Full Year 2022 Pact Group Holdings Ltd Earnings Call RICHMOND Aug 17, 2022 (Thomson StreetEvents) -- Edited Transcript of Pact Group Holdings Ltd earnings conference call or presentation Wednesday, August 17, 2022 at 1:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Paul Washer Pact Group Holdings Ltd - CFO * Sanjay Dayal Pact Group Holdings Ltd - MD, Group CEO & Director ================================================================================ Conference Call Participants ================================================================================ * James Wilson Jarden Limited, Research Division - Associate * John Purtell Macquarie Research - Analyst * Larry Gandler Crédit Suisse AG, Research Division - Director ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and thank you for standing by. Welcome to the Pact Group Full Year Results Briefing Call. (Operator Instructions) I'd now like to hand the conference over to Mr. Sanjay Dayal, Managing Director and Group Chief Executive Officer of Pact Group. Thanks, sir. Please go ahead. -------------------------------------------------------------------------------- Sanjay Dayal, Pact Group Holdings Ltd - MD, Group CEO & Director [2] -------------------------------------------------------------------------------- Good day, and welcome to Pact Group's FY '22 Full Year Results Briefing. I'm Sanjay Dayal, the Chief Executive Officer of Pact Group. I'm joined today by Paul Washer, our Chief Financial Officer. I will first take you through our results overview. I will then discuss the progress to strategy. Paul will then take you through a detailed look at our financials before returning to me to cover the outlook. And we'll be pleased to take questions at the end of the presentation. Starting at Slide 5. I'm pleased to report that our revenue for the year totals $1.838 billion, up 4.3% on prior corresponding period. Our underlying EBIT at $156.2 million is within the guidance range we provided at our half yearly results release. Our underlying net profit after tax was $70 million and the underlying adjustments are in line with those we had already reported at the half year. I'm pleased with this result given the very tough conditions faced over the year with substantial increases in raw materials, energy and shipping costs and the impact of COVID on labor costs. These results reflect our ongoing and intense focus on management of controllable costs and on recovery from the market to offset the increase in material and input costs. It is also a reflection of the effort we have put into growing the business. We have delivered revenue growth in our large 2 segments, Packaging and Sustainability and material handling and pooling with escalating demand for sustainable packaging. In contract manufacturing, we have the foundations in place to drive a turnaround in performance. We have continued our focus on cash generation, resulting in gearing at 2.7x, which is within our target range. On the back of this performance, our Board has resolved to pay a final dividend of $0.015 per share franked to 65%. This takes our total dividend for the year to $0.05 per share. This represents a 25% payout of underlying NPAT, which is lower than our target range of 40%. However, in view of the environmental uncertainties, we believe this to be a prudent approach. We intend to return back to our target payout ratio as economic conditions normalize. Many environmental factors impacted the year's performance as detailed here on Slide 6. There have been challenges this year impacting negatively on labor cost and availability and on our spend on labor. With Australia reporting record low unemployment, I can't see this reversing in the short term. The supply chain crisis has been an unprecedented scale. With, for example, global shipping reliability at less than 40%. Given our reliance on imported raw materials, including resin, we felt the effects of these delays. You will see this in our elevated inventory position as we have had to take proactive action to ensure we fulfill our customer requirements. We are seeing early signs of improvement in shipping with critical ports now open. Raw material pricing and availability was another challenge for the entire year in all key categories. As an example, one of our key inputs HDPE's resin rose 35% from the start of the year. We saw the impact of reduced demand through the second half as inflationary pressures impacted on consumer confidence. This impact was more severe in parts of our business that are subject to discretionary spending, such as retail as well as health and beauty. It will take a reduction in inflationary pressure before we see an improvement in demand. We were also impacted by energy prices with gas and electricity costs increasing in the latter part of the year. We are monitoring closely given our significant usage and we expect energy prices to stabilize later in FY '23. When we combine the effects of all these factors, the negative impact on our FY '22 results, net of cost recoveries, was around $17 million. On Slide 8, I have further defined our 3 segments and their relation to the circular economy strategy. At the annual results briefing last year, I explained how we have redefined Pact through our strategy. During the year, we have further progressed along this journey, and Pact is recognized by industry, customers and government as a sustainable packaging solutions provider, leading the circular economy in our region. Now on to our segments. Packaging and sustainability includes our packaging business across Australia, New Zealand and Asia with a full service offering to our customers, including the growing demand for recycling. This segment includes our market-leading plastic waste recycling business with Pact-owned and joint venture recycling sites. Material Handling and Pooling includes our reuse range of products deployed in grocery and retail. Our plastic crates are more durable than corrugated boxes because they can be used up to 140x before being recycled, which means we are diverting waste from landfill. This segment also includes Sulo bins for curbside waste collection as well as infrastructure solutions such as noise