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

Good day, and thank you for standing by. Welcome to Pact Group Half-Year Results Briefing. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Sanjay Dayal, Managing Director and Group Chief Executive Officer. Thank you. Please go ahead.

Good morning, and welcome to Pact Group's FY '23 first half results briefing. I am Sanjay Dayal, the Chief Executive Officer of Pact Group. I'm joined today by Paul Washer, our Chief Financial Officer. I will first run you through a results overview, and discuss our progress to strategy. Paul will then take you through a detailed look at our financials before returning to me to cover outlook. And, of course, we'll be pleased to take questions at the end of the presentation. Starting at Slide 5. I am pleased to report that our revenue for the half totals $998 million, up 8% on the prior corresponding period, a solid result on the back of both volume growth and cost recovery across our businesses. Our underlying EBIT at $75 million is 3% above the top of the guidance range that we provided at our AGM back in November and reflects a strong performance in the last 6 weeks of the half. Our underlying net profit after tax was $26 million, with finance cost increasing half-on-half. This is a good result in a half that commenced with unpredictable and elevated raw material cost, challenging growing conditions across Australia and New Zealand and an unreliable supply chain. As I will outline shortly, the external environment conditions started to settle later in the half, driving both volume growth and some stability of raw material pricing. These results also reflect our ongoing and intense focus on management of controllable costs, and we will continue this focus on cost management through the second half as well. We have delivered revenue growth in 2 of our 3 segments: Packaging and Sustainability, where we continue to see escalating customer demand for sustainable packaging; and in Contract Manufacturing, where we have benefited from the trend to onshoring. Revenue was down 4% in our Materials Handling and Pooling segment, which was, due to a sharp drop in garment retail demand in the U.S. and Europe, which impacted on our Retail Accessories business. Our gearing has peaked at 3.2x. This temporary elevation of our gearing is on the back of sales late in the half that were sitting in debtors at 31 December. The cash was collected post the end of the half and used to repay debt. It also reflects an acceleration of our capital spend for the year as we prepare to take advantage of the demand for sustainable packaging. I will talk more about this sustainable packaging opportunity shortly. Our gearing also increased as expected on the back of our acquisition of Synergy Packaging, which has been a great addition and that has helped to accelerate our circular economy strategy. I'm pleased to see our inventory levels have reduced somewhat as our supply chain improved and will continue to do so. With strong collections in January, I feel confident that our balance sheet is well placed. Related to that topic, we are considering the makeup of our portfolio as our strategy evolves to ensure that all our businesses are strongly aligned to our strategy, and we have the balance sheet capacity to execute it. We'll continue this review to monetize parts of our portfolio and keep the market updated with progress. Our results are a reflection of the effort the whole Pact team have put into bringing our strategy to life and growing the business. I would like to take this opportunity to thank our dedicated team. We are undertaking a large capital program to keep up with the demand for sustainable packaging, which I will outline further, and this program is landing over the next 6 months. Due to the immediate cash requirements of this program, which will ease before year-end, our Board has made the prudent decision not to pay an interim dividend. The Board will reassess our position at year-end. And at this stage, it is the intention of the Board to pay a full year dividend. It is also the Board's intention to work towards a payout ratio of 40%. Slide 6, environmental factors. At our last results announcement, I outlined the environmental factor that impact on our business. I would like to update you on these factors. As you know, labor availability has been challenging in Australia and New Zealand as our unemployment rate remains low. This remains an ongoing issue, though, I believe we are managing it well. We experienced a steady improvement in our supply chain with global shipping reliability close to 60% at the end of the half, an improvement that has enabled us to better plan our raw material management and to start to bring down inventory levels. Given our reliance on imported raw material, including resin, this is a really important indicator for us. Raw material pricing and availability has been variable over the half with currency working against us at times. The outlook here is favorable, although we have a long supply chain and any price change will take time to flow through. Consumer demand varied by region. Australia is somewhat stable at a low level, whereas demand, particularly in retail in the U.S. and Europe dropped dramatically midway through the half, where the patterns in Australia and New Zealand have also had a material impact on demand. This improved late in the half as conditions improved, but extreme weather patterns continue to impact agriculture sectors in the early part of 2023. Energy pricing remains elevated, although more stable. Undoubtedly, it will take some time for inflationary pressures to abate and demand to normalize. It is pleasing to note, however, that the sustainability agenda is gaining momentum. Overall, the environment remains challenging, although there are signs of improvement in some areas, which are favorable for PAT heading into the second half. Slide 8, our segments. As you will see on the chart, Packaging and Sustainability is clearly our largest segment by both size and number of businesses and, therefore, the most impactful on our results. This segment covers our rigid plastic and steel packaging business across Australia, New Zealand and Asia, with a full service offering to our