In its third time reporting as an independent company since the demerger from Amcor, Orora Group Limited (ASX:ORA) today announced a strong result for the half-year ended 31 December 2014 and indicated that earnings for the full year could be higher than that reported on a pro-forma basis in 2014, subject to market conditions.
Speaking at the media announcement, Orora’s managing director and CEO, Nigel Garrard, said that despite “relatively subdued market conditions” in New Zealand and North America, and “flat” conditions in Australia, the group's performance is pleasing.
“Operationally we have delivered strong EBIT growth of approximately 15% by increasing sales revenue, driving manufacturing efficiencies and continuing to successfully deliver on our business improvement programs.”
“We have continued to focus on financial discipline and have successfully converted the earnings growth into cash which further strengthened our balance sheet, lowered our debt servicing costs and enabled the group to deliver a 23% increase in NPAT and EPS.”
“An interim dividend of 3.5 cents per share has been declared, which is up 16.7% on the 3.0 cents per share declared in the prior half. This represents a payout ratio of approximately 61%”.
Operational performance
Orora Australasia delivered a 10.7% increase in EBIT to A$101 million. Underlying volume growth was 2.1% which is in line with GDP.
The Beverage business delivered increased earnings driven by market share gains in the wine segment where Orora has recently gained some important new customers and improved manufacturing efficiencies. The company has recently rebuilt its first glass furnace at Gawler in South Australia at a cost of approximately $30 million, and Garrard confirmed this should be fully on stream by end of March.
Beverage Can volumes were in line with the prior period while underlying Glass volumes were marginally down.
Following the closure of Alcoa's local aluminium manufacturing plant, Orora has had to transition to a full import aluminium sourcing model for beverage cans in Australasia, which Garrard reports has been seamless.
The Fibre Group reported higher earnings, largely driven by the benefits of cost-improvement initiatives and the ongoing ramp-up of the B9 recycled paper mill (“B9”).
Incremental cost reduction and innovation benefits of $9.1 million were delivered at B9 in the period and the mill produced 185,000 tonnes of recycled paper, a 10% increase over the 167,000 tonnes produced in the first half last year.
The improved strength, quality and printability characteristics of B9 paper continue to be well received by customers.
As an endorsement of the quality of the paper coming out of B9, Orora has just signed a supply agreement with International Paper, the largest paper company in the world. Garrard told PKN while the deal is not “transformational” in size, it's a solid signal that the B9 paper product is meeting the highest standards.
During the period, 19,000 tonnes of B9 paper were exported to Orora North America (nil in same period last year).
On a constant currency basis, Orora North America (“ONA”) delivered a 16.3% increase in EBIT to USD29.9 million, on the back of a 5.2% increase in revenue and improved cost efficiency. Landsberg Packaging Solutions increased sales by 7% and successfully continued its transition towards being a provider of customised packaging solutions rather than a distributor of commodity product. The Manufacturing division delivered higher earnings through productivity gains and strong cost control despite a slight decline in sales revenues.
Garrard noted that the North American market currently holds more opportunities for Orora than does Australia and New Zealand. Asked whether the group would be looking at investing in Asia, he stated that the group's focus was on the markets in which it currently operates, but that it would consider opportunities in Asia on the back of a customer commitment, and as such tit was engaged in some early discussions. However, he made it clear Orora would not be interested in making a greenfields investment.
Innovation and growth
Garrard said: “Our goal has been to establish and build a company that is respectful of its past and excited about its future and essentially that involves us continuing to be a customer-led organisation.
“Greater focus on being customer-led and driving innovation will continue to underpin our future growth,” he said.
“As an example, Orora is proposing to invest approximately $20 million in a state of the art dairy sack line to service growing global demand. If this investment proceeds, it is expected to be in production in the second half of calendar 2016. ”
Garrard told PKN that should the project go ahead, the company had yet to decide whether the plant will be established in Australia or New Zealand, with a decision expected by the end of April subject to customer confirmation of the investment.
“It's this type of investment that we're very excited about making, where we can invest alongside our customers and help them grow,” he said.
Apart from the Gawler glass furnace, and the new aluminium sourcing model, another key projects underway are ONA’s development of the new enterprise resource planning system and the integration of its acquisition completed in July last year.
“In conjunction with pursuing organic and market share growth, we continue to actively pursue acquisition opportunities in our preferred markets to enhance our geographic footprint, extend our value proposition and achieve greater economies of scale,” Garrard said.
Outlook
“It is expected the group will continue to drive organic growth and deliver on the cost-reduction initiatives in FY15, with earnings to be higher than that reported on a pro forma basis in 2014, subject to global economic conditions,” Garrard said.
Results highlights:
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Net profit after tax (NPAT) up 23% to $69.1 million
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Earnings per share (EPS) up 23% to 5.7 cents
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Sales revenue up 3.4% to $1.7 billion
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Earnings before interest and tax (EBIT) up 14.6% to $118.4 million
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Operating cash flow was $117.6 million, up from $108.5 million
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Final ordinary dividend (unfranked) of 3.5 cents per share, up 16.7% - representing a payout ratio of 61.4%
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Net debt $645 million, down from $694 million at 31 December 2013
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Leverage was 2.1 times net debt to EBITDA, down from 2.4 times at 31 December 2013 and interest cover was 7.9x, up from 6.3x.
