Pact : 2022 Half-Year Reports and Accounts

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APPENDIX 4D

Half-Year Report

1. Net tangible assets excludes intangible assets and goodwill (refer to the Consolidated Statement of Financial Position in the Half-year Consolidated Financial Report)

For the profit commentary and any other significant information needed by an investor to make an informed assessment of the results for Pact Group Holdings Ltd ('Pact') please refer to the accompanying Half-year Consolidated Financial Report.

__________________________________________

Jonathon West

Company Secretary

Dated: 16 February 2022

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The Group has reported revenue of $927.2 million for the half year ended 31 December 2021, up 4% compared to the prior corresponding period (pcp). The statutory net loss after tax for the half year was $20.8 million, compared to a statutory net profit after tax of $49.9 million in the pcp. Underlying net profit after tax (NPAT3) for the half year was $39.3 million, compared to $52.1 million in the pcp.

OVERVIEW

• Revenue up 3.7% to $927.2 million (pcp: $894.4 million)
• Underlying EBITDA1 down 8.1% to $151.0 million (pcp: $164.2 million)
• Underlying EBIT2 down 15.6% to $83.1 million (pcp: $98.6 million)
• Underlying NPAT3 down 24.5% to $39.3 million (pcp: $52.1 million)
• Widespread and persistent supply chain challenges well managed
• Intense focus on recovering significant raw material and supply chain cost inflation
• Revenue growth of 4%
• • Volume growth in Asia closures, packaging, crate pooling and recycling services
  • Solid volumes in hanger reuse services
• Underlying earnings in the Packaging & Sustainability and Materials Handling & Pooling segments broadly in line the pcp, with significant raw material and freight cost inflation largely mitigated through pricing discipline
• Contract Manufacturing earnings significantly impacted by higher costs and lower volumes. Non-cash impairments of $65 million after tax recognised in the period.
• Net debt6 in line with December 2020
• • Solid cash conversion despite supply chain challenges
  • Higher inventory holdings to mitigate customer supply chain disruption
  • Gearing4 remains within target range (2.7x compared to 2.4x in the pcp)
• Execution of strategy to Lead the Circular Economy continues with several strategic milestones advanced in the period
• • Continued momentum in building a national network of plastics recycling infrastructure

• • • New Albury recycling facility scheduled to be commissioned in February 2022
    • Two additional facilities in Victoria on track to be operational in 2023
    • Potential new facilities being evaluated in WA (supported by Government funding), Queensland and New Zealand
  • Funding grant of $20 million awarded from the Federal Government's Modern Manufacturing Initiative
  • • to upgrade packaging facilities and assist in the provision of recycled content solutions for dairy, beverage, agricultural and coatings products
    • to support the national roll-out of 20 million additional bins with 80% recycled content under the Waste Harmonisation plan
  • Volume growth in sustainable packaging, further investments underway to enhance manufacturing capability of recycled content packaging
  • Site rationalisation in New Zealand fresh food segment announced, realising synergies from the Flight acquisition
  • Operations in Australian packaging continue to improve
  • Continued crate pooling penetration and conversion in the fresh produce sector
  • Major contract renewals won in hanger reuse services
• Sale process in respect of the Contract Manufacturing businesses ceased, turnaround underway
• Interim ordinary dividend of 3.5 cents per share, 65% franked, to be paid in April 2022 (pcp: 5.0 cents per share)

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Revenue

Group revenue for the first half of the year was $927.2 million, up 3.7% compared to the prior corresponding period (pcp) of $894.4 million.

Revenue was ahead in the Packaging and Sustainability segment by 7.4%, benefitting from volume growth and the pass through of higher material and other input costs. Volume growth was delivered in Asia closures, the dairy, agriculture and fresh food packaging segments in Australia and New Zealand, and recycling services.

The Materials Handling and Pooling segment was also 5.3% ahead, with growth in pooling and infrastructure demand and resilient hanger reuse service volumes.

Contract Manufacturing revenue was lower (10.9%) across most key categories, but also cycled out significant one-offCOVID-19 hand sanitiser and hygiene product demand in the pcp.

