. In our Packaging segment, we delivered underlying volume growth in New Zealand. And in Asia, we are leveraging the benefits of consolidating our regional closures platform. We control our cost and pricing was well managed. We have covered pricing lags from prior periods. Our group margins improved. I'm particularly pleased by a strong cash flow performance and reduction in debt, which has given us further balance sheet headroom to drive our strategic initiatives. Our results illustrate the resilience of our diversified portfolio and our balance sheet discipline. Circular economy transition. Alongside driving improvements in our operating performance, we have been clearly focused on our strategy. In February, I provided detail of our exciting new vision to lead the circular economy and a strategy that clearly aligns our capability with industry needs. The plastic packaging industry is changing rapidly. Plastic sustainability is not only a social and environmental need, it is now an economic necessity. There is strong consumer, government and industry support for the development of a circular economy for plastics. Consumers are becoming more concerned about the waste they produce, the ban on export of plastic waste, the elimination of plastic shopping bags from our supermarkets, and more recently, increased at-home consumption during periods of lockdown during COVID-19 have increased consumer awareness of the need to improve plastic waste management practices and drive a shift toward a circular economy. There is increasing demand for reusable and recyclable products and the use of recycled content. Demand for sustainable supply chain solutions such as reuse and pooling is growing. Research commissioned by Pact in July 2020 indicated that 80% of Australian consumers expressed concern about the environmental impact of their waste, and 2/3 feel guilty about the packaging waste their household produces. Consumers are increasingly focused on sustainable outcomes, and the majority are willing to pay a premium for Australian-sourced recycled content. For governments, the development of the circular economy not only represents an environmental solution to a waste problem, but also an economic solution. It's a self-sustaining industry that can create both jobs and valuable raw materials while solving the problem of waste. Governments have demonstrated commitment to the development of an effective circular economy through funding and industry support. Recently, the Australian government announced a $600 million commitment to the circular economy through the recycling modernization initiatives. Pact has special positions in the circular economy. These positions enable the company to lead in the industry and deliver sustainable competitive advantage. We have industry-leading packaging capability to improve plastics sustainability through innovation and product design, and the scale and technical know-how to provide a meaningful offtake sink for recycled materials. We are a leading plastic recycler, well positioned to lead the chain 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. We believe our special capabilities across the plastic value chain will provide significant opportunity for value creation. Our vision is to lead the circular economy. Presented here is our strategy on a page, a clear summary of our aspiration and targets, our key priorities and the enablers required to win. Our 3 core priorities are: number one, strengthen the core by strengthening our balance sheet and improving the competitiveness of our core packaging business; number two, expand, reuse and recycling capability; and finally, leveraging regional scale. Delivery of these priorities will drive value creation and provide a significant step in delivering our own sustainability aspirations. We have already made great progress in the delivery of our strategy. Here are some highlights of our work in FY '20. We have completed the critical first steps in the turnaround of the Australian Packaging business. We have transformed the operating model to align accountabilities to our customer needs. Our new operating model will promote deeper segment and improve the customer experience. We have appointed strong leadership to lead transformation of our business and deliver change in the way we operate. We have entered an agreement to acquire Flight Plastics, a leading PET recycler in New Zealand with a competitive position in the fresh food segment. We formalized a joint venture agreement with Cleanaway and Asahi, which will develop PET recycling capability in Australia. In our reuse business, we have grown our pooling revenues by 27% with the start-up of our operations to support the ALDI fresh produce supply chain. And we have expanded our reuse platform to support a major new contract in the U.S.A. And we consolidated our regional closures platform and invested in new capability in Asia. These are very pleasing achievements and illustrate the focus we have in transforming the company. More recently, we recommenced the sale process in respect of our Contract Manufacturing business, which had been suspended due to COVID-19. This process is ongoing. We will maintain the momentum in delivering our strategy. Our key initiatives for FY '21 are included here. I will provide further comment on some of these initiatives on the following slides. The turnaround of our core Packaging business is a priority. Having completed Phase 1 of the turnaround, we will continue work on Phase 2. Phase 2 will drive improvements in our competitiveness. We'll continue to improve our core business fundamentals. I'm really pleased with the improvements we've already made on safety, quality, delivery and cost. Our new operating model is supporting further improvements in this area. We'll continue to invest in our platform capability, and we will develop segment strategies that will improve our capability to win in the market. The strategies will sharpen our focus on growth opportunities, guide our investment decisions and leverage our innovation capability and access to recycled materials to differentiate. Whilst we continue to progress the turnaround, I'm confident these actions will provide the pathway to lift performance. We have made great progress in expanding our recycling capability, which will be a key differentiator for Pact in the market. To meet our target of 30% recycled content across our portfolio by 2025, we will require excess of 60,000 tonnes of recycled raw materials. The initiatives we have already undertaken, including the Cleanaway and Asahi joint venture, the acquisition of Flight Plastics and the acquisition of Australian Recycled Plastics, provide a significant step in achieving this target, increasing