Pact Group Holdings Ltd

ASX:PGH

Earnings Call Transcript 2018-Q2

[Malcolm Peter Bundey, MD, CEO & Executive Director]

Good morning, everyone, and welcome to Pact Group's 2018 Half Year Results Briefing. I'm Malcolm Bundey, Managing Director and Chief Executive Officer of Pact Group. I'm joined today by Richard Betts, our Chief Financial Officer.Today, I will provide you with an overview of the key highlights from our half year results before handing to Richard to talk through the financials in more detail. I will then return to talk to you about our strategy, growth initiatives and our near-term outlook. We will be pleased to take questions at the close of the presentation.Turning to the business highlights on Slide 4, at a headline level, sales growth was very strong, up 11% on the prior year, driven by both M&A and solid underlying demand. EBITDA was in line with the prior corresponding period and consistent with guidance we provided at the AGM. Additional depreciation and interest costs resulting from the transformational growth initiatives undertaken in the prior year pushed NPAT 4% lower.Operating cash flow was up 2%, and our balance sheet was strengthened through a successful equity raising of $176 million. Gearing at the end of the period was a comfortable 2.2x, well within our stated range.The board has determined an interim dividend of 11.5 cents per share franked to 65%, in line with the previous year.It has been pleasing to see the benefits of our transformational activities realized in the period. Last year, we invested over $200 million in these growth initiatives, which saw us grow our contract manufacturing and materials handling platforms in addition to increasing packaging capability to support growth in the attractive health and wellness sector.Our new Australian crate pooling business providing fresh produce supply for Woolworths and the broader agricultural community commenced operations in August 2017. Commissioning activities were finalized during this period. The business is operating very well, and earnings have exceeded expectations for the half.We have realized robust growth in contract manufacturing, supported by acquisitions made in the prior year and solid underlying demand. Pascoe's, acquired in February of 2017, delivered strong volumes with earnings in the period above expectation. We are extremely pleased with the growth in this business since acquisition.Jalco and APM also performed well assisted by the ramp-up of new contracts and improving demand in the health and wellness sector following customer destocking in the prior year. Improved demand in the health and wellness sector also positively impacted volumes in our rigid packaging businesses. We are pleased to see the benefit of our increased exposure to this sector following recent investments.Our Operational Excellence Program continues to progress well and has helped in mitigating price and cost impacts in the period. Accelerating the delivery of efficiency initiatives to counter cost headwinds remains a key priority, and we have initiated an assessment of these opportunities, which I'll talk about later in the presentation.In the period, we took a significant step in growing our geographic presence outside of Australia and New Zealand with the acquisition of the Asian packaging operations, excluding Japan, of Closure Systems International and the Guangzhou, China facility of Graham Packaging Company. These businesses are strongly aligned with our existing rigid packaging businesses and builds scale to our footprint in Asia, establishing a strong platform to accelerate sales growth and access a lower-cost manufacturing footprint.We also made a further investment in Australia in the materials handling and sustainability sector with the acquisition of ECP Industries, an IBC and ISO tank reconditioning business. This attractive business aligns strongly with our existing business and now provides us with national coverage in reconditioning services.Disciplined management of our balance sheet and cash continues to support our growth initiatives. Operating cash flow was improved, and our balance sheet was strengthened through the successful equity raising in the period. Gearing and interest cover remained well within targeted levels.We continue to deliver strong cash returns to our shareholders. The board has determined a strong interim dividend of $0.115 per share for the period franked to 65%. Our focus on transforming our portfolio is delivering benefits, and I'm pleased with the progress we are making.Moving to safety performance on Slide 5. We have continued to work hard in this area. The safety performance in our underlying business is stable, however, our newly acquired businesses remain a challenge and a key focus for us. Bedding down new processes and procedures in these acquired businesses takes time and requires a significant cultural shift. We believe this is possible, supported by initiatives within our Operational Excellence Program. Improved safety will make them both safer and better businesses. No injuries are ever acceptable. The health and safety of our employees remains our key priority.With those opening remarks, I'll now hand over to Richard to go through the financials in more detail. I'll then return to talk to you about our strategy, growth and short-term outlook. Richard?

