Earnings Transcript for BXBLY - Q2 Fiscal Year 2022

Graham Chipchase: Hello, everyone, and good morning from Sydney. Thank you for joining us today for our 2022 half year results announcement. Today, I’ll start by providing a summary of our performance in the half and our updated outlook statement, before Nessa takes you through the detailed financials. I’ll then come back to update you on the progress we’ve made with the shaping our future transformation program. Turning to Slide 3 and the key messages from our half year performance. We delivered strong sales revenue growth of 8% and underlying profit was up 4% at constant currency ahead of our FY ‘22 guidance. This performance was driven by price realization in all our regions to recover inflationary cost pressures and other cost-to-serve increases. Our volume growth was impacted by strong COVID-19-related demand in the first half of last year and pallet availability constraints in the current period. Underlying profit included $24.4 million of short-term transformation costs associated with our Shaping our Future transformation program that we discussed in some detail at our Investor Day last September. Excluding these costs, our underlying profit was up 9% and included a percentage point of leverage despite the extraordinary inflation environment we faced driven by price realization and supply chain efficiencies. Free cash flow after dividends decreased $311.7 million compared to the first half of the prior year and included $115 million reversal of FY ‘21 timing benefits, comprising $80 million of pallet purchases deferred from the prior year and $35 million relating to the timing of FY ‘21 tax payments. During the period, capital expenditure increased significantly, reflecting lumber inflation of $270 million and $80 million of additional pallet purchases, which were deferred from the prior year. Our return on capital invested remains strong at 18.8%. We have increased the interim dividend by 8%, in line with our underlying EPS growth. Our share buyback is due to restart on the 28th of February and to complete this financial year. We describe ourselves as the invisible backbone of the supply chain. And during this period, we’ve withstood the impacts of unprecedented volatility to minimize disruption to our customers and deliver the strong result for our shareholders. On to Slide 4 and a look at this extraordinary operating environment. Across all our markets, supply chains experienced significant disruptions associated with shipping delays, transport and raw material shortages as well as labor availability challenges and changes in demand due to the emergence of the Delta and Omicron variance of COVID-19. These shortages and disruptions resulted in record levels of input cost inflation and inefficiencies across global supply chains. Notably, retailers and manufacturers have been holding increased safety stock of their inventory to protect their own customers and consumers against supply volatility. For Brambles, ongoing lumber availability and supply issues have led to pallet manufacturing constraints and have impacted new pallet supply. In response to these disruptions, we’ve been working with retailers, manufacturers and others in the supply chain to improve pallet flow and availability. To optimize service levels across our customer base, we’ve implemented demand management initiatives as well as increased pallet purchases to improve availability. We’ve also deployed advanced data analytic tools and enhanced asset recovery processes to increase pallet collections and returns. We expect pallet availability will remain challenging for the rest of the financial year and into the first half of FY ‘23. And we will continue to increase pallet purchases and work with our customers in all regions to service demand. I want to recognize the efforts of our people who have faced these challenges with resilience and customer focus. Our teams around the world have responded with agility and determination to support local businesses and consumers, and we’re all very grateful for their efforts. On to Slide 5 and our updated outlook statement. In light of the current operating environment and our performance in the first half, we have updated our outlook for the full year. We expect to deliver sales revenue growth of 6% to 8% and underlying profit growth of 3% to 5% at constant FX, including approximately $50 million of short-term transformation costs. Excluding these costs, underlying profit growth is expected to be between 8% and 10%. Based on the assumptions outlined on the slide, we expect FY ‘22 free cash flow after dividends guidance to be a net outflow of approximately $350 million. The increased outflow expectation reflects additional lumber inflation and pallet purchases due to extended cycle times and lower pallet returns in all regions. We expect this increase will be partially offset by higher-than-expected earnings growth and timing of non-pooling capital expenditure. If the current lumber prices and supply chain dynamics persist, Brambles expects FY ‘23 free cash flow after dividends to also be a net outflow. The outflow amount would depend on a number of material unknowns and subject to change, including actual lumber prices, capital costs of pallets and pallet purchase levels as well as the cash contribution from ongoing actions to recover cost-to-serve increases and other transformation initiatives. Due to these strong results, we were able to increase our dividend and restart our share buyback program. We have declared an increased interim dividend of $0.1075 converted and paid as AUD 0.1506. This dividend payout ratio of 50% is within our targeted payout ratio range of 45% to 60%. In terms of capital management, to date, approximately AUD 2.6 billion from the proceeds of the IFCO sale have been returned to shareholders, representing 92% of the capital management program commenced in June 2019. Our on-market share buyback will recommence on the 28th of February 2022 and is expected to complete in FY ‘22, subject to the ongoing assessment of the group’s funding and liquidity requirements. I’d now like to hand over to Nessa to discuss the results in more detail.

