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

Good morning, and welcome to the Pact Group's FY '23 results briefing. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Sanjay Dayal, the Managing Director and Chief Executive Officer of Pact Group. Please go ahead.

Good morning, and welcome to Pact Group's FY '23 Results Briefing. I'm Sanjay Dayal, the Managing Director and Chief Executive Officer of Pact Group. I'm joined today by Paul Washer, our Chief Financial Officer. I'll 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 4, I am pleased to report that our revenue totaled $1.949 billion, up 6% on the prior corresponding period. A good result reflecting very strong cost recovery across all businesses, combined with some volume growth. Our underlying EBIT at $145 million is within the guidance range that we provided back in May and reflects a year with damaging weather events, changes in customer spending patterns on the back of inflation, and a sharp slowdown in demand out of China in the fourth quarter. We have delivered revenue growth in 2 of our 3 segments: Packaging & Sustainability, where we continue to see escalating customer demand for sustainable packaging; and in Contract Manufacturing, where we are benefiting from the trend to onshoring. Revenue was down in our Materials Handling & Pooling segment due to a sharp drop in garment retail demand, which impacted on our retail accessories business. Disappointingly, we have booked a noncash impairment for plant and equipment of $53 million in our Packaging Australia business, as well as in China, which contributed to an underlying net profit after-tax loss of $7 million. This was necessary as we retire old equipment and build new capabilities. Our gearing at 3x is above the same time last year, but lower than the half year. This gearing reduction was achieved despite significant capital that needed to be invested in our packaging assets to ready them to produce recycled product. Pleasingly, our gearing was positively impacted by a reduction in our inventory levels as our supply chain improved. An important part of Pact's strategy has been to release cash to accelerate our strategy to lead the circular economy. To that end, I'm delighted to announce the sale of 50% of our Crate Pooling business into a separate joint venture with Morrison & Co. The cash proceeds from the sale are approximately $160 million net of costs and tax. We will discuss this in more detail shortly. Our progress is a reflection of the efforts that everyone at Pact, as we strive to bring our strategy to life and grow the business. I would like to take this opportunity to thank the entire Pact team. Our large capital program to keep up with the demand for sustainable packaging has continued over the second half. Due to the immediate cash requirements of this capital program, which will ease over the coming year, our Board has made the prudent decision not to pay a final dividend. The Board will reassess the availability of cash to pay dividends during the coming year. Our progress to strategy has been significant as shown here on Slide 6. We have sold 50% of our Crate Pooling business. The successful outcome positions us well as we review our portfolio, and we will consider further divestments in line with our strategy. Our high-speed liquid fill line at Horsley Park will be commissioned by the end of this calendar year. This will position our Contract Manufacturing business as a leader in the home care liquid market in Australia. In our EU segment, we invested in our SULO bin capacity in response to strong demand from councils for the fourth bin rollout and are now positioned for accelerated growth in this segment. A significant focus over the year was upgrading our packaging platform to allow us to produce high-quality packaging containing recycled content at scale. We signed 2 important strategic partnerships with Woolworths and Aldi to convert their own brand products to recycled content. Pact will apply Woolworths with packaging for its own brand portfolio, using around 18,000 tonnes of recycled plastic resin sourced from the Pact operated PET and HDPE recycled manufacturing facilities. With Aldi, we will supply recycling plastic packaging for approximately 300 million units of the retailers' fresh food, dairy, beverage and home care products. To enable this conversion to recycling content, we continue to build our capability to convert waste to recycled resin. The Circular Plastics Australia joint ventures first PET facility is fully operational in Albury with capacity to produce 25,000 tonnes per annum. And we continue to invest in further recycled resin production with the next being Altona, with capacity to produce 25,000 tonnes of recycled PET per annum. And Laverton with capacity of 22,000 tonnes of recycled HDPE and PET per annum. Both of these facilities will be opened this calendar year. And now on to Slide 7. As I said earlier, I'm delighted to advise the sale of 50% of our Crate Pooling business to Morrison & Co. The business will be transferred into a separate joint venture. The sale price reflects an enterprise value of $380 million with FY '23 EBITDA at $34.9 million. The cash proceeds from the sale will be approximately $160 million, net of transaction costs, duties and taxes with a further earn-out of $20 million. Morrison & Co. are a global infrastructure investment manager with approximately $34 billion assets under management, a history of strong investment success and a focus on supporting businesses that enhance their local communities. We look forward to working with them. The joint venture is a great opportunity for our Crate Pooling business. We have secured long-term contract extension with both