[Richard Betts, Chief Financial Officer]

Thank you, Mal, and good morning, everyone. As Mal highlighted, in the half, we have seen the benefits of both transformational growth initiatives and improved underlying demand. Sales revenue in the period was up strongly, increasing 11% on the prior year, including growth in the underlying volumes of approximately 2%.In Australia, we benefited from strong demand in the contract manufacturing, materials handling and the sustainability sectors. Rigid packaging volumes were generally stable, with improved volumes in the health and wellness sector offset by lower demand in the dairy, food and beverage sectors. The timing of Council bin rollouts adversely impacted volumes in our International segment. EBITDA was in line with the prior year at $121 million, favorably impacted by higher overall volumes and benefits from the Operational Excellence Program, which together offset the impact of lower pricing following strategic contract extensions flagged in the prior year, higher cost in the Australian rigid packaging business to support product quality and customer delivery and adverse foreign exchange movements.Increased depreciation following our recent investments pushed EBIT and NPAT slightly lower. Operating cash was up 2% on the prior period, with a group cash conversion of 53%, an improvement on the prior year and a record for the half year. The balance sheet remains strong with gearing at 2.2x, well within our targeted range and a significant improvement on the previous corresponding period.Moving to Slide 7 and segment results for Australia. Our Australian business delivered strongly, with sales growth of 18% and EBIT growth of 5%. Transformational growth initiatives contributed strongly in the period. Our new crate pooling business was successfully commissioned with earnings in the period ahead of expectation. We benefited from the earnings contribution from Pascoe's, acquired in February 2017, and an additional 2-month contribution from APM.Pascoe's has contributed very strongly in the period, driven by the strong demand for aerosol-based home care products with earnings above expectation. We have revised our deferred settlement provisions for the earn-out of this acquisition, resulting in a $5.1 million significant expense in the period.Pleasingly, we delivered strong underlying growth in our core businesses with underlying sales revenue up approximately 6%. Volumes in contract manufacturing were improved with the ramp-up of new contracts in Jalco and improved demand in the health and wellness sector favorably impacting APM.Strong demand from the health and wellness sector also favorably impacted our rigid packaging volumes, following a period of customer destocking in the prior year. This partly offset lower volumes of packaging into the dairy, food and beverage sector, which was impacted by a major customer plant closure in the period.We also saw strong underlying growth in our materials handling and sustainability sectors, favorably impacted by project timing. Our contract portfolio has been stable, supported by strategic contract extensions undertaken in the prior year. As previously signaled, our price was adversely impacted by $4 million in the period because of these extensions.Implementation of the Operational Excellence Program continued. This partly mitigated the higher cost in our rigid packaging businesses required to support quality and customer delivery. Higher costs have adversely impacted margins. Our EBIT margin of 8.7% for the half was down on the prior year. Accelerating our efficiency programs to eliminate increased costs remains a priority going forward.Moving to Slide 8 and our International segment. Here, we saw both revenue and EBIT declined versus the prior period due in part to foreign exchange. Demand in the consumer sectors and industrial dairy was generally stable, with volume in line with the prior year. We saw softer volumes in our materials handling sector due to the timing of Council bin rollouts, and we saw some weakness in demand for industrial products in China. Together, these adversely impacted earnings by $3 million.Pleasingly, our contract portfolio has been stable, supported by strategic contract extensions undertaken in the prior year. As previously signaled, this impacted price by approximately $2 million. Partly mitigating these factors was strong cost control with net efficiency benefits of $1 million delivered in the period, a very pleasing result. Margins were down slightly due to price, though remain very strong at 18.6%.Turning now to cash flow management on Slide 9. We reported another strong operating cash flow performance for the period with operating cash flow at $64 million, excluding securitization, representing a record cash conversion rate of 53% for this time of the year. Our cash flow is seasonal and is bias to the second half, and we would expect to see cash conversion improve significantly in the second half consistent with prior years.Capital expenditure was down on the prior year due mainly to lower spending on the new crate pooling business with spend on that project now largely complete. Turning now to Slide 10. Our balance sheet remains strong. Net debt at the end of the period was $519 million, an improvement of $144 million versus the prior year. The successful equity raising during the period of $176 million and good operating cash flows had a positive impact, and was more than sufficient to fund growth initiatives over the last 12 months, including the acquisitions of Pascoe's and ECP and the new crate pooling business.We had $457 million of undrawn facilities at the end of the period providing sufficient capacity to fund the Asian acquisition. We completed this acquisition on 15 February for a provisional consideration of USD 109 million. We have $377 million of debt expiring in July 2018. During the period, we refinanced part of this facility with a new $120 million, 7-year term loan. We are well-progressed in refinancing the remaining $257 million. Current tenor is 2.5 years, though this will improve significantly following the completion of the refinancing activities.During the period, we also extended our debtors securitization facility to June 2020. Gearing at 2.2x is comfortably below our targeted level of less than 3x, and our interest cover is a healthy 7.6x.That concludes my comments on the financials. I will now hand back to Mal.