Nessa O’Sullivan: Thanks, Graham, and good morning, everyone. Operating in an environment with unprecedented challenges across global supply chains and extraordinary levels of inflation, the group has delivered sales growth of 8% and operating profit growth of 4%. The increase in earnings was after expensing $24 million of short-term transformation costs. Excluding these costs, underlying earnings growth was 9%, which is 1 percentage point ahead of sales growth in the period. After-tax profit increased 4% at actual FX and 5% at constant currency, with underlying EPS growth of 8%, reflecting both earnings growth and the benefits from the continuation of the share buyback program announced in conjunction with the sale of the IFCO business in 2019. Turning to the group sales revenue growth on Slide 9. All segments delivered revenue growth in the period, contributing to overall group revenue growth of 8%. Pricing contributed 8 points to revenue growth reflecting increased cost-to-serve across our businesses. Group volume was broadly in line with the prior year, with pallet availability constraining volume growth during the half. Whilst volumes were flat, net new business growth of 2% was offset by 2 points of organic volume decline as the business cycled COVID-related demand in the prior year. The net new business growth was largely driven by customer wins in Central, Eastern and Southern Europe, and includes rollover benefits from a large APAC region RPC contract, which commenced in the prior financial year. Turning to Slide 10 to the details of the group underlying profit performance. Underlying profit grew 4% as increased pricing, higher surcharge income and operational efficiencies offsets increased costs driven by inflation, supply chain disruptions and Shaping our Future transformation costs and also reflects the cycling of a one-off $8 million site compensation in the prior year. Pricing and surcharge income net of volume-related costs, excluding IPEP and depreciation, contributed $243 million to year-on-year earnings growth. Plant costs increased $61 million as inflation of $85 million was partly offset by efficiency gains, including benefits from automation and lower damage rates. The first half results also reflects $25 million of repair and handling activity timing benefits due to lower pallet returns. Transport costs increased $71 million including cost inflation of $93 million and higher pallet collection and relocation costs due to low plant stocks. These cost increases were partly offset by network efficiencies and lower transport activity related to pallet returns and other transport savings in the automotive business. Higher depreciation costs reflected prior year pallet additions in the second half of the year, and increased pallet purchases in the current period. IPEP increased $43 million, with $35 million of this due to higher losses primarily in the U.S. business and $8 million of increased unit FIFO value of pallets. Pallet return rates declined as inventory stockpiling increased across supply chains. In addition to this, the increased market pricing of pallets and pallet scarcity also contributed to higher loss rates recognized in the first half. We also recognized this increase in IPEP expense as part of the increased cost to serve and are implementing a range of initiatives to improve pallet return rates and to increase compensation for lost assets with a view to reducing loss rates, improving the return rates of assets as well as the overall efficiency of the pool. These initiatives include pricing for higher risk loans, implementing pallet allocations to limit stockpiling across supply chains and increased pallet recollection activities. We’ve also increased the use of data analytics and enforcement of legal title for pallets flowing outside of our networks. Transformation costs increased $34 million, which includes short-term costs of $24 million as well as higher ongoing transformation costs associated with the digital transformation and other initiatives we outlined to the market at the 2021 Investor Day. The $6 million increase in other costs largely reflects the cycling of one-off site compensation of $8 million in the prior year. Turning to Slide 11 and looking more closely at inflation and cost recovery. The left-hand side of this chart highlights the increased P&L cost to serve of $221 million, including plant and transport inflation and increased expenses reflecting higher loss rates, partly due to increased unit value of wooden pallets driven by lumber inflation as well as pallet scarcity. These costs were reflectively recovered with $243 million of pricing and surcharge income in the first half. The extraordinary lumber inflation has resulted in pallet price inflation which has added $270 million to our pooling capital expenditure in the first half. When considering recovery of this increased investment in pallets driven by inflation, it should be noted that the investment relates to an asset with a 10-year life and that we currently anticipate a cyclical moderation in lumber costs as supply and demand factors are expected to be rebalancing in the second half of FY ‘23. In the second half of this year, we expect pricing and surcharges to continue to offset increased cost to serve in the group P&L. Taking a closer look at lumber inflation on Slide 12. As you can see on the chart in the middle of the slides, we experienced record levels of increases in lumber costs. Historically, we’ve seen cyclical increases in lumber costs in a range of around 30% to 50%, which is well below the 200% plus levels of inflation we are currently seeing in the market. What is markedly different about the current inflationary environment is that unlike historic lumber cycles, which have typically been driven by either supply or demand factors, the current inflationary and lumber availability pressure is driven by both supply and demand factors. On the demand side, we’ve seen housing booms and DIY increases, while supply has been impacted by global shipping and transport bottlenecks, capacity constraints across sawmills and other inefficiencies due to scarcity of raw materials and labor shortages, with increased stockpiling across supply chains adding to increased demand for pallets. These supply and demand pressures have impacted both the cost and availability of lumber and pallets. And while lumber inflation impacts repair costs, the biggest impact is on CapEx investment, with lumber representing over 80% of the cost of a new pallet with $270 million added to the first half CapEx due to lumber inflation. Turning to Slide 13 and asset efficiency. As you can see from this slide, you can see the $270 million increase in pooling CapEx due to lumber inflation has added 10 points to the group pooling CapEx to sales ratio in the first half. This higher-than-expected level of lumber inflation added 7 points to the pooling CapEx to sales ratio over and above the Investor Day guided to level of 3 points of inflationary impact in FY ‘22. The first half pooling CapEx investment also includes the reversal of $80 million of the FY ‘21 $180 million of delayed pallet purchases highlighted to the market at the full year results. Subject to pallet availability and the level of pallet returns across the balance of FY ‘22, the remainder of the FY ‘21 deferred purchases are expected to largely reverse in the second half of this year. The full year asset efficiency ratio is expected to be broadly in line with the first half, with the lumber cost not expected to moderate until the second half of FY ‘23. Graham will outline the work we’re doing to further improve asset efficiency as part of our transformation program later in the presentation. Turning now to segment review of the half 1 results and starting with CHEP Americas region on Slide 14. The Americas region reported revenue growth of 10%, largely reflecting pricing growth in The U.S. and Latin America businesses to recover cost-to-serve increases. Earnings growth of 19% reflected a 1 percentage point expansion in margins despite extraordinary levels of inflation and supply chain disruptions, which drove higher operating costs. These cost-to-serve increases were effectively offset by pricing, surcharges, operational efficiencies and cost benefits driven by lower repair and handling costs associated with lower pallet returns. Margin growth in the region was driven by the Canadian and Latin American businesses, with margins in The U.S. in line with the prior year as the business successfully recovered cost increases due to high levels of disruption to supply chains, input cost inflation and increased IPEP asset charges in the period. In terms of half 2 expectations for the region, we would expect to see revenue growth largely driven by pricing in a high inflationary operating environment, with effective operation of surcharge mechanisms expected to continue to support recovery of increased operating costs. We also expect the full year region results to reflect margin expansion of around 1 percentage point, including margin growth in the U.S. business. Turning to Slide 15. The waterfall chart on this slide provides further detail on the key movements in CHEP Americas income and costs in the half. Worth highlighting here is the impact of input cost inflation on the key plant and transport cost categories. Plant cost increases were largely driven by lumber inflation and inefficiencies due to supply chain disruptions. These cost increases were partly offset by approximately $15 million of benefits in the period due to deferred repair costs as a result of lower pallet returns with damage rates in The U.S. and other improvements in The U.S., and other automation benefits further offsetting cost increases. Transport costs increased $59 million with fuel and transport inflation and additional asset recovery costs in the period, partly offset by inefficiencies in The U.S. and Latin American businesses. IPEP expense increased $40 million, primarily reflecting higher losses in the U.S. business with the longer cycle times, pallet scarcity, and increased market value of pallets, reducing return rates of pallets during the half. Turning to The U.S. on Slide 16. Revenue growth in the U.S. business grew by 9%, driven by pricing to recover increased costs. Volumes declined by 4% as the business cycled strong volume growth of 5% in the prior period. Pallet availability challenges limited both like-for-like and net new business growth in the first half, noting the business has prioritized supply to existing customers rather than allocating pallets to new business. From the second half, we expect pricing momentum to continue with the rollover benefits from pricing actions in the first half and additional pricing actions in the second half to recover ongoing inflation and higher cost to serve. Volume growth is expected to remain constrained. Turning now to CHEP EMEA on Slide 17. The region delivered overall revenue growth of 6% and that which includes pricing growth of 4% in a high inflationary cost environment with net new business growth in Central, Eastern and Southern Europe. And despite the shortages of semiconductors, automotive and containers revenue grew by 5%, cycling softer demand in the prior year. Underlying earnings grew 4%, which was 2 points below revenue growth, as pricing and operational efficiencies lagged cost increases across key inputs. And while margins declined by 0.5 point in the first half, overall ROCI increased. In terms of half 2 expectations, we expect market conditions to remain challenging with lumber, transport and labor inflationary pressures set to continue into the second half. We also expect further pricing initiatives and operational efficiencies in half 2 to help offset higher cost to serve. On Slide 18, looking at more detail in EMEA sales growth. The chart here provides some prior year revenue growth comparisons for the region, showing annual revenue growth of generally around 4% to 6%, with the region consistently delivering both volume and pricing growth. Notably, the mix of price and volume has shifted, with revenue growth in the prior year weighted to volume growth, reflecting both COVID-19 and Brexit-related surges in demand, and revenue growth in the current year is weighted to pricing reflective of the higher operating cost environment and cost -- with cost increases, including higher transport and fuel costs and increased European pallet heat treatment costs post Brexit. In terms of the half 2 outlook, we’d expect revenue growth to be driven by both volume and price, with the increase in revenue weighted to pricing, reflecting the operating environment driving the higher cost to serve. Turning to CHEP Asia-Pacific on Slide 19. The pallets business in Australia has been particularly challenged with pallet availability in the first half due to increased stock holdings across supply chain and longer pallet cycle times. This resulted in a material reduction in the level of pallet returns relative to historic norms in the half, which in turn reduced availability of pallets to support demand. We have increased pallet purchases over the last 12 months and have also taken actions to improve the efficiency of the pool and enhance asset recovery processes to improve availability. Despite cost and availability challenges constraining issue volumes in the region, pallet revenue grew by 3%, with increased daily hire fees reflective of longer cycle times. In addition to pallet revenue, RPC revenue also grew by 18%, reflecting the rollout of a new RPC contract which commenced during the prior year. Underlying profit growth of 15% includes delayed repairs and handling costs associated with the lower pallet returns. The business is also cycling a prior year one-off site compensation, which was partly offset by increased asset compensation income in the first half. The business has also continued to invest in the service center networks and capability to support both the pallet and RPC businesses, with efficiencies from these investments also contributing to the first half earnings and overall returns. In terms of the second half expectations, we anticipate the pallet availability disruptions and higher inventory holdings across supply chains are likely to continue, and we expect increased pallet purchases in the second half to support customer demand. Turning to corporate costs on Slide 20. The increased cost of $38 million includes $34 million of transformation investments, made up of short-term transformation costs of $24 million, $5 million of increased investments in ongoing digital initiatives, and $5 million increase in costs related to IT and -- technology investments to support our transformation ambitions. The year-on-year increase in corporate costs also includes $2 million related to Brambles’ share of MicroStar after tax loss. In terms of half 2 considerations, short-term transformation costs are expected to remain in line with the first half costs with full year short-term investment costs expected to be around $50 million, which is in line with the guidance provided at the 2021 Investor Day. Other corporate costs are expected to increase relative to the first half ‘22, largely reflecting increased investments in ongoing Shaping our Future program costs to support the delivery of transformation benefits and also reflects the usual weighting of corporate costs to the second half of the year. Turning now to cash flow on Slide 21. In FY ‘21, we reported positive free cash flow after dividends of $341 million and also highlighted that this included $215 million of timing benefits expected to reverse in FY ‘22, with FY ‘22 free cash after dividends previously guided to be an outflow of $200 million. Free cash flow after dividends in the first half was a net outflow of $148 million and included $115 million of reversal of FY ‘21 timing impacts related to deferred CapEx purchases and tax payments. Excluding the timing impacts, finance costs and tax payments were broadly in line with the prior year, while dividend payments increased by $22 million, reflecting a $0.015 increase in the FY ‘21 final dividend payment compared to the FY ‘20 final dividend payment. Year-on-year first half cash flow from operations was down $261 million due to higher pooling CapEx, including $270 million of pallet price inflation and also reflecting the cycling of high levels of U.S. pallet plant inventory in the prior year. The first half increase in pallet purchases also reflects $80 million reversal of timing benefits from FY ‘21 and increased pallet additions to support demand and in response to lower levels of pallet returns. The impact of higher pooling CapEx investment spend in the first half was partly offset by higher earnings and lower non-pooling CapEx spend. On a full year basis, due to the continuation of extraordinary lumber inflation, we now expect FY ‘22 free cash flow to be a net outflow of $350 million which is an additional outflow of $150 million on the previously guided-to outflow of $200 million, with increased lumber inflation, expected to be partly offset by higher earnings. Finally, turning to the balance sheet on Slide 22. We continue to have a strong balance sheet and conservative net debt positioning, enabling the funding of increased dividends and the continuation of the share buyback program. At the first half, we have $1.1 billion of undrawn committed facilities and a cash balance of $194 million, with a conservative net debt-to-EBITDA ratio of 1.37x. Despite the lumber inflation and revised full year free cash flow outflow guidance, we would expect the full year to remain well within our BBB+, Baa1 ratings and well within our financial policy of net debt-to-EBITDA ratio of under 2x, and be well placed to invest for growth and transformation as well as being in a position to continue to pay dividends in line with our stated dividend policy. I’ll now hand back to Graham for an update on our Shaping our Future transformation plans.

