U.S. Markets closed

Edited Transcript of ORA.AX earnings conference call or presentation 14-Aug-19 11:00pm GMT

Full Year 2019 Orora Ltd Earnings Call

Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Orora Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 11:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Brian Lowe

Orora Limited - CEO, MD & Director

* Nigel D. Garrard

Orora Limited - MD, CEO & Director

* Stuart G. Hutton

Orora Limited - CFO

================================================================================

Conference Call Participants

================================================================================

* Daniel Kang

Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research

* David Errington

BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia

* John Purtell

Macquarie Research - Analyst

* Nathan Reilly

UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials

* Owen Birrell

Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to investor call FY '19 results. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Nigel Garrard. Thank you. Please go ahead.

--------------------------------------------------------------------------------

Nigel D. Garrard, Orora Limited - MD, CEO & Director [2]

--------------------------------------------------------------------------------

Thanks, operator, and good morning, everybody, and thank you for joining us today, and welcome to the Orora Group's results call. Today, I'm joined by Brian Lowe, our incoming Managing Director and CEO; and Stuart Hutton, our CFO.

So today, I'll start by giving you an overview of our full year results for 2009 (sic) [2019]. And then I'll hand over to Stuart, who will take you through corporate costs, cash flow and debt position. And Brian will then conclude with an update on Orora's sustainability program, the progress of our strategy and some commentary on the perspectives about the outlook for FY '20. And at the conclusion of the presentation, Stuart, Brian and I will be happy to take your questions.

Before I start, I just want to point out the important information on Slide 2. Today, through the presentation, we'll be referencing underlying earnings. You will all know that on the 2nd of August, we announced we would recognize a significant item after-tax expense of $55.8 million in our statutory results, and we'll provide some further detail on that in a moment. And in FY '18, you'll also remember that we had significant items that were derived after excluding the -- sorry, we will exclude a net significant item expense of $1.9 million, which relates to the closure of our Smithfield site and some additional costs associated with decommissioning of Petrie; and a one-off tax adjustment gain of $5.5 million, resulting from the changes of tax rates in the U.S. And we're doing this just so that it helps everybody understand the underlying operating performance of the business.

If I look to our full year results, we're pleased to report another positive year of earnings growth despite a challenging trading year, particularly in North America, with underlying NPAT up 4% on the prior corresponding period at $217 million. And the result was driven, you will have seen, by a solid performance in Australasia, which helped offset lower earnings from North America. The result included benefits from recent acquisitions and our continuing capital investments to deliver customer-led product solutions and to improve our productivity.

Operationally, the business delivered EBIT growth of 3.7% through higher output at the B9 mill. This year was a record production year for B9. So we've certainly got that mill now operating at or above design capacity, the ongoing focus on improving manufacturing and operating efficiency across the Australasian business, which is a consistent theme that we've had over the last 4 or 5 years. We saw higher can volumes and favorable glass and cans product mix and some positive translational FX impact from our U.S. dollar earnings.

The Board declared a final dividend of $0.065 a share, partially franked to 30%. So the total dividend for FY '19 is $0.13 per share, which represents an increase of 4% on the prior comparative period. And that equates to a payout ratio of approximately 72% of NPAT, which is slightly above the top end of our indicated range and further highlights the continued confidence the Board has in the business.

Looking at cash conversion at 56%. This was in line with our expectations but below the prior corresponding period, but the prior period included proceeds from the sale of Smithfield land of $45.5 million. The cash flow reflect a continued heightened capital investment in our business mix, seasonal conditions in Australasia leading to higher inventories and certainly some additional planned inventory being held for capital investment, inventory builds in likes of Fibre and the Glass businesses. And return on average funds employed was down 100 points to 13% on the prior corresponding period, reflecting lower earnings in OPS in North America and a lower seasonal contribution from the acquisition of Pollock. Just as a reminder, the Pollock business is 70-30, so 70% in the first half of the fiscal year and 30% in the second half of the fiscal year. So we had the smaller contribution during FY '19, and we would expect a stronger contribution in this coming half.

Investing in future growth remains a key strategic priority. And during the period, Orora's spent about 150% of depreciation, with $180 million -- or nearly $181 million on base and growth projects, and we invested a further $140 million on acquisitions in North America. The Global Innovation Initiative of $75 million has continued and delivering to our expectations, and we've committed about $66 million under that initiative.

Turning to Page 4 on the significant items. As I've said, we recognized an after-tax SI of $55.8 million, and this consists of $35 million for additional decommissioning costs of the Petrie site and $20.8 million for restructuring and some asset impairment charges.

Going into that into a little more detail, in relation to Petrie, the decommissioning of the site is a significant and complex exercise involving multiple government agencies. With an amended contract having recently been entered the -- entered into with the landowner, the scope for the final phase of remediation and decommissioning was able to be finalized. And this resulted in the estimated cost to complete the decommissioning being higher than previously contemplated. We have engaged a specialist environmental concerning firm to manage the completion of the works.

In terms of cash flow, the costs are expected to be relatively evenly phased over the next 3 financial years. And there are residual proceeds of $10 million from the sale of that land, which will be collected evenly over FY '20 and FY '21.

Going back to May, Orora announced that in response to the slower start to earnings experienced in early calendar 2019, cost structures in both Australasia and North America were being reviewed. We have since completed this review and determined that certain parts of the business require restructuring to ensure operations are optimized and the cost base aligns with the expected market outlook.

From a time and cash flow perspective, the majority of the initiatives will be implemented in the first half of FY '20, with some spilling over into early calendar 2020. As part of this review, we looked at some assets, and that resulted in a noncash impairment charge of $3.7 million after tax. There's no material effect on our earnings from this impairment charge. The expected return on the restructuring initiatives is circa 30% in FY '20 and circa 65% in FY '21. The roughly $17 million of restructuring initiatives allocated between Australasia at about 50%, North America at 40% and corporate at 10%.

Turning now to safety. You will have all heard me say many times that the safety of our team members is a fundamental priority. In FY '19, increases in both recordable and lost time injury frequency rates were seen and frankly, that's just unacceptable. Last November, Orora launched an independent global review of safety practices. This review is complete in Australasia and nearing completion in North America. It has provided great insights into where the opportunities exist to better focus on our safety improvement actions, and this includes things like maintaining the focus on education and training, continuing the rollout of comprehensive risk profile reviews, implementing appropriate mitigation plans for high-risk hazards and sites and ensuring Orora's tools and processes reflect industry-best standard. It is and it remains a priority of the business. And I know that Brian Lowe, when he assumes the MD and CEO role, will bring the same passion for safety as we go forward.

During the year, in addition to the global review, we also launched a new alcohol and drug policy. And implementation of this policy has included extensive education, testing and support programs across the Australasian business.

