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

Ladies and gentlemen, welcome to the 2021 Annual General Meeting of your company. My name is Raphael Geminder, and I'm delighted to address this meeting as your Chairman. 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. 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 29th of October 2021, and I will take the notice as being read. The company's 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 and Mr. Michael Wachtel. We also have our Managing Director and Group Chief Executive Officer, Mr. Sanjay Dayal; and executives, Mr. Paul Washer, our Chief Financial Officer; and Mr. Jonathan West, our Company Secretary. I'd like to thank our Directors and senior management for their efforts, strong focus, ongoing diligence and governance. Also in attendance is David Shewring, 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 be acting as our returning officer. Questions can be submitted at any time. [Operator Instructions] Please note that your questions may be moderated or, if we receive multiple questions on 1 topic, amalgamated together. I will address questions at the end of the meeting. Will allow a reasonable amount of time to ask questions. But due to time constraints, if we run out of time to answer all your questions, we will endeavor to answer them in due course by 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 voting tab will appear. Selecting this tab 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 enter -- or 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 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 am required to vote those proxies as directed. Before we commence with the formal proceedings, I would like to briefly reflect on the company's performance over the last year. 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. At the risk of stating the obvious, it's fair to say that the last year has been challenging, not just here in Australia, but globally. For more than 18 months, COVID-19 has done enormous social and economic damage globally. And while vaccination rates are high in Australia, recent events in Europe would seem to confirm that the battle against this insidious pandemic is not quite yet over. Nevertheless, I'm pleased to report another successful year for our company. During the year, the group delivered strong earnings growth, improved margins, a robust cash performance and lower net debt. We made great progress in our strategy. Our performance in the year demonstrates the capability and commitment of our people to maintaining the safe and efficient operation of our facilities and diligently supporting the needs of our customers. Against the challenging backdrop in that period, our financial performance was pleasing. The group delivered revenue of $1.8 billion, EBIT of $183 million and underlying NPAT of $94 million. Group operating cash flow was strong, net debt was reduced and balance sheet metrics were improved. The Board increased dividends with total dividends declared of $0.11 per share, franked to 65%, up $0.08 per share. In the year, the company has driven business improvements, captured new growth opportunities and made great progress in the delivery of our strategy to lead the circular economy. Sanjay will provide you further comments on these achievements shortly. Sustainability is at the heart of everything we do at Pact. We are committed to protecting the environment and the world in which we live through the supply of recycling, reuse and sustainable packaging solutions for our customers. We strive to be recognized as the partner of choice for sustainable packaging and a leader in the circular economy. We divert plastic material from landfill through our recycling and reuse operations. And in our packaging manufacturing operations, we repurpose recycled materials into value-added products. We believe this is not only good business, but it is also the right thing to do. And that is why we have set ourselves up for ambitious goals. By 2025, we plan to eliminate all nonrecyclable packaging that we produce; have solutions to reduce, reuse and recycle all single-use secondary packaging and offer 30% recycled content across our entire packaging portfolio. We will do this by collaborating with our customers and other stakeholders in product innovation and by investing in new manufacturing technology to improve the sustainability of our packaging. Some of our key achievements in FY '21 include: we continued to decrease consumption of polystyrene resin, our most significant nonrecyclable resin, and are working closely with customers to transition products to alternative substrates. Since 2018, we have reduced our use of nonrecyclable resins by 34% or 3,000 tonnes. We have now fully decommissioned the production lines in New Zealand used to make expanded polystyrene foam trays for the meat industry and have transitioned these customers into 100% recycled PET food trays. We continued to grow the use of returnable produce crates in Australia's supermarket supply chain. We have reduced single-use corrugate secondary packaging by more than 2,700 tonnes since 2018. Our retail accessories business continues to grow and is now supporting the reuse of 1.2 million garment hangers each day through global retailers. We produced over 33,000 tonnes of recycled resins, 59% of our 2025 target. Our products averaged 8% recycled content and we are on track to increase this to more than 10% in the next 12 months. And critically, we are expanding our recycling and manufacturing capability to provide recycled content solutions to our customers and promote the development of an effective 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 and reaffirm our commitment to become 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 identify new opportunities through insight-led innovation. We continue to receive prestigious industry awards and customer recognition for our innovative packaging solutions. Recently, Pact was honored to be recognized as one of Australia and New Zealand's most innovative companies by the Australian Financial Review for the ninth consecutive year. We won this award from over 800 nominated organizations for our innovative freeway noise walls made from up to 75% recycled plastics. Situated along Mordialloc Freeway, the noise walls transform approximately 570 tonnes of hard-to-recycle plastic materials into panels spanning 32,000 square meters, providing a second life for single-use plastic milk bottles. At the end of their 40-year life span, each panel will be 100% recyclable. This is an outstanding example of value creation opportunities that exist in the circular economy and a testament to the hard work, the vision and the commitment of our people at Pact. Congratulations. I'll now hand over to Managing Director and Group CEO, Sanjay Dayal.