Graham Chipchase: Thanks, Nessa. Turning to Shaping our Future transformation program, which supports our aspiration to transform the way the world moves goods, using insights from data to enhance our customers’ growth and to pioneer smarter, more sustainable regenerative supply chains. Through Shaping our Future, we are taking a twin-track approach to both optimize our core business through asset efficiency, network productivity and business process simplification, while building the Brambles of the future by digitally transforming the business and customer experience to deliver value for our customers, shareholders and employees. I am pleased with the progress we’ve made with the implementation of our transformation initiatives across the organization. You may recall, we established a scorecard to track and report our progress. As you can see, we are tracking according to our plan on digital, business excellence and sustainability, but market-related headwinds have impacted 6 metrics, which I’ll now touch on. In customer engagement, our NPS results for the first half of fiscal ‘22 are not showing the improvement required to be on track for the multiyear goal. That is not surprising giving the wider economic conditions and the well-publicized challenges with supply chain disruption and availability. We are working hard with our customers to mitigate these disruptions, and we recognize the pressure this is putting on their ability to serve their customers. Similarly, our net volume growth target was impacted by strong COVID-19-related demand in the prior year and pallet availability constraints. As Nessa mentioned, lumber inflation is significantly increasing the cost of new pallets, while industry-wide pallet scarcity and disruptions to global supply chains resulted in extended cycle times and lower pallet returns in the period. These dynamics have impacted our progress with both our pooling CapEx-to-sales ratio and uncompensated losses reduction targets. As I will outline shortly, we have a comprehensive asset productivity strategy, which we are implementing as part of the transformation program, and we’re making good early progress with the expectation for a bigger impact as we scale and roll out a combination of pricing, asset collection and digital solutions to support the efficient use of our assets across supply chains. Under network productivity, the rollout of integrated repair sales across our service center network is behind plan due to semiconductor shortages that are well reported across industries around the world. Progress towards our target of 40% of management roles held by women plateaued during FY ‘21 and early 2022, largely driven by decreased mobility due to lockdowns. In recent months, this has improved, and I’m confident we’ll soon be back on track. Slide 26 sets out how we are aiming to transform our customer experience. You may remember that we talked about this at our Investor Day in September. We start from a North Star view of how we want to support our customers to be successful in their businesses. The role that our teams play in making that happen and the power of partnering with our customers to create smarter and more sustainable supply chains. To deliver that, we are focused on 3 pillars of value. Most immediately, effortless customer experience; second, ensuring that Brambles is the natural partner of choice today and tomorrow; third, looking further ahead, collaborating with our customers and other partners to create the regenerative and digitally enabled supply chains of the future. And to achieve this, we have identified the 2 underpinning pillars

Operator: [Operator Instructions] Your first question comes from Jakob Cakarnis from Jarden Australia.

Jakob Cakarnis: Just 2 quick ones from me. Graham, maybe you could start. Could you just talk to some of the competitiveness that you’re seeing in the global pallet market? And specifically there, maybe in your comments, just reference what you’re seeing from white and recycled wood in The U.S., and then anything you’re seeing on Continental EMEA that’s potentially changing or evolving into the second half, please?

Graham Chipchase: Sure. Thanks, Jake. So I mean, I think we’re not seeing any material change in market share. So I think things are stable. And the course of the reason for that is everybody is struggling to get hold of pallets. Now I think without wanting to sort of be too bullish about it, we’re in a pretty good shape because of our size and, I think, the strategic investments we’ve made both in The U.S. and across -- actually across the world in terms of investments with sawmills and setting up pallet manufacturers and sort of trying to ensure that we’ve got the resilience to cope with some of these dislocations. So I think if there were to be a prolonged period of difficulty, we’re probably in better shape than anyone else to be able to support our existing customers and maybe then start looking at growing into other areas. But I think at the moment, if you want sort of the summary position, I think there’s not much change. We’re seeing still our customers -- sorry, our competitors be very, very disciplined, no one is trying to do anything irrational. And we’re just trying very, very hard to get pallets available and service our existing customers.

Jakob Cakarnis: And just the second one for Nessa, just on the uncompensated losses. You’ve spoken in the past about the transformation, delivering around a 30% reduction, and there’s comments today talking about improving asset efficiency and collections. Just wondering what needs to be accelerated, just noting in the slide deck that you are behind plan. Are you seeing any structural changes in how customers are using pallets that could make that recovery of uncompensated losses harder in the future?

Nessa O’Sullivan: Let’s about uncompensated losses, more that we’re going to this dynamic that people have moved from having just-in-time inventory to just in case. So we’re seeing a lot less pallets coming back than we would normally have. I think with the increased scarcity of pallets and the value, it’s fair to say that there is more unauthorized reuse of pallets where people may be using -- taking our pallets. We would expect over -- that as supply chains rebalance, that we get more pallets back. We also expect that while people might use them in a non-compensated way that they end back in flows and there’s a portion of those that we have the opportunity to recover as things get rebalanced. But we are saying, look, technology can play a big role in us getting smarter about how we pick up pallets, about improving the efficiency of the asset pool and how we can then actually collaborate with customers and other participants across the supply chain so they benefit as well with more efficient flows. But just the current dynamics with scarcity of pallets, longer dwell times and our inability to replace all those pallets instantaneously really means that the current situation is not really reflective of what where we would expect to be over time. And if you have a look at the CapEx to sales, while we say we’re behind on some of those initiatives where we would have liked to see more underlying change, we’re actually not really off in terms of where we had guided to for this year in terms of CapEx to sales. It’s really more inflationary driven. But we’re certainly not declaring victory because we haven’t bought all the pallets we would like to buy to meet our customer demand. And I think what we wanted to communicate is we see this as a critical piece of how we drive improved asset efficiency and improved cash flow in the business over time. We’re honest. Graham has explained a whole range of initiatives that we have in place, and we’d expect to see progressive improvement. But market dynamics are playing a role in terms of inefficiency, and we need to see that rebalancing to get into a better place.

Operator: Your next question comes from Anthony Moulder from Jefferies.

Anthony Moulder: If I can start on pricing, obviously, very strong pricing in the half as pallet availability remained tight. Outside of pricing for the higher loss lines, is there a mechanism for pricing to revert for customers when availability does improve? Or just should we think about this as the new high watermark for pricing?