Woolworths and Aldi, enabling the joint venture to now focus on corrugated conversion and growth in new produce categories. This growth trajectory will be achieved on the back of capital support and the expertise of both parties, which will provide a positive outcome for our customers. Given Pact retains 50% ownership, we will continue to share in this upside. This transaction will release capacity to target our capital investment towards accelerating the circular economy strategy, including upgrading our packaging platforms. In the first instance, we'll use the proceeds from the sale to repay debt and reduce gearing. The sale remains subject to standard conditions and approvals. We'll work through these over the coming weeks and provide an update at the AGM, if not before. This is a truly great outcome for Pact. Slide 8 show the targets that we are working towards. As I mentioned in the past, these remain a key focus for us. I will provide you with a brief update on each item. We have proven our strategy by forming many strategic partnerships, including consumer goods companies and retailers such as Woolworths and Aldi. This is moving us along the path of achieving the target EBIT growth. In addition, we have launched a headcount reduction program to reduce our cost to serve, which will provide an uplift in EBIT. This is an ambitious undertaking for Pact and we'll provide further details at our AGM. Related to this, we will grow margin in Packaging Australia to 10%. This will be achieved via a range of improvements. The upgrade of the packaging platform will lead to a stepped improvement in operation efficiency. In addition, the sale of recycled product will allow us opportunities for value creation with our customers. Recently, margin has been challenged due to the inflationary environment, supply chain and labor issues. We are working hard to get back on track from FY '24 onwards. Our recycled content across our plastics portfolio now averages 12%, which is a great progress as we move towards our target of 30% by FY '25. We are focused on refining our portfolio of businesses and resetting gearing levels to below 2.5x. The safety target has been achieved early, reporting total recordable injury frequency rate of 7.1 at the end of the year, which is an excellent outcome. An activity to meet our emission target is well underway with solar panels at a number of our sites. Green energy conversions and other milestones are also on track. I'm encouraged by our progress in safety and the environment. 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 7.1, down a very impressive 26% on the same time last year, which means we are keeping more of our people safe. I'm really proud of this outcome in the context of our large capital build program that the company has embarked on. We are making good progress on our safety culture. Our recent focus has been on hazard identification and on sharing learnings from near misses. I will now take you through our segment performance. In relation to our largest segment, Packaging & Sustainability, we reported 6% growth in revenue to $1.282 billion, and underlying EBIT down 8% to $102 million. The revenue growth here was predominantly recovery of costs, which though challenging, is evidence of the strong relationship we have with our customers. We continue to work hard on our margins, including rightsizing of our costs in this segment. Packaging Australia's results reflects cost recovery and a particularly strong results from Health and Personal Care business, which has proven resilient in the current inflationary environment, as well as an increase in demand for sustainable packaging. Packaging New Zealand's growth was in fresh food and in dairy and beverages. Our Closures business reported mixed results with demand for Closures out of China dropping in the latter part of the year, while Southeast Asia continued to perform well. Underlying EBIT reflected the impact of rising domestic freight and labor costs. Now to Slide 13. In the Materials Handling & Pooling segment, revenue fell 2% to $347 million and underlying EBIT was down by 19% to $40 million. This result is consistent with the first half, reflecting a slowdown in our retail accessory business on the back of a sharp drop in volume from garment retailers. Cost reduction initiatives have offset the decline in volume in the second half for this business. Volume in the Crate Pooling was good in the second half of the year with the program to replace corrugated boxes continuing at pace. And we extended 2 of our key contracts with Woolworths and Aldi for 10 and 5 years, respectively. This is a good outcome for Pact. We have also invested in the crate pool in New Zealand to expand our capacity there. SULO bins performed well, delivering strong growth, reflecting our success in winning a large number of council bin contracts. These contracts, together with the recent investments we have made in this segment, will serve us well throughout FY '24. Moving to Slide 14, Contract Manufacturing. The EBIT result in Contract Manufacturing clearly demonstrates the turnaround that is taking place. Revenue is up 17% on previous corresponding period to $357 million and underlying EBIT of $3 million, which is a fantastic result. Approximately half of this is due to repricing existing contracts and the remainder is from new volume. The new site at Horsley Park with a high-speed liquid fill line is getting close to completion and we have presold the capacity in this facility. The turnaround plan for Contract Manufacturing is gathering pace. I will now hand you over to Paul to take you through the financials in detail. I'll return at the end of the presentation to talk briefly to our outlook.