our recycling capacity from around 30,000 tonnes to 50,000 by 2022. This represents a significant step-change in our capability to provide food-grade recycled content sourced from recycled materials that support the local circular economy. This capability will establish for us an important competitive advantage. Our strategy has reconfirmed the huge opportunity we have in scaling up our position in returnable produce crate pooling and garment hanger reuse. FY '20 was a significant year in expanding both our pooling and reuse platform. With these expansions now both operational, our strategic focus has shifted to drive organic growth through increased penetration. In our pooling platform, we have identified potential to lift penetration rates in the existing produce categories from around 47% up to 70% over the strategy period. In addition, we can expand the produce categories we support and enter new fresh produce loops, such as eggs and protein. In our garment hangar reuse business, we have the potential to expand further in offshore markets. We have established a strong platform in Asia with a scale to capably support services globally. We are proud of the industry-leading capability we have developed in our pooling platform, which provides a sustainable alternative to single-use packaging for our customers. Now on to our targets. We believe through our strategy, we can deliver significant long-term value for all stakeholders. We have set clear targets that we will hold ourselves accountable for. By 2025, we will deliver top quartile shareholder returns, ROIC above 15% and the company's sustainability promise of 30% recycled content across its portfolio. We will maintain a strong balance sheet and ensure our investment and divestment are clearly aligned to strategy. And we will target the payment of dividends to you, our shareholders, in line with our dividend policy. Now briefly looking ahead to FY '21. In trading to date, the business has demonstrated earnings resilience. Pleasingly, we have seen good earnings momentum in our reuse business, supported by improved clothing retail demand and increased volumes into the U.S.A. In our Contract Manufacturing segment, volumes have been higher than the same period last year and efficiency is improved. Packaging volumes have been in line with seasonal expectations. We expect EBIT before significant items for the half year to be ahead of the prior comparative period. The duration and economic impact of COVID-19 remains uncertain. A further update on FY '21 trading will be provided at the company's half yearly results in February. This opportunity to thank our talented and committed team of people across all areas of the organization for their ongoing contribution in FY '20. I'm confident that our strategy will guide the business to further success. I would also like to thank my fellow directors for their support and guidance, and to you, our shareholders, for your ongoing support. I will now hand back over to the Chairman, who will go through the formal resolutions of today's meeting. Thanks.

Thank you, Sanjay. I will now move to the formal business of the meeting. Before we consider the items of business, there are a number of procedural matters, which I wish to draw to your attention. Today's meeting is being held online via the Lumi platform. This allows shareholders' proxies and guests to attend the meeting virtually. All attendees can watch a live webcast of the meeting. In addition, shareholders and proxies have the ability to ask questions and submit votes. I will now go through the formal resolutions of today's meeting. There are 6 items of business. Each resolution will be put separately. As previously indicated, questions can be sent through at any time but will be addressed after all of the 4 items of business. And it is my intention to vote all such proxies in favor of the resolutions. Any directed proxies that are not voted at the meeting will automatically default to me as Chairman of the meeting, and I'm required to vote those proxies as directed. I will now move to the items of business to be considered at this meeting. The first item of business relates to the tabling of the company's financial reports for the year ended 30 June 2020. The Corporations Act requires the financial report, the Director's report and the auditor's report to be received and considered at the AGM. Shareholders are entitled to ask our auditor's questions relevant to the conduct of the audit and the preparation and content of the auditor's report or other related matters. As mentioned earlier, Glenn Carmody of Ernst & Young, who is our lead audit partner, is in attendance online and available to answer any such questions. I'm advised by the auditor that there have been no questions received for their attention prior to the meeting. I ask the company secretary to record that the financial report for the company and its controlled entities for the year ended 30 June 2020, together with the Director's report and auditor's report, have been received and considered by shareholders. We will now proceed with the resolutions to be considered. Again, please note that only shareholders and proxy holders may vote. I now move on to Item 2, the adoption of the remuneration report. The Corporations Act provides for a vote on the remuneration report. Under the act, this vote is advisory only and is not binding. The Board will, however, take into consideration discussion on this resolution when considering the future remuneration arrangements of the company. Pact Group's remuneration report is contained at Pages 38 to 47 of the 2020 Annual Report. Pact Group's executive remuneration strategy is designed to attract, retain, reward and motivate high-performing individuals so as to achieve the objectives of the company in alignment with the interest of the company and its shareholders. These remuneration arrangements comprised fixed remuneration, variable remuneration and discretionary bonuses. The variable remuneration consists of both the short-term incentive, measured over a 12-month period; and a long-term incentive available to the CEO and select senior executives, which is measured over a 3- year period. The fixed component is structured to attract high-caliber executives with the right mix of experience, qualifications and industry expertise. The short-term and long-term incentives are to reward executives for their role in achievement of the group's financial performance targets and their own individual performance targets. Group EBITDA and cash management are the key financial measures assessed against budget on a half yearly basis, along with nonfinancial measures. A discretionary bonus may be paid for an executive's