Ladies and gentlemen, thank you for standing by, and welcome to the Orora Limited investor update call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question at that time, you'll need to press star one on your telephone. I'd now like to hand the conference over to Mr. Brian Lowe. Thank you. Please go ahead.
Thank you, operator. Good morning. Thank you everybody for joining us today for the Orora Group half year results presentation. I'm joined by Shaun Hughes, our Chief Financial Officer, who joined us last October. This will be Shaun's first results call with Orora, so welcome to Shaun. I'm really pleased to be able to bring you today a number of pieces of information. We'll cover an overview of the results for our half year end of 31st December 2020, and details about our new management team, who are responsible for delivering against our strategic pillars. We've made some really good progress this half delivering against those strategic priorities. I'll provide an update on our safety performance and our new 2024 Eco Targets as we position ourselves as a leading provider of sustainable packaging solutions.
I'll also take the opportunity to provide some background on the strategic direction of our OPS business in North America. I'll then hand over to Shaun, who will take you through the group and business unit financial results. Then we'll conclude with some perspectives and an outlook for FY 2021, after which we will be happy to take your questions. Before we start in any detail, please take note of the important information that we do have on slide two. I don't propose to read through that today, but please ensure that you do refer to that. Turning now to slide four and the full year results for the continuing businesses. The group reported a solid set of financial results for the first half, with all of the businesses reporting an increase in underlying EBIT.
Group EBIT increased by 5.2% on a reported basis and 7.5% on a constant currency basis. The increase in group EBIT was driven by solid earnings growth in both Australasia and North America, with EBIT up 4.2% and 6.7% respectively. NPAT was up 18.9% to AUD 91.1 million, whilst EPS increased 20% to AUD 0.096 per share. The stronger first half earnings translated to a 13.8% increase in operating cash flow. The board have declared a final ordinary dividend of AUD 0.065 per share, unfranked, and 100% sourced from Conduit Foreign Income Account. Turning to slide five now. Pleasingly, our solid first half operating performance was driven by a focused and solid improvement on execution to our strategic priorities within the businesses. As I said earlier, all businesses reported an increase in underlying EBIT.
In Australasia, higher earnings were driven by stronger volumes, particularly in the cans and closures businesses. Volume gains across all businesses were somewhat offset by an unfavorable mix in cans and in glass, and the impact of higher energy and insurance costs. The impact of COVID-19 and a weaker wine vintage was evident in the first half of 2021, with an unfavorable mix shift, as I referred to, in cans and glass volumes. This led to a negative EBIT impact in terms of margin, which was down 50 basis points to 19.5%. In North America, the businesses improved their operating and financial performance, increased by sales force effectiveness, which was leveraging our data insights and focused on customer account profitability, together with a stronger focus on cost control measures across all businesses.
Pleasingly, these actions have delivered for our North American businesses, a result that has stronger AUD as well as U.S. dollars earnings in both OPS and OV. Local currency U.S. dollar EBIT was up 12.7% to $39 million, and the EBIT margin expanded by 30 basis points to 3.9%. The impact of COVID-19 on our North American business was certainly materially greater than what we felt in Australasia. Whilst OPS returned to revenue growth, many retailers in North America remain closed or have restricted operations. This has negatively impacted OV's revenue within the first half of FY 2021. Moving to safety on slide six. Despite the impact of COVID-19, we've made improvements to safety during the period. Continued strong focus on safety has delivered a reduction in our total recordable cases globally.
However, we have seen a slight increase in our lost time frequency rate, which does reinforce the need to continue to focus on improvements in our safety, which remains a key priority for our business. We continue to drive safety improvements and invest in safety to improve performance within our three-year targeted program. As part of our ongoing COVID-19 response, we have implemented a digital system that enhances and streamlines the monitoring of COVID-19 incidents within our North American sites. Safety at Orora is also about mental as well as physical well-being, and we have implemented a number of programs to support our team members across the business. I'm now on slide number seven, and I thought I'd take a moment to acknowledge the positive contribution of our leadership team, and in particular, the newer members of our global executive team.
In terms of the changes that have taken place during 2020. In January of 2020, Matt Wilson joined us in the role of Group General Manager of Strategy, and Matt has over 20 years of strategy, banking, and advisory experience. In March, Bob Firenze commenced in the role of President of Orora Visual, and Bob has over 20 years experience in the North American packaging industry. Shaun Hughes joined us in October of 2020 as our new CFO, and Shaun has extensive finance experience with much of his career spent in ASX-listed companies operating across multiple industries, geographies, and functions. Most recently, in November, Frank Pennisi joined Orora as President of OPS, and Frank has extensive leadership experience gained across manufacturing, engineering, logistics, and technology companies.
Whilst I'm encouraged by the positive steps that we've taken this half, my executive team remains focused on building on this positive momentum throughout second half of 2021 and well beyond. We'll now move to slide eight. At our FY 2020 results, I've presented the strategic pillars that we've established to support Orora in executing our objective to become a leading sustainable packaging solutions company. Our strategic pillars remain unchanged. Just as a reminder, these are really to optimize and grow through operational improvement and best-in-class execution, which has been a big focus of the business during the first half of FY 2021. It's also to enhance and expand our core products and services to strengthen our value proposition across our businesses and to enter new segments that are complementary to Orora's capability set. I'm now on slide nine.
I won't go into all the detail that's covered in this slide, as it also remains unchanged of what we showed you late in 2020. We remain committed to delivering and reporting progress against these strategic pillars and delivering on organic growth, meeting returns-focused hurdles, and making appropriate investments whilst ensuring a disciplined approach towards capital management. This is what you can expect from me and from my executive team. Moving now to slide 10. For the first half of FY 2021, we made really good progress against our core strategies in each of the businesses and have good momentum to carry forward into the second half of the year. In Australasia, we continue to actively assess our future requirements to meet customer needs and the growth of can demand, particularly.