Thank you, Sanjay, and good morning, everyone. Let's start by reviewing the group results for the year on Slide 16. Revenue for the group was $1.949 billion, an increase of 6% and $111 million on last year. Of this increase, $95 million relates to the recovery of cost increases, which is a good effort by the team to enact these increases, and it reflects the strong relationships we have with our customers. We are seeing most of our costs stabilize, noting domestic freight, labor and energy are increasing, and so any future increases will be at a smaller rate. The remaining revenue growth of $16 million was from net volume increase, which was pleasing given the inflationary pressures and changing consumer preferences we face later in the year. We generated volume growth in health and wellbeing packaging in Australia, fresh food in New Zealand, Closures in Southeast Asia and Crate Pooling and SULO bins in the Materials Handling & Pooling segment and across all sectors in Contract Manufacturing. Underlying EBIT was $145 million, which was within our guidance range and 7% below the prior year. When comparing to last year, this reduction was due to inflationary pressures in Australia and New Zealand, a slowdown in China late in the year and due to the increase in domestic freight and labor costs. Our after-tax underlying adjustments totaled $51 million, which resulted in an NPAT loss of $7 million. These underlying adjustments include transaction costs relating to the Crate Pooling transaction, restructuring costs and the largest item was the noncash impairment of plant and equipment in the Packaging Australia and China businesses, which I will discuss in more detail shortly. Moving ahead to Slide 17. Our gearing was 3x, which is above the same time last year, but below the level reported in December. We have reduced inventory levels by $33 million on the prior year, which reflects a significant and disciplined reduction in volume given our raw materials are held at higher prices than the prior year. Our operating cash flow was $291 million and well above the prior year, reflecting primarily the work done to reduce working capital over the year and reflects strong collections in the later part of the year in line with our seasonal sales pattern. The operating cash flow improvement has enabled the company to keep debt levels at only a $25 million increase over the prior year, which is especially pleasing in the year that we completed the acquisition of Synergy Packaging of $20 million, incurred a higher interest cost and funded the significant investment in our capital program of $123 million net of government funding. Of course, the sale of 50% of the Crate Pooling and Supply Chain Solutions business announced today and reported as a post balance date event is forecast to result in a material reduction in gearing. The cash proceeds of approximately $160 million, net of transaction costs and tax, will initially be used to repay debt once the transaction completes. We will provide a further update on that transaction at our AGM in November. As you can see from the chart on this slide, our debt facilities are next due for refinance in FY '25, and we have strong support from our financiers. Now to run through capital expenditure on Slide 18. As mentioned, we have lifted spend on capital projects in line with our drive to achieve our strategy. We spent $130 million for the year. This was a growth of $7 million federal government MMI funding that we received this year. Of this total, $63 million was spent in Packaging & Sustainability across a range of projects, including upgrading our process foods capability, opening our household and industrial site at Laverton, a dairy packaging upgrade in Western Australia, and we opened a new facility in the Philippines for our Closures Asia business, and we'll manufacture deodorant bottles and caps. Our capital spend in Materials Handling & Pooling totaled $33 million and included a new capability to manufacture folding mega bins in Australia, a new wash line in crate pool in New Zealand and investment in our SULO bins capacity in New South Wales and Victoria to enable the execution of council contracts supporting the fold bin rollout. In Contract Manufacturing, the new liquids filling site at Horsley Park is progressing well and will open later this year. We have presold the output from this new filling line, which is expected to contribute to margin improvement in the segment. CapEx in the segment was $34 million for the half, almost all of which was on the Horsley Park site. We are forecasting capital spend for FY '24 at around $85 million, and a significant part of that investment is in our Australian dairy and beverage platform to ensure we are ready to supply recycled milk bottles and packaging in the sector at scale. Now to run through capital expenditure projects on Slide 19. Our capital program has been significant and is now reducing. In line with our Circular Economy strategy, it has been critical for us to invest in recycling capability as we begin to source recycled resin from our joint ventures and make it into sustainable packaging solutions for our customers. On this slide, we have the key projects underway during the year, including folding mega bins at Minto, the high-speed liquid fill line at Horsley Park, a new packaging site in the Philippines, and an investment in closure capability at our Christchurch site. As is evident, these projects are either complete or in the case of Horsley Park close to completion. And so we are nearing the end of our major capital program. To Slide 20 and the noncash impairment of property, plant and equipment and Packaging & Sustainability segment covering Australia and China. Due to the need for Pact to continue to invest in recycling packaging in line with our strategic intent, we have made the decision to impair the value of some of the plant and equipment. As we continue our program to invest in this business, we will be left with stranded and redundant assets, and so writing down the value of these plants and equipment makes sense at this time. An example was the packaging platform used to manufacture dairy and beverage packaging, where we know we need to invest in new plant and equipment over the coming 3 years to ensure we can meet our customers' demand for recycled content in their dairy and beverage packaging. Of course, this new platform will utilize the recycled HDPE resin that we will manufacture in the joint venture with Cleanaway and therefore position Pact well to deliver on our Circular Economy Commitment. In China, the medium economic outlook is uncertain, and the impairment reflects a cautious outlook on the future cash flows of the business. That concludes my analysis on our financial results. I will now hand back to Sanjay.