Moving now to the business segments. In Australasia -- I'll start with Australasia, where we saw another solid performance. Underlying sales grew by 1.5% during the period. Our Fibre earnings were slightly higher than the prior year. Some key notes to -- or some key points to note. B9 had a record production year, as I've said. Our volume -- Fibre volumes were higher in most processed food, fresh produce and meat sectors compared to the prior corresponding period. However, we did see some unfavorable seasonal conditions in some regions as they're adversely affecting volumes.

As an example, the kiwi fruit season in New Zealand, which is a big part of our New Zealand business, the kiwi fruit season produced smaller fruit due to adverse growing conditions, and that meant a lower number of boxes that was needed to be supplied to that part of the market.

In Fibre, still our ongoing operational efficiency and cost improvement programs continued, and they supported the improvement in results and efficiencies and helped offset the impact of higher input costs in areas like kraft paper, starch, electricity and imported cartonboard.

The Beverage businesses earnings were higher driven by higher can volumes, favorable product mix in cans and glass and continued improvement in operating efficiencies across all of the Beverage businesses.

The Cans business, in particular, was strong with the trend of switching from other substrates to particularly plastic continuing and demand for mainstream and craft beers in cans continuing to grow.

Our Glass volumes were down on record numbers in FY '18 largely driven by reduced export volumes in the wine market. Much of this volume reduction was offset by market share gains in beer and increased volumes in non-alcoholic beverages such as kombucha.

Importantly, in Australasia, top line growth has translated into higher profitability. But with the EBITDA, 6.2% despite the cost headwinds, kraft paper, electricity and starch, the effect of which was about $13 million. Our EBIT margin in Australasia grew 50 points to 11.5% as a result.

We are continuing to invest in our Australasian business and believe the success that we are seeing flow from this CapEx supports that focus. In FY '19, $144 million was invested in organic capital, and this included the asset refresh program in Fibre continuing at a heightened level. We expect this program to continue into the future, albeit at a somewhat lower intensity as we consolidate on the investments that are made -- that we've made thus far.

We're also at the final stages of commissioning the secondary water treatment plant at B9. And you may recall, in FY '18, the Glass business committed $50 million to upgrade existing warehouses and to build a new on-site warehouse at Gawler to hold our inventory on site and to reduce off-site pallet storage and transport costs. The upgrade was completed in early calendar 2019, and the new warehouse is on track to be delivered by December 2019.

Preparation work has continued at Gawler for the rebuild of the second furnace, which is scheduled to take place between February and April 2020. The total cost of the rebuild is circa $50 million, with the majority to be spent in the coming financial year.

Return on average funds employed in Australasia was steady at 13.4%, with increased earnings offset by the recent capital investments and heightened working capital mainly due to the seasonal and capital project-related increases in inventory that I referred to earlier.

Turning to Slide 7. The earnings bridge highlights the growth in the Australasian EBIT of 6.2%, and the organic earnings growth has once again offset the input cost headwinds that we continue to see in the Australasian business.

Turning now to North America. As we've discussed recently, market conditions in North America are generally tough in the sectors that we serve, and this was even more pronounced in the second half of the financial year, and we've noted the reports from other companies in the packaging sector in North America and have seen a constant theme in those.

While in U.S. dollar terms, sales grew 12.4% to $1.86 billion, EBIT declined 11% to $83.4 million. And this is a result of the generally tough market conditions, which impacted volumes and margins in -- sorry, in OPS and to a lesser extent, the earnings reset at OV from the loss of the AT&T business during FY '18. These, combined with other factors, flowed through to the EBIT margin which was lower at 4.5%.

In response to the tough market conditions, we have implemented a number of initiatives aimed at improving processes, efficiencies and taking costs out of the business. This earnings improvement program has recently been bolstered with further dedicated external resources brought into the business to ensure that we have the right focus and urgency to deliver on the initiatives that have been identified. While these initiatives progressively gain traction in FY '19, most of the benefits are expected to impact in FY '20. And the costs associated with implementing this program have been included in the group-wide restructuring initiative that I talked about in relation to the SI.

Cash conversion in the U.S. was solid at 69%, which was in line with our expectations. With the decline in earnings, we saw a decline in RoAFE as a result of the earnings decline but also the dilutionary effect of the Bronco and Pollock acquisitions, which we have talked to you about in the past.

Constant currency revenue growth at OPS was approximately 14.1%, predominantly from acquisitions, as I've said, with net organic growth around 1% or a little higher. And this reflects the challenging market conditions I've talked about.

The functional and organizational integration of Bronco and Pollock, our 2 acquisitions in Texas, has added some 500 people to the North American business. And that integration continues to be on track with the accountability for delivery of synergies and integration clearly embedded. The focus on the customer experience and delivering the synergies are both tracking to plan. As I've said earlier, it's important to understand Pollock's earnings are weighted approximately 70% in the first half of Orora's fiscal year, which is the half that we're currently in.

In terms of investment activity, the ERP system rollout has been completed, and the transition costs are progressively being removed as part of the restructure program. The manufacturing division has commissioned a new 6-color press in Northern California, and this has provided a step-up capability and opened new higher value-add markets in that part of the country.

In Southern California, the new high-speed, large-format digital printer, which is the same as the printer commissioned by Fibre Packaging in Victoria, has been commissioned and is already enhancing our value proposition.

From Orora Visual perspective, they've continued to successfully build out their value proposition to serve national corporate customers and the offering of a consistent point of purchase. Visual communication and fulfillment business is being offered across our multiple locations. Orora Visual has 2 creative design centers in Los Angeles on the West Coast and in New Jersey on the East Coast, and this helps provide the expected uniformity of offering benefits from the digital and fabric printing capability that we have installed.

The focus for OV is to continue to grow share of wallet with existing customers and to continue to onboard new accounts while also driving efficiencies in manufacturing.

I turn now to Slide 9, which is the earnings bridge in North America. Yes, it's quite clear here that the U.S. businesses, particularly OPS, was impacted by generally tough market conditions. And the volume and margins effect have been reflected in that.

The positive impact of the weaker Australian dollar, which was a help during the year, was approximately $7.8 million. From a guidance point of view, a $0.01 move in the Australian dollar against the U.S. on an annualized basis, equates to approximately a $1.8 million FX translation sensitivity on EBIT and a $1.1 million sensitivity on NPAT.

Looking now at Slide 10. I'll hand over to Stuart to take you through that.

--------------------------------------------------------------------------------

Stuart G. Hutton, Orora Limited - CFO [3]

--------------------------------------------------------------------------------

Great. Thanks, Nigel, and good morning or good evening, everyone. So FY '19 corporate costs were $28 million, which is a slight improvement on the prior year. Just included in that, there's a couple of items to note. Transaction costs relating to the Pollock and Bronco acquisitions of approximately $1.5 million are included in that number, but these have been offset by what we call ongoing sound management of our corporate costs. In terms of guidance for FY '20 corporate costs, basically, we expect them to be broadly in line with the reported costs of this year. So somewhere around that $28 million, $29 million mark for FY '20.