Graham Chipchase: I think I’ll go back, Anthony, to some of the things we said, I think, nearly 2 or 3 years ago about what are the environments where you could expect a lot of support for a higher pricing environment. And I think there are 3 things. One is you need to have rational competition, which I think we’re seeing and have seen for some time. The second is there needs to be a balance between supply and demand. And if anything, a slight sort of shortage on the supply side, which, of course, we’re seeing significantly at the moment. And then the third one, which we said some time ago was, it would be good to have a bit of cost inflation. Well, of course, we’re seeing that some in extreme examples now. So if you put all those 3 things together, there’s no reason to suppose that the support for elevated pricing is not going to continue for some time. Now having said that -- and I think when you look at the split between how we have increased prices, we’re very clear that some of it is through the surcharge mechanism, which absolutely will reverse when the appropriate -- the underlying commodity price goes down. But the general price increases that we’ve been putting through the business over the last few years, those are largely there to reflect an increase in cost to serve in terms of complexity of supply chains and us having a better handle on the relative cost to serve for higher risk lanes versus lower risk lanes. So there’s no reason that those would go down. The only thing you would anticipate is if you start having irrational competition of massive surplus of pallets in the market. And then, yes, that would put pressure -- downwards pressure because, of course, you can imagine the sort of the competitive dynamics changing. But we don’t see that happening in the foreseeable future. And our objective is to continue to make sure that we are recovering cost to serve and inflationary costs. And at the same time, we’ve got to recognize that our customers are facing a huge amount of pressure at the moment. So what we’re trying to do with on that front is whilst desperately trying to keep them supplied as best we can given the scarcity of pallets, also ensuring that we’re doing our best on operational efficiencies so that we’re not passing everything through to our customers and trying to find ways of using technology to make the whole supply chain more efficient, which will clearly will benefit everybody. So I think it’s a long-winded answer of saying, no, I think what we’ve achieved so far apart from the surcharge piece will be here to stay. But being -- clearly, it’s quite a quite complex situation. I think the other thing that’s really important and we’ve said this before the recent sort of shortage of pallets, we must also start showing our customers that we’re delivering value in other ways, so to justify our premier position and sort of the other value we give them or describe being large and having the best network in the industry. So I think that’s where I stand on that.

Anthony Moulder: Very good. I guess related to that, the surcharges offsetting that higher cost to serve, but the higher cost to serve [indiscernible] of the efficiency benefits that you’re delivering, at what point do you think that it’s appropriate to share some of those efficiency benefits with customers?

Graham Chipchase: Well, let me start with the surcharge piece, it doesn’t reflect the higher cost to serve. The surcharge piece is purely to offset the inflationary elements of things like fuel and lumber. So the time when you start sharing things with customers, we still think that we are trying to make an acceptable return on the assets and investments we’ve made in the business. And so for example, the return we said 3 years ago that the investment we made in automation in The U.S., we were making that with the capital we had been reallocated from the sale of other assets. And we felt that, that was a benefit that we needed to keep within the business to offset the general change in the structure of the business and our greater understanding of where the costs were. So I don’t think we think we have to give that back at any time. And Nessa, if you want to add on to that?

Nessa O’Sullivan: Yes. Look, the other comments I’d make is that the investments that we’ve made across The U.S. in the last 3 years have added 15% to 20% capacity to our network. And we knew shorter pallets then have to move things around a network, having capacity in different spots has enabled us to service our customers much better than we otherwise would have. We also, over the last 3 years, if you look at the Australian market, we’ve reinvested in sort of the older sites. We had a lot of sort of 20-, 30-year-old sites that we’ve reinvested in. We’ve reinvested in new RPC facilities. So we’ve actually done a lot to add more capacity and also to support our customers. And they do see the benefits of that. The strategic partnerships that we had for lumber gave us access to more lumber than we would have otherwise got when lumber became really, really scarce. And some of the other changes that Graham is talking about where we’re working with customers, they will see the benefits of these investments where we’re able to communicate more directly with customers and help solve problems. So there’ll be more on that sort of customer communication and value as we go through full year and into next year. But customers are already seeing benefits from those investments we made. And I think it’s important to note that.

Anthony Moulder: Very good. And last one for Nessa, if I could. The $25 million of deferred maintenance, I think you called out $15 million in the Americas. Is the expectation that that’s caught up or expensed in second half ‘22? How do you think about that as part of the guidance, please?

Nessa O’Sullivan: As part of the guidance, we’ve assumed that materially reverses in the second half. But obviously conscious, it may not all reverse depending on the level of returns that we get. But absolutely, we have factored that in. So as we think about the first half, we sort of go, well, we’ve had a range of inefficiencies because we didn’t have enough pallets. That’s added costs. So we rehandle more pallets when you have less safety stock, et cetera, so we did have added costs. But yes, absolutely, we factored in the majority of that reversing in the second half.

Operator: Your next question comes from Anthony Longo from JP Morgan.

Anthony Longo: Look, I just had a quick question on the loss rates in The U.S., which looked to increase. Just wanted to get a sense as to what your control ratio is on the pallet pool in that region.

Nessa O’Sullivan: Yes. So as you know, we don’t publish the control ratios by region. But you can tell, obviously, we have shown how much is of the increase. So of the $35 million loss increase, we’re saying that’s predominantly The U.S. If you to look at a split, sort of 80% of the cost of the increased IPEP is really in the U.S. business. And what we’re seeing in there is we’re seeing much lower levels of returns of pallets. And how we provide an expense for this is if they’re out there for longer, that we reflect and we provide for a loss anticipation, that’s our anticipated loss rate. So look, we would expect as we go into the second half and see some of the initiatives, to see some improvement in loss rates. We generally have more of the audits that give us the surplus results weighted to the second half as well. But obviously, that remains to be seen because we are dealing with unprecedented times. And we’ve seen a little bit of an improvement in the flow-through ratio post the first half, but frankly, we would expect to see that seasonally post the Christmas period anyway. So too early to call whether we’re seeing the needle moving on that yet. Obviously, we’ll talk more about that at the full year. I think what’s important for the market and everybody else to see is that we recognize that now as a cost to serve. So if you look at the charts we’ve shown with inflation increase, we’ve added that in as an increased cost to serve, and that will be part of what we look to recover if that’s an ongoing cost of doing business. Meantime, we’re working on a lot of self-help to reduce those losses, working with recyclers, working with retailers and customers and taking other actions to drive improvements.

Anthony Longo: That’s great. And then second one from me, if I may. Just in terms of the overall CapEx, I mean, I appreciate pooling CapEx to sales, now this is going to be quite high this year and into the second half. But how should we ultimately be thinking about your FY ‘25 targets in that regard? Are you still on track for that? And then I guess as another point, looking at the supply chain and maybe with the pallet shortages and maybe incremental CapEx that you’re spending now, to what extent are you effectively bringing forward some of that CapEx and growth in the pool.

Nessa O’Sullivan: Yes. So if I think about them, we’re on track in terms of FY ‘25 ambitions? Yes, at this point, we think there’s a lot of cyclical noise in particular market, I guess, circumstances, the current environment is not conducive to running an efficient pool. I think over time, everybody would expect that supply chains will move to being efficient as opposed to having excess stock holdings. And the current supply chain risk, we wouldn’t expect to persist. So we certainly don’t look and think that some of the current disruptions relate to us or have some sort of a flow through to FY ‘25 not delivering on the ambitions. As you think about the current year and where we are, we’ve guided with the pooling CapEx that we expect CapEx inflation to remain above what we previously guided to. So that’s why we’re saying, assume the second half. Basically, CapEx to sales for pooling is essentially in line with the first half. We’ve also guided to just so as you can kind of think about where you’re going, that we wouldn’t expect to see the impact of rebalancing on lumber prices to happen until the second half of FY ‘23. But that all remains to be seen and something that, again, we’ll continue to update the market on what are we seeing, what do we expect to see. But we’ll continue to make sure that we factor those increased costs of operation into how we need to price. But obviously, what you don’t do is in the year where you see your CapEx go up for a 10-year asset, you don’t expect to recover that in the year it happens. And in terms of non-pooling CapEx, you should expect that we will have more expenditure as we go into the second half as we do more of the automation. And as we go into next year as well, there will be additional spend in some of that automation investment. And as you know, we’ve got a very good history of getting really strong returns from that investment.