Thank you, Mr. Chairman, and good morning. I'm delighted to be presenting to you today as the Chief Executive Officer of your company. Today, I'll provide you with an update on Pact's performance over the last year and the progress we are making in executing our strategy to lead the circular economy. Firstly, to safety, our #1 priority. We have continued to improve our safety culture and processes across Pact. While our lost time injury frequency rate for FY '21 at 4.2 was up on the prior year, there has been a reduction in the severity of incidents, which is good news. Like the rest of Pact, I'm committed to ensuring that this continues. We have managed the health and safety risks associated with COVID-19 very well. It's been quite inspiring to see first-hand the way our employees have come together during these challenging times. Strict health and safety protocols, strong teamwork and vigilant management and compliance protected our sites and our people and resulted in no material impact to our operations during the period. This focus continues today. Vaccination has been a key priority. In areas where vaccines are not funded, the company has provided funding support to protect our people. And in other areas, we have provided incentives to increase vaccination rates. Turning to our FY '21 financial highlights. As the Chairman indicated, we delivered solid improvements across all key financial metrics. We achieved solid organic growth in key segments with growth in closures and reuse services, particularly pleasing. Efficiency programs delivered results and sharply rising raw material input costs later in the period were well managed. Our margins improved. Our balance sheet remains strong. In FY '21, we reported gearing at 2.4x, well within our targeted range, and cash flow was solid. This supported an increase in our dividend payout. These results were delivered against a backdrop of continued operational challenges and market disruption arising from COVID-19. I'm very proud of how well the company performed through these challenges and the demonstrated resilience of our portfolio. Our performance in FY '21 illustrates the great progress we are making in transforming Pact as we drive towards our strategic vision. Through our strategy, we have redefined Pact. Today, we are a sustainable packaging solutions provider, firmly recognized by industry, our customers and government as leaders in this space. We are differentiated through our circular economy credentials with deep experience and capability in packaging, recycling and reuse solutions. Our industry is undergoing a radical transformation into sustainable options and our unique and integrated capability provides a significant value creation opportunity. The circular economy transition is accelerating, with growing consumer demand for sustainable packaging, strong government support and legislative changes. Our strategy to lead the circular economy aligns our special capabilities in packaging, reuse and recycling to industry needs. Presented here is our "strategy on a page," giving a clear summary of our aspiration and targets, our key priorities, the enablers required to win and our values. Our strategy sets out 3 core priorities for the company. First, strengthen our core. Here, we are focused on improving our business fundamentals and delivering margin growth. Secondly, expand our reuse and recycling capability. Here, we are focused on leveraging our special capabilities in recycling and reuse to differentiate and win. And finally, 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 this region. Our strategy seeks to leverage this advantage. As the Chairman said earlier, we are making strong progress in delivering our strategy. Included here are some highlights of our progress in FY '21. Our Australian packaging business, we have increased margins and delivered improvements in operational performance, safety, quality and delivery. A new operating model, strong leadership and investment in platforms have created a solid foundation that will support continued improvements in performance throughout the strategy period. Our target is to return margins to global industry standards by 2025. Construction of our new Albury recycling facility is progressing well. This facility, that will increase Australia's recycling capability by 20,000 tonnes, will be operational next month, on time and under budget. In the period, we also announced plans to construct 2 further plastic recycling facilities, which together will lift Australia's recycling capability by another 40,000 tonnes. Several other projects remained under evaluation. Pact is demonstrating outstanding leadership in the area of recycling infrastructure. We completed the acquisition of Flight Plastics, New Zealand's only food grade PET recycler. Flight has provided Pact immediate access to quality, locally processed, recycled PET for use in packaging in the fresh food segment and will allow operational synergies to be realized. Pact's access to recycled materials, coupled with its manufacturing, technical and innovation expertise, is differentiating its service capability in the market and driving top line growth. I'm very pleased to announce that this month, we were awarded a $20 million grant from the federal government's Modern Manufacturing Initiative that will support continued investment in manufacturing capability to meet customer demand for recycled content in locally made packaging, in line with government's 2025 National Packaging Targets. In our reuse business, strong demand for hanger reuse services and continued penetration of pooling in the fresh produce sector delivered double-digit revenue and EBIT growth. And finally, our closures business had a great year, delivering solid organic growth, demonstrating the capability of our regional closures team. As you can see, we have made great progress and Pact is leading change that is transforming our industry. Finally, some comments on