Just a brief comment on tax while we're on corporate matters. While we have, I guess, been positively impacted by the lower U.S. tax rates through the recent tax reforms over there, we do operate in several other jurisdictions where rules have had an adverse impact on Orora, and that will impact basically from FY '20 onwards. This means Orora's effective tax rate is unlikely to be materially different from historical rates going forward, so we expect average tax rate for the group to be at or around the 28% level as we move forward.

In Appendix 2 there's, just again, from a corporate point of view, we've included a pro forma set of financials showing the estimated impact on the profit loss and balance sheet from the adoption of the, somewhat confusing, but these were the lease accounting standards. So we'll be adopting the standard effective from 1 July 2019. Comparative information will not be restated as it's not required under the standard, but we've given you the guidance there just so as you start to see our numbers reporting from here, they will be including the impact of the lease standard. Although I think in this first year, we will provide both with and without lease accounting so that we can help you understand our numbers, including for ourselves for that matter.

But I think the other thing to say about the lease standard is at the NPAT point of view, the impact is unlikely to be material, it does impact specific lines but is immaterial. And any guidance we're giving you in relation to capital to depreciation, et cetera, et cetera, in this announcement today, is before the impact of the lease standard.

On to Slide 11, the cash flow. So again, positively, from -- as we would say it, increased earnings were converted into cash with operating cash flow at around $270 million. This was down slightly on the prior period, but as Nigel referred to before, there was an impact in the prior year of the sale of Smithfield proceeds which aided last year's number. The, I guess, cash conversion at approximately 60% was in line with our guidance for the year, and this reflects ongoing investment in CapEx and planned inventory builds to maintain supply during capital investment programs that are underlying Glass and Fibre.

Average working capital to sales was higher at about 10.3% driven primarily by seasonal capital project-related inventory builds, which Nigel referred to before. There are always opportunities to continue to improve and remain vigilant, and we expect this ratio to be back under 10% by the end of FY '20 as some of these, hopefully, seasonal conditions come back in our favor. And certainly, the capital projects, which we control will be behind us at that point in time.

As mentioned by Nigel earlier, a heightened level of lower-risk organic capital expenditure has been a focus for Orora for the past 18 to 24 months. And across the year, we invested approximately $180 million in this type of expenditure. The total CapEx investment represents approximately 150% of depreciation and is a positive endorsement of the strength of, and management's commitment, to the base businesses.

In terms of guidance for net CapEx for FY '20, with some residual spend on the current phase of the asset refresh program in Fibre, the rebuild of G2 and the new -- which includes also the new forming line, and the completion of the warehouse development at the glass facility in Gawler, capital expenditure is expected to be approximately 120% of depreciation. And calculated depreciation, as stated before, any lease accounting is expected to be approximately $140 million. In addition to the capital, $140 million was also invested on the acquisitions of Bronco and Pollock in North America.

In terms of guidance for cash conversion in terms of, I guess, in one of the factors I've just talked about in terms of still an ongoing heightened level of CapEx, we're expecting cash conversion of approximately 60% again in FY '20.

On to the balance sheet and our debt position. I guess the important thing for us is, we've clearly, we still have a very strong balance sheet, and that's despite the level of investment made in FY '19. And it has us clearly well positioned to invest in further growth. And as the opportunities present, and we would see ourselves ready to invest in that type of activity.

And so net debt increased to about $890 million. Leverage is around 1.9x, which is up from June of last year of 1.5x and 1.8x at December '18. The current leverage of 1.9x is still at the lower -- or it's actually, below the lower end of our management's target range of between 2 and 2.5x, and as I said, provides us with the capacity to continue to explore and execute on our growth investment strategy.

As a company, we remain committed to maintaining a sensible debt levels and investment-grade credit metrics. And to this end, we have significant capacity and headroom in our current facilities with undrawn capacity of approximately $370 million and cash reserves of over $70 million as at 30 June.

In terms of our debt facilities, Orora -- or sorry, we, I should say, refinanced and upsized our $400 million syndicated facility here in Australia, which was due to mature in December '19. This is now $450 million facility with a maturity of April '22. And during this process, we also took the opportunity to upsize and extend our U.S. syndicated facility from USD 200 million to USD 300 million with a new maturity of April 2024. The average weighted life of our facilities is now approximately 4 years. And importantly, just from a guidance point of view, these new facilities were renewed on similar commercial terms to the prior facilities.

Our principal focus is to use our strong financial position to invest in acquisitions and organic growth opportunities that will generate future shareholder returns. While investing to drive organic and new growth remains the primary objective, as we have continually said, capital management options will be considered in the absence of suitable growth investments existing in our pipeline. At this point in time, I would add that capital management is not a priority at this present time. We still see a number of growth opportunities before us, but at this point in time, we are consolidating on what's before us before we pursue some of those activities.

So with that, I'll now hand over to Brian, who will cover up on the Orora Way, our sustainability initiatives strategy and perspectives for the year ahead. Brian?

--------------------------------------------------------------------------------

Brian Lowe, Orora Limited - CEO, MD & Director [4]

--------------------------------------------------------------------------------

Thank you, Stuart. So we'll turn to Page 14, which is the Orora Way focus. And as a number of you would have heard me say 5 weeks ago, where we had an introductory call relative to the Orora Way, I'm planning very much the progress on leading the business in a business-as-usual way in terms of how we've focused on the overall conduct of the organization and very consistent with Nigel's tenure. Orora's leaders and I will continue to place value on the importance of our organizational culture. We'll continue to invest in embedding that culture because we truly believe it drives our performance and our competitive advantage and, therefore, generates long-term shareholder value.

And as you'll see on this chart where we represent the Orora values, coupled with, particularly I want to point out in terms of passion and respect, which leads into what I'll cover next in terms of sustainability. They are really at the forefront of how we're focused and look at sustainability, which I'll refer to on the next chart.

And we're now -- our focus on sustainability is really managing through 3 focal areas that is plant, people and prosperity. And the aim is really to minimize Orora's impact on the environment. And this includes setting eco targets and improving the sustainability of our products and our services. And Orora's approach is guided by being a signatory to the United Nations Global Compact, or UNGC, as most people now refer to it as, which requires us, as an organization, to undertake specific initiatives to promote greater environmental responsibility. And while Orora's sustainability journey is ongoing, we certainly undertake actions to reduce our emissions and waste to build a more sustainable business for the long term. And I'll cover over the next several slides some specific areas where we believe Orora is doing a very credible job in this particular area.

So on the next page, I'm going to cover Orora's focus on recycling. Well, we're really proud to be a leading large-scale recycler, particularly in the areas of manufacturing in this part of the world. Orora collects more than 650,000 tonnes of old corrugated cardboard and mixed waste product nationally here in Australia. Approximately 450,000 tonnes of that is then fed through Orora's recycled paper mill in Botany, and this produces in excess of 400,000 tonnes of paper, which is 100% recycled paper, that is used to then create cardboard boxes across our Australasian and North American converting facilities. So this process creates a continuous loop of recycling from paper to cardboard and then back to paper again.

