Orora has reported a strong set of full year results (see highlight summary* below) despite subdued economic conditions and “input cost headwinds” in Australia – notably energy costs that have increased by an estimated $15 million over the last 12 months.
“Escalating energy costs – both gas and electricity – is an issue impacting all manufacturing companies in Australia, period. We're a huge energy user across our 31 sites and we have had to wear these costs,” Orora CEO Nigel Garrard said.
However, his focus in this announcement was more on the group's continued investment for future growth, and said that as a result of this the group expected earnings to be higher in fiscal 2017.
Since its listing in 2013, Orora has made investments of over $225 million.
In Australasia, this has included a $42 million investment to increase the forming line capacity by 60 million bottles at its Gawler glass facility, a project that should be completed during FY17.
“This is replacing bottles we previously imported and is underpinned by existing customer demand,” Garrard said.
The Gawler glass facility has also benefited from investment in a new glass bottle sleeving (shrinksleeve) line under the umbrella of the Orora Global Innovation Initiative announced in July 2015.
Garrard told PKN that this line allows on-site value adding for Orora's glass bottle customers who are looking for ways to differentiate their products on shelf, or want short-run promotional packaging.
“We're currently the only glass facility in the country offering this on-site service,” he said.
Another investment to cater for short run demands and a more flexible packaging offering is in a digital printer which is to be installed in the Australian Fibre Packaging division in late 2016. Garrard said this will “step change Orora’s product offering and customer value proposition”.
Asked if there would be further investment in digital printing across the group, Garrard said while he didn't believe digital will ever replace traditional printing for long runs, Orora would make further investments in digital printing technology where there was a clear case for improving efficiencies and broadening the customer value proposition.
In other local investments, Orora is also currently commissioning the new $20.0 million state of the art dairy sack line at Keon Park, Victoria, with the new line expected to be fully operational in the second quarter of FY17.
“In addition to targeting profitable organic and market share growth, Orora continues to actively pursue acquisition opportunities in preferred markets to enhance its geographic footprint and customised product capability.”
Garrard noted that acquisitions are more likely to be in the North American market than in Australasia.
In March this year, the group acquired Texas-based provider of Point of Purchase (POP) retail display solutions, IntegraColor, for US$77m (AUD 107m) and is now developing a pipeline of national POP acquisition targets to bolt onto IntegraColor.
“The acquisition has moved Orora North America further up the value chain, closer to the brand owner,” Garrard said. “The integration is on track and the business is performing in line with expectations.”
Crowdsourcing initiative
In other developments, Orora has launched an internal 'crowdsourcing' initiative called Fresco (Spanish for fresh) inviting its 6000+ employees to come up with initiatives and innovation that could make a difference to the company's performance.
Garrard said that in the first three weeks following its launch, over 1500 employees have logged in to the system and already there is a pipeline of hundreds of good ideas.
“We have gone in with the mantra that there's 'no such thing as a bad idea' and we're pleased to see the enthusiasm with which it has been embraced.
"This demonstrates two significant things. One, we have a team of people with passion for the company, and two, that we have a great opportunity here to mine this passion, knowledge and expertise and develop our innovation pipeline.”
*ORORA FY16 RESULT HIGHLIGHTS
Statutory Results
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Net profit after tax (NPAT) up 28.3% to $168.6 million
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Earnings per share (EPS) up 29.4% to 14.1 cents
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Sales revenue up 13.0% to $3.8 billion
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Earnings before interest and tax (EBIT) up 24.6% to $280.5 million
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Final ordinary dividend of 5.0 cents per share, 30% franked. Total dividend is 9.5 cents, up 26.7% and represents a pay-out ratio of 67.4%
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Net debt $630 million, up from $607 million at 30 June 2015
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Leverage was 1.7 times, down from 1.9 times at 30 June 2015 and interest cover was 9.2 times, up from 8.5 times.
Underlying Earnings and cash flow (excluding profit/cash on sale of land at Petrie, Queensland)(1)
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Underlying EBIT was up 20.9% to $272.1 million
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Underlying NPAT was up 23.8% to $162.7 million
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Underlying EPS was up 24.8% to 13.6 cents
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Underlying operating cash flow was up 20% to $313.8 million
Operational performance summary
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Orora Australasia delivered a 10.4% increase in EBIT to $200.4 million in flat market conditions, with underlying sales increasing 2.5%.
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In the Beverage business, increased earnings were driven by improved operating efficiency across the business group, higher glass volumes and the reversal of the adverse financial impact from the FY15 glass furnace rebuild. This was partially offset by the impact of rising energy and soda ash costs within the glass business.
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The Fibre Packaging business delivered increased sales driven by organic growth, improved Australasian agriculture volumes and higher sales to the grocery sector in Australia. Orora’s “go direct” channel transition in the Queensland fruit and produce sector is progressing well with new depots already established in Bundaberg and Mareeba and a further site expected to open in Innisfail in late 2016. Incremental cost reduction and innovation benefits of $13.7 million were delivered at the B9 Recycled Paper Mill during the period, taking total cumulative benefits to $35.1 million.
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Despite flat market conditions, Orora North America delivered a 20.2% increase in local currency EBIT to US$72.0 million on the back of a 6.0% increase in organic sales revenue, margin improvement initiatives and benefits from the recent acquisitions of Jakait and IntegraColor. Landsberg Packaging Solutions continued to execute on its market growth strategy through leveraging its product breadth, uniform service offering and national footprint to increase sales to existing customers and win market share, largely from independent players. The Manufacturing Division delivered increased earnings through higher volumes and improved efficiencies and cost control, despite continued margin pressure.