Since the demerger, we've invested approximately AUD 530 million of capital into Australasia. You can expect us to continue to seek out expansion opportunities within our businesses here. Further expansion of our cans capacity. Our slimline expansion at our Revesby site in New South Wales is well underway and is expected to commission in the fourth quarter of FY 2021. Also pleasingly, our G2 rebuild of our furnace and our glass plant in Gawler was completed successfully during calendar year 2020, and since then has operated very efficiently. We also continue to make investments to increase our recycled content in glass, which is an important part of our sustainability agenda. We have commenced a preliminary assessment of international beverage footprint expansion and will continue to evaluate potential ANZ adjacency opportunities. In North America, new leadership was installed in both OPS and OV during 2020.
In OPS, we have seen significant improvement and gain momentum in operating disciplines and in financial performance. Orora Visual has returned to profitability during the first half of FY 2021, driven by a focused cost reduction program and improved execution in spite of a really tough retail trading condition in North America. The North American team remains focused on enhancing the business model with initiatives across both OPS and OV. Moving now to slide 11. Each business unit has strategic priorities under our three strategic pillars, which are Optimize and Grow, Enhance and Expand, and Enter New Markets, as I have mentioned. In Australasia, we are committed to investing in our beverage business both organically and inorganically. The organic focus will continue to pursue increased automation and more efficient practices as we look to further optimize, enhance, and expand our high-quality domestic beverage business.
Based on customer demand, we anticipate and are committed to bringing more capacity online. In addition, we continue to explore the viability of potential offshore entry points and potential opportunities for adjacencies in our domestic markets in Australia and New Zealand. Within North America, our new management teams in both OPS and OV have been focused on business operational improvements to drive profit improvement and build a solid foundation for growth. These improvements include volume growth, margin recovery, and efficiency cost reduction programs, which have all shown positive momentum during the first half of the year. Moving forwards, our North American business will continue to be focused on proactively managing account profitability, enhancing sales force effectiveness, and continuing to focus on cost control measures. These actions resulted in an increase in local currency earnings for both businesses during the year.
We're also excited about the opportunities that further digitization of our North American business models will bring in the coming years, with a number of initiatives expected to come online during 2021. These include our new e-commerce platform at OPS. We have a robust roadmap for further enhancements planned for the years to come. Within OPS, product and targeted geographical expansion remains a focus area, with inorganic expansion a consideration for us from calendar year 2022. For Orora Visual, we will review the strategic direction by the end of calendar year 2021, clarifying how best to progress our profit improvement initiatives and the logical next steps. This is beyond the immediate stabilization activities that the team have been focused on over the last six to nine months. Moving to slide 12.
Orora has continued to build on its already strong credentials as a leading sustainable packaging solutions company through improved environmental outcomes via our Eco Targets and focused on recycled content and recyclability of the packaging offered to our customers. Orora launched its new five-year Eco Targets at the start of FY 2021, covering reductions in CO2 emissions, waste to landfill, and water use. The Eco Targets are ratios expressed against production-related metrics, as depicted on the slide. This was done to increase their relevance to Orora's business groups. At the half year, Orora is tracking well on achieving our first-year Eco Targets. In regard to our all-employee culture pulse check, insights will be available to us at the end of March, and steps will be taken to implement what has been identified following that review.
As stated at the full-year results, Orora has secured 100% of the glass cullet that is generated from the Western Australian Government's Container Deposit Scheme. This scheme has now been operational since October, and the glass cullet has been successfully transported to Gawler and the facility is increasing the recycled content within the product. This increased use of cullet builds on Orora's existing use of cullet from the South Australian and New South Wales Container Deposit Schemes. Orora has also reflected on its focus on human rights issues, this has been in relation to the production of our Modern Slavery Statement in accord with the regulatory timeframe and framework, this report is currently undergoing board approval. Moving to slide 14. We are conscious that there are varying degrees of understanding of our North American business and, in particular, the Orora Packaging Solutions business or OPS for short.
I did want to take the opportunity today to provide a little bit more color on the business and the industry in which it operates and also provide some insight into our strategy to firstly stabilize the business, which has been well underway, and then to grow the business into the future. From an industry perspective, OPS operates in a very large market. The North American packaging distribution market is estimated to be worth some $35 billion. Unlike Australia, B2B distributors like OPS play a significant and critical role in supply chains in North America. This is given the breadth and depth of the economy and sheer number of companies that do transact every single day.
A significant number of customers, particularly SMEs, value the service offering of distributors, given that distributors like OPS provide a one-stop shop for a variety of products, saving time and cost, have knowledgeable sales teams who can tailor products and services to specific customer needs, maintain networks of warehousing capacity to store products and ship quickly, which is often the same day to these customers. Provide a wide range of value-added services such as design and engineering, kitting and customization of products, and provide the flexibility to customers of smaller order quantities, helping them to manage their working capital. Turning specifically to the OPS business model on page 15, it is important to understand that OPS is more than just a distributor of packaging products, as it spans manufacturing as well as value-added services.
The business is vertically integrated into corrugated packaging, operating eight manufacturing sites in California and Texas, two of the largest economies in North America, as well as operations in Chicago. This vertical integration ensures surety of supply to our distribution arm and allows us greater flexibility to cater to customer requirements. Our distribution capabilities has a national reach. Operating from 64 sites across the U.S., Canada, and Mexico, and is led by a highly experienced sales team with strong customer relationships. The value-added services in our business, such as engineering and design and fulfillment, are a competitive differentiator and provide heightened customer stickiness and higher margin earnings. These are areas we are actively looking to expand over time. From a revenue breakdown perspective, the business has a strong presence in corrugate, which aligns with our sustainability goals. Although importantly, the product portfolio is agnostic and well-diversified beyond that too.
From an end market perspective, the business provides products and services to a diverse range of largely defensive and growing end markets. Moving to our strategy for OPS, which is depicted on slide 16. As we reported, over the course of FY 2019 and FY 2020, the business experienced some market and operating headwinds, which impacted the performance of the business. Over the course of the past 12 months, the root causes of these operational issues have been identified with a range of operating initiatives now in place to stabilize the business performance and position the business for sustainable growth. Pleasingly, you can see from the results, the performance of OPS has significantly improved and is a credit to the focus and expertise of the entire OPS team for the outcomes today.