customers, including the growing demand for recycling. Included here is our plastic closures business that spans Australia, New Zealand and parts of Asia. And this segment also includes our plastic waste recycling business with both Pact-owned and joint venture recycling [ Pact ]. Materials Handling and Pooling contains our reusable plastic crates that are used in place of single-use corrugated boxes and, therefore, divert waste from landfill. In this segment, we have Retail Accessories where we recycle and reuse hangers and security Pact's for the garment retail industry. We also have our Sulo bins business for curbside waste collection and infrastructure solutions such as noise walls. Contract Manufacturing is the smallest of our segment. It manufactures complete solutions for our customers in the home, personal care and health and wellness markets. Contract Manufacturing uses Pact's high sustainable packaging as one of its inputs and a valuable point of difference. Slide 9 Pact's role in the circular economy. Slide 9 outlines how the circular economy comes to life at Pact. We are driven by a desire to divert waste from landfill and ensure it is recycled. We are uniquely positioned within the recycled plastic packaging value chain as we are involved in all of the 4 key elements to a successful circular economy. Starting at the bottom left of the slide, we have agreements to access plastic waste at a significant scale, and the federal government export ban on plastic waste, which came into effect last July will further increase our access to waste at a reasonable price. In addition, our partnership with Cleanaway, Australia's premier waste collection company, provides us with reliable and consistent supply of the raw material we acquire. Related to this, we have the largest household garbage bin manufacturer in Australia and New Zealand contributing to the collection of plastic waste, and we have invested to expand our capacity here. Moving to the top left, we have a recycling business that has an ability to produce in the order of 50,000 tonnes of recycled plastic resin. We continue to invest in new manufacturing facilities here and have 2 sites in development in Victoria, which would add another 35,000 tonnes per annum of recycling capacity with further sites under consideration. Moving to the top right, we are the largest rigid plastic packaging manufacturer in our region with proven innovation capability. Our average recycled content across plastic is over 10% now, and this is the area where we have focused our capital program for the first half. We have invested to ensure that we have the platform in place to produce sustainable packaging at scale using our recycling material. We have focused our investment in process food and in dairy and beverage packaging as this is the greatest level of demand. I will provide more details on these investments in the next slide. And, of course, the circular economy is driven by our customer preference, and we are seeing growing demand here. Our customers are all household names in retail with their own commitments to increase recycled content in their packaging with many of them having ambitious APCO targets, which is generating strong demand for sustainable packaging. This positioned Pact as a leading partner of choice for our customers. Slide 10, capital program to be delivered in 2023. We are undertaking a capital investment program that is larger in size and scale than usual. With delays in the associated equipment arriving caused by COVID and now with all of the equipment in place, we are currently in the final stages of a larger-than-usual number of capital-intensive projects. All of these projects are closely aligned to a successful circular economy. This means we need to preserve our cash now to fund this program of work. The program will be likely funded by the end of this financial year, which will then ease our cash availability by the year-end. It will also mean we'll be generating revenue from this capital program from early in FY '24 year and, in some cases, before that. We have continued our investments in both the Laverton and Altona recycling joint ventures to increase the amount of recycled resin we produce and have access to. As you will see here, in this image of the Altona facility, it is well advanced and both sites due for completion by June. You will see on the slide, there are other significant projects underway, including a new packaging site at Laverton. This site is designed so that we can rapidly increase the recycled content in our household and industrial packaging and is scheduled to open in May. We have also developed the capability to produce a new type of folding mega bins for transportation of fresh food and protein with the first bin sold this month and full production from next month. We are also investing in our mobile garbage bin and lid manufacturing capability. So we have improved reliability and capacity to produce these bins, which have high demand from local towns. At the same time, we are investing in a new state-of-the-art facility with a high-speed filling line in Horsley Park. This facility is well advanced, as you can see from the photo, and is due for completion in the first quarter of FY '24. This will materially increase our capacity to produce liquids and represents a step change in the efficiency of our contract manufacturing business. Strategy in action, some recycled examples. Slide 11 highlights a small sample of our innovation. Working with our customers, we have developed a capability to produce Sulo mobile manufacturing bins with over 80% locally sourced recycled content. These are in high demand from local councils and so we have invested in our garbage bin production capacity. The bins on the screen have been rolled out across the city of Whittlesea for use in their glass recycling program. We manufactured the noise walls for the 1.6 kilometers Werribee section of the Princes Highway using 75% recycled plastic. In the manufacturing process, we have been able to incorporate post-consumer waste collected from homes across Melbourne. Over 61 tonnes of recycled plastic was used to make the panels for the wall, equivalent to the volume of plastic that 50,000 homes produce in an average year. We worked with a