walls. Contract manufacturing, the smallest of our segments, manufactures complete solutions for our customers in the home, personal care and health and wellness markets. The high-quality recycled packaging from Pact is a source of a valuable point of differentiation and therefore, a competitive advantage for this segment. We are a global operator. You can see here on Slide 9, the location of our operating sites, sales offices and joint ventures. Our footprint enables us to be close to our customers and is our engine of growth. Slide 10, outlines how the circular economy comes to life at Pact. We are driven by the desire to divert waste from landfill and ensure it is recycled. At our core, we make and remake recycled plastic packaging. Starting at the bottom left of the slide, we have an agreement to access plastic waste at a significant scale, and the federal government export ban on plastic waste, which came into effect on 1st of July, will further increase our access to raw materials at a reasonable price. We are well placed to access plastic waste through a number of initiatives, including our joint ventures with Cleanaway. Moving to the top left, we have a recycling business that has the ability to produce in the order of 50,000 tonnes of recycled plastic resin. We are investing heavily here and have 2 new sites in development in Laverton and Altona, which will add another 35,000 tonnes per annum of recycling capability, and there are further 3 sites under consideration. Once these facilities are operating, we will produce around 120,000 tonnes of high-quality recycled resin and as a reflection of the importance of our role in escalating Australia's local circular economy, the federal government awarded us $20 million from a Modern Manufacturing Initiative fund to upgrade our facilities to manufacture food-grade recycled material. Moving to the right. We are the largest rigid plastic packaging manufacturer in our region with proven innovation capability. Our average recycled content across plastics is 10% now, and we are building the capacity to scale this up to 30%. The circular economy is driven by customer demand. Our customers are all household names in retail with their own commitments to increase the recycled content in their packaging with many of them having ambitious APCO targets. All of this positions Pact as a leading end-to-end partner for our customers to achieve their objectives. Slide 11 is our strategy on a page. Our vision is to lead the circular economy through reuse, recycling and packaging solutions. We are targeting top quartile returns and 30% recycled content by 2025. In relation to our portfolio of businesses, we announced on 23rd May that we had appointed Citi to assist in the consideration of future options for the pooling and retail accessories business, both of which are part of our Material Handling and Pooling segment. It is an opportune moment to explore the market for these businesses. We're quality businesses that are performing well. Management is continuing to consider options and we will update the market on progress in the event of any development. Slide 12 highlights some of our FY '22 achievements in our strategic journey. Overall, I'm delighted with the progress we have made in the year. In relation to leading plastic recycling, we have made very material progress. Our market-leading innovative recycled plastic solutions continue and we have converted numerous customers to recycled product. One of our dairy customers, Norco, transitioned to 100% recycled milk bottles. Goodman Fielder's mayonnaise jars are also at that level. Meadow Fresh converted their milk bottles to 30% recycled. (inaudible) packaging is 50% recycled as is (inaudible). And in solving a long-standing challenge for the industry, we have -- now have fully recycled protein trays and films in use in New Zealand. The Circular Plastics Australia (PET) joint venture, we have in Albury with Cleanaway, Asahi and Coca-Cola commenced operations early in this calendar year. We have U.S. and European food safety approval for the resin produced out of this site. And the facility has commenced supplying high-quality food-grade recycled resin. Aligned with our strategy to produce innovative packaging solutions, we have acquired Synergy Packaging for approximately $20 million. Synergy manufactures and supplies plastic packaging from its facility in Tullamarine, Victoria. And specializes in the manufacture of PET and 100% recycled PET packaging tailored to the beauty, cosmetics, nutraceuticals and food segments. By adding this expertise and technology to the Pact Group, we are better able to service the increased demand from our customers for recycled packaging in health and beauty. In very exciting news for Pact and for Australia, we announced on 25 July that we have entered into a sustainability partnership with Woolworths to convert all their own brand products to recycled content by 2025. Woolworths and Pact's sustainability partnership will see Pact produce milk bottles, protein trays, fruit and vegetable pallets and beverage bottles using locally-made recycled packaging. This will replace in the order of 1.2 billion pieces of plastic packaging with recycled plastic using around 18,000 tonnes of recycled plastic resins per annum. We have continued to scale up reuse solutions with new contracts won during the year. And the Woolworths partnership will also see Woolworths increase the use of Pact's reusable plastic crates from 50 million to 80 million crates over the next 3 years. Slide 13 shows the target we are working towards. The most significant of these to Pact and our investors is realizing the value in the circular economy. With our leadership in the circular economy, our packaging footprint, our focus on operational efficiency, we will add $25 million to our packaging business EBIT by end of FY '25. Another target that goes to the value of Pact is to grow the margin in the packaging Australia to 10%. 