If you look at our Glass business within our South Australian facility, we recycle approximately 80% of all the glass that's collected through the South Australian container deposit scheme. And we still look for economical ways to source recycled glass from other states around the country.

Within our Cans business, we source aluminum coils that contain approximately 70% of recycled aluminum. And during our can production, leftover aluminum is collected and sold back to the aluminum manufacturers for recycling. In our North American operations, particularly our cardboard corrugated manufacturing, which is part of our OPS business, contains approximately 55% recycled content. And this is largely sourced from our B9 operations.

We turn to Slide 17, and Orora has signed 2 long-term power purchase agreements with renewable energy providers to supply wind-generated electricity for Orora's operations in South Australia, Victoria and New South Wales, where we operate our largest and most energy-intensive facilities. And under these PPAs, Orora has secured the supply of renewal energy, which is equivalent to about 80% of all of our requirements. And that provides us some long-term stability in terms of both supply and in terms of energy costs.

We've also invested approximately $25 million in a secondary water treatment facility at our Botany paper mill, which has been commissioned and came online from late 2018. And a further $10 million has been invested across a number of our operations in a wide range of initiatives to improve energy efficiency within Australia and New Zealand. So we're continuing to invest across the board, and we're also looking at renewable energy opportunities and exploring areas such as cogeneration and small-scale solar opportunities at certain sites we have located around the country.

Slide 18 looks specifically at our eco targets. And at the time of demerger in 2013, Orora set some eco targets that we would aim to achieve by 30th of June 2019. And outlined in this chart, these defined Orora's goals to reduce the energy intensity of greenhouse gas emissions, waste to landfill and water use across the business. And I'm really proud to announce that Orora has achieved these targets, including reducing CO2 emissions by 28%, reduce of waste-to-landfill volumes by also 28% and reducing our water usage by 15%. And we will be setting new eco targets during the next -- during this upcoming financial year.

On Page 19, there's a focus in terms of what we're doing from a product perspective, looking at sustainable packaging solutions. So we're working closely with our customers and looking at investment opportunities and how we can develop innovative recycling packaging alternatives to help reduce the impact on the environment. So in addition to the proven and existing technologies and capabilities we have within the current portfolio, we're trialing a number of new packaging formats such as fiber trays, fiber-based punnets and even a paper-based bubble wrap product, which is very innovative and new to the market. So while a number of these will have varying times to commercialize, our clear intent at Orora is to be a leader in bringing these initiatives to market.

We'll now turn to Slide 21, which is Orora's blueprint for creating shareholder value. This is a really multifaceted approach, comprising of -- first of that being organic growth. And across Australasia and North America, this is underpinned by good market structures and opportunities, and is enhanced by continued investment in innovation. And this is also supplemented by a returns-focused approach to allocating capital towards investments across 3 specific avenues. The first being organic growth capital, which entails investment in existing businesses backed by our customer. An example of this is the expansion of the capacity for new sleek cans, where we recently put an investment in New Zealand, and also the warehouse expansion that Nigel referred to recently for our Glass business in South Australia.

The second, which is bolt-on M&A, and that's largely been focused on expanding our geographical footprint primarily in North America with acquisitions like Pollock and Bronco. And the third being adjacent M&A, which entails parallel packaging substrates or markets. And this would be the initial expansion to North American pulp market.

And while I'll always look to enhance what we do in this particular area, as of today, I see no reason to substantially change this value creation model. We have the capacity to comfortably invest between $150 million and $200 million per annum in growth initiatives, and we invested at this level in FY '19. We also aim to provide shareholders a steady income stream through a sustainable dividend, where we seek a payout ratio of between 60% and 70% of profit after tax.

On Slide 22 and summarize how Orora has been executing its growth investment agenda since listing in 2013, having now invested approximately $675 million in return-generating investments. And based on the success of recent organic investments, Orora plans to continue to invest to support organic growth as well as ensuring effective investment of recent acquisitions. I'd like to reiterate that as appropriate, Orora will continue to explore and evaluate a pipeline of acquisition targets that are expected to be return-accretive. However, the focus at the moment is on consolidating and integrating recent investments.

Slide 23. Turning to the focus that we've had in terms of what we've committed to deliver versus what we have deliver, we're firmly committed to generating shareholder value. And I think if you went through the items on this, we would clearly believe we're [upholding] this commitment in terms of what we've been expected to deliver over the last financial year.

Our perspectives on 2020. The market operates -- the markets that Orora operates in are expected to remain challenging, especially North America, and Nigel covered a number of the challenges that we've had over the past 12 months there. However, with the recent announcements about our restructuring initiatives and the earnings improvement programs that we've been bolstered now by some external resources, we do expect to drive the business forward during FY '20. The success of recent organic capital investments supports management's ongoing investment in CapEx. So I do expect CapEx to be invested at approximately 120% of depreciation, as Stuart has indicated previously. Capital does include the G2 rebuild, as we've previously disclosed. And this does have an adverse impact on earnings in the second half of FY '20 of approximately $8 million, and this should largely reverse as we get into FY '21.

The Australasian business, as a whole, is a strong and resilient business for us. And as it has done consistently to offset ongoing cost headwinds, and in addition to pursuing growth, the Australasian part of the business will continue to identify and implement cost reduction opportunities such as we've done with the restructuring initiative. We'll invest in asset upgrades, new capacity, new sites, and we'll use the Orora Global Innovation Initiative to support this business ongoing.

Approximately 50% of the significant item restructuring charge announced earlier in August relates to the Australasian business, and we expect to deliver return of approximately 30% in FY '20.

Orora has successfully secured some new gas supply arrangements with multiple parties for the next 2 years. The anticipated net cost headwinds from the gas price increase in the second half of FY '20 will be approximately $3.5 million.

We also have increases in kraft paper and insurance premiums that are expected to impact earnings by a further $5 million and $3 million, respectively.

Our OCC commodity price volatility is expected to continue, as we have seen over the last year, and our sensitivity to that remains unchanged relative to previous guidance. And that is a $10 per tonne movement in OCC price, represents a gross annualized impact of approximately $0.5 million at the EBIT line.

The focus for North American business is to consolidate and deliver on the restructuring programs. This is both to drive growth and improve cost efficiency. OPS is focused on successfully integrating Pollock and Bronco and driving the expected synergies as soon as practical. Approximately 40% of the SI restructuring charge is in North America and is expected to deliver approximately a 30% return in FY '20. The consolidation of the Orora Visual acquisitions continues to drive the business forward towards our expected returns.

Increased insurance costs have also impacted our North American operations to the tune of approximately $1.5 million.