[Malcolm Peter Bundey, MD, CEO & Executive Director]

Thanks, Richard. Moving ahead to Slide 12, as I have articulated previously, our strategic focus is on driving the business to deliver growth for shareholders through 3 core pillars: Organic growth by protecting our core and growing organically, operational excellence and efficiency and disciplined M&A. This slide outlines our achievements against each of these pillars during the period.Against our first pillar, organic growth, we have commissioned our new crate pooling business, which represents a significant milestone in establishing our leading position in pooling for RPCs in Australia and New Zealand within our materials handling business. We have delivered strong underlying growth in Australia in our contract manufacturing, materials handling and sustainability sectors. We have delivered improved rigid packaging volumes, particularly in the health and wellness sector. We have maintained a stable contract portfolio across our businesses with no major contract losses, and pleasingly, our innovation capability has been recognized for the fifth consecutive year, with inclusion again in the AFR's 50 Most Innovative Companies list.We believe the business is very well positioned to deliver organic growth over the longer term, in line with GDP. We have a market-leading platform in this region, and we are differentiated through our world-class innovation. Our increasing diversification is opening new avenues for growth, which are already delivering benefits.Against our second pillar, operational excellence, we have progressed the implementation of the Operational Excellence Program. Incremental benefits delivered in the period were a pleasing $3 million, in line with our expectations. Annual incremental benefits for this year remain in line, with initial expectations of $8 million to $12 million. This is an ambitious but achievable target.The program will continue to help support our strategy to protect our core from rising input costs and market headwinds, including the impact of rising energy costs expected in the second half. We are actively pursuing energy savings initiatives throughout our network and we'll recover costs where our contract arrangements permit. Notwithstanding, we believe earnings will be adversely impacted by approximately $7 million this year.Finally, in line with our third pillar, we have remained active in M&A. Last week, we completed our recently announced acquisition in Asia. This included the Asian packaging operations of Closure Systems International and Graham Packaging. This acquisition builds scale for us in Asia and provides an attractive platform for growth. I'll speak further on the importance of this to our strategy, shortly.We also acquired ECP Industries, an ISO tank and IBC reconditioning business in Western Australian. This business gives us a national footprint in reconditioning services, providing attractive growth in our existing materials handling and sustainability businesses. The acquisitions we made in the previous fiscal year are all performing in line with expectations.Moving to Slide 13. In 2013, Pact Group was a rigid packaging company with 92% of revenue coming from those operations. Today, Pact is a diversified group, with rigid packaging representing only 59% of group revenues. Of these revenues, there is an increasing contribution from sectors such as personal care, home care and health and wellness.We have strategically moved from a packaging manufacturer to a packaging solutions provider. We are increasingly integrating our manufacturing capability with packaging solutions, providing a strong, vertically integrated platform to deliver future growth.Through our contract manufacturing businesses, we have moved from being a component manufacturer to an integral part of our customers' supply chain. We can develop the concept, source the raw materials and manufacture the product as well as the packaging.We see robust growth in demand for contract manufacturing services largely due to our customers' increasing need to move fast, innovate and also deliver lower-cost manufacturing. Contract manufacturing creates opportunities of scale, which independently, our customers may not achieve, and delivers our customers the benefit of local supply in an ever competitive retail world.The growth in contract manufacturing has leveraged our existing customer relationships, sector knowledge and capability in manufacturing and innovation in sectors that we believe can provide strong growth over the longer term.APM supplies the health and wellness sector. There is an increasing demand for Australian-made vitamin and health supplements. This is a sector which we believe will benefit from not only increasing consumption domestically, but also in offshore markets.Jalco and Pascoe's supply a broad range of products, predominately in the personal and home care categories. We believe increasing demand for both branded and private-label products in these categories will also deliver solid organic growth over time.Within our materials handling and infrastructure sector, we have also increasingly focused on growth opportunities, which move us from being a component supplier to an integral service provider. We have grown our position in pooling services and are now the leading provider of pooling services for RPCs in Australia and New Zealand. This is an attractive sector driven by increasing demand for returnable packaging and materials handling products. In infrastructure, we have grown our position in supplying noise