Anthony Longo: Absolutely. And look, sorry, I’m -- final one for me. I just wanted to just get confirmation on the CHEP Americas margin comment. So with respect to The U.S. being largely flat, I just wanted to get an understanding of what specifically drove the increases in Canada and LatAm combined? Or is that mainly the price that you were getting through Latin America? Or is there anything else that we should be aware of?

Nessa O’Sullivan: It’s the combination of pricing. It’s also a combination of operational efficiency and a combination to -- we’ve used a lot of data analytics in Latin America and Mexico. We’re just sort of taking that business from being a user of cash about 3 years ago, $10 million, to now kicking out cash positive about $40 million to $50 million a year. And we’ve been using a lot of data analytics there that’s continued to sort of help that business to be more efficient. And while it’s a developing country, so you always have higher CapEx to sales in those particular regions, that business has continued to actually eke out ongoing efficiencies as well as increased pricing reflecting the inflation environment.

Operator: Your next question comes from Andre Fromyhr from UBS.

Andre Fromyhr: Just a question regarding the effective price you’re paying for pallets at the moment and the choice around, do you grow or do you not grow. We see that the sales growth was heavily driven by price with a neutral impact on volume. How much of that is because there’s volume growth out there that you’re choosing not to pursue? Or how much of it is because even if you wanted to grow, you basically can’t get enough pallets to serve it?

Graham Chipchase: So I think the first thing to say is, if you look at -- I mean, you’re right, obviously, the majority of the revenue growth in the first half is pricing, but there was volume growth as well. And I think we are still seeing some conversions and, in some markets, some like-for-like growth. The issue really is, and particularly in The U.S., it’s highlighted where we’re cycling really higher than normal growth over the last 18 months because of that COVID-19 impact and much greater at-home consumption. So it’s a bit of a sort of cycling impact. Yes, I think, and particularly in the first half, the beginning of the first half, that the pallet shortages we are experiencing in The U.S. back then and now it’s a bit more widespread. Our priority had to be to try and make sure that our existing customers -- we’re delivering product to their customers. But you’ll have seen a little bit in places like The U.S., there, we’re beginning to start seeing a bit more conversion growth even though the organic growth is negative on the cycle. In Europe, we’ve been able, and as Nessa talking through our slides, there was still good growth. So as an overall point, we’re saying, yes, we’re returning back to a little bit of growth. We will think the organic growth point is going to be driven as much by things like economic circumstances, a return to a more normal mix between at-home and not-at-home consumption. So getting us back to our normal levels the -- and we -- as Nessa said, we would expect that pallet scarcity point to start moderating halfway through FY ‘23. And therefore, we’ll be able to go back to having enough pallets to service both ongoing customers and going after growth. So it has moderated the ability to get new growth, but I don’t think it’s the major factor going forward. I think there are other things at play.

Andre Fromyhr: Okay. And then just on the transformation program. I guess we can see the dollar values around the short-term spending and the digital spending, but the benefits of the program a little more directional. To what extent should we expect the transformation to actually deliver or like contribute cash benefits in FY ‘22? Or are there any already in the half just gone?

Graham Chipchase: I think in terms of the cash benefits in fiscal ‘22, I mean, a couple of things to say there. One is when you -- if you go back to the Investor Day, we always said that this -- particularly the investments we’re going to pay -- we’re going to return not in the first year, it was always going to be going to ‘23, ‘24, ‘25, and I don’t think anything -- we would say there’s anything that would change our opinion on that. I think -- but the other thing to say is that you’re looking at the impacts on this year on cash flow, the biggest impact by a country mile is lumber inflation. So we are seeing some, as you’d think, described as directional benefits in terms of greater asset returns from some of the initiatives we’ve been taking, using some of the transformational, underpins around digital or data analytics, but it’s tiny compared to the immediate impact of asset -- of lumber inflation. But what we are saying is we are very confident from the results we’ve seen in the pilots that, in the medium term, which you can probably read ‘24, ‘25, if you want to have a punt, that some of those things are going to really make a big difference. And we do say and we said that we expect to see a material impact and a step change impact in asset efficiency in that medium term. So I don’t think we’ve changed our view about the impact or the phasing of the impact. I think it’s just at the moment, hard to show anything material because of the other factors that are dwarfing them at the moment.

Nessa O’Sullivan: Yes. And I think if you look at the overall cash, I think you have to look at after dividends, free cash flow last year was a positive $341 million. And then you reverse out and just say, well, lumber inflation by itself, if that had been the only add in there, that was still $270 million. That’s before you go into reversing of $80 million. So really, you have to take into account we’ve had more earnings that have contributed to cash flow, and we’ve managed to offset a lot of the impact despite the $270 million. So I think it’s really important that you look at the context of how strong the cash flow was last year because we couldn’t get all the pallets we wanted. $80 million has gone back in as well as a $35 million tax payment that was timing from last year, and you’re adding on all this lumber inflation. So there’s a fair bit of self-help in there. And you wouldn’t expect, with asset prices escalating from a cyclical commodity change for us to be able to recover that all at once when you see that kind of escalation. I just think it’s important you have that context.

Operator: Your next question comes from Paul Butler from Credit Suisse.

Paul Butler: Good morning. I had a few questions, if I may. Just firstly talking about the just-in-case versus the just-in-time, what proportion of additional demand is that driving? And when things normalize, which I understand you’re saying is hopefully in FY ‘23, is there a risk that you end up with more pallets than you need? And how do you manage that risk?

Nessa O’Sullivan: So thanks, Paul. So first of all, the just-in-case versus just-in-time. The just-in-case really started happening more than 18 months ago with Brexit, and we didn’t see it unwind. And then we saw a lot of volatility with rundowns of stock. And then as COVID went on and Omicron hit, more and more people are sort of saying, actually, we’re going to hang on to increase stock until the second half of FY ‘23. So a lot of major retailers have said we expect to hold additional stock. So in terms of your question then, do we run the risk that we love loads of extra pallets. Well, this -- if you think about it currently, we currently don’t have enough pallets or safety stock. We’re trying to rebuild our safety stock. So if it all change tomorrow and we got pallets back, that would allow us to go after net new business. And while I don’t have a crystal ball, I’d say there’s at least 1 to 2 points of annual volume from us not having enough pallets relative to where demand would be. So we’d be able to go after new business. We’d be able to rebuild plant stock. Don’t expect it all to unwind all at exactly the same time, but it would give us a bit of a CapEx holiday as we went. And when you think about that normal replacement for scrapping, et cetera, that we’ve got, we currently don’t see that as being a particular challenge in terms of the unwinding. And as you’re able to service more, sure you might get back some pallets back, but we actually think that, that will enable us to service new demand that we haven’t been able to get to.

Paul Butler: But just to clarify, the additional demand due to the just-in-case instead of just-in-time approaches, would that be sort of single-digit percentages of your pallets that are being used for that? Or...

Nessa O’Sullivan: So Paul, can I -- maybe to think about it this way. So to service the same amount, we now need more pallets because the just-in-case means people hang on to the pallets for longer. So it’s not necessarily -- so you have a demand, but you don’t get the pallet back. So we need more pallets to service the same level of demand. So I think you got to look at it both ways, that as you get pallets back, it allows us to have a more efficient pool as opposed to what volume growth are we not getting. As I said, I can’t do an exact science, but maybe there’s 1 to 2 points of growth -- volume growth that we don’t guess because we haven’t got as many pallets. But you have to think about that longer cycle time as being one of the key challenges for us as well.

Paul Butler: Yes. Sorry. What I’m trying to understand is what’s the percentage of additional pallets that you need to service that, that higher demand?

Nessa O’Sullivan: Well, usually, if we have a percentage growth, you’d have a percentage, your CapEx to sales, you’d have an increase in your CapEx to sales of about 1 point as well. That’s sort of roughly, roughly, not again, not an exact science. And increase in cycle time, if you look at sort of in theory that might help you and I’m not quite sure how you’re modeling this, but if you saw that we’re going an increase, we had -- we needed 4 million more pallets in the first half just to service the increase in cycle time. In terms of European and other growth, we needed another 2 million. And we had 3 million from the -- 3 million more pallets was that reversal of the $80 million, which was just catch up to get a little bit more safety stock. But we’re still not caught up to have more plant stock.

Paul Butler: Okay. And if I could ask on the digital transformation on Slide 29, you’re talking about rolling out the productivity analytics to 20 markets this year and 30 markets next year. What proportion of your business does that cover?