12 months ago, we advised we would achieve this milestone by end of FY '25. Unfortunately, FY '22 has been a year with significant challenges beyond our control, and therefore, we are resetting the target out 1 year. The margin will be at 10% by FY '26. This will be achieved through our strategy of differentiation and improved operational efficiency. Indeed, the way we have managed our cost recovery during the difficult environment in FY '22 gives me further confidence that this target will be achieved. Another key target is to reset gearing levels to below 2.5x by FY '24. Actions to reduce gearing include refining our portfolio of businesses, amongst other initiatives. We are proud to advise that this year, we have set a target to achieve a 50% reduction in greenhouse gas emissions by 2030 as shown here on the slide. We have a number of exciting initiatives underway at all our sites to help achieve this emission target. Turning on to our people. I will start with our primary focus safety. We have invested further in our safety program over the year. And pleasingly, our total recordable injury frequency rate is 9.6%, down 38% on the prior year. And we are committed to bringing that down further. Our workers' compensation claims have also reduced materially, again reflecting our improvement in this area. At Pact, we have a diverse and engaged workforce who are proud to work here. We have introduced a Pact leadership program to raise our capability, and we have also rolled out a sales excellence program. This program has been very successful in enabling our sales team to sell the circular economy value proposition. These initiatives reflect the care we have for our people and the culture of success we have at Pact. Now for some highlights from our segment performance. In relation to packaging and sustainability, I'm pleased to report 7% growth in revenue to $1.2 billion and 5% growth in underlying EBIT to $110 million. This is an excellent result despite the lag effect of price recovery, which we estimate had a negative impact of $5 million on EBIT. In our Asian closures business, we achieved both revenue and EBIT growth despite broad lockdowns in China over the second half. The Chinese market represents a significant portion of our volume and we expect that to return over the second half of FY '23 as the situation eases. Our recycling business delivered both revenue and EBIT growth. The importance of recycling to our strategy cannot be overestimated, and this will continue to grow as more facilities come online. And we have a robust capital program to upgrade our facilities to use recycled content and improve operational efficiencies. Supply chain was another area of focus in FY '22. We learned many lessons as our supply chain was tested as were those of our suppliers and customers. We are converting these learnings into our procurement strategies, and this will result in stability of future earnings. I remain confident that as we deliver on our strategy, momentum in this segment will continue to accelerate. Now on to Slide 17. In the Materials Handling and Pooling segment, we have revenue growth of 3% to $354 million, whereas underlying EBIT was down by $4 million to $50 million. This was due to a surge in demand of retail accessories in FY 2021 post-COVID that was not repeated this year, and also the lag effect of price recoveries. The reuse business reported revenue growth despite environmental factors impacting on the business. The pooling business delivered organic growth, which in the context of the slowing of the supply chain as well as floods in Northern Australia was an excellent result. The other significant variance was in our Sulo business with new bin contracts at the lowest we have seen in recent times. Pleasingly, the Sulo business has already won more than $7 million of new business so far in FY '23. In pooling, we are focused on delivering double-digit top line growth as we increase penetration in the produce and protein categories. In retail accessories, our focus is to win new global contracts. Moving to Slide 18, contract manufacturing. Revenue is down by $16 million. After adjusting out hand sanitizer and other one-off items, revenue is consistent with prior year. Underlying EBIT is a loss of $4 million, which is a disappointing result in a very challenging year. In particular, the result was negatively impacted by $10 million means the net difference between cost escalation and price recovery. We have done significant work to position contract manufacturing for success. We have a high-quality new management team in place, who have introduced an increased focus on the commercial aspects of the business such as improving contract structure, better customer offering and an increased capacity to recover price. Tax ability to provide recycled content continues to be an important differentiator. Making a step-up in supply chain performance has been an important area of focus as is the ability to control cost through a detailed expense management exercise. Winning new business is a priority. This has been facilitated by several customers wanting to onshore their manufacturing, thereby reducing the risk in the event of another global disruption. Looking forward, in our wellness category, we are seeing the supply chain issues easing, although our volume remains impacted by China lockdowns. Our focus here remains on diversifying the customer base as we have done with success in other parts of Pact. Work is advanced in relocating our liquids facility to Horsley Park and installing a high-speed line, which will significantly improve productivity and efficiency of our liquids business. This project is due for completion at the start of 2023 calendar year. I believe this investment will provide a new platform for a home care category and will result in a step improvement in revenue and earnings. Overall, the turnaround plan for contract manufacturing is starting to gain traction, and I expect improved performance in FY '23. 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? -------------------------------------------------------------------------------- Paul Washer, Pact Group Holdings Ltd - CFO [3] -------------------------------------------------------------------------------- Thank you, Sanjay, and good morning, everyone. Let's start by reviewing the group results for the year on Slide 20. 