popular Western Australia brand, Brownes Chill, to transition their chocolate milk packaging to Pact's 100% recycled PET bottles. This recycled PET is Australian sourced and processed, a local circular economy at work. We have used recycled plastics to manufacture closures for the Swisse Ultivite range containing up to 50% recycled HDPE sourced from household recycling bins. There are many other examples and the rate of take-up of sustainable packaging and the demand for packaging with recycled content continues to grow. Slide 12, strategic growth targets. The slide shows the targets that we are working towards. I ran you through these at the last results release. So I will provide you with a brief update here. The targets outlined how we will deliver value from our strategy, as well as our safety and environmental targets. As I discussed earlier, we are focusing on all 4 areas to a successful circular economy. It is successful like our arrangements with Woolworths that will help to deliver a margin uplift. Our recycled content across our plastic portfolio now averages 10% as we move towards our target of 30% by FY '26. We have had good margin growth in packaging Australia over the last half. We are now beginning to deliver margin levels we were at prior to the supply chain crisis and we'll continue this momentum to 10% by FY '26. Differentiation through our circular economy strategy with our access to recycled content will assist to further lifting margins. An important focus for us is refining our portfolio, so we have the balance sheet capacity to accelerate progress towards our goals. This effort is ongoing. I will discuss safety on the next slide, and we are on track to have our TRIFR below 8 by FY '24. And after announcing our emission target last year, we are working on progress to our goals. The main focus has been on installing solar panels at our sites, and this is underway. Slide 13, focus on our people. Turning to our people, I will start with our primary focus safety. We continue to invest in safety and pleasingly, our total recordable injury frequency rate is 9.5, down 13% on the same time last year, and the vast majority of incidents were classified as low consequence, which means we are keeping more of our people safe. At Pact, we have a diverse and engaged workforce who are proud to work here. We are actively investing in our staff. We have had 200 of our talented leaders through our Pact Lead program to enable them to shape culture and drive performance. Through these programs, we continue to identify, develop and recognize new talent. These initiatives reflect the care we have for our people and the culture of success we have at Pact. Slide 15, Packaging and Sustainability. Now, for some highlights from our segment performance. In relation to our largest segment, Packaging and Sustainability, we reported 9% growth in revenue to $661 million and 3% growth in underlying EBIT to $57 million. I'm pleased with this progress. However, there is more work to do on cost recovery, as well as reducing our cost base as we work towards lifting our margin here. Packaging Australia's results reflects a more stable supply chain, cost recovery and increasing demand for sustainable packaging. Packaging New Zealand's fresh food business reported strong volume growth over the half, and its dairy business had record sales in December. Our Asian closures business reported mixed results by country, reflecting the varying conditions in the region. We had good growth in India and Nepal, whereas the sugar shortage in the Philippines caused the short-term closure of manufacturing at Coca-Cola and a delay in volume. And COVID lockdowns in China had a particularly negative impact on this business. The momentum we experienced late in the half is encouraging, and we expect to see demand stabilize in the second half as growing conditions improve across Australia and New Zealand and COVID restrictions eased in China. Slide 16, Materials Handling and Pooling. Now to Slide 16. In the Materials Handling and Pooling segment, revenue fell 4% to $179 million, and underlying EBIT was down 35% to $18 million. This result reflects a slowdown in our Retail Accessories business on the back of a sharp drop off in volume from U.S. and European garment retailers who were faced with a stock build in highly unfavorable economic conditions. The COVID lockdowns in China were also unfavorable for this business. Demand in the Australian business was stable. We expect trading conditions to improve for our U.S. customers during quarter 4 and our China volume slowly return. In the meantime, we have removed a material level of cost out of this business and will continue to do so. Volume in the Pooling business was negatively impacted by poor weather conditions in Australia and New Zealand. These conditions have stabilized and Pooling business is now back to expected volume levels. I'm pleased to report that the Sulo bin business delivered very strong growth, reflecting our success in winning a large number of council bin contracts. And this business has significant contracts in place for the second half. We are expecting a solid performance from this segment in the second half with crate pooling and Sulo bins to perform well and Retail Accessories volume returning later in the half. Slide 17, Contract Manufacturing. I'm pleased to report revenue is up $26 million on the previous half, which is a fantastic result. Approximately half of this is due to repricing existing contracts, and the remainder is from new volume won by this business, reflecting a great performance from our new management team. As mentioned earlier, we're building a new site at Horsley Park with a high-speed liquid fill line and the new volume this will create has been presold. This adds to the volume we have gained from onshoring post COVID. The turnaround plan for Contract Manufacturing is well underway. The monthly EBIT run rate in the business at the end of the half was positive, and our ambition is to achieve an $8 million EBIT turnaround from FY '22 to FY '23 on the back of improved performance. I will now hand over to Paul to take you through the financials in detail. I will return at the end of the presentation to talk briefly to our outlook. Thank you. Paul?