Graham Chipchase: Well, it’s not -- we’re not doing it on a couple of the very big markets, but it’s got to be -- I’m guessing now, it’s got to be 1/3, I would think, at least. I mean at least 1/3.

Nessa O’Sullivan: Look, generally, what we want to do is get coverage on this diagnostics really across all the major markets. But to what extent and percentage that covers, you do a trial for us with a smaller number and then you go to a progressive rollout as you test various hypothesis about what you need and what you roll out.

Paul Butler: Yes. Okay. And just one last one. I think on Slide 23, you were talking about targeting the high cost-to-serve markets in Europe and The U.S. where you were hoping to address or put through price increases for 60% of flows in Europe and 40% in The U.S. Those percentages, are they the percentage of the flows that you see as high risk? Could you just explain what those are?

Graham Chipchase: For example, in The U.S., it’s 40% of the NPD flows.

Nessa O’Sullivan: So I was just looking 23 is a divider page, so I was looking a little puzzled at Graham as to what you were referencing. So yes. So yes, it’s exactly that. It’s increased pricing on higher risk lines that you have to progressively price and -- to get to that percentage. So thank you, Graham. I was looking very puzzled here.

Paul Butler: Okay. And does that mean there’s another 60% of flows where you can put up prices in FY ‘23 and onwards to address that risk?

Nessa O’Sullivan: So we have -- so internally, yes, we’ve got milestones that actually are by quarter about the coverage that we want to get to. So some of these are flows that are under contract and we’ve got a 3-year contract cycle as well. So we can’t get to all of these straight away. So yes, we have set out and we would expect to, Graham referenced, to be over 40% by the end of this year and then we have other targets that get us to a higher percentage. But you shouldn’t assume that in the next 2 years, you get to 100%.

Operator: Your next question comes from Sam Seow from Citi.

Sam Seow: Just quickly on the 30% reduction in uncompensated pallets. Are we more likely to see that in CapEx or OpEx? And could you perhaps quantify that, I guess, at current lumber prices?

Nessa O’Sullivan: So when you’re talking about -- you’re talking about the increased IPEP that we’re seeing because of a higher loss rate and where do we see it. Is that correct?

Sam Seow: In the scorecards of the digital, the 30% reduction in uncompensated pallets.

Nessa O’Sullivan: Yes. Okay. Yes. So where we see that coming through is that, that helps with the cash flow outcomes as you go throughout the years, the asset efficiency objectives are really -- so when you get into the helicopter, we really don’t want to get compensations from customers for lost assets. We just don’t -- we don’t want to lose assets. And so a big piece of what we want to do with better information is collaborate across supply chain so that we get much more efficient returns. But yes, the expectation would be then lowering that CapEx burden year-on-year so that you have lower loss rates and better efficiencies within pools because of the use of technology in digital and shared information and also shared benefits, because that creates a lower cost to serve, which then factors into the pricing models that we pass on to customers.

Sam Seow: Great. And I guess on CapEx, are we there? Obviously, increasing your CapEx as cycle time slows. But I think -- I guess as things normalize, can you give us an idea if we should be expecting a CapEx holiday down the track? Or how we should think about that?

Nessa O’Sullivan: Well, look, as supply chains unwind, you’d expect to get lower numbers of pallets stuck in warehouses and people with stock on it. You’d also expect some -- in some cases where people might have hoarded stock, you’d expect there to be more efficient flows. So yes, there could be a bit of a benefit. I’d like to think that it opens up the opportunity more for us to go after growth. Even in our most developed markets, we still have material areas of opportunity for growth. You think about the U.S. market, half of it is pooled and half of it is unpooled, and we still see that there’s opportunity. While not all of it’s addressable, we still see that there’s more growth opportunities. And net-net, it’s just -- and that’s why over the longer term, the CapEx to sales ratio is a good 1 to manage it because we’d rather have more pallets available to go after new business. But yes, we would expect to see that percentage of CapEx relative to the sales go down.

Sam Seow: Great. And then I guess quickly on automation, it looks like the rollout has been slightly delayed. Can you give us an idea when you expect, I guess, the bulk of that margin benefit will roll through?

Graham Chipchase: Yes. I mean so it wasn’t -- whilst the program for this year has been delayed, it hasn’t really got a material impact on the margin for this year or even next year. It’s going to be a couple of years out. So if it’s delayed, and we don’t know how long it’s going to delayed for, I don’t know necessarily what the security of supply on both and it’s not just semiconductor chips for the machinery, it’s also there’s a shortage of cameras driven, because they’ve also got chips in them as well so -- as well as the lenses, I think, are under a high demand. So we don’t know for sure. But if it’s -- we’re not anticipating it being materially delayed, because at some point, the flow of products will become easier and we’ll get back on track. So I think if you’re looking at taking a slightly longer-term view, we’re not concerned about it. But just looking at that FY ‘22 target, which we’re just calling it out, but there are delays.

Sam Seow: Does that impact the CapEx profile?

Graham Chipchase: It’s not material, lumber inflation.

Operator: Your next question comes from Owen Birrell from RBC.

Owen Birrell: Graham, I just had a quick question on that Slide 25, which is the Shaping our Future matrix that you’ve got there. Just looking under the customer segment, you referred to, I guess, the underlying drivers of revenue growth, which gives you that sort of 5% to 7% revenue growth. And based on the last few years, that sort of implies a 6% to 8% roughly profit growth. Now I noted there that you’ve written that, that customer segment delivers 55% of the underlying profit growth that you’re expecting, and that there’s an additional 45% of underlying profit growth coming from the asset efficiency and network productivity and so forth. So can I -- am I reading this correctly in that your expectation through this plan is to deliver circa, at what, 12% to 13% profit growth on the back of 5% to 7% revenue growth?

Graham Chipchase: I think what we said was if you go back to the Investor Day that we’re looking at 10% plus value growth, and that was driven off of -- yes, I think what we effectively said was high single digit. If we had mid-single-digit revenue growth, it was high single-digit earnings growth or profit growth. So we didn’t commit to anything specific, but we did say 10% plus. I think I probably ought to leave it at that instead of getting myself into too specific guidance. So I wouldn’t necessarily disagree with your analysis so far.

Owen Birrell: Excellent. Now I’m just wondering, with some of these metrics, it’s obviously over, what, another 3 years, 4 years time horizon. Are we going to be able to measure you against some of these? I mean I’m just wondering, are you going to be able to provide us with some data such as uncompensated pallet losses so that we can actually measure you against these metrics?

Graham Chipchase: I mean -- so yes. When we -- first part, the scorecard, clearly, we were trying to show people what the FY ‘25 numbers were, and we have got detailed milestones by year going out to that point. Now our intent is to start -- as some of these programs become more developed, we’ll start tracking the actual metrics against each of those milestones. So yes, that’s the plan. Because I think it’s important, as you rightly say, some of these initiatives you won’t necessarily see the benefits for several years. We’ve got to be able to show you that there’s a road map to get from now to FY ‘25, and there are points along that road, which we can check in on, and that is the absolute intention of having a scorecard and quite a detailed scorecard. That’s why we spoke for 50 minutes rather than normal 35 because I think it was important to go through what is on the scorecard. And I think we’ll try not to make it quite so long next time. But I think giving you that detail on each of those milestones in some sort of granular level is important.

Owen Birrell: That’s right. And just one on -- still on the scorecard. Under the sustainability in the industry section, there’s a mark there which says 30% recycled or upcycled plastic in new closed loop platforms. So I’m assuming plastic pallets. Just wondering where -- I’m assuming at this point that you’re 0% recycled on closed loop platforms. And just wondering in which markets those closed loop platforms actually exist?

Graham Chipchase: So if you remember, I think it was September, we talked about the dolly system in The U.S. -- in Europe which had upcycled plastic in it. So that’s what we’re looking at, those sorts of things. It’s not all plastic pallets, for example. So at the moment it’s quite small, but the plan is we’re delivering new plastic products, we have to start looking at a high degree of upcycled or recycled content.

Nessa O’Sullivan: We’re also looking at some innovation that we’re not ready to talk about yet, but there is something that’s been quite exciting that we might apply more widely across the total pallet pool that will help us with damage rates that we think could have a component of this that could help us as well. So in the background, we have a number of different ways to get to that target of upcycled content that I think will be pretty good in terms of taking sustainability credentials, but also really helping us with the overall business model.