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 $1.838 billion, an increase of 4% compared to the prior year, mostly due to the pass-through of cost recoveries. We did achieve volume growth in the Packaging and Sustainability segment and particularly in Packaging New Zealand and the closures businesses, which was partly offset by a reduction in contract manufacturing revenue. Underlying EBIT was down 15% at $156.2 million, which is within the guidance range we provided at the half year, in line with consensus and reflects the quality of ongoing trading units in the business, given it was achieved in a year with unprecedented cost pressures. On that note, the impact of supply chain costs, including raw material, labor and freight, net of cost recoveries was unfavorable by approximately $17 million at the EBIT level. This unfavorable variance reflects that costs have not yet stabilized, and that the business must continue to recover from the market throughout the first half of FY '23. We believe this is upside in the business once these cost pressures abate and the time lag to recovering cost reverses. I would note that we are not seeing this reversal yet, and we don't expect to in the first half of the FY '23 year. Reported NPAT is $12 million post the impact of underlying adjustments, which are consistent with those reported in our first half results and discussed on the next slide. Moving ahead to Slide 21. As is evident from the chart on the top right, the HDPE blow molding resin price index rose 35% from the start of FY '22. Noting this is an index for only 1 type of resin that we source and actual pricing incurred rose even further at times when the cost of shipping was included. Pleasingly, we are seeing some stability in pricing after reduction in June. Resin is a key raw material for us representing approximately 25% of our cost of goods sold. As is also evident from the chart on the bottom of the slide, shipping delays were at recent all-time highs, with shipping reliability below 40% for the entire year and down as low as 30% at times, which makes demand planning almost impossible. This has the double impact of both increased freight costs and the additional working capital cost of holding additional safety stock as insurance against reliability issues. Again, we are seeing a stabilization of shipping delays, and we expect it to move back to normal levels in the second half of FY '23. Reported underlying adjustments were $58 million after tax, and this is consistent with the level of underlying adjustments we reported at the half year, which was $60 million after tax. This total includes noncash impairments and inventory write-downs and contract manufacturing of $53 million after tax and $13 million after tax, respectively. These underlying adjustments included a net cash inflow of $28 million, which is mainly for the sale of our property in China. As I advised at the half year, the impairments and write-downs in the Contract Manufacturing segment reflect an assessment of carrying value as part of Pact's periodic impairment review and reflect the reduced medium-term outlook for this business and the relocation of a major site. The net benefit to annual depreciation and amortization because of the impairments is approximately $3 million per annum, and the inventory adjustment reflects the exit of hand sanitizer related inventory. Now to a summary of our balance sheet on Slide 22. Our gearing had consistent with the half year at 2.7x, which is comfortably below our target range of 3x. This was achieved despite the supply chain disruptions by working closely with customers to plan higher inventories to ensure we could meet consumer demand. Our inventory levels, which are $42 million above prior year, reflect these planning needs and are expected to decline as supply chain reliability improves. Net debt was $561 million, a drop of $14 million on the half year and $24 million below the prior period. This is a solid result given the trading conditions we have experienced and again reflects our focus on managing working capital and cash flow. We refinanced our core debt facilities during the second half resulting in 4 years average period to maturity with 37% of variable debt facilities hedged at year-end, all of which positions us well in a rising interest rate environment. On to Slide 23. Our operating cash conversion was below the prior year as our underlying EBIT is down 15%. Operating cash is still a significant total at $253 million, and our free cash flow was $69 million, reflective of our CapEx program, where we invested $90 million during the year and an increased investment in working capital as previously discussed. As mentioned, our underlying adjustments contained $28 million of cash inflows, reflecting our ongoing focus on cash generation. In addition to the China property sale, we were pleased to receive the first inflow from the federal government's modern manufacturing initiative scheme of $8 million. The supply chain crisis is not over, but early signs of improvement are encouraging. We expect disruption will impact on our half 1 results for FY '23 and will also impact on our working capital levels, and so this remains one of our main challenges moving into the new financial year. Turning now to Page 24 and our approach to capital allocations. On the left of the slide is our framework for capital investments. We have a disciplined approach to capital allocations and returns from our investments that sees us prioritize sustenance capital. We target to spend 70% of depreciation to keep our sites up to date with the latest technology and rebuild our efficiency across our platforms. This framework also ensures we have a strong focus on maintaining our balance sheet targets. Our growth spend will be prioritized based on return on invested capital returns with a hurdle of 15% in place for all business cases and a group target of at least 13.5% return on capital invested. In the period, the return on invested capital decreased to 9.8%, and this reflects our lower earnings in the current challenging market, as previously outlined. As Sanjay mentioned, the final dividend is $0.015 per share franked to 65%. This represents a total dividend of $0.05 per