Underlying EBIT2

Group underlying EBIT for the half year was $83.1 million, $15.4 million or 15.6% lower than the pcp. The Group delivered a solid performance in its Packaging & Sustainability and Materials Handling & Pooling segments, benefiting from volume growth in key sectors and outstanding management of COVID-19 related disruption to operations and the supply chain. Overall earnings in these two segments were broadly in line with the pcp, with significant raw material and freight cost inflation mitigated through strong pricing discipline and efficiency programs. The reduction in Group underlying EBIT was largely due to lower earnings in the Contract Manufacturing segment, which was significantly impacted by lower volumes and lags in recovering raw material costs.

Further detail on revenue and earnings in each of the Group's operating segments is contained in the Review of Operations below.

Underlying Adjustments

Pre-tax underlying adjustments for the half year were an expense of $78.2 million. This includes transaction costs of $0.7 million, business restructuring costs of $3.6 million, mostly related to the exit of a site in New Zealand, clean-up costs and other expenses arising from a factory fire in the prior year at a Contract Manufacturing site of $1.3 million, inventory write downs and related disposal costs of $16.9 million and impairment and write off expenses of $67.6 million. The inventory write down relates to hand sanitiser inventory with no realisable value, and the impairment and write off expenses relate to non-cash impairments in the Contract Manufacturing segment (a tangible asset write off of $37.6 million and an intangible asset write off of $29.9 million) following an assessment of carrying value and reflecting challenging trading conditions and a moderated medium-term outlook for this business. In addition, pre-tax underlying adjustments contain income of $1.9 million from settlements of an insurance claim from events in prior periods, income of $1.0 million for a net gain on a lease modification and a profit of $8.9 million from the sale of property in China (vacating and transferring a section of land to local government).

Pre-tax underlying adjustments to earnings in the prior half year were an expense of $2.6 million. This included transaction costs of $0.8 million and $1.8 million of costs associated with business restructuring.

Net Finance Expense

Net financing costs for the half year were $27.5 million, an increase of $1.8 million compared to the pcp. The increase primarily relates to $1.4 million of higher lease liability interest. Interest on bank loans and borrowings was $0.4 million higher, driven by higher New Zealand interest rates, increased interest margins and slightly higher average net debt in the period.

Income Tax Expense and Significant Tax Items

The income tax expense for the half year (excluding tax on underlying adjustments) was $16.3 million, representing an average tax rate of 29.4% of underlying net profit before tax, consistent with the statutory tax rates payable by the Group across its main operating geographies, but slightly higher than the prior year with a different profit mix. Tax on underlying adjustments was a benefit of $18.1 million for the half year in relation to the items noted above and compared to a benefit of $0.4 million in the pcp.

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BALANCE SHEET

Net debt at 31 December 2021 of $601.4 million was $16.4 million higher than 30 June 2021. Higher net debt was driven by lower earnings in the Contract Manufacturing segment along with an increase in working capital. Working capital outflows were adversely impacted in this period by higher raw material costs and the need to hold additional safety stock due to uncertainty and disruption in global supply chains and international freight as a result of the COVID-19 pandemic. Net debt was also adversely impacted by the timing of tax payments in the first half, but also partly offset by proceeds from the disposal of property in China. Net debt was essentially in line with 31 December 2020 ($598.8 million).

Net debt including lease liabilities at 31 December 2021 was $1,091.5 million, an increase of $36.6 million from 30 June 2021, with an additional $20.2 million in lease liabilities in addition to the $16.4 million increase in underlying net debt. Compared to 31 December 2020, net debt including lease liabilities was $51.5 million higher, representing $48.9 million in increased lease liabilities (including $27.2 million from the acquisition of Flight Plastics) and $2.6 million higher underlying net debt.

The Group has significant undrawn debt capacity, with $288.9 million in committed undrawn facilities. During the period the Group extended the maturity of the debt portfolio to an average of 3.4 years and introduced new lenders, increasing diversification and reducing refinancing risk.