performance in related specific projects. The directors recommend that the shareholders vote in favor of the resolution. I will now put the resolution to the meeting that the company's remuneration report for the financial year ended 30 June 2020 be adopted. Please now record your vote online for Item 2, if you have not already done so. Valid proxy votes received for this resolution are currently shown online. As indicated in the notice of meeting, I intend to vote valid undirected proxies given to the Chairman in favor of the resolution. I now move to Item 3, reelection of Director, Mr. Jonathan Ling. Mr. Jonathan Ling, who was appointed to the Board on the 28th of April 2014, retires in accordance with the constitution and offers himself for reelection at today's meeting. Mr. Ling's qualifications, background and experience are summarized in the notice of meeting. The Board recommends Jonathan's reelection. I will now put the resolution to the meeting that Mr. Jonathan Ling , who offers himself for reelection and being eligible, be reelected as a Director of the company. Please record your vote online for Item 3, if you have not already done so. Valid proxy votes received for this resolution are shown online. As indicated in the notice of meeting, I intend to vote valid undirected proxies given to the Chairman of the meeting in favor of the resolution. Based on the proxies received, it is apparent that the resolution will be passed. Congratulations on your reelection, Jonathan. I will now move to Item 4, election of Michael Wachtel as a Director. Mr. Michael Wachtel, who is appointed to the Board on 21 April 2020, retires in accordance with the constitution and offers himself for election at today's meeting. Mr. Wachtel's qualifications, background and experience are summarized in the notice of meeting and in the company's annual report. The Board recommends Mr. Wachtel for election. I will now put this resolution to the meeting that Mr. Michael Wachtel, who offers himself for election and being eligible, be elected as a Director of the company. Please now record your vote online under Item 4, if you have not already done so. Valid proxies -- valid proxy votes received for this resolution are currently shown online. As indicated in the notice of meeting, I intend to vote valid undirected proxies given to the Chairman of the meeting in favor of the resolution. Based on the proxies received, it is apparent that the resolution will be passed. Congratulations on your election, Michael. I now move to Item 5, approval of FY '21 long-term incentive grant of performance rights to the CEO. The company is seeking shareholder approval for the third grant of performance rights to Mr. Sanjay Dayal under the Pact Group Holdings Limited Long-Term Incentive Plan. Mr. Dayal was employed for the company on the 3rd of April 2019, and this third grant of performance rights represents Mr. Dayal's long-term incentive for the financial year ended 30 June 2021. The plan is designed to allow the Board to make grants of awards to employees, which provide the opportunity to acquire shares to assist with attracting, motivating and retaining employees, delivering rewards for performance and aligning interest of employees with those of shareholders. I will now put the resolution to the meeting that approval be given for all purposes, including ASX Listing Rules 7.1 and 10.14 and Section 200B and Section 200E of the Corporations Act, the grant of performance rights to Mr. Sanjay Dayal, the company's MD and CEO, as his annual long-term incentive grant for the year ended 30 June 2021 on the terms described in the explanatory memorandum accompanying the notice of meeting. Please now record your vote online under Item 5, if you have not already done so. Valid proxy votes received for this resolution are currently shown online. As indicated in the notice of meeting, I intend to vote valid undirected proxies given to the Chairman of the meeting in favor of the resolution. Based on the proxies received, it is apparent that the resolution will be passed. I now move to Item 6, amendment to the constitution. The company is seeking shareholder approval to make proposed amendments to the company constitution. We seek the proposed constitution be adopted as the constitution of the company in place of the current constitution, with effect from the conclusion of the meeting. It is proposed to update the constitution as there have been development in law, corporate governance, principles and general corporate and commercial practice for ASX-listed companies. The proposed amendments to the constitution reflect current market practice and terminology and will provide the company further flexibility moving forward. I now put the resolution to the meeting that for the purpose of Section 136 of the Corporations Act, and for all other purposes, the company's constitution be amended in accordance with the proposed amendments outlined in the explanatory memorandum accompanying the notice of meeting and as contained in the amended constitution tabled at this meeting and signed by the Chairman for the purpose of identification with the amended constitution to become effective from the closing of the meeting. Please now record your vote online under Item 6, if you have not already done so. Valid proxy votes received for this resolution are currently shown online. As indicated in the notice of meeting, I intend to vote undirected proxies given to the Chairman of the meeting in favor of the resolution. Based on the proxies received, it is apparent that the resolution will be passed. Questions will now be read out by our AGM moderator, Mrs. Anita Jones. Thank you, Anita.

Mr. Chairman, we have not yet received any questions.

Thank you. I will pause for a minute and allow people to enter any questions if they have any. Thank you. We will now conclude questions. For any questions, obviously, that have not been answered or any questions that come in through the remainder of the day, we'll endeavor to answer those via e-mail or on our website. Ladies and gentlemen, that concludes our discussion on the items of business. I will now pause for a minute in order for you to finalize your votes prior to closing the voting system. Once again, please ensure that you have cast your votes on all resolutions. [Voting]

Voting is now closed. Ladies and gentlemen, I thank you for your attendance and participation, and I hope that this has been an opportunity for you to learn a little more about the company and its exciting future. The final outcome of the polls will be declared by notice to the ASX later today and placed on the company's website. I now declare the Annual General Meeting of Pact Group Holdings Limited closed.