share for the year and a full year payout ratio of 25% and which is below the payout ratio in the prior year and is reflective of a prudent position taken by our Board as we wait to see how the supply chain crisis and current economic conditions play out. Capital expenditure was well controlled at $90 million of which $59 million was invested in the Packaging and Sustainability segment, which is the core of Pact and where we are investing in our end-to-end recycled resin capability to deliver innovative recycling products to our customers. We have further expanded our fleet of crates and invested in the high-speed filling line in contract manufacturing. We are forecasting capital spend for FY '23 at $100 million, following the methodology I've outlined. And as part of our investment towards leading the circular economy and a significant part of that total is an investment in our recycling facilities and recycling capability. That concludes my analysis of our financial results. I will now hand back to Sanjay. -------------------------------------------------------------------------------- Sanjay Dayal, Pact Group Holdings Ltd - MD, Group CEO & Director [4] -------------------------------------------------------------------------------- Thanks, Paul. Moving now to our outlook for FY '23 on Slide 26. At Pact, we are focused on bringing the circular economy to life and in doing so, growing returns to our shareholders. The supply chain availability and environmental factors that we faced in FY '22 continue to impact on the first half performance this year. We believe the situation will ease in the second half resulting in some improvement. And therefore, we expect to see slight growth in underlying EBIT in FY '23. In line with the approach we took last year, we will provide an update on trading at our AGM. That concludes today's presentation. We will now take questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of James Wilson from Jarden. -------------------------------------------------------------------------------- James Wilson, Jarden Limited, Research Division - Associate [2] -------------------------------------------------------------------------------- Can you hear me? -------------------------------------------------------------------------------- Sanjay Dayal, Pact Group Holdings Ltd - MD, Group CEO & Director [3] -------------------------------------------------------------------------------- Yes, we can hear you. -------------------------------------------------------------------------------- James Wilson, Jarden Limited, Research Division - Associate [4] -------------------------------------------------------------------------------- Just 3 questions for me, if I can, guys. Firstly, on the guidance outlook that you've provided a slight EBIT growth in '23. Given that you've also mentioned that the second half will be running at a more normalized cost to margin environment, does that imply a weaker first half of '23 relative to the first half of '22? -------------------------------------------------------------------------------- Paul Washer, Pact Group Holdings Ltd - CFO [5] -------------------------------------------------------------------------------- Yes, that's correct. We are seeing -- with the challenges we have in the first half, we will have a weaker first half performance in '23. But then that should -- our assumption is the environment will improve, and we should see an improved second half. -------------------------------------------------------------------------------- James Wilson, Jarden Limited, Research Division - Associate [6] -------------------------------------------------------------------------------- And so that weakness in the first half, are you accounting for any EBIT uplift benefits from lagged cost pass-throughs that might flow through in that first half that were meant to flow through this financial year instead? -------------------------------------------------------------------------------- Paul Washer, Pact Group Holdings Ltd - CFO [7] -------------------------------------------------------------------------------- Well, we believe for the first half that those will continue. So as we said in the presentation, we're not seeing a reduction in the -- rate of the cost decreasing. So our assumption is, we will continue to have that challenge into the first half and through the first half. So we really want to see that reversal until the second half of the year. -------------------------------------------------------------------------------- James Wilson, Jarden Limited, Research Division - Associate [8] -------------------------------------------------------------------------------- Okay. And then also just on the Materials Handling and Pooling business, as the mix shifts into pooling and reuse and away from retail, given the slowdown that you guys called out, what do you expect that to do to the margin profile for the segment? -------------------------------------------------------------------------------- Paul Washer, Pact Group Holdings Ltd - CFO [9] -------------------------------------------------------------------------------- Sorry, can you just repeat that question? I didn't quite catch that last part. -------------------------------------------------------------------------------- James Wilson, Jarden Limited, Research Division - Associate [10] -------------------------------------------------------------------------------- Sure. What do you think that will do for the margins to shift away from retail volumes and towards the pooling business in Materials Handling given that you've seen a retail slowdown over '22? -------------------------------------------------------------------------------- Paul Washer, Pact Group Holdings Ltd - CFO [11] -------------------------------------------------------------------------------- I think within that division, we wouldn't -- we would probably see an improvement in terms of mix. I think that's where your question is going, as it comes out of retail and then into pooling. (inaudible) to improve the margins going forward. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Our next question comes from the line of Larry Gandler from Credit Suisse. -------------------------------------------------------------------------------- Larry Gandler, Crédit Suisse AG, Research Division - Director [13] -------------------------------------------------------------------------------- Can you hear me. -------------------------------------------------------------------------------- Paul Washer, Pact Group Holdings Ltd - CFO [14] -------------------------------------------------------------------------------- Yes, Larry. -------------------------------------------------------------------------------- Larry Gandler, Crédit Suisse AG, Research Division - Director [15] -------------------------------------------------------------------------------- I guess continuing on about the first half outlook for F '23, to some extent, is it energy pressures that are more acute this coming half and maybe it was more resin last year F '22. And if it is energy, I know you called out resin was about 25% of COGS. Can you give us some color about your energy exposure, gas, electricity and how it's impacting the result in FY '23? -------------------------------------------------------------------------------- Paul Washer, Pact Group Holdings Ltd - CFO [16] -------------------------------------------------------------------------------- Yes, Larry. Look, I mean, energy price is roughly, I suppose, 5% of our cost of goods. So not necessarily too significant in the scheme of things. And to be honest, we're pretty hedged as we look into F '23. I think the reason why the first half is weaker just because it's just patchy in terms of where revenue is at. There's a lot of our customers do that aren't able to supply raw material ingredients themselves. So that sort of means that it comes back to our demand profile. So it's more than just that there's very patchy demand at the moment and how that plays out, we sort of can't sort of guess how that's going to play out, but we sort of -- we're just being cautious in respect to the sales volume in the first half of the year. -------------------------------------------------------------------------------- Larry Gandler, Crédit Suisse AG, Research Division - Director [17] -------------------------------------------------------------------------------- Okay. That's -- and that patchy demand is because it sounds like is it inflationary impacting elasticities or you're seeing in supply chain cause. -------------------------------------------------------------------------------- Paul Washer, Pact Group Holdings Ltd - CFO [18] -------------------------------------------------------------------------------- Yes, that's right. I mean with interest rates, et cetera, that's right, with the inflation, interest rates, no one's quite sure how that's going to react through in terms of ultimate demand. And as I say, those supply chain issues are still there. So there's no real reliability yet in terms of planning, in terms of this definitely demand planning. As to how that's going to impact the first half of the year. -------------------------------------------------------------------------------- Larry Gandler, Crédit Suisse AG, Research Division - Director [19] -------------------------------------------------------------------------------- Okay. Understood. And another question I have is with regards to the announced review of tick and crate pooling, you're sort of indicating that it's an ongoing process. I know (inaudible) transaction was going on in the background, and that seems to have terminated. So that clearly is not a factor in your guys' decision because you're continuing the process. How long would you allow this process to run and is it really a very active process at the moment? Or is it starting to fade? -------------------------------------------------------------------------------- Sanjay Dayal, Pact Group Holdings Ltd - MD, Group CEO & Director [20] -------------------------------------------------------------------------------- I think Larry, the main thing here was there's an opportunity the interest in the market. We just wanted to see how that plays out with our situation. So it's not like an open ongoing process or anything like that. We're just trying to understand together with Citi what is possible and that's why we just called it out because things tend to leak. So that was the main thing. It's not that we have got a clear timeline or a clear clarity in our mind also as to whether -- what exactly we want to do. But once there is an interest in the market, we thought we have a lovely business here, it's performing exceedingly well. What is it that we can do to add some value to our shareholders. And I think that's where we are at. And if something significant occurs there or we do something significant. We will certainly update you. Otherwise, it's business as usual. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- We have a follow-up question from the line of James Wilson. -------------------------------------------------------------------------------- James Wilson, Jarden Limited, Research Division - Associate [22] -------------------------------------------------------------------------------- Just another one for me. On the circular economy, EBIT contribution, are we right in assuming that $25 million is a yearly contribution flowing into the core Packaging segment? And what are the margin profiles like on circular economy earnings that you're expecting compared to normal earnings in the Packaging segment? -------------------------------------------------------------------------------- Sanjay Dayal, Pact Group Holdings Ltd - MD, Group CEO & Director [23] -------------------------------------------------------------------------------- Yes. So the answer is yes. You will see that uplift primarily in the Packaging and Sustainability segment. In terms of margin, I think the way we have called it out is that one of our objectives, which actually complements this objective is the increase in the Australian business margin to 10%. So both are actually complementary in many ways. And there are many avenues which will lift the margin up during the -- as we play out the circular economy. The fact is that we beat avenues which will lift the margin up during the -- as we play out the circular economy. The fact is that we do have a special place in this space now. And certainly, that is something that the customers want. There is also the opportunity as we have called out, we are upgrading all our platforms. We got some money from the government as well to upgrade the platform. So our operational efficiency is also going to get better. So the combination of that and of course, the recycle material coming out of the JV will be the best in terms of its efficiency as well because these are very, very new, very, very modern plants. So the combination of all of this is what we have done some detailed work on, and that adds up to $25 million. That's why we called it out. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Our next question comes from the line of John Purtell from Macquarie. -------------------------------------------------------------------------------- John Purtell, Macquarie Research - Analyst [25] -------------------------------------------------------------------------------- Good morning, Sanjay and Paul, how are you? -------------------------------------------------------------------------------- Paul Washer, Pact Group Holdings Ltd - CFO [26] -------------------------------------------------------------------------------- How are you doing? -------------------------------------------------------------------------------- John Purtell, Macquarie Research - Analyst [27] -------------------------------------------------------------------------------- Just had a couple of questions, please. Just in terms of -- just back on the last question there, just thinking about the timing of the ramp-up on that $25 million of additional EBITDA. Are you seeing or expecting much of a positive contribution from, say, the Albury joint venture, for example, in '23? Or is it much more sort of back-end loaded in terms of that ramp-up as we profile forward. -------------------------------------------------------------------------------- Sanjay Dayal, Pact Group Holdings Ltd - MD, Group CEO & Director [28] -------------------------------------------------------------------------------- John, I think progressively, we will see the improvement. This is a new field, as you know, in terms of our -- in terms of how it all plays out. But clearly, all signs that we are seeing right now, we can -- like, as an example, as you know, we've called out the partnership with Woolworth, which is the largest supermarket we have got. And that's an example of what is possible here. So I think to look at it on a piecemeal basis is not the way I would think about it. This is an evolving area, John. And I would say it will progressively get better. So it's not that it's all back-ended. I wouldn't say that. But it will progressively get better as we -- as we are able to sort of say, monetize some of the partnerships and some of the relationships that we are right now developing. And we are able to fulfill what the customers want. So the combination of that and as I mentioned before, in terms of our new platforms, which are also currently -- I mean, we've done only about 1/4 of that so far. We've got more investment coming in those over the next few years. So I think this will play out and progressively reach that sort of target. They were -- it's not a sudden jump, I would say. But I feel very, very confident about it. And the more as we progress on the strategy and the more we deal with customers, the more we feel confident that there is that opportunity for us to fulfill the demand, but at the same time, make money for our investors. It also makes all our customers very sticky, because we are the ones who will be having a quality product for the future, so to say, with the recycled content. So yes, that's all I would say that there's -- progressively, you will see the improvement. -------------------------------------------------------------------------------- John Purtell, Macquarie Research - Analyst [29] -------------------------------------------------------------------------------- And just a second question for Paul. Can you just provide some comments on Pact's debt refinance profile over the next couple of years? And also exposure to higher interest rates. I know you've talked about, I think, 37% hedging there. But logically, your interest expense should move higher with floating rates? -------------------------------------------------------------------------------- Paul Washer, Pact Group Holdings Ltd - CFO [30] -------------------------------------------------------------------------------- Yes, that's right. And look, we've just spent the last 6 months refinancing the bulk of our lending facilities. So now we've got a maturity of 4 years. But to your point, for us, around 100 basis points is around about $4.5 million after tax in terms of the NPAT impact. So that's what we use in terms of our sensitivity around interest rates. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Your next follow-up question comes from Larry Gandler. -------------------------------------------------------------------------------- Larry Gandler, Crédit Suisse AG, Research Division - Director [32] -------------------------------------------------------------------------------- Yes, I was going to ask also on the circular economy $25 million. Is there any of that already in the numbers? Or is that all incremental -- have you kind of ring fence that is all new business? -------------------------------------------------------------------------------- Sanjay Dayal, Pact Group Holdings Ltd - MD, Group CEO & Director [33] -------------------------------------------------------------------------------- Yes, majority -- I won't call it new business. I would say it's a combination of new business and a combination of added recycled content and improve margins. So not all of it comes from new business necessarily. But as we convert many of our customers into recycled product. And as we use the material from our joint ventures, that all should add to earnings. That's the idea of driving the strategy, and that's our target. So -- and your first point was, is it already baked in the numbers? No, no, no. That is incremental. That's