Thank you, Sanjay, and good morning, everyone. Let's start by reviewing the group results for the year on Slide 19. I will focus on the headline numbers here, noting that Sanjay has provided an overview and spoken to the segment results already. Revenue for the group was $998 million, an increase of 8% compared to the same half last year. Most of the increase is due to cost recovery through resetting of quarterly pricing mechanisms, general trade price increases and renegotiations with customers. Cost increases continued through the first quarter of the financial year, and we are still passing through price increases in Q3, albeit at a smaller rate. Approximately 10% was generated by volume growth, which was pleasing given the difficult trading conditions across our geographical spread. Growth in fresh food, closures and the personal and health care sectors was reflective of the increase in demand for sustainable packaging and recycled products. Whilst the growth in the Contract Manufacturing segment reflected new contract wins in the nutraceuticals and detergent sectors from onshoring and new capability investment. Underlying EBIT was $75 million, 3% above the top of the guidance range we provided back at our AGM, reflecting improvement in demand later in the half. Compared to last year, underlying EBIT was down 9% due to the slowdown in demand in our Retail Accessories business, and we expect to have now experienced the bottom of the demand cycle. We were pleased to see the continuation of solid EBIT performance contribution from our Packaging and Sustainability business, which is benefiting from a more stable supply chain, especially in Australia. And our Contract Manufacturing business has stabilized and will begin to contribute positively to EBIT in the second half of the year. We will need to keep vigilant as demand reacts to underlying economic factors, but we are expecting to continue to improve our margins in the second half through price recovery where appropriate and strict cost control, which has been facilitated through our cost reduction program that will help support our earnings growth in the second half. Moving ahead to Slide 20. Our gearing was 3.2x, and this is higher than the normal seasonality increase at this time of the year. High inventory holdings due to supply chain constraints, late first half sales, accelerated capital spend and the completion of Synergy Packaging in July have all contributed to the increase in December's gearing, but it is only short term as the peak working capital seasonality will unwind in the second half of the year, with the group returning to under 3x by the end of the financial year. Some of the key factors driving the gearing ratio are as follows: Firstly, in the last 6 weeks of the half year, the external environment was more favorable, and we experienced strong sales demand across a number of sectors. This is evident in our trade debtors movement, which was up $44 million, a 33% increase, well above the expected growth of 8% due to revenue. The majority of these receivables were collected post the end of the half year and used to pay down debt. It does mean though that as at the 31st of December, our debt was temporarily elevated. Combined with the additional inventory held to alleviate the impact of supply chain disruptions, we have had an increased working capital investment program, which is only starting to reduce as shipping reliability improves. It is especially pleasing to see our inventory below the 30th of June balance and only $10 million higher than this time last year despite our seasonality peak at this time of year. We funded the acquisition of Synergy Packaging for $20 million last July, and this was additive to gearing in the short term. And finally, as Sanjay outlined, we accelerated $15 million of our capital spend in the first half of the year, spending $65 million on a range of projects, including an upgrade of our processed foods and dairy platforms so that we can manufacture packaging with high recycled content. As you can see from the waterfall chart on this slide, after adjusting for these items, our adjusted gearing would have been 2.9x. This is still at a high level, so our main focus is on refining the portfolio of companies we own, growing EBITDA and reducing inventories now that supply chain conditions are becoming more favorable. We have actions in place to ensure gearing falls below 3x by the 30th of June, and we will continue to work on reducing gearing further. Now to run through capital expenditure on Slide 21. As mentioned, we have lifted spend on capital projects, which means the related revenue generation will be accelerated. We spent $65 million in the half. Of this total, $33 million was spent in Packaging and Sustainability across a range of projects, including upgrading our processed foods capability, relocating our household and industrial site at Laverton, a dairy packaging upgrade in Western Australia and the continuation of our redesign of the New Zealand fresh food platform. These investments increased our capacity and capability across a variety of sectors and product types so we can provide scaled sustainable packaging solutions to our customers. Our capital spend in Materials Handling and Pooling totaled $17 million and included new capability to manufacture folding mega bins in Australia, investment in our mobile garbage bin capacity and a new wash line and crate pool in New Zealand to support customers moving to more sustainable supply chain solutions. In Contract Manufacturing, we are significantly increasing our liquids filling capability with a new site at Horsley Park. We identified unmet demand in this segment, and we have sold the output from this new filling line to capacity well in advance of completing the capital spend. CapEx in this segment was $15 million for the half. The opportunity to invest in recycling capability is critical as we begin to source recycled resin from our joint ventures and make it into sustainable packaging solutions for our customers. In line with our circular strategy vision, we are getting ready to make all of the [ path work ] together. We are forecasting capital spend for FY '23 at $120 million, and a significant part of that investment is in our Australian platforms, including investment in upgrading our mobile garbage bin platform this quarter. As Sanjay outlined, our Board has made the prudent decision to not pay an interim dividend. This is a short-term measure as we deliver on our large capital program over the next 6 months and reduce our working capital in line with expectations. The Board will reassess our position at the full year after our capital program has reduced. And at this stage, has the intention to pay a full year dividend. It is also the Board's intention to work towards a payout ratio of 40%. On to Slide 22. In relation to our debt facilities, they have a long tenure, reflecting the support of our banking syndicate with the first tranche due in FY '25. Our operating cash flow was solid at $98 million and broadly in line with corresponding half years. Operating cash flow was impacted by both our EBITDA results and by increased working capital, as I mentioned previously. With our seasonal cash generation period now upon us, we expect this to improve. That concludes my analysis of our financial results. I will now hand back to Sanjay.