wall and cladding products for major road and rail projects.Our core rigid packaging sectors in Australia and New Zealand are of scale and remain critical to the business. We have diversified our sector exposures within rigids with investment in the higher-growth sectors such as health and wellness where we can leverage the overlap in customer portfolios with contract manufacturing. Whilst growth rates over the longer term in our mature sectors are not expected to exceed GDP, these sectors provide resilient returns and provide the business with very strong and stable cash flows.The acquisition in Asia in the period has provided us further geographic diversification for our rigid packaging businesses, establishing a material platform in this attractive region.Moving now to Slide 14, we are delighted to welcome to the group the recently acquired operations of Closure Systems International and Graham Packaging Company. These operations include 7 manufacturing sites in 5 countries and a regional headquarters in Hong Kong. CSI is a leader in rigid plastic closure design and manufacturing, whilst GPC is a significant market player in injection blow-molded and extrusion blow-molded bottles in China. The acquisition is a strategically important, provides geographic diversification for the broader group and establishes a material platform in the Asia region.Asia moves to a more meaningful 13% of group revenue, with in-region revenues increasing fourfold to approximately $200 million. The acquisition provides scale to accelerate growth and significantly enhances our customer diversity, manufacturing technology and management capability. The businesses boast a highly capable in-region management team supported by regional sales and R&D teams with strong local and international connectivity.In addition, our Asia platform will provide a low-cost manufacturing base, which can support new product sales into existing markets. The businesses have a reputation for quality, service, technical expertise and innovation and are strongly aligned with our existing rigid packaging businesses.Integration work has already begun. Whilst the integration of this acquisition will bring exciting new challenges, we feel confident that our extensive experience and disciplined approach with regards to integration activities will deliver a smooth transition.Turning to Slide 15. In my opening remarks, I referred to the ongoing need to accelerate the delivery of efficiency initiatives to challenge cost headwinds. This is a priority. In the half, in our Australian rigid packaging businesses, we have seen increased costs to support quality and customer service and delivery.Rapid growth through acquisition has created significant complexity in the way we operate. We have multiple facilities in Australia with over 700 machines and limited standardization. Our footprint is complex, freight and warehousing add significant cost and it can be challenging to manage quality and DIFOT for our customers against this backdrop.It is imperative we manage the costs within our control. Simplifying our process and network is key to achieving this. We have recently appointed a new Executive General Manager of our consumer and industrial packaging group in Australia with accountability for our Australian rigid packaging business. Lis Mannes joined us in October. With most recent experience at George Weston Foods where she held the position of Operations and New Business Development Director. Lis previously held positions as Operations Director at Kraft Foods and Manufacturing Director at Goodman Fielder. Originally from the U.K., Lis has held managing director positions at Samworth Brothers and Uniq. Lis' extensive experience in operations and FMCG businesses has been invaluable to the group as we assess transformational change opportunities to better service our customers, determine what we make and where we make it and drive the bottom line. We still have some way to go in this assessment, yet we feel confident there are pathways for change which can significantly enhance our business effectiveness and reduce cost. We will continue to update you on our progress.Turning now to Slide 16 to summarize, our recent transformational investments are delivering earnings benefits. Our new Australian crate pooling business and Pascoe's have both performed above expectation. We have delivered strong underlying growth in Australia. The implementation of our Operational Excellence Program is progressing well and has helped mitigate price and cost impacts, and we are exploring opportunities to accelerate the delivery of efficiency benefits.We have again demonstrated disciplined management of cash. Our balance sheet remained strong, strengthened by the successful equity raising in the period. Cash returns to our shareholders remained strong, with an interim dividend of $0.115 cents per share determined by the board. Our solid strategy and our sector-leading capabilities provide us with a strong platform to deliver future growth.Turning now to our near-term outlook on Slide 17. We expect to achieve higher revenue and earnings, before significant items, in FY '18 subject to global economic conditions.That concludes our presentation, and we will now take any questions. Thank you.

[Operator]

The first question comes from Mark Wilson of Deutsche Bank.

[Mark Wilson, Managing Director, Co]

Mal, just wondering whether you could elaborate on the energy cost pressures, whether you experienced any in that period, and just ways that you will go about trying to mitigate that?