Moving forward, the next phase of our strategy will focus on enhancement to the OPS business model, particularly through further digitization, starting with the new e-commerce platform expected to be online by the end of FY 2021. Further enhancements are planned in the coming periods and will help transform how we go to market and create a further competitive differentiation. Our new OPS president, Frank Pennisi, is working hard with the team to prioritize growth initiatives to drive top-line performance as well. We will be proactively seeking to expand the reach of our business as well as enhance the market positions in higher growth products and end markets over time. As I touched on earlier, there's also a renewed focus on expanding our value-added services.
We are genuinely excited about the platform we're building now in OPS and believe we are well-placed to generate sustainable revenue and earnings growth in the business for many years to come. I'll now hand over to Shaun, who will take you through some of the group and regional financial results.
Thanks, Brian, and good morning, everyone. I'll start with the group results before I cover the regional financial performance. I'm on slide 18. This slide summarizes our first half group underlying and statutory earnings. At a group level, in line with the strengthening of the Australian dollar, revenue was 1.2% lower, driven by a 3.5% Australian dollar reduction in North American sales. Importantly though, local U.S. dollar revenue in North America was up 2% compared to the prior period. Net finance costs were down AUD 13 million on the prior period to AUD 14.4 million, primarily reflecting the reduction of net debt following the sale of Fibre in April 2020. Underlying NPAT and EPS were both up strongly in the half, with NPAT increasing 18.9% and EPS 20%, reflecting higher earnings and lower net finance costs.
Our on-market buyback has progressed well, and this is reflected in our EPS growth, which has outpaced NPAT growth. On a statutory basis, there were two significant items in the first half that net out to an AUD 6.3 million after-tax gain. Related to the Fibre sale, we completed the post-completion accounts processes and have recorded an AUD 12.8 million after-tax gain in discontinued operations. We have also recorded additional decommissioning costs of AUD 6.5 million after tax at the former Petrie Mill site following ongoing project review and a reassessment of estimated remediation requirements. The timeline for Petrie remains unchanged and is expected to be completed by December 2022. Turning to slide 19. Australasia delivered sales revenue of AUD 441.2 million, up 7% on the prior period. EBIT of AUD 86.1 million was up 4.2% on the prior period, and I'll step through this more on the next slide.
ROFE was 340 basis points below the prior period, reflecting the impact of recent capital upgrades now in the asset base as a result of the G2 furnace upgrade and the new Gawler warehouse. Benefits of these investments will continue to flow in the coming years. However, ROFE is still a very solid 28%. Cash flow was strong in the half at AUD 91.8 million, reflecting higher earnings and lower base CapEx, offset by a AUD 17.7 million negative movement in working capital, reflecting increased receivables in line with higher sales, a one-off unwinding of extended terms related to a single supplier, and partially offset by reduced inventory in cans.
Base CapEx of AUD 10.4 million was lower than the prior period, given the second half weighting of the CapEx program in FY 2021 and the G2 rebuild in the prior period of approximately AUD 25 million. Cash flow conversion was strong at approximately 77%, and we expect that the Australian business will deliver cash conversion in excess of 70% for the full year. Turning to slide 20. EBIT growth in Australasia was driven by strong volume growth in both cans and closures compared to the prior period. In cans, the mix of product was skewed towards the grocery channel, supported by continued strength of at-home consumption. In glass, despite the impact of a smaller 2020 wine vintage, total glass tonnage was broadly in line with the prior period, with wine volumes slightly behind the prior period, offset by growth in beer and other beverage categories.
Earnings margin was adversely impacted by this shift in mix in both cans and glass, together with the impacts of previously announced cost headwinds related to increased energy and insurance, AUD 1.5 million and AUD 0.75 million respectively. Moving to slide 21. In spite of the ongoing impacts of COVID-19 throughout North America, our business has performed well, with the first half results highlighting both the resilience of our business and the results of our profit improvement initiatives. In local currency terms, revenue was up 2% to $993 million . EBIT increased 12.7% to $39 million, and ROC increased 370 basis points to 15.4%. I'll step through this in more detail on the next slide. The OPS business improvement programs have continued to gain traction in the half, with revenue up 2.8% and margins increasing by 0.5% to 4.6%.
Importantly, while OV continues to experience challenging trading conditions in retail, cost reduction initiatives and a shift in sales to defensive market segments has seen the business return to positive EBIT in the half. Operating cash flow increased 14.7% to AUD 53 million, broadly in line with the improved earnings. Cash conversion was approximately 84%, up from 74% in the prior period, driven by improved working capital management. Slide 22. The call-out here is that North American EBIT on a constant currency basis has improved by 12.7%. On a reported basis, the EBIT margins have increased by 30 basis points to 3.9%. As mentioned, the improvement in earnings was driven by the continued execution of our strategic improvement initiatives, including increased transparency and analysis of customer account profitability, enhanced sales force effectiveness, and a stronger focus on cost control measures.
These actions resulted in an increase in local currency earnings for both OPS and OV. The widespread closure of retailers across North America due to COVID-19 has continued. This had a direct impact on the OV business, with a decline in revenues of approximately 6% on the prior period. Despite the lower revenue, OV earnings marginally improved compared to the prior period, driven by the continued focus on defensive end customers and the execution of cost control measures, which included the L.A. site closure and rightsizing of the cost base. Reported EBIT includes an Australian dollar FX translation impact of AUD 3 million. Turning to slide 23. Stronger earnings were converted into cash as forecast, with operating cash flow of AUD 144.8 million, which was up 13.8% on the prior period. Cash conversion of 79% is higher than 72% reported in the prior period.
Was in line with management's expectations, given the phasing of the base CapEx program in Australasia in FY 2021. The main points to note include an increase in cash EBITDA, broadly in line with lease-adjusted earnings, lower base CapEx of AUD 21.4 million compared to the prior period of AUD 50 million, which reflects the impact of the G2 build at Gawler of approximately AUD 25 million in the period, and a second half phasing of base capital expenditure in Australasia. Gross CapEx, comprising base and growth, was AUD 26.4 million in the half and was approximately 80% of underlying depreciation. Investments were made in working capital to support the increased sales, the early payment of payables in North America to capture settlement discounts, and the unwind of extended terms of a supplier in Australia. These were partially offset by a reduction in cans inventory and paper in OPS.