Thanks, Paul. Moving now to our outlook for FY '23 on Slide 24. We reiterate guidance of FY '23 underlying EBIT to be slightly ahead of FY '22, noting the demand outlook is uncertain. In relation to our individual segment outlook, Packaging and Sustainability. FY '23 results to be above FY '22 as trading conditions normalize and demand improves with impact, particularly on Australian packaging, New Zealand with improved dairy demand and Asia closures as China recovers. Materials Handling and Pooling, second half FY '23 EBIT expected to be in line with EBIT generated in the second half of FY '22. And Contract Manufacturing will deliver positive EBIT for FY '23. This concludes today's presentation. We will now take questions.

[Operator Instructions] We have the first question from Simon, investor.

Some very strong results. You previously mentioned an MOU to supply sustainable packaging to Woolworths. I was just hoping you had an update on that agreement, please?

Thank you, Simon, for the question. Yes, actually, I do, and I'm delighted to say that as of this morning, we have progressed to a signed agreement for our strategic partnership with Woolworths Group in relation to the use of recycling content in recycling plastic packaging for Woolworths own brand products. You remember we had an MOU, which we had talked about earlier, but now it's been changed into a signed agreement. So we look forward to working with Woolworths to bring the strategic partnership to life. We are also jointly expanding our usage of reusable crates with Woolworths as well.

Our next question comes from the line of James Wilson from Jarden Group.

Just a couple from me. Firstly, on the second half for the Materials Handling and Pooling business, your guidance implies EBIT effectively doubling from the first half into the second half of this year. Are you able to talk to us about how much of that is catch-up from unrecovered first half earnings compared to how much of that will be actual organic second half earnings?

Thanks, James. So in our outlook, we said that the second half of Materials Handling and Pooling the '23 will be in line with '22. And you'll recall that first half is $10 million lower than this time last year. So a lot of that is for the second half of '23 is demand returning in the Retail Accessories business. We expect that to return around Q4 of the financial year '23. And then the remainder would be around organic growth in the Australian Materials Handling business, predominantly out of the mobile garbage bins platform, which you'll recall, there were no contracts last year, but this year, that business has been able to secure those contracts.

Okay. Great. And just another one for me on the lower cash number that you guys reported at this half. How much of that working capital build up do you actually see unwinding in the second half of the year? And typically, is there a skew to working capital in the second quarter of each year for you guys historically or...

So yes, James, you're right. So I think it was in the waterfall. There's approximately $30 million of working capital that we would expect to just reverse from a timing issue into the second half just because of the late sales that we had in the last 6 weeks of the first half. But -- and to your point, there is generally a generation of cash in the second half because we've come off our seasonality of the first half. And if you go back even to last year, we were at -- we can go down from sort of levels of about 2.7% where we were last year in terms of cash generation. So there's no doubt the second half is a much better cash performance when you look at the 2 halves.

Okay. Great. And sorry, just one last one for me. With the decision to not pay a dividend this half driven by those gearing levels just being ahead of targets. I mean, given that you've guided to the full year dividend at the moment, staying in place, what is the change that you're expecting in the second half that's going to allow you to pay a full year dividend but not this half's dividend?

So the main -- James, the main focus is that, we want to make sure we can fund the cash program. So we've got a cash capital program. So there's a lot of cash required around the capital, especially in the next quarter. So as Sanjay outlined, those projects that were shown visually are all mostly being delivered over the next sort of 3 or 4 months. So it's really just ensuring that the Board, I think, really wanted to be sure that we could deliver those projects and then we'll get back to a normal cash cycle as we look towards the end of the year.

Our next question comes from the line of John Purtell from Macquarie.

I had a few questions, please. Just the first one, which has been an extension to the James' one there before. But I suppose, historically, we've seen a seasonally weaker second half earnings for Pact versus the first half, and that, I suppose, related to the timing of dairy seasons in New Zealand, et cetera. But I appreciate some of the commentary there on the tech business and on Contract Manufacturing expected to be profitable there in the second half. But have you sort of baked in that normal seasonality? And what are the factors offsetting that?