Thanks, Paul. Moving now to our outlook for FY '24 on Slide 22. We will provide an update on performance at our AGM in relation to factors impacting FY '24. Inflationary pressures are continuing, which impacts on consumer demand and buying patterns. Input costs remain elevated but are stabilizing, and we are focused on a reduction in our cost to serve. This concludes today's presentation. We'll now take questions.

[Operator Instructions] And I show our first question comes from the line of James Wilson from Jarden Australia.

Just firstly, are you able to talk to us about the underlying Materials Handling business ex the crates business, particularly just how volumes and margins are tracking in that segment?

So in the Materials Handling & Pooling business, we've actually seen quite a switch in Australia where we just talked about pooling. We've seen quite a bit of stability since the weather improved for the last 6 months. So that came back quite well compared to where we were this time last year where we had floods in Australia, et cetera. Clearly, also, that covers our mobile garbage bins business. We've completed the full upgrade across New South Wales and Victoria and dare to say that we have 18 months' worth of contracts on that business, and they are being sold, especially in the last couple of months. So pretty very pleased with where that's positioned. And then also in our infrastructure business, we've had good volumes in terms of our [ PET ] products that we make out of our infrastructure business. In New Zealand, clearly the pooling business has been impacted by the poor weather over the last 6 to 7 months, but that should improve as time goes forward. So we should see that stabilize. But overall, I think we've been pretty pleased with pooling and infrastructure business. And then you got retail accessories. Clearly, that had a very difficult first half of last year of '23 because that impacted from the correction of inventory levels out of the U.S. that did stabilize in the second half. So from a division perspective, we're really pleased to see the second half in line with last year in terms of [ EBIT ] performance.

And then just also on your core packaging business, I mean stripping out some of that Synergy Packaging integration and then also those cost inflation pass-throughs. Are you able to talk to us about the actual underlying top line and volume performance there?

Yes. Look, I suppose most of the recovery to your point was in revenue was due to those cost recovery efforts. So that was roughly, I think, $90-odd million in terms of revenue improvement. To your point, a bit of synergy was about probably about $18 million of revenue. But the rest was actually volume growth in the Packaging & Sustainability business. And that was predominantly in the dairy sector, as well as in house and on personal care sector, but definitely some weakness in agribusiness and industrial. And clearly, a slowdown in the second half in China as we didn't see the recovery that we were expecting when we were sort of last talking in February of this year. So a bit of a mixed bag, to be honest, but pleased that we could see those price recoveries really coming through the market.

And just 1 final 1 for me. You've provided sort of a CapEx guidance to '24 of $85 million. Does that assume the Crates joint venture goes ahead and you split sort of the CapEx for the Materials Handling & Pooling business or is that just assuming for the current growth?

It does -- yes, it does still assume that the Crates business is there. But even if the Crate business has taken out, we would still be looking to use that for our Packaging & Sustainability platform upgrades. So we do think that $85 million is roughly the right level when we think about the next 12 months of the capital program.

And I show our next question comes from the line of John Purtell from Macquarie.