Excluding the impact of AASB 16 for leases, interest payments were AUD 9 million, down AUD 11.7 million on the prior period, principally as a result of lower net debt following the receipt of the Fibre sale proceeds in the second half of FY 2020. Cash conversion for FY 2021 is expected to be 70%. Slide 24. Slide 24 highlights Orora's strong balance sheet, which provides operating and strategic flexibility as we move forward.
At the 31st of December, net bank debt decreased to AUD 277 million, with leverage at 0.9x , in line with June 2020 and down from 2.3x at December 2019. This small reduction in net debt was driven by stronger earnings, reduced base CapEx, receipts from the closeout of the Fibre completion accounts process that was flagged in FY 2020. The timing of a tax refund and a $13 million FX benefit on the U.S. debt.
These inflows were largely offset by cash outflows resulting from the on-market share buyback, where we have now spent approximately AUD 111 million since commencing in September 2020. The buyback is now 44% complete, with 42.7 million shares purchased at an average purchase price of AUD 2.59. We expect to complete the on-market buyback prior to the 30th of June 2021. We have significant headroom in our facilities, with undrawn capacity of approximately AUD 595 million and cash reserves of over AUD 80 million as at the 31st of December. In terms of our debt facilities, Orora has a AUD 350 million syndicated facility maturing in April 2022. We have commenced a process to refinance this and expect to have this completed by June 2021. The average tenure of the group's facilities is 2.5 years.
Our approach to capital will continue to be balanced and disciplined, and we remain committed to maintaining sensible debt levels and investment-grade credit metrics with our target leverage range between 2 and 2.5x EBITDA. Our principal focus is to use our strong financial position to invest in both organic and inorganic growth to generate future shareholder returns, while returning funds to shareholders in the absence of immediate opportunities for growth. Turning to slide 25. The board has declared an unfranked dividend of AUD 0.065 per share. This represents a payout ratio of 68% of underlying NPAT. This AUD 0.065 dividend is in line with our first half, our 2020 interim dividend, and is AUD 0.01 higher than the final FY 2020 dividend. I'll now hand back to Brian.
Thanks, Shaun. We'll now turn to perspectives for FY 2021, which are covered on slide number 27. I'll start with Australasia, where we will continue to identify and implement cost reduction initiatives. We'll reinvest in asset upgrades and new capacity where it's appropriate. Cans volume is expected to remain strong. The 2020 wine vintage was certainly weaker. Exports are expected to remain subdued. We expect industry wine bottle volumes to decline for the second half of fiscal year 2021. We will work, and are working very closely with our customers to understand the plan for the impact of China bottled wine exports, particularly in the second half of 2021 and beyond. We have a range of activities underway to find new homes for capacity that may be freed up based on that shortfall. Energy prices are expected to remain steady beyond the reset experienced in calendar 2020.
A further increase in insurance costs of approximately AUD 750,000 will impact the Australasian business in the second half of 2021. The G2 rebuild that we referred to earlier, has an expected gain in the second half of 2021, of approximately AUD 6 million. We expect this to be more than offset by the volume softness that we've alluded to in the second half. In North America, the new management team remains focused on building on the improved performance delivered in the first half of 2021. The earnings improvement programs, sales growth, margin improvement, and cost efficiency initiatives are the priority. Market conditions in North America continue to remain challenged, with the future impacts of COVID-19 uncertain. California and Texas, which are the key markets that we operate in, represent 60% of our total North American revenue.
We also expect approximately AUD 750,000 of insurance cost impact in the second half of our North American business. In respect to cash flow and CapEx, we continue to target group cash conversion greater than 70% in FY 2021. Phasing of our Australasian-based capital program is weighted to the second half of fiscal year 2021, and FY CapEx is expected to be approximately 90% of underlying depreciation if we exclude depreciation of leases. In respect to capital, the FY 2021 dividend is to be towards the top end of our targeted payout range. The current on-market buyback, as Shaun referred to, is expected to complete within FY 2021. We will explore and continue to explore adjacent growth opportunities within Australia and New Zealand, Orora will assess the strategy for our growth opportunities and the strategic direction for Orora Visual by the end of the calendar year 2021.
M&A within our current North American business is not an immediate priority, particularly for the remainder of FY 2021. Now I'll turn your attention to our outlook statement on slide 28. Orora delivered solid operating performance in the first half of 2021, with improved operating momentum and financial performance across all business units. Correspondingly, at a group level, Orora is forecasting higher earnings in FY 2021 compared to the prior year.
In Australasia, Orora expects second half of the FY 2021 EBIT to be negatively impacted by lower wine bottle exports to China and the smaller 2020 wine vintage. Full-year EBIT is expected to be broadly in line with that of the prior year. In North America, in a continuation of the improved operating and financial performance, Orora expects EBIT to be higher in the second half compared to FY 2020, and we expect it to be higher for the full year.
This outlook obviously is subject to global and domestic economic conditions and any further adverse impact from COVID-19. That concludes our presentation remarks. Thank you for listening to us today. I will now ask the operator to open the line for your questions. Please, operator.
Thank you, Brian. Ladies and gentlemen, just a reminder, if you would like to ask questions, please press star one on your telephone. Our first question comes from Larry Gandler at Credit Suisse. Please go ahead.
Thank you, guys. Can you hear me?
Yes, Larry.
Oh, great. Thanks.
Good morning.
Excellent result. Look, a few questions from me. First question is, with regards to your outlook for Australasia, it seems quite conservative. I imagine can volumes were the largest contributor of the strong performance in the first half. What's your view towards can volume in the second half? I'm sorry about that, Brian. Why would the momentum ease up in the second half?
You are correct. We certainly saw strong can volume in the first half, which was the primary driver of the revenue and the profitability growth. We would expect strong can volume to continue into the second half. Can volume is generally weighted to the first half, particularly as the run-up into the summer period, so it will have a lesser of an impact as we go through relative to the total beverage business, in the second half. We do expect that to remain strong. To your question about conservatism, look, there are a lot of unknowns, particularly with the impact of the China exports. Probably as you would all expect, we've taken a conservative view of the impact of that. We don't know yet what the redeployment opportunities look like for our customer base.
We are working with them very closely, the timing of which there is some uncertainty around. We have looked at the scenario where we will have virtually no product supplied through our customer base to China for the second half. We have a pipeline of opportunities that we're pursuing outside of what they are pursuing, which would be generally non-wine product, for us to find alternate homes for that glass. We would expect those to start to have some impact as we go into 2022 and beyond, but limited opportunity to cover that off during the second half of FY 2021.