And finally, as you're aware, this is Nigel's last results briefing before retiring at the end of September. So I'd like to thank him for his outstanding contribution to Orora over the past 10 years, and especially since the time of demerger in 2013, and like to wish him all the best for the future, personally thank him for his support during my 8 years with the organization and his support during this transition period, which is certainly helping myself be well prepared to continue to lead the organization in the future. I'm really honored to be able to take on this position. I'm really pleased that our Chairman, Chris Roberts, has decided to delay his retirement to continue on into calendar year 2020 to support the transition also. And today, you also would have noted that as a further confidence in Orora's future, we have announced the appointment of Tom Gorman as a new director. And Tom is a U.S.-based director, and many of you would know, I'm sure, from his time as CEO of Brambles and having been on the Board of several Australian-listed companies. And Tom will join us from the 2nd of September 2019.

And on the last slide, to summarize, as a matter of course, we don't provide specifics around earning guidance. However, what I can say is that to help challenge -- help offset challenging market conditions and cost headwinds in FY '20, we'll continue to invest in efficiency and growth and innovation as well as to integrate our recent acquisitions.

So thank you for your time and attention today, and I'd like to turn it over to the operator, where Nigel, Stuart, and I will be happy to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of David Errington from Merrill Lynch.

--------------------------------------------------------------------------------

David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [2]

--------------------------------------------------------------------------------

Look, I've only got one question. It's probably pretty in-depth though. The U.S. business, you probably knew this was coming, but in our numbers, your second half deteriorated by over 20% on an underlying basis. Can you go into detail as to which business really fell away? I know that economic conditions are tough, and I know all that sort of stuff, but it's not that tough. Something fundamentally is going very badly wrong, in my view, that's my view in the U.S. Is it in the OPS business? Or is it in the OV business? Can you give us a bit of breakdown? Because that second half result was clearly a very significant miss.

--------------------------------------------------------------------------------

Stuart G. Hutton, Orora Limited - CFO [3]

--------------------------------------------------------------------------------

David, it's Stuart here. Thank you for your question. I mean I think most of the, I guess, shortfall to where we were expecting and where you were expecting is in OPS. So Orora Visual is fairly stable. What I would say is -- what happened is we alluded to it when we updated the market in May. Certainly the start to calendar '19 was very challenging in the first few months. We did see progressive improvement from February over January, March over February and April over March. But then I think that sort of plateaued. And that goes back to, basically, where we had been, but we certainly did not -- in that last quarter, we were not able to make up any of the lost ground that we encountered in the first quarter.

And I think if you look at other reference points, which Nigel referred to before. If you look at -- it's not just us. In some regards it doesn't really matter what others are doing, but it is relevant. But most other participants in the packaging space suffered the same scenario. As to the root cause of that, I mean, you could ask many, in our view, it was a combination of press overstocking in the lead up to the Christmas holiday period in calendar '18. There was the government shutdown in January and there was the polar vortex in early January in the northeast of the country, which all impacted, if you like, volumes. And it was across the -- I guess the thing that we haven't seen before is we've seen impacts in regions. This was across the whole of North America.

And then I think another contributing factor that has appeared more recently, which has been -- well, it's really in the press, is the uncertainty created by the Trump administration's stance on Chinese tariffs. So that has also, what I would describe, caused subdued demand in North America. So all that is...

--------------------------------------------------------------------------------

David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [4]

--------------------------------------------------------------------------------

Now if you're saying that OV was okay, but -- OPS must been down 25%, 30%.

--------------------------------------------------------------------------------

Stuart G. Hutton, Orora Limited - CFO [5]

--------------------------------------------------------------------------------

It was -- on the prior year, it was down, yes, about 20%, 25%. That's right.

--------------------------------------------------------------------------------

David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [6]

--------------------------------------------------------------------------------

That's a big drop, Stu. That's more than the market. No one else has gone down that much.

--------------------------------------------------------------------------------

Stuart G. Hutton, Orora Limited - CFO [7]

--------------------------------------------------------------------------------

No. I think you'll find they may have. But in any event, David, I think, look, we can -- and we're not being dismissive of what's happened because, clearly, we've been -- we started an improvement program in February. And I think the message we're seeing today is that has got us to a position. But we would say that, that hasn't -- the speed at which that has started to drive costs out of the business hasn't been where we would like it to be. So that's why we've added, in July, we've added some external resources into the mix to ensure that, that program drives those costs there quicker.

--------------------------------------------------------------------------------

David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [8]

--------------------------------------------------------------------------------

But that could make it worse, couldn't it? I'm assuming the second half, that's going to lead into the first half. So the first half, we can expect down a significant multiple of that. I mean, gosh, this is turning pretty hairy for you, isn't it? I mean you're going to need to put more into that $8 million or $10 million of restructuring charges in there.

--------------------------------------------------------------------------------

Stuart G. Hutton, Orora Limited - CFO [9]

--------------------------------------------------------------------------------

That's an interpretation. David, just to step back a little bit just to probably help shape it, and others, no doubt, will have a similar question. The margin contraction in OPS was about 110, 120 points. So walk through what that is. There's about 20 points, which is related to what I see is a structural issue, which is about us passing through raw materials through the customers. So that causes a dilutionary impact on margins. So that's kind of -- that's call that in the base.

The rest of it, I'd say to you is about 40 basis points is related to just where we are with Pollock on its seasonal contribution in the half is completed. As we roll forward into this first half, I mean, that's a seasonally strong point or strong contribution from Pollock, and we've got -- we're not uncomfortable where we sit in terms of being able to deliver synergies on that.

And then the other element really is just what has happened, and you can -- exactly the pinpoint, this is probably -- it's difficult. There's about 50 points or thereabout through the balances that relates to just the volume reset. So if you think of the structure of our OPS business, we do have -- because of the number of warehouses, et cetera, we have, you can -- we do have a, let's say, a high fixed cost price. And where -- that's some of the things we're addressing with this restructuring program.

So I think as we look forward, we would expect the 40 points impact from Pollock to -- that's up to us to deliver to expectation. If we deliver Pollock as expected, which we see as achievable, then that 40 points disappears. And we'll make inroads into that in the next -- over the next couple of years. And then I think the bolstering of our effort around the profit improvement program in OPS, yes, that again is with us, but we would expect to make some inroads into that sort of 50 or 60 points that has been caused by the market.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Your next question comes from the line of Owen Birrell from Goldman Sachs.

--------------------------------------------------------------------------------

Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [11]

--------------------------------------------------------------------------------

Just wanted to turn the attention just firstly back to Australia again. Just -- I wanted to really just clarify your comments around the sensitivity to, OCC pricing. The guidance that you've provided there of a, what is it, $10 movement in OCC pricing to have an inverse impact of, what, $0.5 million on EBIT. Can I just confirm, is that just for the spot purchases that you make? Is that really where that sensitivity is?

--------------------------------------------------------------------------------

Stuart G. Hutton, Orora Limited - CFO [12]

--------------------------------------------------------------------------------

Yes. It is, yes.

--------------------------------------------------------------------------------

Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [13]

--------------------------------------------------------------------------------

Okay. And so just to confirm that the remaining OCC contracts is still contracted on a roughly 18-month out basis at this point. Or has that contracted?