Owen Birrell: Excellent. Just one final question for me, given the events of yesterday. Just wondering if you’ve got any assets or -- in the Ukraine or in the surrounding regions?

Graham Chipchase: None in the Ukraine, and we’ve got a very, very small business in Russia. So nothing to be -- nothing it’s material. I think just to expand on that a little bit, for us, what we’re looking at is clearly the impact on global fuel prices, oil prices, because that potentially has an impact on us, as you can imagine. But that’s something that -- I don’t think anyone can make a judgment on that based on just the last 24 hours. We’ll have to keep an eye on that going forward. But the actual Russian business we have is not big.

Owen Birrell: Price cost inflation gets passed through?

Graham Chipchase: Yes.

Operator: Your next question comes from Cameron McDonald from E&P.

Cameron McDonald: Just a question on the increased CapEx to start with. Can you just confirm that, that is all pricing, you’re actually not buying additional pallets versus your expectations from 6 months ago?

Nessa O’Sullivan: Yes. Look -- yes, I think it is important to note, if you were sort of looking at where we are, 3 million of the increase is the reversal of the pallets we couldn’t buy last year. That’s the sort of 80 million. The increased cycle time has also added 4 million that we’ve had to buy. So there is increased pallets. And you’d say, a bit between Europe growth and higher losses in The U.S. is another couple of million. So I’d characterize the sort of 10 million as a combination of the reversal, increased cycle time, and some of those extra losses in Europe is probably how I’d characterize it. But of the $270 million increase in inflation, that’s all pricing. That’s just taking the number of pallets we bought and looking at the weighted average cost of pallets last year and what’s the weighted average cost of pallets this year. And if you wanted to kind of think about that even in split, I know how you guys all love numbers, as do I, and you go by 20% of that is related to sort of new pallets and 80% of that inflation is the like-for-like same pallets.

Cameron McDonald: Okay. And...

Nessa O’Sullivan: You probably wanted?

Cameron McDonald: I did. You’ve spoken about the increased cycle times. How -- and I know you won’t tell me what the cycle time actually is, but what is the increase in percentage terms that you think you’ve seen in the cycle time versus what you would expect normally?

Nessa O’Sullivan: Well, I would just take -- not that we published it, but I would just take what’s your total pallet pool and I take 4 million above that, and you might multiply that by 2 to get an annualized and say that might be the percentage increase.

Cameron McDonald: Okay, great. And can I just also get some comments around the -- you’ve said that you’re going to make a decision on plastic pallets for CostCo by the end of FY ‘22. Can I just ask, have your decision -- is the decision framework changed from when you articulated it last time, noting that pallets are much more expensive now, presumably the resin price is trending through the CapEx requirements around plastic pallets? Thirdly, you’ve got -- it’s a lower ROIC that you’re targeting or accepting through the plastic pallets. Your short pallets [indiscernible]. So why -- can you just -- so why have you changed the metrics? And two, if you haven’t, why not?

Graham Chipchase: Well, we haven’t changed the metrics because the metrics were -- we’re not going to do this unless there’s an acceptable return on the investment. We haven’t changed our view on that. And we were pretty broad about the metrics, which were -- it was a very difficult decision if the return on capital invested was 10-odd-ish. It was a quite -- quite a difficult decision. It was between 12 and sort of 15. And above 15, it was quite an easy decision. So I don’t -- and I don’t think that sort of framework has changed. And your comment about resin prices. Well, yes, they have gone up and so wood prices, too. So it’s the relative premium you’ve got to look at, and I don’t think that’s changed materially. Clearly, we have to keep an eye out on forward prices for resin which may not move in the same way as forward prices for lumber. So those are all things that we have to factor in, in making our decisions. But the fundamental metrics and criteria have not changed.

Operator: Your next question comes from Scott Ryall from Rimor Equity Research.

Scott Ryall: All righty. That answered the first one of my 3. So second one, Graham, the -- in terms of the digital stuff that you’ve outlined today and some of the anecdotes around we’ve been able to improve performance and things like that. I guess the big one from the outside seems to be the relative ease of getting pallets back from Wal-Mart. Could you just comment on how it helps you deal with Wal-Mart, please? .

Graham Chipchase: I mean I don’t really want to talk about specific customers or retailers. And as you know, with Wal-Mart, we’ve been working with them very productively and collaboratively over the last few years, there’s nothing particularly new, and we have been using things like smart assets to help us both pinpoint areas of efficiency where we can make the supply chain work better. And there’s nothing new there to report on other than it continues to progress, and we continue to work with them in terms of improving the efficiency and cycle times within that chain. I think what we’re looking at more is the scalability of what we’ve found with people like Wal-Mart already and with territories like Spain and the U.K. and now Ireland. So it’s much more about how can you scale up the learnings and the insights in a smart way from a CapEx point of view, as well as rolling out our capabilities around things like data analytics, so that we’re getting the -- like the strap line we’ve been using internally is we think -- because we always used to think we knew what was going on and I think the Wal-Mart, conversation is a relevant one here, so we know. So we actually do have the data to support the hypothesis that we have or debunk the myth that what was out there. I think as it works both ways. And then -- so we can act. So with the data and with an agreement with our customer or a distributor or a recycler, we have the data and the knowledge to then do something differently. And I think that’s what we’re already focusing on rather than it’s being used specifically with one particular customer, one particular retailer.

Scott Ryall: Okay. Can you maybe just tackle it a different way. What do you believe are the benefits you’ve been able to bring to Wal-Mart and some of -- maybe some other large supermarket chains in -- kind of national in the U.S. market?

Graham Chipchase: I think what we’re seeing is that getting a better understanding of where there are bottlenecks in the end-to-end supply chain, so that we can release pallets and then put them back into the system, that’s a benefit to us and a benefit to the retailer. We are beginning to start looking at things like how can we help give much better insight on what’s going on throughout their supply chain. I mean, Costco, another good example where I think it’s working not only on plastic, but with wood to give them and us a much better understanding of where there are potential areas to speed up what is already quite an efficient supply chain. So it’s just about better insight and being able to get collaboratively with customers and retailers rather than it being us saying we think this is going on, we don’t like it, we’re going to change our commercial terms. It’s a completely different mindset change. It may end up -- we think it will end up with much better results but even if it ends up with the same level of results before we’re doing it in a completely different way with our customers, which I think it’s got to be the right way to go.

Scott Ryall: Okay. And then my last question, there was some speculation about [indiscernible] last week, and I don’t expect you to comment on them specifically. But these types of entities will look at firms that have significantly underperformed perhaps because of long-term things that they’ve set out that haven’t perhaps been -- the value of which hasn’t perhaps been recognized by the market. And I think the post-September Investor Day is a pretty good example of some -- of exactly that. Maybe it’s in -- maybe the response you got to one of the earlier questions is it. But how will you better, I guess, hold the hand of the market with respect to the upsides of the significant spend that you are undertaking to transform and improve your business and your service?

Graham Chipchase: So I mean, I think that’s -- as you say, I try partly to answer before talking about this is why we’re spending a lot more time talking through the scorecard and particularly what we’re doing around customer experience and digital. So it’s important that when we look at the feedback we got from September, I don’t think we articulated well enough what it is we were trying to achieve with the digital transformation and the transformation generally. So we’re trying to address that. And it will take time undoubtedly, and we’ll continue to communicate and go into detail on it. But I also think that there’s an element of people not understanding the risk-adjusted approach we did set out in September about the capital investment. We did say it split into tranches, and I don’t think, for some reason, that really is terribly well understood. So the fact that we are spending the first tranche on stuff that is extremely low risk because it’s automation that we’ve done before, we’ve proven the returns, and we’re very comfortable and confident about the returns, that people should be able to take that and accept that and hopefully give us credit for what we’ve done over the last few years on that. And the next tranche was around investment in smart assets, which is why I spent some time talking about smart assets and where we are gradually proving the value that we think is there through the pilot. And then obviously, there’s a scale up. Now we’ve been trying to say, look, we’re not going to do the scale up unless we see a very clear link to value. So what we’re going to be doing over the next 6 months, not much is showing where we think that value is and articulating and quantifying that value. So that, again, hopefully, will make people much more comfortable about the second tranche. The third tranche was one where we did say, look, this is about customer solutions, which we don’t know what they look like today and did it back in September. We know that it’s going to require some investment in ‘24 and ‘25, but the benefits don’t come until ‘26, ‘27. But we’re also very clear, we will not invest that third tranche unless we see the value. And we may not -- we won’t be able to answer that question for some time. So you might take the capital out of your numbers for those last couple of years or you put the capital in and assume we get a decent return on in ‘26, ‘27, ‘28. I mean that’s the way I’d look at it. I do think that we didn’t do a brilliant job of communicating back in September. We are trying to fix that, and that’s why we’re doing what we’re doing today and we’ll continue doing it. It’s just a little unfortunate that the macroeconomic inflation stuff is swamping. I think what we’re making very good, solid progress on some of these initiatives around things like asset efficiency and the digital transformation. But I think the only real answer to that is time will tell. And we’re very confident, but we understand that people want to see the money rather than us telling them how great it is. So we’ll just have to wait and see and give, as we said earlier, on constant and regular feedback on our progress via the scorecard.