I do have a couple more questions. That's pretty clear. Just clarification on that. China, for you guys, in terms of glass exposure, would be no different than the industry, say, 10% of industry exposure would be similar to you guys?
Yeah, that's a pretty good ballpark to use, Larry. Yep.
Okay, great. Just in terms of the U.S. business, fantastic momentum there we're observing in terms of national box shipments. Sounds like you guys are participating. It looks like costs are starting to rise. The paper companies are starting to take price increases. Are you absorbing those price increases, passing them on with ease? What's the state of play there?
We have certainly seen those increases coming through, and we are passing those through to the market. The ones that have come through to date, we have had full success in getting those through to the market, and we would fully expect that to continue.
Okay, great. Thank you. Last question from me, Brian, is just on the U.S., you sort of mentioned international expansion cans. The U.S. is clearly a market in short supply there. Since you've mentioned international expansion, is this something that's a concrete opportunity on your desk, or you're just kind of looking at the industry?
Well, at this point, I would say we're looking at the broader industry, and when we say beverage, we mean broader beverage, not just cans or cans specifically. These are more medium to longer term opportunities that we're assessing. The immediate priority for us would be investment in organic growth opportunities and capacity expansions here in Australasia and building on the capabilities that we have in the existing business, particularly in OPS in North America. It's a little bit more longer dated rather than something we've got imminent there, Larry.
Okay, fantastic. Thank you very much, guys.
Thank you, Larry.
Our next question comes from David Errington of Bank of America. Please go ahead.
Good afternoon, Brian. I really enjoyed your presentation on OPS, and what you're looking at or establishing what you're looking to do in optimizing, enhancing, and expanding. To gain an understanding to what you've done to date in terms of optimizing, and you've obviously got some very good margin improvement there, can you go through a little bit of more in detail as to what you actually mean by improving account profitability, enhancing, getting efficiencies through harnessing data? Again, they're pretty broad buckets. You've got enhancing sales force effectiveness, which basically means rationalization. I suppose the first point of the question is, can you break out what the improvement has been through gross profit versus improvement to cost of doing business?
What the sustainability of that is? In other words, I'd like to see it probably more from gross profit improvements, because there's probably an element there of business improvement rather than just cost reduction. There's a bit there. How that's going to lead into the next improvement in the enhanced bucket, is to what you can b uild on that as to what we can look forward in terms of dollars and cents in the next, say, 12 to 18 months.
Yep. Thanks. A lot in your question there. Look, the first priority and where a lot of the improvement has come from is related to the account profitability improvement. This stems from work we've really started over 12 months ago. Off the back of our SAP implementation and our business intelligence tools that we could hang off that, we really started to get better insights in terms of customer profitability down to a specific customer/SKU level, which we did not have before.
Given we have north of 100,000 SKUs and 10,000+ customers, we take some time or took some time, as you would expect, to start to go through that and really understand where do we make money, where don't we make money, put some disciplines in place, the rigor and cadence within the organization to start to address that and make inroads in ensuring that not only we address where we had underperforming parts of the business, but also as we bring new business online, we look at it through that lens and make sure that it is going to be profitable business that comes into the stable rather than something we've got to go and address later. We're still early, I would say, in that journey, so there's still opportunity ahead of us. The teams are working really hard on that.
I think you should expect from us some continued focus. We will, as a result of that, most likely have some churn within the business. We'll look at customer churn. Whilst we will be moving the momentum towards growth and the sales force effectiveness is really starting to target those market segments and products where we know we can get a bigger bang for our buck, right?
Focusing on these value-added areas. I think it'll be the blend of both, continuing to work on account profitability and starting to focus the sales organization on areas that we know we can get a higher return.
It's just not cost cutting. You're just not cutting people. It's actual business improvement that you're actually-
Correct.
...doing this. Yes. Oh, that's positive.
Absolutely.
Yeah. Following into OV, is it the same strategy there, or is it a little bit more of a blunt edge to that business?
It's fair to say during the first half, we did some cost cutting.
Yep.
That needed to happen given we suffered, based on the size of that business, a fairly substantial loss in the second half of FY 2020. There was some cost cutting had to take place. The team in the last several months, really the second quarter of the year, have been focused on starting to optimize what we have, pursue some revenue opportunities, even within the very subdued retailer market. We are behind year-on-year on revenue. Pleasingly, they have started to build some momentum in that area, and are really focused on initiatives like pricing and estimating accuracy and those sorts of things that are really enhancing the capability within the business. I think, a big portion of the recovery thus far has been cost cutting.
Yeah. You sound a lot more confident, Brian, or certainly Orora sounds a lot more confident that you've ruled a line under the U.S. business, and now you can look forward to business improvement and earnings improvement, in both businesses. Not putting words into your mouth, but that seems to be the message you're giving today.
Yeah. I would say that's the case, and we'd certainly say we're further on the journey in OPS than we are on OV.
Yeah.
OPS is stronger. OV, we've still got some work to do.
Work to do.
We're comfortable we're at least in the black now, and that was priority number one.
Good start. Yeah. Thanks, Brian. I appreciate it. Thank you.
Thank you.
Our next question comes from Brook Campbell- Crawford at JP Morgan. Please go ahead.
Yeah. Thanks for taking my question. The first one's just on the can business.
Very strong growth outside of CSDs there in the half. You talk about that expected to continue. Just wondering if you've won new customers or increased wallet share with your existing customers, outside of CSD that is, that's driving this growth, or is it more just temporary market strength you're seeing there in the market?
It's not market share gain, Brook, to answer your question. It's our core business and our core customers, we've seen a continued shift from other formats into cans. Certainly, the channels that people are buying products are more at-home consumption, and grocery channel has driven an increase in can demand. Based on forward predictions from our customers, we expect reasonably steady demand to continue, and to be able to grow off that base. We don't think we're going to see a slide backwards from where we now sit.
That's clear. Thanks. The second question is just around U.S. margins. Just wondering if you have any sort of medium-term target for that business. Is the target to kind of get back to prior highs? That'd be the first part of the question, and second part would be just if you think there's any potential structural changes in the market now relative to when you previously had those higher margins that would potentially make it more difficult to get back to 5%+ even margins in that division.