--------------------------------------------------------------------------------

Brian Lowe, Orora Limited - CEO, MD & Director [14]

--------------------------------------------------------------------------------

Well, that's about right...

--------------------------------------------------------------------------------

Stuart G. Hutton, Orora Limited - CFO [15]

--------------------------------------------------------------------------------

It's true, right? But Owen, it's probably more -- ideally, most of them we want shorter term, given the volatility. So we're moving to shorter term rather than longer term. So we're -- with this ongoing volatility, now it's on a downward swing which, no doubt, again, most on the call would see we're chasing that down, it's the best way I can describe it, and working to have shorter rather longer contracts. Just to be clear, though, the primary focus we will have is to maintain supply for mill.

--------------------------------------------------------------------------------

Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [16]

--------------------------------------------------------------------------------

Sure. So is it fair to say that through the course of FY '20, that average duration will reduce from 18 months down to, say, 12 months or so?

--------------------------------------------------------------------------------

Nigel D. Garrard, Orora Limited - MD, CEO & Director [17]

--------------------------------------------------------------------------------

That's correct.

--------------------------------------------------------------------------------

Brian Lowe, Orora Limited - CEO, MD & Director [18]

--------------------------------------------------------------------------------

That would be the plan, yes.

--------------------------------------------------------------------------------

Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [19]

--------------------------------------------------------------------------------

Okay. Now that leaves you with a fairly stable or stagnant OCC input price for at least the next 12 months. I'm just wanting to get an understanding of how market prices are moving or are likely to move in the current market given that offshore OCC prices are falling through the floor. And I would imagine IPP pricing for your end-market products is coming down.

--------------------------------------------------------------------------------

Stuart G. Hutton, Orora Limited - CFO [20]

--------------------------------------------------------------------------------

Yes. Look, I'd place you, Owen, in the Australasian context. The market price, which really is where it meets the market, is in the form of a corrugated box.

--------------------------------------------------------------------------------

Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [21]

--------------------------------------------------------------------------------

Correct, yes.

--------------------------------------------------------------------------------

Stuart G. Hutton, Orora Limited - CFO [22]

--------------------------------------------------------------------------------

So that is relatively inelastic to movements in OCC prices, especially with the volatility that they've been. So there's not a clear relationship -- that basically somewhat soldiers on as it does. But you're quite right that there's -- in some of the export markets, there is -- as OCC prices move around, especially exports to Asia and, to a lesser extent, North America are impacted by what's happening with OCC prices.

--------------------------------------------------------------------------------

Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [23]

--------------------------------------------------------------------------------

So you're basically saying that input kraft papers are not impacting your -- or I think that the input paper, the falling price in input paper is not affecting your box?

--------------------------------------------------------------------------------

Nigel D. Garrard, Orora Limited - MD, CEO & Director [24]

--------------------------------------------------------------------------------

Yes. That's true.

--------------------------------------------------------------------------------

Brian Lowe, Orora Limited - CEO, MD & Director [25]

--------------------------------------------------------------------------------

Yes. The market for -- in box prices is quite stable, and as Stuart said, fairly inelastic to what happens with global or regional paper prices and has been quite stable over many years now.

--------------------------------------------------------------------------------

Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [26]

--------------------------------------------------------------------------------

Excellent. Can I ask a second question just for you, Brian, really around the U.S. market environment and how committed you are to that? Because, I guess, the previous view was that investment would only be in, I guess, as the company sort of stated, markets which had good market structures, where it sounds like the market structure in the U.S. is pretty challenged at the moment. So I'm just wondering about the sort of ongoing commitment to invest into that space?

--------------------------------------------------------------------------------

Brian Lowe, Orora Limited - CEO, MD & Director [27]

--------------------------------------------------------------------------------

Yes. Well, certainly, we're not seeing any immediate need to make any departure to our current strategy. I've spent a reasonable amount of time there earlier this year. And in fact, as recent as a few weeks ago, had a couple of weeks since they're getting across what we're doing in terms of the improvement programs we've got underway. And really, that's the priority to make sure that all our efforts going into getting the business back in the right shape and getting the momentum back where it needs to be. We're certainly still got confidence in that part of the business, in that part of the market. So I certainly don't expect to see any immediate departure from that.

--------------------------------------------------------------------------------

Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [28]

--------------------------------------------------------------------------------

Okay. And just one final question for me on the guidance. The outlook comments this time are even more vague than usual. Is there an implication within that comment that the earnings will actually go backwards this year?

--------------------------------------------------------------------------------

Nigel D. Garrard, Orora Limited - MD, CEO & Director [29]

--------------------------------------------------------------------------------

It's Nigel here. I think what we we're trying to say is, look, the things that we've done in the past about offsetting cost increases and the like in Australasia, we'll continue to do. I think it's been successful to date, and we would expect that success to continue. We do have the effect of the G2 rebuild, which will, as Brian said, will be sort of $8 million or so in the second half of fiscal '20.

And from our point of view, we're confident that we're pulling the right levers in North America to get that business closer to a result that we would be happy with. And time will tell over the next few months, whether the traction that we expect to get is starting to show in the weekly and monthly numbers. But there's no doubt about it. It's a tough grind, particularly in North America at the moment.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Your next question comes from the line of Daniel Kang from Citigroup.

--------------------------------------------------------------------------------

Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [31]

--------------------------------------------------------------------------------

Firstly, to Nigel. Congrats on a great career at Orora and what you've done in transforming the business. I had a few questions. Firstly, in the U.S. On OPS, would you be able to provide the EBIT contribution of the acquisitions, Bronco and Pollock, and the margin performance in the year? Are we still hovering around the 3% level? And then can you talk through your expectations for the additional contribution that may arrive for FY '20?

--------------------------------------------------------------------------------

Stuart G. Hutton, Orora Limited - CFO [32]

--------------------------------------------------------------------------------

So we won't get into the specifics, Daniel, but what I'd say to you is the contribution from Pollock is, basically, as we outlined when we acquired the business. So the EBIT for that business was approximately, as you alluded to, 3% of revenues. So revenues are around that $250 million, $260 million mark. So that's what the earnings are tracking to. And then, as I said, the seasonality factor is the way the earnings -- just because of the mix of customers, et cetera, it's 70% first half -- our first half, 30% second half. So that across the year, an EBIT of $8 million is right. But in the second half, which is the half we just reported, if you have factored in a 30% weighting, then you could imagine that the return on sales in that sense is less than the 3% across the year. So it's going to skew our returns a little. So that's contributing to why the return on sales in -- across, if you like, the second half was lower than the first half. And it's really just Pollock. Bronco is, in terms of return on sales, is basically in line with, call it, legacy OPS levels.

--------------------------------------------------------------------------------

Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [33]

--------------------------------------------------------------------------------

Got it, got it. Okay. And just while we're in North America, in the OV business, you've put through a considerable restructuring of the business over the last 12 to 18 months. And it seems to be getting much evidence of improvement, and particularly with margins on my calculations. Just I guess, a couple of questions here. What should we expect -- what should we be expecting in regards to margin accretion over the coming years? And more broadly, is the target of the 20% return on funds employed, is that still a realistic target?