[Malcolm Peter Bundey, MD, CEO & Executive Director]

Hi, Mark. Yes, we did. It's predominantly gas. We saw some increases there. We certainly will see increases in the second half, and we have been doing a number of things across our network, including implementing more efficient equipment through to doing some pretty detailed assessments on solar. We have a number of plants that have got solar panels installed. And we're doing a number of things across the network, obviously, always weighing up the cost and the benefit and the payback we get. So something that I think as all manufacturers in this country are acutely aware of, we have to manage that through trying to get cheaper sources, but also through efficient usage.

[Mark Wilson, Managing Director, Co]

So the $7 million, is that primarily -- that is primarily gas?

[Richard Betts, Chief Financial Officer]

No. Sorry, Mark, just -- it's Richard here. The cost that we incurred in relation to utilities would have been reasonably marginal in the first half. So obviously, when we caught up previously, we talked about the headwinds associated with primarily electricity in the utility space, and that will be in the second half. The cost of $7 million primarily relate to operational costs at the facilities across -- right across our -- well, primarily across about 9 of our facilities, as Mal said, that relate to making sure that we are better servicing our customers and delivering quality and DIFOT.

[Operator]

The next question comes from Michael Aspinall of CLSA.

[Michael R. Aspinall, Research Analyst]

Just can you step through the $17 million impact of higher volumes in Australia in terms of the crate pooling, Pascoe's and APM, and then the materials handling and rigid packaging?

[Malcolm Peter Bundey, MD, CEO & Executive Director]

Sure, Michael. Look, I think if we look at the numbers that are associated with each of those, that's an EBITDA number, the $17 million. About $5 million came from [ DPS ], that's about a $3 million EBIT, $5 million from Pascoe's, $2 million from APM and $5 million from underlying.

[Michael R. Aspinall, Research Analyst]

Okay, great. And then I'm just interested in what drove the beat in the crate pooling business versus your previous expectations?

[Malcolm Peter Bundey, MD, CEO & Executive Director]

Sorry, so on the crate pooling, you just dropped out a touch at the start there, Michael?

[Michael R. Aspinall, Research Analyst]

Yes, sorry, just on the crate pooling business, you mentioned that it beat your expectations in terms of earnings. I'm just wondering what drove that? If it was volumes or costs or something else.

[Malcolm Peter Bundey, MD, CEO & Executive Director]

Yes, so volumes were pretty much in line. We probably saw a little bit of a buy up as people were preparing for the transition to our supply. But I would say that we were probably a little conservative in terms of the costs that we anticipated to make sure that we overserviced that area on the way through and through the commissioning process. So we probably saw some quicker commissioning than we anticipated. And therefore, the ongoing costs that we thought might have hit us from sort of August through to December didn't continue on for as long as we anticipated. So I'd say, volumes, relatively in line, a little bit of an uptick at the start where we saw some buy up early and people getting ready for a transition. And then I would say that we didn't see the costs continue for as long as we thought they might have, which we'd sort of planned for. And we see the second half will see pretty much the returns on track as we've given guidance to the market, that 20% ROI.

[Michael R. Aspinall, Research Analyst]

Right, perfect. And just one last one, what, if any, impact are you seeing from higher resin prices?

[Malcolm Peter Bundey, MD, CEO & Executive Director]

Look, I think resin, we have a pretty solid pass-through mechanisms. There's always some lag on the way up and on the way down. So we probably saw a little bit of impact on the way through to Christmas as oil went up and resin prices certainly increased in that period. But nothing that I would say over the course of a full year that would say we're going to have a large resin issue or anything like that. But a little bit of ramp up in cost into the back end of the first half that ultimately we pass-through on about an average 90-day lag.

[Operator]

The next question comes from Brook Campbell-Crawford, who's with JPMorgan.

[Brook Campbell-Crawford]

Just had a question on the Asia acquisition. Can you help us understand how organic revenue and earnings growth tracked for those businesses during 2017? And also what your key areas of focus will be for those businesses this year.

[Richard Betts, Chief Financial Officer]

Yes, so Brook, obviously, in terms of the Asian business, our existing Asian platform, the returns were reasonably modest in both the '17 year and certainly in the first half. As Mal said, we are, in terms of the Asian acquisition being of the old Rank businesses, we acquired those from the 15th of February. So we'll have about 4.5 month’s worth of contribution from that business. And I think on an annualized basis, we've called out that, that should contribute an EBITDA of around about $19 million. So, yes, that...