the divestment process for Contract Manufacturing. Recently, we announced that we have ceased this process because, to be blunt, we could not reach an agreement that met our value expectations. International supply chain disruption and demand volatility arising from COVID-19 has created a challenging operating environment for the business in the near term. Against this backdrop, we could not execute a sale transaction that would realize the true value of the business to Pact. Simply, now is not the time to sell. We believe, at this time, retaining the business delivers greatest value for our shareholders. Our balance sheet is robust, and we are confident we can deliver on our strategy while Contract Manufacturing remains in our portfolio. Our focus now is on managing the short-term headwinds while developing a pathway to improve performance. To this end, we have appointed new management that is reinvigorating the team following the distractions of the sale process. This is bringing a sharp focus on performance and a renewed sense of urgency in action. The team is recovering higher supply chain and raw material costs in the market, and we do expect improvements over time. We expect to see demand improve following the easing of lockdown restrictions in Victoria and New South Wales. We are also looking at opportunities to diversify our customer portfolio to increase volume resilience. Whilst Contract Manufacturing is not core to our strategy to lead the circular economy, it has a potential to deliver significantly more value than the sale process could deliver. Our focus is to deliver this value. We continue to progress the delivery of our strategy with energy and excitement. Our key ongoing initiatives are included on this page. I will provide further comment on these opportunities on the following slides. As I mentioned earlier, we are targeting to return margins in our Australian packaging business to global industry standard by 2025. Attainment of this target represents a significant value creation opportunity. We are driving margin improvement through 4 key levers: market strategy, operational performance, procurement and supply chain, and finally, people. These levers are enabling us to differentiate in the market, improve operational performance and quality and reduce cost. We have already made good progress over the last year, and I remain confident that these levers will continue to drive further improvement. Our recycling and manufacturing capability enables us to deliver change that others cannot. Plastic recycling infrastructure is essential to an effective circular economy and Pact is leading the industry in building a network of recycling facility through innovative industry solutions. As I mentioned earlier, we acquired Flight Plastics in New Zealand giving us access to packaging with up to 100% recycled content in fresh food segment. Our first new PET recycling plant in Albury, in partnership with Cleanaway and Asahi, will be operational next month, on time and under budget. In July of this year, we announced a further partnership with Cleanaway through which we will build a new plastic recycling plant in Laverton, Victoria. This plant will produce 20,000 tonnes of recycling plastics for use in dairy and personal care categories. And in August, we announced a partnership with Cleanaway, Asahi and Coca-Cola Europacific Partners that will jointly develop another 20,000 tonne PET recycling facility in Australia. We have several other projects under evaluation that will create for Pact a recycling network across Australia and New Zealand. Our investment in recycling infrastructure is establishing an important advantage in access to recycled materials. This, coupled with our manufacturing, technical and innovation capability, will support the transition to recycled content packaging and differentiate us in a rapidly changing market. I'm very proud of our leadership, innovation, collaboration and visionary approach in this important area of growth. Our strategy focused on improving packaging sustainability not only through recycling, but also reuse. Reusable packaging provides a sustainable alternative to single-use packaging and provides a more circular solution, keeping packaging in use for longer before it reaches end of life. Pact's reuse platform is best in class. Our crate pooling platform boasts world-class facilities and innovative asset tracking technology with capability to improve efficiency and significantly reduce waste through the entire supply chain. Our network of over 6 million crates has the capability to replace 850 million single-use boxes in their life. At the end of life, the crates are recycled and used in other industrial products. Our garment hanger reuse business provides an innovative and sustainable reuse service for garment hangers and accessories. The reuse model dramatically reduces use of single-use plastic hangers through a closed loop system, whereby hangers are reused multiple times and then recycled at end of life. Reuse has been an area of significant growth for Pact, and we remain very optimistic of the continued growth in this space. In crate pooling, we expect to deliver growth through increased penetration in the fresh food -- produce sector and diversification of pooling into new categories such as protein. We are also investing in smart packaging, that is, supply chain solutions that can improve efficiency and reduce waste. In reuse services, we have the opportunity to diversify and grow further in offshore markets, and this remains a focus for us. With the delivery of strategy in other areas now gaining momentum, our focus is turning to the opportunities to accelerate growth in our Asian region. Our closures and Asian packaging business is sizable. It generates over $280 million in revenue. We have centralized management under leadership of an experienced team based in Asia. We operate in 9 countries with over 20 sites and 1,000 employees. We have regional