The increase in other current assets of $42.4 million includes an increase in inventories of $25.8 million, a reclassification to assets held for sale from property plant and equipment of $5.8 million (relating property in China) and $10.8 million of higher prepayments and other current assets. The increase in inventories relates primarily to higher raw materials (due to increased resin and steel prices and the need to hold more raw material safety stock noted above) and adverse foreign exchange translation, partly offset by a reduction in finished goods due to the write down of hand sanitiser in the Contract Manufacturing business.

The movement in property plant and equipment (including right of use assets) primarily reflects additions of $77.8 million and increases from lease modifications of $9.7 million and foreign exchange translation of $9.3 million, less the depreciation charge for the period of $67.2 million, a write off expense of $37.6 million (relating to the Contract Manufacturing business) and a reclassification to assets held for sale of $5.8 million (relating to the sale of property in China).

The decrease in intangible assets of $30.6 million relates mainly to amortisation of $0.6 million and the impairment of intangible assets in the Contract Manufacturing business of $29.9 million.

The increase in other assets of $17.5 million relates primarily to increased deferred tax assets ($12.5 million) and increased investments in the joint ventures that are building a national network of recycling infrastructure ($4.8 million).

The increase in other liabilities payables and provisions of $10.5 million relates primarily to increased trade and other payables ($17.7 million) and provisions ($4.7 million), partly offset by lower tax liabilities ($10.0 million).

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At 31 December 2021 gearing was 2.7x, an increase of 0.3x compared to the pcp, mainly as a result of lower earnings in the Contract Manufacturing segment. Net debt was essentially in line with 31 December 2020, and the Group retains a strong balance sheet. Including the impact of lease accounting, gearing was 3.6x (compared to 3.2x in the pcp). Rolling twelve-month interest cover at 8.8x was an improvement from 8.5x in the pcp with lower interest expense (excluding lease interest) over the period more than offsetting the impact of lower earnings. Including the impact of lease accounting, interest cover was 5.7x (compared to 5.8x in the pcp).

Gearing and interest cover remain well within the Group's targeted levels.

CASHFLOW

Statutory net cash flows provided by operating activities was $66.6 million for the half year, down $33.5 million compared to the prior half year. The inflow from securitisation of trade debtors was $3.3 million for the half year compared to an outflow of $1.2 million in the pcp. Excluding securitisation cash flows, statutory operating cash flow was $37.9 million lower than the pcp. Net receipts and payments were $19.5 million lower, net finance costs and interest cash flows $4.1 million higher and tax cash payments $14.3 million higher (largely the timing difference in tax payments).

Payments for property, plant and equipment were $39.4 million for the half year, $4.3 million higher than the pcp, but essentially in line with historic half yearly trends. The Group continues to maintain a disciplined approach to capital expenditure and balance sheet management, whilst continuing to support initiatives aligned to the business strategy to Lead the Circular Economy. During the first half of the year the Group has invested in projects supporting customer growth, automation and efficiency programs in the Australian and New Zealand packaging businesses as well as the use of recycled content in New Zealand. Other projects have also been undertaken to support capacity initiatives in the Asian closures platform, the systems integration of the hanger reuse business and the expansion of the crate pooling services.

Payments for investments in associates and joint ventures of $5.9 million in the current half year and $5.7 million in the pcp relate to further investments in the joint ventures with key suppliers and customers that are building a national network of recycling infrastructure to supply high-quality food grade recycled resins.

Payments for deferred acquisition consideration of $23.3 million in the pcp represents deferred consideration and post completion adjustments in respect of the acquisition of TIC (acquired in the first half of FY2019).

Repayments of lease liability principal (net of incentive received) represents the payment of liabilities recognised after the adoption of AASB16 in FY2020. The increase of $3.0 million compared to the pcp reflect lease asset additions.

The dividend payment of $20.7 million reflects the six cents per share final dividend from FY2021 (paid in October 2021). The $10.3 million dividend payment in the pcp reflects the three cents per share final dividend in respect of FY2020 (paid in October 2020).