Well, certainly our target and our genuine belief is we can get back to those historical 5% return on sales numbers. That is our aim. We believe we can progress towards that over the coming years. We're not going to see an immediate jump to that next year. We would progressively expect to work towards that. No, we wouldn't see any structural shift within the broader industry that would hamper that. In fact, what I mentioned earlier in terms of our continued focus towards more value-added services and higher margin potential industries that we'll service as we look at growth opportunities. I think we will inch our way towards that, regardless of what's happening in the broader industry.
Great. I'll leave it there, thanks.
Thank you.
Our next question comes from Craig Woolford at Citigroup. Please go ahead.
Good afternoon, Brian and Shaun. Just a few questions. Firstly, with regards to the cost performance in the North American business, it was obviously very good. Is there anything we should be mindful about some costs returning into the business if revenue trends continue to improve in the second half?
I'd say not particularly. We're very conscious of that, and the leaders of our respective businesses have been very conscious of that, where we've taken cost out that we don't have this yo-yo effect of taking particularly people cost out and then having to add it straight back in. That's been part of the review process when we have made those changes. I think we are comfortable that we've been able to reset the base. An example would be we have within the OPS business, by force, had to go to a lot of remote working, so we still have some 2,000 people working remotely. As a result of that, it's enabled us to then have a lot of the support functions support multiple locations, where we used to have some dedicated support by either distribution center or manufacturing center.
We're able to actually get some efficiency across that. Where we've taken some cost out, it's really by driving that overall efficiency. That model we intend to keep on going. Our team are comfortable working on that or through that model, and we believe the efficiencies we can lock in as an example of how we're comfortable that won't creep back in.
Okay. Thanks for that. Yeah, that's clear. With regards to your OPS business, more of a strategic question, I guess. Are you seeing discussions with some of the customers about packaging demand growth? It's probably at odds with some of the environmental concerns out there, but with COVID, there's been more concern and more protection around packaging for different products, particularly food items. Are you seeing an increase in demand in some of your sub-segments or customers?
Well, we've certainly seen an increase in demand from an e-commerce perspective and a direct delivery perspective, which has driven overall packaging demand. Our manufacturing business has increased, we would say, in line with what we're seeing in the box industry. We think there's been a reset in that. People won't necessarily revert back to going fully into bricks and mortar retailers when things settle back down. I think there's been a shift, but more so in terms of how people get product sent to them as opposed to how product is necessarily base packed.
Understood. I understand the can market is quite tight here in Australia because of the demand that you're seeing in beverages. Are you seeing any increase in import competition, particularly as the Australian dollar has strengthened over recent months?
No. That's not something that we see here in Australasia. To be honest, it's probably not something that we would expect to see. Most of the industry is pretty tapped out globally.
Yeah. It's tight. Okay, thanks. Thanks, Brian. Appreciate that.
Thanks, Craig.
Our next question comes from Andrew Scott at Morgan Stanley. Please go ahead.
Hi, guys. Thank you. Just a couple from me. Brian, first of all, just on the wine bottle impact, you've obviously called out a couple of factors there. I wonder if you could just sort of give us a bit more color, sort of orders of magnitude between the vintage issue, which is obviously a larger one-off and the China restrictions, which is perhaps here to stay a little bit longer. Just anything to help us sort of size those two and sort of what you're putting into those expectations for a flat Aussie outcome year- on- year?
Look, it's actually hard even for us to break that down because a lot of what we supply to the broad customer base. We're not really sure where it ends up. What gets exported versus what goes domestically. It is actually really difficult to break that down. The smaller proportion of it would be in our second half outlook there would be from the domestic overall wine vintage impact, and the majority of it would be from lower exports. Order of magnitude, certainly a far greater portion to the exports, but I can't give you an exact percentage. As I said, there's multiple components of that for the future. What comes back from a domestic standpoint, a wine vintage, what our existing customers are able to find alternate homes for, which would flow into us from a positive perspective.
We are out there vigorously pursuing opportunities, and we've got quite a few in our pipeline, which would be non-wine opportunities, and some of those are import replacements, so it's not necessarily having to fight with our local competitor for additional volume. They're import replacements that we believe would fit within our manufacturing capability. Again, you can't turn these around and start producing them and selling them, in a fairly short space of time. They're more going to have a positive impact in terms of covering off that and rebuilding the volume base as we get into 2022 and beyond.
No, that's very helpful. Thank you. Just one more for Shaun, if I can. Shaun, strong balance sheet, you mentioned you're well below your target gearing range, looking in a good position there, arguably not necessarily being rewarded for that, if we look at the share price, and certainly if we look at packages around the world, these businesses carry a much higher level of gearing. Just interested, any thought of getting a little bit more immediate with capital management? I know you have the buyback there, but certainly you could make an argument that you could sort of immediately step up the gearing to a certain degree and conscious that you did scale back the capital management post the Fibre sale last year, given the uncertainty.
Yeah, look, I think, good question. The current plan is to complete the initial buyback, and that'll increase leverage at the full year. We'll take stock and have a look at where we are at that point. Our preference remains to invest capital in our existing business. That's kind of the priority. That's where we'll focus our efforts.
Okay, understood. Thank you.
Our next question comes from Richard Johnson at Jefferies. Please go ahead.
Thank you very much. Just returning to the U.S., Brian. We're seeing price inflation really across most packaging formats now in the U.S. Presumably looking ahead, that's going to help your revenue growth rate step up. And I know historically in those sorts of times, that actually helps your dollar margin. Is there any reason to believe that won't be the case going forward?
Our aim would be at minimum to make sure we're covering those increases. That's point one. If there's opportunity to increase margin off the back of it, then absolutely, we want to try and rebuild that, particularly where we've been over recent years. We wouldn't be internally relying on that as our pathway to increase margins. We'll see case by case where those opportunities exist.
Got it. Presumably, your more sophisticated back end of your business actually helps that whole process, given your investment in technology, right?
Yeah, absolutely. Yeah.
Okay, great. Just trying to get a better feel for the seasonality in the U.S. business. If you were to take out the impact of Pollock, can you help me understand what the seasonality would be, please?