Just a few quick ones. Just a comment there, Paul, on gearing. You're expecting that to be below 2.5x by the end of '24. I mean do you need any other asset sales to get there? Or is that really just a reflection of what we have, obviously, with the RPC sale announced today and the lower CapEx?

So I think initially, it is definitely going to be improving the operating cash cycle to your point. But yes, I mean, there will always be opportunities in the portfolio, and that will clearly reduce gearing further. But to be honest, it's operating our own -- managing our own operating cash flow, making sure that we continue on the path of working capital improvement and then at the same time, start to bring down that capital program, we should be in a much better space in respect to our gearing performance.

And yes, just in terms of the potential reduction in CapEx regarding the RPC sale. What is the potential reduction in go-forward CapEx there?

So I don't think it will be an overall reduction, but it didn't probably be sort of $10 million to $15 million that we would have had there initially in the $85 million, but we now see the opportunity to accelerate in our platform upgrades in our Packaging & Sustainability business. So that will be the focus of what we'll be trying to do over the next 12 months. But as always, those plans are necessarily approved. So there's a lot of work to be done yet as to what are the options we want to take.

And just in terms of the outlook commentary there. Obviously, you made some points through the factors there, but you obviously haven't sort of given guidance for growth per se there. I mean, is there any sort of -- I appreciate some of the comments you've already made. But any further sort of comments on to the recent trading to just provide a bit more color there. Obviously, you're still seeing some pressures, but what are the sort of positives and negatives, maybe just to call out?

So look, it's pretty early in the year for us to really give any guidance, we needed to say that we're still seeing soft demand and soft recovery out of China. So Asia is still pretty flat. Clearly, we're seeing improvement in Australia with trading conditions, weather, et cetera, those things are definitely picking up, but still soft in agribusiness and industrial. We still really haven't seen demand come back to where we would expect. And then in New Zealand, you've got a fairly wet continuation of the last 7 or 8 months. We expect that to be a pretty slow start to the dairy season. And we would have -- we all know there was a dollar reduction in milk price over there last Friday. So we do expect we're probably going to have a bit of a soft start over the next sort of Q1 period. So a little bit early to tell what that means overall. But it is not as if we are seeing our conditions changing rapidly. We're just experiencing some of the conditions to what we had in Q4.

Got you. And just a final one, if I can. Just on the interest expense or just a reminder where you're floating versus fixed rate exposure there?

Yes. So we're 20% fixed.

[Operator Instructions] And I show our next question comes from the line of William Nguyen from retail holder.

Paul, my name is William. I just have 2 general questions in regards about the share market and the share price. My first question is about -- this has been a concern about the insider information of trading. I was just wondering why -- who could have received a sensitive information about our business? And in regards about like how would you guys in protecting those sensitive information? And the next question I want to ask you guys is about leadership -- particularly about Sanjay. Given his decision on the share market before to the shareholder, I want to [indiscernible] his decision is like, fair -- in term of fairness about the shareholder over the company interest. Just say a few years ago he decided not to sell out the Contract Manufacturing division, and it has caused a big tumble with the share price. And now today his decision to sell out 50% of the Crate Pooling division, and right now on the market, it has been causing a big boost with the share price. So my question to him is -- it seems to me that like he is not being fair to the shareholder over this company business interest. And so I want to hear what does he have to say about the situation right now that what is his answer to the company and also to the shareholders and especially as his title as the CEO, and what is his commitment for the business, for the company and for the shareholders?

William, thanks for the question. This is Sanjay here. Firstly, I'm not aware at all of any insider trading. So that's all I can say there. In terms of Contract Manufacturing sale and currently, the 50% sale of the pooling -- Crate Pooling, these are decisions we take based on the circumstances of the company. We look at what's the position in the market in terms of our ability to sell something. We also see how the business is tracking and whether we'll get good value for our shareholders in terms of selling that business. So those are the factors we see. Your point about what happens when we decide to sell or not sell and what happens to the share price. I really can't comment on that. Really, I mean, that's a consequence of what we do. It's not necessarily the reason for what we do. We do -- we're looking after your company and we look at it from the point of view of, is this the right thing and the right value we can get from a sale process. Not so much about what will be the consequence of that. I hope that explains your question, William.

I'm showing no further questions in the queue at this time. This concludes the Q&A session and today's conference call. Thank you all for participating. You may now disconnect.