I think when you look at the first half of this year, I don't think we would say it was a normal season. There's a lot of disruption in the first half of a number of growing conditions across Australia and New Zealand. So it's fair to say that we do expect the second half to, therefore, have a lot sort of different profile in terms of other years when you look back on comparables. So we are expecting the second half to be a much stronger growing season, both in New Zealand, whether it's dairy, et cetera, but also in Australia with its growing conditions, which were pretty hampered in the first half of this year. So those are the factors we're taking into account. And then, of course, to your point, around Contract Manufacturing and the demand returning in Retail Accessories, it should ensure that we have a better second half than the first half of this year.

Second question, in terms of your interest cover, it's moved lower in the period. So the question is, are there any interest cover covenants in your debt facilities? And if so, how do they compare to current metrics?

Yes, we do, but they're well below -- our actual performance is well below where the covenant is. So there's no issue in terms of interest cover.

And a final question there. Can you comment on the -- I know Sanjay made some broader commentary to this, but the status of the reuse review? And also, are you revisiting a potential sale of Contract Manufacturing in line with your sort of earlier portfolio comments?

Yes. John, I think I already mentioned during my speech that we are looking at the portfolio, some parts are very close to strategies, some parts we are thinking can we monetize them. And you already know the history around the Contract Manufacturing. So that -- yes, that is ongoing. Certainly, right now, we are focusing -- for Contract Manufacturing, we're focusing on stabilizing it. That's the first thing we mentioned about the investment we've made at Horsley Park, that's going to give that business a really special asset. That sort of asset is not available anywhere on this -- in the Southern Hemisphere. So all that we are focused on right now. But yes, long-term, we would be looking at monetizing parts of the portfolio so that we can execute the strategy faster and really deliver all our targets around the strategy. That part of it, John, has been going exceedingly well in terms of the strategy, the demand for recycled products. I couldn't be happier with all that we have been doing at that end. And I think as Paul explained, one of the things which has happened in -- for the second half is the fact that there's so much to do around the strategy that has, therefore, pushed the dividend out so that we can actually utilize it to maximize the opportunities that are there in front of us. So that's probably all I had to say on that. But it's all good news, to be honest.

Next question comes from Larry Gandler from Credit Suisse.

A few of my questions have been asked already. But just while carrying on with the reuse review, Sanjay. What's the sort of hold up there? It's probably upwards of about a year since the original announcement. Is it something intrinsic in the business that maybe you want to develop before executing a transaction? Is it lack of buyers? What's -- what are you guys pondering with regards to that reuse review?

So Larry, the announcement was around July last year in terms of the reuse announcement that we put out there. I think what you got to look, I think with interest rates moving around and the economy sort of the direction and everyone's a bit uncertain, I think there's probably been a little bit of less activity to be seen in the last 6 months of last year, especially. But I think there's -- coming out of COVID anyway, there's a lot more interest in sustainability and sustainability solutions. So we do think there's going to be more interest in that space. So I think you'll find that there's -- given what's been happening in the economy globally, I just think that people get a pause and there should be some interest I would have thought in the space as we now look forward. What do you think, Sanjay?

Yes. Listen, the -- I have to say as we are reviewing the portfolio and looking at some of the conditions in the market, I think they are much more positive than when we came out with this about a year back. That's all I will say. We are on it in terms of -- we do understand that there is work to be done around the portfolio to really get the organization focused and drive the strategy, accelerate the strategy. So we understand that, and we're actually living it, so to say, in terms of the success that we are getting in the strategy. So the whole portfolio thing is critical and important for us. And we are -- all I can say right now that we are on it. And the environment is probably much a bit better than it has been for a while as things start to stabilize around the world. So I think this is a good time for us to really explore and drive that further. That's probably all I can say right now.

Yes. So another question for me, Sanjay is, I think you're at about, as you say, 10% recycled content. Can you hear me?

Yes. Sorry, Larry, I got your name wrong. Apologies. Sorry.

It's okay. Yes. So I think you're about 10% recycled content in your packaging business with a target of 30%, it says here by FY '25. I'm just wondering what are the -- it sounds like maybe Woolworths will be a big step change there. But what are the milestones you need to get to that target fairly quickly? And how does it generate revenue?