It's still first half weighted. At the moment it's really difficult because the environment we're living with within COVID has probably thrown some of those historical seasonality and trends out the window a little bit. I wouldn't like to give you a weighting. Obviously, if I give you a specific number, that'll tell you where the second half will be, I won't do that. For us, we still think it is first half weighted. Not massively, but it is first half weighted.
That's great. Thanks. Just in Australia, I was just thinking about your commentary around glass and potential penetration of non-beer and non-wine markets. I understand obviously there's import replacement opportunity, but would it be right to think that there are some sectors that you're looking at that may be pretty similar to what wine was like when it was pretty much a monopoly? I.e., there's a significant opportunity from an efficiency and cost perspective for somebody else to take share?
Look, we always look at all of the opportunities and to try and optimize our portfolio. For us, the sweet spot is wine. That's where our assets are geared to produce, and certainly from a location standpoint, being in South Australia, the geography is important. As soon as we start to ship products outside of South Australia, the freight impost starts eating into your margin pretty heavily. Those things you've also got to weigh up, not just relative to the particular industry segment or the type of product.
I think we've always got an eye on everything that's utilized within Australia and continue to try and optimize the portfolio. As wine volume has decreased, it looks like it will be for a little while, we then go to the next best options, if you will, to make sure that we're continuing to optimize from a volume and margin perspective.
Got it. Thanks. Then finally, can you just remind me how material the capacity expansion in specialty cans is in Revesby?
Look, it's a AUD 13 million investment that we're making. What it really does is provide us the capability for flexibility for these multi-sized cans in slim and sleek. It allows us to flex across the range, rather than a massive capacity increase. It really just gives us, certainly as we're seeing the trends, now the trend has swung back to more of a classical 375 ml can more recently. As we had seen an increasing trend towards the smaller format cans, it gives us the capability to flex into that which we need to support our customer base. Certainly from a margin perspective, there's a little bit more favorable impact on that sort of format as well.
Fabulous. Thank you very much. That's it from me.
Our next question comes from John Purtell at Macquarie. Please go ahead.
Hey, John.
Oh, good day, Brian and Shaun. How are you?
Good.
Just had three questions, please. The first one is just in relation to the glass business here. Brian, in terms of what the China issue means on the ground for your glass manufacturing, do you have to turn down the furnace, and reduce operating rates through the next six months, or can you mitigate that with some inventory builds and import reduction?
That's exactly what we're looking at. The conservative view at the moment has a combination of those things, John. That's why it's probably a little greater impact that you're seeing than what some people may have assessed based on how much we supply to the export market. If we do slow down the furnace or furnaces, this is a fairly well-invested fixed cost type business. Your fixed cost recoveries are not there if you slow down the volume. It's that balancing act. There is a portion of that we are forecasting in our number. Obviously the more we can do to build future demand, whether it be into FY 2022 or even at the back end of FY 2021, we could confidently either build some inventory to support that, or in fact sell it in FY 2021. We're continuing to watch that closely.
We have not dialed down the furnaces at this point of time. That's a decision we'll make over the coming months.
Okay. Thank you. Look, just two questions on North America. Firstly, if you have a comment on the performance of the Pollock business, there is mention of increased competition there.
Yeah, look, the Pollock business, I would say, is broadly in line with how we're seeing the rest of the business go. It has had a slightly heavier weighting towards retail within Pollock. That part of it has been, let's say, a bit up and down based on the retail segment it services. More broadly, it's been tracking in line with our expectations and with the broader business.
Thank you. Last one. Last year you indicated, this is obviously for the second half re North America, a COVID impact of - $15 million . Your organic growth looks like it was about sort of $5 million in the period. So, I suppose the two-part question is, do you expect to be able to recover over time that full $15 million, or is some of that lost structurally? And I suppose how much of that have you recovered in the first half? If you assumed all of that market growth was recovery, looks like you've got about a third of that back.
I would say the piece that's recovered is what we've seen in the broader box demand. That's certainly been some market recovery that has fueled the revenue growth or the majority of the revenue growth that you've seen. That piece probably roughly in line with what you're talking about, we've got back. The improvement we've seen in the other parts of the business, I would put down to self-help. There are actions and activities that we and the teams have been taking to improve the business' underlying performance. It's getting more and more difficult to build a bridge and even internally try and unwind all of that, John, and given that the impact of COVID's gonna run right through now into, I think at least well into the start of FY 2022, it's gonna be difficult for us to unwind and say what's COVID recovery and what's not.
Certainly some of the impact that we saw last year, we've seen a positive return based on the box demand increase. The rest of it I think has been the work the team have done to improve the business.
Terrific. Many thanks.
Thank you.
Our next question comes from Nathan Reilley at UBS. Please go ahead.
Oh, thanks, gents. Brian, just a quick comment in relation to I think a statement you made about M&A not being an immediate priority in North America. Clearly understand where you're at at the moment with that business in terms of the turnaround. At what point do you think it can become a priority? What are you expecting in terms of, I guess, some of the financial metrics for that business and the new management team to be delivering before you can resume that bolt-on M&A strategy that was put on pause?
One is ensuring that we are very comfortable with the underlying performance in the business, that the processes that are in place are sustainably delivering for us. We are confident in that now, but what we want to do is see continued momentum in that. There's still a lot of work to do and a lot of opportunity we have in those areas. What we referred to earlier in account profitability, as an example, is one. We still have I think a lot of opportunity to optimize the business performance, so we don't want to distract the team, in any way by starting to look at M&A opportunities. We are also starting to look at and build capability from an integration standpoint. We are having a good look at the work we've done thus far and need to continue to do on Pollock, for example.
The finalization of the integration activities are there, so we're putting some dedicated resources on that and developing some internal capability all to help us be well-positioned, as we probably exit this calendar year to say, all right, we're now comfortable that the base business is robust, performing well. We've built some additional capability that building on that will truly be additive to the business rather than be a potential distraction.
Okay. Final question on the North American margin improvement. Has it been possible to assess the impact of the SAP rollout in terms of the self-help initiatives, but also, I guess, some of the benefits from that SAP implementation in terms of the margin uplift?