--------------------------------------------------------------------------------

Stuart G. Hutton, Orora Limited - CFO [34]

--------------------------------------------------------------------------------

Daniel, just -- again, I think your observation, your numbers is near enough. I think what we're seeing is -- and we've called this out. Remember that when we -- the Toys "R" Us business that we lost last year was sweet spot business for us. So I think you might recall at the half, we said we've, in a positive sense, we've recovered the revenue line, but the margins on the business that we've replaced it with were not as attractive as the Toys "R" Us business. So revenue-wise, we're still going to have to grow the business. But you're quite right in terms of earnings, which we've guided to, that the earnings are yet to catch up with the revenue growth.

And I think to answer your question on where to from here, I think it's -- it's a steady improvement process for Orora Visual. In terms of -- I think we also said at the half year, I think 20% return at the moment is what I'd describe as still our aspiration, but I think it's more aspirational than reality to your -- using your [pilot]. But I think what we're endeavoring to get to over the next couple of years or, say, 2 to 3 years is a return of -- a RoAFE of about 15%.

--------------------------------------------------------------------------------

Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [35]

--------------------------------------------------------------------------------

And just lastly, maybe for Brian. Great to see another strong performance in the Australasian business, expanding margins by 40 to 50 basis points. Just given the long list of cost headwinds that you've outlined, is it too ambitious to be expecting margins to expand in FY '20?

--------------------------------------------------------------------------------

Brian Lowe, Orora Limited - CEO, MD & Director [36]

--------------------------------------------------------------------------------

Yes. Look, I think, as Nigel said, one of the biggest challenges we've got is we've got a fairly costly rebuild at G2 at $8 million. So that's probably something that will be challenging for us to overcome in terms of absolute dollars, given all the other headwinds we've got. So I think if you put it in context of all that together, it'd sort of be challenging to overcome all of that.

If we put that aside, we would back ourselves, as we have done in many years gone by, to be able to combat what we generally face.

--------------------------------------------------------------------------------

Nigel D. Garrard, Orora Limited - MD, CEO & Director [37]

--------------------------------------------------------------------------------

So -- and Daniel, it's Nigel. I think all of the cost headwinds we've talked about with gas and kraft and starch and all of those things, as Brian said, we will back ourselves to cover that. It's going to be tough to do all of that and recover the one-off cost of the outage as a result of the G2 rebuild. Now will we try and do that? Sure. That's a big challenge, so I wouldn't be banking the whole lot yet.

--------------------------------------------------------------------------------

Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [38]

--------------------------------------------------------------------------------

Sure. But I mean, just to be clear, that $8 million is a one-off and we -- it should be reversed in the following year?

--------------------------------------------------------------------------------

Nigel D. Garrard, Orora Limited - MD, CEO & Director [39]

--------------------------------------------------------------------------------

Yes. I guess, sort of 70%, 75% of that should reverse in FY '21.

--------------------------------------------------------------------------------

Brian Lowe, Orora Limited - CEO, MD & Director [40]

--------------------------------------------------------------------------------

And as you know, we don't do those every year, so they do happen periodically. But the year they happen, it's a significant impact.

--------------------------------------------------------------------------------

Nigel D. Garrard, Orora Limited - MD, CEO & Director [41]

--------------------------------------------------------------------------------

I mean, just by way of background, we've got 3 glass furnaces in Gawler. We have to rebuild them about every 15 years. And so we've got to rebuild about every 5 years. So this is a -- we did one 4 years ago. We got one coming up, and you should assume we've got one in 2025.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

John Purtell, Macquarie Research - Analyst [43]

--------------------------------------------------------------------------------

And congrats, Nigel, on a very successful tenure at Orora. So all the best going forward.

--------------------------------------------------------------------------------

Nigel D. Garrard, Orora Limited - MD, CEO & Director [44]

--------------------------------------------------------------------------------

Thank you, John. Thank you.

--------------------------------------------------------------------------------

John Purtell, Macquarie Research - Analyst [45]

--------------------------------------------------------------------------------

Just had a couple of questions on North America. Just starting with 2. You did mention additional sort of manufacturing capacities, presumably from the rest of the sector. So can you just give us some color on what's going on there, and also what the ERP implementation costs were in the period? And do you expect those now to sort of dissipate this year and expecting some improved revenue traction?

--------------------------------------------------------------------------------

Nigel D. Garrard, Orora Limited - MD, CEO & Director [46]

--------------------------------------------------------------------------------

Yes. On manufacturing capacity, certainly in regions we operate, mainly in California, where we have those assets, there has been quite a bit of additional capacity going over the last couple of years. And that coupled with a slowdown in demand in recent years has -- or sorry, in recent months, in the last 6 months or so has seen certainly a dramatic oversupply of capacity. And that has had a fairly material impact on our business. I must say in the last month or so, we've seen a little bit of that coming back favorably. But certainly has had an impact. And there's no doubt, there is still overcapacity in that market. Stuart...

--------------------------------------------------------------------------------

Stuart G. Hutton, Orora Limited - CFO [47]

--------------------------------------------------------------------------------

And on -- just on the ERP. So just to -- the total investment in the ERP system was about $35 million. And as I said in the commentary here, that was completed in the first half. So part of the, call it, the restructuring initiative is basically -- I would say through that rollout, we had to invest in extra resources just to, I guess, shepherd activity through the system. But as far as we're concerned, the system is now with -- we're improving the reliability every week, and we're at a point where we don't -- we no longer need the people. We don't -- we've got to rely on the technology. And that's why this restructuring initiative, we're, I guess, upping the ante and being more robust with some external help to drive those costs out. So a number of those costs in terms of people will be leaving the business progressively over -- some left last week, to give you an idea, and more will be leaving in the next couple of weeks.

So we are resetting the cost base because we've invested in the technology and we know the technology works. We've spent the last few months refining that and improving some of the, I guess, initial wrinkles we had with some of the way the system operated, we've fixed that. So now our quest, and we've started and we're implementing, is to take the surplus labor out of the system.

--------------------------------------------------------------------------------

John Purtell, Macquarie Research - Analyst [48]

--------------------------------------------------------------------------------

And just 1 or 2 others, if I can. So just sort of North America. You've got a full year effect of Pollock to come through. You've got the restructuring costs, obviously. It sounds like markets likely remain challenged. I mean the net out of those, from best you can see at this point, you're expecting sort of local currency, North American growth next year?

--------------------------------------------------------------------------------

Nigel D. Garrard, Orora Limited - MD, CEO & Director [49]

--------------------------------------------------------------------------------

Yes, I think there's no doubt there's uncertainty, John, but we'd be disappointed if we can't -- with those factors you outlined and there are things that we've got to do, if we can't move North America forward. How far we can move it forward, that's -- some of that is with us and some of that is not with us because it depends on what happens in the market. But as I said, with the annualized impact of Pollock and the benefits of the restructuring, we would be disappointed if we can't move it forward.