Yes. So I think that's really the key to the strategy. So firstly, if you start from the customer end of it, Woolworth is an example, and of course, a fairly large retailer, as you know, but there are other retailers as well, very keen to put recycled content in their products. So if you start from the customer end of it, a large number of customers are very keen, and they already have their target for FY '25, as you know, with the APCO targets. There's a lot of drive centrally from the government as well to accelerate this whole area of sustainability and recycling -- recycled products. So I think there is a strong momentum, which is being generated from a customer end. Now, if you look at our products, so we are -- if you look at the other side of it, we are building, as you know, facilities, we are building 2 facilities -- we already have firstly about 50,000 tonnes of recycled content that we make, sorry, 35,000 tonnes of recycled content that we -- recycled product that we make. But we all -- but we are building 3 facilities, 2 in our PET. One of them is already operational and more we're building. And we are also building one in HDPE, which is for personal care and dairy and products like that. So as they come online, which will happen by end of this year, this financial year, and we then sell those products to the supermarkets and other customers. And that's how the percentage of recycle is going to go up. Also, the third point there, which I've put in my -- in the sort of circular economy slide is, we've got to upgrade our facilities to be able to reuse the recycled content. So you get all the recycled resin from all these new facilities. But then after that, you've got to make sure that you have got -- you can upgrade your facilities to use that recycled resin, which is what is happening as we speak right now in many of our facilities across Australia and New Zealand. So that is an enabler for us to be making products and sell it to the customers. So your point about how do you see it, so to say, economically play out, I think the recycled products that we make, our joint ventures are, of course, one way to create some sort of economic benefit. But the real benefit comes when we sell the recycled product of -- convert the recycled resin into a valuable product and meet our customers' aspiration for their APCO targets or whatever sustainable targets they've got. And that's -- as we started, Woolworths is one of the examples of that. And as we go through this process, our own average recycled content will be going up from 10% to 30%. Many of the products we make maybe 100% recycle, 80% recycle, some maybe only 20%, depending on what the customer wants. But on an average, this journey will take us to 30% recycle and should also take us to an uplift in our margin in terms of our benefit -- economic benefit. Larry, do you understand that? Or anything else on that?

Yes, it's clear.

The next question comes from the line of Anthony Longo from JPMorgan.

A quick question from me. During your presentation, you did highlight cost out. Is that being an area that you certainly are looking at and then sort of managing that operating cost base over the balance of the year? Are you able to give us a bit more color into both the magnitude of cost out you're thinking of taking out and perhaps where some of those opportunities actually are?

So look, we put a -- we have been doing a fair bit of a cost program just due to the environment. I mean, you've got to in the business we have. So a lot of it's around simplification and process improvement. It's really just underpinning and helping us getting to a slightly better EBIT than this time last year. So we won't put a number out there as such. But it's really to ensure that we at least keep our costs at least equal to last year when it comes to our operating cost framework. And then we'll look for further opportunities to enhance that over time. But there's no doubt that we are absolutely capping any sort of discretionary spend or whatever because that's the sort of environment we've had to be in, especially over the last 6 months, and that's what we continue to look to focus on.

And if I just -- I'll just add, we gave the examples in the presentation of 2 capital programs. One is around Horsley Park on Contract Manufacturing, the liquids facility. And also the other one was a packaging plant in Laverton. You will see the photos of the that in the presentation. Now, both of those are going to give us a significant reduction in the cost of how we make the product. So what we are trying to do is, one is, bringing the cost down operationally, but also taking strategic decisions as you upgrade your facilities, as you move out to new facilities, can you also reduce the cost base and make yourself much more competitive. And the Laverton facility will be much more efficient than the facility which was there before. And same way, the Horsley Park, as I mentioned, it is actually state-of-the-art facility and the unit cost of making, let's say, a bottle -- of filling a bottle in that facility will be significantly lower than the unit cost that we have today. So it's both structurally in terms of the way that we operate the business, but also some of our capital programs are also doing the same thing in terms of reducing the cost base.

Okay. Great. Second one for me is just -- look, I appreciate you have given guidance, and I guess, you do give guidance for a reason. But what sort of confidence do you have in that guidance in the context of demand uncertainty that you have flagged over the second half and particularly that weakness that you have seen in both the European garments business and the U.S.?

Yes. Look, we -- I suppose when we baked into our outlook, you think about this time last year, everyone was sick in Australia and New Zealand, supply chains all over the place. No one knew what was happening with COVID policies in every geography. It just is significantly different the environment from this time last year. So we clearly see China coming out in terms of recovery. You've gone through pretty hard growing conditions. That seems to improve, especially in Australia over the last few weeks. The supply chains are not as complex as they were, reliability has improved. I think we're up now to like 57% reliability and shipping, where we were 40% last year. So that's sort of giving us the opportunity to plan our business more. So I think in that sort of context, you do give yourself the chance, I think, that we do feel like we are in a better position around our second half looking forward than this time last year. And I suppose you combine that with what we've been able to see in our Contract Manufacturing business, we're having the confidence that that business is also turning around because we went into it last year, we were looking -- we were facing a loss situation. Here, we're clearly looking at a profit situation. So that's sort of real -- I suppose, real things that are happening, as well as the whole macro environment, it feels like the world is in a better place. And so, that gives you a lot more confidence that the second half of '23 should be better than the second half of '22.