Well, I think we could comfortably say, the gross margin improvement that we have seen over the last 12 months is directly related to our ability now to drill down in the business and see at that micro level where we're performing, where we're not performing, and help us optimize the business. It has certainly streamlined it. The opportunities are still in front of us, I think, in terms of further optimization in that regard. There's still a lot we can learn from SAP. There's still a lot of process streamlining we can do to make our life a little bit easier in operating in that environment. We would clearly attribute our margin improvement, gross margin improvement and activity, to the capability that's been installed there.
Okay. Thank you.
Just a final call. If you would like to ask a question, please press star one. Our next question comes from Keith Chau at MST. Please go ahead.
Good afternoon, gents. A couple of quick questions, principally follow up on the North America business. Brian, I think you mentioned one just in your prior comments, around account profitability and last year, the business was obviously undergoing a process to assess each of its customers. Can you perhaps give us a bit of a sense of how far through the customer portfolio that exercise has been completed and how much further there is to go? I'm assuming that once the first round is done, that'll be an iterative process going forward as well.
You're right, it is an iterative process. I would say we're still a relatively small way through that process. As with any of these things, you tackle the larger priority ones first. Where we've had customers who identified that we're losing money with or underperforming, they were the immediate cabs off the rank and we made some changes there. In fact, there were some customers that we either no longer do business with in totality or have elected to only do business with part of their entire network, because we couldn't do it sustainably at a profitable level for us. We've had to make some of those tough decisions. There's the number of customers, and from a number of customers, we're only a small way through that.
In terms of starting to tackle the biggest bang for our buck, we're making some good inroads into that and have done, certainly in the first half. As to your point, it'll be iterative. Yes, we'll continue to do that. What we are putting in place now is also good visibility as we take on work to be able to run that work through this tool, right? We can basically predict at a sort of fully loaded cost to serve level what sort of profitability it will deliver to us. We don't get in a situation where we bring on work and then a month or two later we're having to go back and try and find ways to improve its profitability. That'll lessen that need to do that rework later on.
Brian, is it the case that you've identified and remedied all of your loss-making customers and that you have no loss-making customers left in your portfolio, and then now it's just about tuning up the profitability to what would be deemed to be reasonable levels?
No, I'd love to say that was true, Keith, but it's not. I'd say we've tackled the biggest of those, but we still have a reasonable number of loss-making customers. As you can imagine, it's not as simple as just going and saying, "Well, I need a price increase," or, "We don't do business," because depending on the location we service them from, then there's some fixed costs in that location that don't disappear if you stop trading with that customer. Therefore, depending on where you're losing money, it's not at a variable cost level, it's at a total allocated cost. We've got to work through those, and make sure that we're making the right business decisions and doing them carefully.
There are still quite an amount of loss-making customers, at a net profit level, that we would see as opportunity for us over the next period of time.
Okay, thank you. That's great. The second question I had was in relation to the expansion of digital capabilities within the North America business. I think last time, or at the last set of results, there was some discussion around appointing a senior executive to run that part of the business, or that strategy. Part of that was to improve the interaction with customers, whether it be through e-commerce platforms, self-service tools, e-marketing, et cetera. Can you give us a sense of how far through that process you are? I know that the senior executive was to be engaged in the second half of last calendar year, has a strategy been formed and is that actively being pursued at this point in time? If possible at all, would it be possible to put a bit of a number around the benefits for that?
To your last question first, not yet. We're still sort of formulating what we think all that'll be worth over time. To your previous questions, the answer to all of those is yes. We employed a new head of digital experience and transformation back in October of last year, a gentleman by the name of Sean Mahaney, who has some very strong credentials in this area in helping a number of organizations on this journey. He has been working with the team, and now with our new President, Frank Pennisi, on developing our roadmap for our digital transformation. We have that cleared and in fact, we'll be reviewing the updated version of that, with our strategic plan update with the board in a few weeks' time. We're really comfortable we've got good visibility on what that looks like over the coming years.
We will have initialing capability installed in the business towards the end of FY 2021, relative to e-commerce capabilities. Starting to get up to what you would say is expected standard for a market leader, in this field, in terms of those capabilities, and then building on those over the coming years in terms of additional capabilities, whether it be ability for people to interact directly and get quotes online, all these sorts of things. Making tools available for our sales reps to streamline their roles. We've got a whole suite of things that form part of that roadmap, and it ties nicely into having the base capability we've got in SAP, and we want to make sure that we do that in a controlled manner, and that we have good data and data integrity behind us.
There's a lot of work going on on that front as well so that we don't get ourselves in a position where we launch something and find that what our customers are going to interact with is not what they're expecting.
The capital associated with those projects, do we assume that it's rolled up in the capital outlook for the rest of this year?
Yes. These are not substantial amounts of capital. In our capital outlook for this year is the biggest chunk. Then going forward, we're only talking probably a few million dollars a year of outlay with this roadmap we've got, because we've got the foundations in place and are spending some of that money this year. What we're talking about build on, we're not talking huge chunks of capital here to transform the business.
Thanks, Brian. Do you expect those new digital strategies to help you grow your customer base, or does it just make it stickier and easier for your customers to deal with you? Or is there a genuine proposition for new customers coming onto Orora's platform?
I think in the short or medium term, it's helping with the ease of doing business with Orora, is one of the critical things here. It will help from a cost of serve perspective for us. If we can, particularly for a lot of our small customers, transition them to an online model, that will help. I think we've got an opportunity in that arena. As we build out the capability and some more sophisticated tools and e-marketing tools, we believe it will help us grow the business from a revenue perspective, but we're not banking that on that really in the next couple of years. It'll be beyond that that we would have those expectations.
Okay, great. Thanks for your time, Brian. Appreciate it.
Thank you.
Thank you. We have no further questions, so I'll hand back to you, Brian. Thank you.
Great. Thank you, operator, and thank you all. Some great questions. Thank you all for that. Happy to have any follow-ups with any of you, as you think through more and digest more of the information that we've provided today. As we said at the outset, we're really happy with how the first half has gone. We believe we've got some good momentum in the business that we can carry forward. Look forward to talking with you more over the coming days and weeks. Thanks. Thanks, operator.
Thanks so much. Ladies and gentlemen, that does conclude the call today. Thank you for attending. You may now disconnect.