[Brook Campbell-Crawford]

I mean, just, I suppose, following up on that, my point is really more on how did those businesses performed in the period before being acquired by yourself?

[Richard Betts, Chief Financial Officer]

Sorry. Yes. No, no, look, I mean obviously those businesses, up until now, I think it would be fair to say that they had been reasonably flat. As we talked when we acquired the businesses, I think there was a -- these were businesses that within the Rank portfolio were largely not part of their core direction going forward. And so whilst they were invested in from a sustenance perspective, they were really never funded for growth. All the growth capital that was going towards those businesses or the Rank organization was largely in other parts of the world. So I think, for them, it was noncore. For us, we see significant opportunities in those markets to drive growth and to bring those back to -- from what has been a flat profile through to a growing profile going forward.

[Brook Campbell-Crawford]

Okay, great. And then I think at the time of the raising and acquisition it was called out that there was some funds put aside for other growth projects. Just interested if anything has been identified. I think you called it out as near-term growth initiatives? Just if anything has been confirmed on that front?

[Malcolm Peter Bundey, MD, CEO & Executive Director]

Look, I think, Brook, that we probably have a pretty robust M&A pipeline, as we sort of talked to. And I think I've said in the past often, the ones that you think are relatively close or around the corner tend to take a bit longer than you anticipate, and the ones that you think are a long way off sometimes heat up. So it's pretty hard to say there's something that's going to happen imminently. But what I would say is that we've -- as we always do, we've got a pretty robust and targeted M&A pipeline that we'll continue to pursue. And I would say that we try and flag to the market, as we get some certainty, that something's going to happen as early as possible and to our investors. But there's nothing that I would say that we would be flagging right now, other than we've got a healthy pipeline and we continue to drive it pretty hard as 1 of our 3 core parts of our strategy pillars.

[Brook Campbell-Crawford]

That's great. And one more, if I can, on the International division. I think earlier on, you mentioned there was a -- maybe a timing issue with the Council bin rollout in the periods. Just confirming if that is a timing issue or should we expect this to impact the second half of '18 as well?

[Richard Betts, Chief Financial Officer]

Yes. No, look, that business, obviously, is very heavily dependent on both our Australian and our International segments. They're both heavily dependent on both Council rollouts and infrastructure projects. And certainly, the International business, through its New Zealand operations, was affected negatively in that half. That's a -- that is really a product of rollout time. If you actually look at some of the organic growth that came within the Australian business in the first half, that actually was completely opposite where we actually had an upside in terms of some of those infrastructure and Council rollouts. So that's more a product of timing at any phase of the cycle, and it's certainly not something that we see is an ongoing issue. We will -- in some halves we'll win, some halves we'll lose in terms of those timings just due to the size of those rollouts.

[Operator]

The next question comes from Keith Chau, who's with Evans & Partners.

[Keith Chau, Senior Research Analyst]

Maybe firstly just an extension on Brook's question. I think for the materials handling sector and the impact there, that certainly seem to be the key detractor of earnings in the period. So if you -- if we assume that the balance of the portfolio was stable, that seems to have had quite a significant impact on the division. So notwithstanding the timing issue around some of the products that go-to-market, is there anything else that we should be thinking about in the International division that could continue to weigh on earnings in the second half?

[Malcolm Peter Bundey, MD, CEO & Executive Director]

Look, I think the -- that materials handling piece in the International business was probably around about $2 million, I think, we've called out. So in the scheme of things, it's not what we'd like to see. But that materials handling and infrastructure tends to be a cyclical or lumpy sort of a business. That's major projects that start and finish when a Council does a rollout. We did the Auckland City Council 18 months ago and that was a very large rollout over a period of time for the largest municipality of mobile garbage bin. So you do that 18 months ago and then some of the other Councils that roll out are a bit smaller or they've got to wait until they've got funding. So it's a capital project for the Councils and tends to be -- reflect that a bit more like an infrastructure business. But it was about $2 million impact against the -- against that sort of International business. And we saw a little bit of softness in some of the industrial demand in the plants we have up in China. That were really the 2 things that hit that part of the business. And that was about...

[Keith Chau, Senior Research Analyst]

[ Second ] half? Sorry, Mal?