Okay. That's great. Very helpful. And look, final one for me. I just wanted to get a bit more of an understanding on the contract repricing conditions at the moment. So I appreciate your revenue was stronger given you're actually able to pass through some of those costs, but you did sort of touch on rewriting of contracts. How far are you through that process? And what should we be expecting on that top line going forward into the balance of the end of this year but also into next as well?

So we are mostly through the program now. As you'll know, I suppose the cost side of things are starting to stabilize, albeit I must admit it's stabilized internationally. I'm not so sure it's stabilized necessarily domestically. We all know that pallets and domestic freight and all those things are still going on. Look, we will continue to deliver revenue ahead of last year. But as time goes, that differential will reduce as you go through each month. But there are still the need to keep some of those pricing mechanisms have to continue. Some are [ formulaic ], as you know, some are sort of just general price increases. There's no doubt that the commodity markets have started to decline and they've sort of flattened out, but there's definitely a sense that the commodity markets are somewhat normalizing. And, of course, then you got FX that has also strengthened in the short term. So I think you will see, I think, the sort of rate increases around pricing will definitely reduce in terms of the percentage increases, which will mean that the revenue won't necessarily continue to grow at the speed that it is right now, and it will flatten out over time. But we do believe our second half will be better than the second half of last year in terms of revenue.

One moment for the next question. We have questions from the line of [ Keith Davis ], investor.

Paul, congratulations on coming in above guidance. Just a couple of questions. First one was, I believe that interest costs were in the order, I think, at the AGM of about $70 million guidance for this current year, correct me if I'm wrong. But could you just comment on what you see as being interest cost on current profile over the course of the next couple of years given the rate book of the various central banks around? And also, some of that interest, I believe, was subject to sustainability goals. So when you would be hitting those goals in order to get those rate discounts?

Yes, that's a good -- I can't tell you where interest rates are going to go. That's for sure. But look, we -- all we know is that, an increase -- a 100 basis point increase for us is effectively $7 million of interest expense. So clearly, it's something we're very sensitive to. So look, I don't know where it's going to stop and where it's going to pick, I don't think any of us do now. Albeit at the signals out of the U.S. last month were encouraging. So look, that's what we were. So then the interest expense from last year and actually this year, it's about $10 million up, I think, for the half. That is all interest rate increases over that period of time. So -- and that definitely ties to that sensitivity around 100 basis points and $7 million movement. So the second part of the question was...

Sustainability and discount.

And sustainable -- sorry, yes, that's right. So the sustainable-linked loans, there is a criteria. It will be measured every year, very much linked into the recycled ambition, whether that's 30% and other metrics that we have. At this stage, these things will be measured every year. At this stage, we don't see any concern that we can't hit those targets. And to your point, if we do, then there will be an interest rate benefit. But it's too early to say that that will be achieved because those are actually measured at points in time.

Is that a significant part of the interest cost, those sustainability and discounts, Paul?

Not a significant amount, not a material amount that would move the needle.

The -- you've spoken about the EBIT coming in above last year, I think. Does that mean that you're guiding NPAT now above 55%?

No, I wouldn't say that. I think we would be -- within NPAT would be around where the consensus is currently.

Okay. And lastly, at the AGM, I believe, Chairman said that he was guiding towards a 40% dividend. And my understanding was that, that would be likely this year? I understand now the reasons why you've entered the half yearly. Are you now guiding towards that $0.05 per share or $0.055 per share for the full year? Or is it likely that you would deduct from the $0.055 to whatever the half year is likely to be? If that make sense?

So you now under our -- and I think we've expressed this a number of times, there is a financial discipline that we work under with the Board, and the target is to pay 40% of underlying NPAT at any point in time. That assessment will be made at the appropriate time. So it's too early to say what that will be. But we are definitely operating under that financial discipline framework around how we deal with ourselves and the dividend side of things.

So are you guiding to 40% of NPAT for the full year, the dividend?

No, that's up to the Board. Ultimately, the Board has the discretion of whatever dividend they pay.

In the interest of time, we'll now take the last question from Jim Wilson from Jarden Group.

Sorry, just one final question from me. You have to quantify for us any earnings that you saw from that Albury joint venture plan over the half? Or any other sustainability initiatives? Can't see any material change in that equity accounted earnings line, which is where I was looking for them.

There's no material movement at this stage. It's too earlier days. It's been going for roughly 5 or 6 months, I think. So not at this stage.

Thank you for the questions. With that, this concludes today's conference call. On behalf of the management, thank you for participating. You may now disconnect.