--------------------------------------------------------------------------------

John Purtell, Macquarie Research - Analyst [50]

--------------------------------------------------------------------------------

On a year-on-year basis?

--------------------------------------------------------------------------------

Nigel D. Garrard, Orora Limited - MD, CEO & Director [51]

--------------------------------------------------------------------------------

Yes, correct.

--------------------------------------------------------------------------------

John Purtell, Macquarie Research - Analyst [52]

--------------------------------------------------------------------------------

Yes. Okay. And just one last one, if I can. You've achieved $27 million of organic growth in Australia, which was quite strong. Can you just comment on sort of maybe sort of the continuation of that into next year, where you see the organic growth coming from? Obviously, you talked to some of that earlier as far as particularly cans, but where you see the organic growth moving forward in (inaudible)

--------------------------------------------------------------------------------

Brian Lowe, Orora Limited - CEO, MD & Director [53]

--------------------------------------------------------------------------------

Well, from an overall market perspective, generally, we probably track with GDP. I mean we have had some focused growth segments in parts of our business that have been able to grow over recent years. And some of those have been in that part of segment focused on areas like fruit and produce and small to medium enterprises that have seen some good growth. So that's continuing to be part of that strategy, and we'll continue to pursue growth in those areas. But more broadly, we do track probably in line with GDP. But our endeavor is to still pursue growth above that, but it will be targeted in specific segments.

--------------------------------------------------------------------------------

Nigel D. Garrard, Orora Limited - MD, CEO & Director [54]

--------------------------------------------------------------------------------

So John, if I can just add to that. I think you'll see a continuing consumer push for alternatives to plastic, particularly in the beverage sector, which could potentially be advantageous to Orora. We saw some of that last year. We would expect that to continue. And we're continuing -- from a glass point of view, we're looking at expanding our offering outside beer and wine to some of the non-alcoholic. And I referred in my comments to kombucha and those type of things, and they are strong growing parts of the market, which, I think, from a volume point of view, can help that part of the business.

So in addition to the things that Brian's talked about and also, you'll recall his comments about some of the innovation that we're looking at with replacing plastic in supermarkets and then the cans push and the glass opportunities, so I think we've got opportunity to continue to grow the top line.

--------------------------------------------------------------------------------

Operator [55]

--------------------------------------------------------------------------------

Our last question comes from the line of Nathan Reilly from UBS.

--------------------------------------------------------------------------------

Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [56]

--------------------------------------------------------------------------------

Just following up on the Bronco and Pollock acquisitions, can I just get a quick update on, I guess, how the integration is going, and also just with respect to how you're thinking on the synergy realization profile?

--------------------------------------------------------------------------------

Nigel D. Garrard, Orora Limited - MD, CEO & Director [57]

--------------------------------------------------------------------------------

Nathan, it's Nigel. I'll give Stu and Brian a break. I'd say the integrations are on track for both. We are delivering to expectations. And Bronco, which we've had for 12 months now has certainly met our targets for the first year. And Pollock, we've had for 7 or 8 months now and is again on track. And if that being said, we've got the important 4 or 5 months ahead of us from a sales and profit point of view. So we're confident that, that will deliver.

From an integration savings perspective, nothing to see at the moment that would see us not make the targets we set on acquisition. And we have included the integration saving targets as part of the overall improvement plan with the internal, and more recently, external resources to ensure that not only we achieve that but potentially outperform.

So here we are sort of 8 and 12 months, respectively, into acquisitions, I'd say we're on track in meeting expectations.

--------------------------------------------------------------------------------

Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [58]

--------------------------------------------------------------------------------

Okay. And finally, just on the OPS volume impact that was called out earlier, hearing what you're saying there with that March quarter being a little bit harder than expected, just given all the various factors you outlined. Can you give us an idea of how the June quarter performed relative to initial expectations? And also just sort of run rate, I know it's early days yet, but how July was looking relative to prior expectations?

--------------------------------------------------------------------------------

Nigel D. Garrard, Orora Limited - MD, CEO & Director [59]

--------------------------------------------------------------------------------

On June quarter, we'd say was certainly better than the March quarter, which was pretty average. But June was not back at the levels that we would have expected. So some improvement. And if the momentum which we've seen in April had continued through to May and June, perhaps we wouldn't have brought in the external people to accelerate and expand our improvement activities. So it's not back to where it needs to be by some degree. So yes, better in June than March but not where we want it to be yet.

--------------------------------------------------------------------------------

Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [60]

--------------------------------------------------------------------------------

And any idea on what you think the market is sort of performing at in terms of annualized sort of growth rate in that space at this point in time?

--------------------------------------------------------------------------------

Nigel D. Garrard, Orora Limited - MD, CEO & Director [61]

--------------------------------------------------------------------------------

If you look at our -- if you look at other listed companies in North America in the packaging space, they're -- whilst our, I think, our top line -- underlying top line earnings were up 1% or so in North America, a number of the others were down. So I mean I'll suggest you look at Sealed Air and 3M and some of those businesses there. Their volumes were down. So I looked at their performance and their reported results versus ours. And whilst it didn't make me feel good, it made -- it certainly reinforced the fact that it was a general industry thing rather than -- rather than ours. And the results are inconsistent amongst the -- amongst those that we've been able to look at from a public perspective, other than to say they, generally, they were all flatter in that half.

--------------------------------------------------------------------------------

Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [62]

--------------------------------------------------------------------------------

And sorry, final question. Just post the implementation of the ERP system. Have you seen any benefit with respect to -- I know you're sort of highlighting a pretty challenging sort of market for growth, but have you been able to sort of gain a little bit more traction in terms of increasing wallet share with existing clients (inaudible) implementation of the system?

--------------------------------------------------------------------------------

Nigel D. Garrard, Orora Limited - MD, CEO & Director [63]

--------------------------------------------------------------------------------

Early days. But I think what I would say about the ERP system is that it is giving us visibility that we've never had into profitability by customer by SKU and enabled us to look at improving our overall margins as a result of that. So whilst we haven't seen share of wallet growth necessarily, it's a really important tool that we're now using in our improvement programs across the board in North America. And frankly, if we hadn't done it, it would make our job now that much more difficult. So I'm very pleased we've done it. I'm even more pleased that it's behind us.

--------------------------------------------------------------------------------

Operator [64]

--------------------------------------------------------------------------------

There's no more question at this time. I would now like to hand the conference over to your presenter. Please continue.

--------------------------------------------------------------------------------

Nigel D. Garrard, Orora Limited - MD, CEO & Director [65]

--------------------------------------------------------------------------------

Thank you, everybody, for your interest. I understand that it's a really busy day with a number of other companies reporting. But as always, if you have questions, please reach out to us, and we'd be happy to answer them. Thanks all for your interest.

--------------------------------------------------------------------------------

Operator [66]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.