[Malcolm Peter Bundey, MD, CEO & Executive Director]

Sorry, I was just going to say, and that was about $1 million.

[Keith Chau, Senior Research Analyst]

And so in the second half of the year, if we just kind of take those comments into context, we should be expecting at least a flat result from that business in the second half, if not improvement?

[Malcolm Peter Bundey, MD, CEO & Executive Director]

Look, again, because it's -- they are sort of project-based, I would say that's probably going to be in line with first half.

[Keith Chau, Senior Research Analyst]

Okay, okay. Just second question on some of the contract price resets that we've seen in the period, the $6 million headwind for the group, 4 million in Aussie and 2 million in International. I think previous guidance suggested that those pricing resets were going to be completed in the first half of '18. Just wanting to confirm that, that is indeed the case or whether there could be some more headwinds in the second half?

[Malcolm Peter Bundey, MD, CEO & Executive Director]

No, look, I would say that the ones we called out are pretty much on track with previous guidance. We always see competitive bids and tenders as we go, but the specific activity we took around locking up some of our larger customers and getting extensions is, as you just said, pretty much in line with what we'd given in guidance earlier and should end.

[Keith Chau, Senior Research Analyst]

Okay, great. So just to be explicit about it, the price -- the negative price movement in the period this half shouldn't recur in the second half?

[Malcolm Peter Bundey, MD, CEO & Executive Director]

That's right, that's correct, yes.

[Richard Betts, Chief Financial Officer]

I mean, as we said, that was actions we took 12 months ago and it would have a first -- it had an effect of roughly the same amount in the second half last year and would impact us going into the first half this year. So -- and that's in line with our expectations.

[Keith Chau, Senior Research Analyst]

Fantastic. And then just the final one on costs for the Australia business. Just can you delve into a bit more detail around the higher costs incurred to support quality in customer delivery. So just if we can dig a little bit deeper into that. Then perhaps if you can give us some context as to what was some of the costs that were incurred. Was it people being added to the business, more machinery and why now in terms of that investment?

[Malcolm Peter Bundey, MD, CEO & Executive Director]

Yes, look, I think one thing that we did, Keith, was, and I've talk before, is we restructured our sales force and we certainly started maybe having a bit more of a customer focus from a manufacturing-led business, some of the things we noticed were DIFOTs that weren't where they needed to be or delivery on time in full, some quality things that we wanted to invest in. So really, if you're going to drive sales and start to return to see some organic growth, which we did see in the period, in Australia in particular, you have to make sure that you're servicing and delivering properly. And so if you look historically, we think that might have been part of the cause, of why we weren't seeing the organic growth. And what we've seen now with some investment in those particular areas and customer satisfaction improving, we're certainly seeing the revenue line come up. The challenge for us now is to say, "Okay, distribution was probably a little high. R&M investment in some aging equipment, some of those types of things to make sure we service the customer base. Our job now is to manage that whilst we continue to focus and drive the top line, now we've got to make sure we make it stick to the bottom line and start to get aggressive on those costs.

[Keith Chau, Senior Research Analyst]

In terms of the stage or, I guess, how far through that project in terms of reinvestment Pact is in, how far through do you think that is, particularly if we look at the short term, I'm assuming the second half is going to see some more of those costs being continually invested into the business. But does that start to dissipate in, say, FY '19, FY '20? Or when does the base kind of level out from a cost perspective?

[Malcolm Peter Bundey, MD, CEO & Executive Director]

Yes, I think that analysis is spot on. And that also then leads into, I think, what we talked about in the presentation around efficiency and looking at our overall platform, which we're starting to take a pretty hard look at now and we're doing some more detailed analysis around what we should make, where we should make it and what that network should look like. After 55 acquisitions over more than a decade, we've got some inefficiency in the system of where we make things and ship into states and those types of things. So that's the reason why we're doing the assessment, and that will also play into dissipating those costs over that time.

[Keith Chau, Senior Research Analyst]

Okay. So that will largely be -- that redesign of the footprint in Aussie is part of -- will that be classified under the lean program or the Operational Excellence Program that's currently underway? Or an extension of that, so to speak?

[Malcolm Peter Bundey, MD, CEO & Executive Director]

No, we're continuing to drive the lean program, which we are seeing operational efficiencies come through at that level, notwithstanding some of these incremental costs that we've incurred. But I would say that the assessment we're doing in terms of our network design and network assessment is probably going to be an overlay on that.