scale with deep category expertise and special technical capability that provides a competitive advantage in the region. We are well positioned to grow. The performance of our closures and Asian business in FY '21 has given us confidence that our opportunities are significant. I'm very pleased with the transformation that we are delivering at Pact. We have delivered improvements in key metrics and maintained strong cash generation. Our balance sheet strength has improved and gearing is comfortably within targeted levels. ROIC is improving. We are targeting top quartile shareholder returns by 2025. Our progress so far gives me confidence that we can achieve this. Our strategic positioning and continued progress on improving business fundamentals will ensure our success. I'm looking forward to sharing further progress with you. Now briefly looking ahead at FY '22. Our portfolio continues to demonstrate resilience through significant market and supply chain disruption. I'm delighted by the capability and discipline demonstrated by the entire Pact team in managing this environment while continuing to operate our business in a safe and efficient manner and deliver on our strategy. Volumes across most of our businesses have been generally in line with expectation despite the disruption arising from raw material shortages and pallet availability. Maintaining continuity of supply to our customers, however, has required increased working capital in some areas. Pleasingly, strict margin management activities are covering higher raw material and international freight costs. In the Packaging and Sustainability segment, these actions will mostly mitigate the impact of earnings in our first half. Covering these costs in our garment hanger reuse business has been more challenging, but we are making great progress here, too. In the second half, we expect positive underlying demand to continue. While market and supply chain disruption is expected to persist in the near term, it will be managed with the same focus and discipline that has been demonstrated to date. In our Contract Manufacturing segment, as we discussed earlier, performance has been impacted by lower demand due to lockdowns in Victoria and New South Wales and by higher input costs. It means, for the first half, underlying EBIT is expected to breakeven. While easing COVID-19 restrictions are expected to create a significantly more favorable demand environment in the second half, further cost increases will challenge margins. For the group, we expect underlying EBIT in the first half of FY '22 to be around $80 million. Excluding the Contract Manufacturing segment, this will be around $5 million lower than the prior year. A further update on earnings expectation for FY '22 will be provided at the company's half yearly results in February. I'd like to take this opportunity to thank our talented and committed team of people across all areas of the organization for their ongoing contribution in FY '21. 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.

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 4 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 formal 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 2021. The Corporations Act requires the financial report, the directors' report and the auditor's report to be received and considered at the AGM. Shareholders are entitled to ask our auditor questions relating to the conduct of the audit and the preparation and the content of the auditor's report or other related matters. As mentioned earlier, David Shewring 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 2021, together with the directors' 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 this act, the vote is advisory only and is not binding. The Board will, however, take into consideration discussions on this resolution when considering the future remuneration arrangements of the company. Pact Group's remuneration report is contained at Pages 42 to 57 of the 2021 Annual Report. Pact Group's executive remuneration strategy is designed to attract, retain and 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 relation to 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 2021 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, Ms. Carmen Chua. Ms. Carmen Chua, who was appointed to the Board on the 1st of September 2018 retires in accordance with the constitution and offers herself for reelection at today's meeting. Ms. Chua's qualifications, background and experience are summarized in the Notice of Meeting. The Board recommends Carmen's reelection. I will now put the resolution to meeting that Ms. Carmen Chua, who offers herself 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 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 reelection, Carmen. I now move to Item 4, approval of FY '22 long-term incentive grant of performance rights to the CEO. The company is seeking shareholder approval for the fourth grant of performance rights to Mr. Sanjay Dayal under the Pact Group Holdings Limited Long-term Incentive Plan. Mr. Dayal was employed by the company on the third of April 2019 and this fourth grant of performance rights represents Mr. Dayal's LTI for the financial year ended June 30, 2022. This 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, for 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 June 30, 2022, on the terms described in the explanatory memorandum accompanying the Notice of Meeting. Please now record your vote online under Item 4, 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. Questions will now be read out by our AGM moderator, Ms. Anita James. Thank you, Anita.

Thank you, Mr. Chair. We've got no text or audio questions.

Thank you. We will now conclude questions. 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. Please ensure that you have cast your vote on all resolutions. [Voting]

Thank you. Voting is now closed. 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.