what we are talking about. -------------------------------------------------------------------------------- Larry Gandler, Crédit Suisse AG, Research Division - Director [34] -------------------------------------------------------------------------------- Okay. So things like circular plastics, PET, those earnings are there as well as the Woolworths arrangements that you're about to work on. -------------------------------------------------------------------------------- Paul Washer, Pact Group Holdings Ltd - CFO [35] -------------------------------------------------------------------------------- That's correct. -------------------------------------------------------------------------------- Larry Gandler, Crédit Suisse AG, Research Division - Director [36] -------------------------------------------------------------------------------- And just in terms of those Woolworths arrangements, I think it was a memorandum of understanding with the last official word. Has it progressed to something more solidified in terms of deliverables? -------------------------------------------------------------------------------- Sanjay Dayal, Pact Group Holdings Ltd - MD, Group CEO & Director [37] -------------------------------------------------------------------------------- Yes. So we are working with them as we speak, and that should all be done before Christmas, that's for sure, maybe even earlier, but certainly before Christmas. So that's happening as we speak. We've got the teams from both sides. We're working through that now. -------------------------------------------------------------------------------- Larry Gandler, Crédit Suisse AG, Research Division - Director [38] -------------------------------------------------------------------------------- Okay. And 18,000 tonnes is -- must be a significant incremental uplift not only in your recycled content, but your total resin conversion base, is that a fair comment to say? -------------------------------------------------------------------------------- Sanjay Dayal, Pact Group Holdings Ltd - MD, Group CEO & Director [39] -------------------------------------------------------------------------------- Yes. I mean, today, we use 180,000 tonnes. So it's about 10% of that, if that's what you mean in terms of the total quantity of resin. But from a recycle quantity, yes, it is significant. But our idea is to have -- by the time all our factories are running and all the operations are there, we have the potential to make 120,000 tonnes of recycled total, including with our JV partners, of course. So it's definitely something which we have had a look at as to where all the material will come from and certainly more opportunities with other partners as well. We have included that. So yes, it is significant, but not something which is way out there. It is definitely within our reach and in terms of our total quantities that we make today and that we are planning to make as we have more and more recycled plants running. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from the line of Craig Davis. -------------------------------------------------------------------------------- Unidentified Analyst, [41] -------------------------------------------------------------------------------- Sanjay, you paint a fairly rosy picture of the business. You talked about being a wonderful business and so on. But as a small shareholder, it's been quite a disappointing ride over the past 3 months or so, perhaps a bit longer. What do you see as being the catalyst for a reasonable increase in earnings over the next 18 months, given your positivity in this briefing? -------------------------------------------------------------------------------- Sanjay Dayal, Pact Group Holdings Ltd - MD, Group CEO & Director [42] -------------------------------------------------------------------------------- I think our strategy, big would be the main thing. We are driving hard on strategy. We've had I mean I can -- I understand your disappointment. I have to say that the year like -- the year just gone by has been quite an unprecedented year. And I do feel at the end of the year that we got somewhere in terms of being able to deliver an outcome for our shareholders. It was very tough at times, particularly around supply chain and not having availability of whether it's pallets or its resin. So I do want to share your concern about the performance in the last year, but it was unprecedented time. So I think as things get better and normalize, the big driver is our strategy. Our strategy positions us and already is starting to position us as a very special company. So we are a packaging company with a difference. We are not a -- not a normal sort of packaging company, where it's all about just minimizing the cost. It's also about differentiation. It's also about being special to your customers and be able to give something which everybody wants. All large customers have got their own ambitious targets on -- by 2025 for recycled content. And we are one of the key enablers to actually doing that. So as you can see, there are already some green shoots as we talked about the Woolworths. I also mentioned in my speech about half a dozen other sort of customers who have started to buy recycled product from us and are delighted with what they're getting. So that is, for me, the positivity, which I see is that. I believe that Pact is already in a special position here. And as we drive our strategy forward, of course, you need a little bit of normalization of things as well. I take that. But as we drive our strategy forward, you would see an improvement in earnings. Even if you take last year, FY '21, we did start having some momentum in terms of our earnings, but unfortunately, '22 was, as I said, unprecedented year. So I'm hoping that I can give you better earnings as we go forward through our strategy. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Thank you. We have reached the end of the question-and-answer session. We thank you all very much for all your questions. And with that, we conclude our conference for today. Thank you for participating. You may all disconnect.

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