Operator: Your next question comes from Matt Ryan from Barrenjoey.

Matt Ryan: I’ve just got a few very quick questions, predominantly around the situation in the Americas. First question is just whether you lost steady contracts based on price over the last 6 months.

Nessa O’Sullivan: So if we look at our Americas region, you’d expect in any given year that we have to take pricing. There may be some, as we price contracts, that we may not have retained a contract, and you can see there is still a bit of volume growth in there. So look, net-net, no major contracts have been lost, but the normal commercial negotiations occur and you expect to see normal in and outs of some customers, but nothing major.

Matt Ryan: So I guess what I’m pointing towards specifically is, I guess, the shortage of pallets and potentially the balance of negotiations falling into your favor? And I guess, versus history though, is it difficult to see customers moving because of price at the moment? That’s really at the core of my question.

Graham Chipchase: Yes. I think the other way I’d look at it is, whilst clearly, customers don’t like there to be a shortage of pallets and they don’t like the fact that in a high inflation environment, we’re having to raise prices. What we have found, though, is that it’s led us to have a much more regular debate and conversation and collaboration with customers because we have to, to ensure we understand what their daily, weekly needs are by location for pallets. And then, actually, if anything, it’s -- in many cases, it’s strengthened the relationship with the customers. And we have seen contracts being renewed early than expected and extended, because people have said, okay, we may not necessarily like the short-term impact of this, but we do recognize the fact that compared to the competitor base or whitewood in The U.S., you have got the best network. And we know because of your scale, you’re doing strategic things around trying to secure supply as best you can, and we think that’s something we need to rely on in the future. So I mean that’s probably a glass very hard full version of what’s going on at the moment and others would take a different view. But I don’t think I would necessarily say there’s pent-up demand, so ditch us when things reverse. I don’t think it’s like that. I think the fact that we’ve taken the time and spent a lot of time at a very granular level with our customers trying to help them through this is probably done us a bit of good. I’m not saying it’s perfect, but I actually wouldn’t be quite as negative about it as you might want to be.

Nessa O’Sullivan: No, there’s probably more customer wins for both us and our competitors because everybody is in a pallet constrained environment, and you would normally expect both us and our competitors to get some growth from whitewood conversions.

Matt Ryan: Okay. And how do you judge the price that you need or, I guess, the cost to serve in your language for each customer? Is it on an earnings outcome or on a cash flow outcome?

Nessa O’Sullivan: So as you can imagine, we have pretty detailed pricing models. And so even if you just take it very fundamentally, we have areas where we end up with excess pallets and we have areas where we have deficit pallets. If you happen to be a customer who has a lot of flows that are coming from areas where we normally have excess pallets, you’re going to get a better pricing in terms of the cost to serve relative to somebody who’s in deficit market. That’s very, very simplistically, but that’s one factor. Then your pricing also depends on where your flows are going to. If you are having a fair percentage of your flows going into higher-risk lanes, then you’re going to get a higher issue price than somebody who has flows going mainly through participating distributors, which have lower losses. Then there’s a piece of that advantage to the overall network flows and footprint, we also look at what’s the scale of customers and what they bring to us and sort of the value they bring to us. And so look, all those factors come in. So we look at what are the costs and then we look at how many pallets does it -- what’s the efficiency of the flows to those particular -- to the lanes those customers are using? Because obviously, if a pallet has a longer cycle time, then that adds to the cost. So all those factors are inputs, and we update those in a pretty dynamic way depending on what happens on our experience with flows, declarations, et cetera. And this is where technology can really help us to be a lot more dynamic over time and also use that information to help our customers to help us with more efficient flows, which they can then benefit from as well in terms of flowing through to pricing.

Matt Ryan: Okay. That helps. And then my last question is just related to that. And again, just focusing on the Americas for a minute. Do you think that your contract structure is, I guess, nimble enough to adapt to, I guess, changes in cost inflation? I fully recognize that things are very abnormal at the moment. But just wondering whether you’re able to move quick enough or whether this idea of a historical 3-year type contract structure is a little bit too stagnant.

Graham Chipchase: So I think if you think about your question, when you’re talking about are we nimble enough to react with inflation, well, I think the answer is yes. Because the surcharging mechanism is not yet 3 years, it’s more regular than that. So I think that bit of it is covered appropriately. And if you think about the sort of cost-to-serve point, well, the average is 3 years, some of them are not, as you know, some of them are 1, some of them are a bit longer. And I think as long as we shouldn’t be pricing on a short-term change in cost to serve on a long-term contract, I think our customers would not be happy about that at all. I think we have got to look at the pricing model on a longer-term view of what the market model is. So for example, if we felt that there was a systemic change in the business model in The U.S. through -- for example, we’re going from just-in-time to just-in-case, and that was there forever, then yes, we would have to change the market -- the contract structure and it would take 3 years to get to 100%. But you’ve got to look at the flip side of that, which is the benefit for us in having some long-term contracts, notwithstanding that things might change. It’s good to have the volume underpinning the network for a period of time, which is not just a year. So I think you’ve got -- there are swings and roundabouts about it, some having longer-term contracts, as long as in those longer-term contracts, the ability to reprice for things which are changing more -- in a more volatile way, like cost inflation is there, which I -- my view is we’ve now fixed that. We didn’t have that 4 years ago. We do have it now. And I think that’s a major change. And all kudos to our commercial team in The U.S. for being able to get through that and put us in position we’re in today. Because if we hadn’t done that work over the last 3 years, we’d be looking at a very different set of results today than we are.

Matt Ryan: Yes. I guess I’m probably talking more about the stuff that you don’t have surcharges for. So things like lumber on the CapEx side and some wage inflation on the OpEx side. I mean I think if we would have been speaking 12 months ago, both of those things looked elevated and we might have presumed that they might have come down by now. And I think your 2023 commentary suggests that if it stays at these levels, then you could still expect an impact to cash flow. So has your thinking changed at all because of those, I guess, exposures and, I guess, your ability to move quicker than in the way that you’ve just described?

Nessa O’Sullivan: So Matt, a couple of things. First of all, there’s no doubt that the labor becomes more challenging and there has been a scarcity and therefore, more inflation. So for us, it really underscores the importance of continuing on this journey of more and more automation, which is a hedge against future inflation. So even the returns we’ve got are likely to actually be better because we have this, I suppose, cost savings in addition that we would have been exposed to. So I think there is that piece. We also do continue to look at what are the indices that we use in contracts, should we vary them. And in certain contract renewals now, we’ve had slightly different indices that we’re looking at because they don’t always map. You can’t always tell exactly where the cost increase is going to come from and market index may not reflect your cost for different reasons. So we continue to look at, are they the right indices. But -- and as we look at indexation, we have in Europe, for instance, taken additional charges, for instance, for heat-treating pallets because that was a new cost that came in relative to where we’ve been because of regulations post-Brexit. We have also gone back and taken -- instead of just taking indexation on the first of June, we took extra pricing in Europe in October, and there’s extra pricing we’ve also taken in January. So I guess there’s a piece about for customers, as Graham said, swings and roundabouts. We continue to look at it. We continue to turn our mind. Are we doing this as well as we could. And we continue to try different pricing models and different indices to see if they make sense. Obviously, we have to land somewhere that our customers are also happy with and feel that we’re not going to price gouge, but we are very focused on, if there’s a permanent change in cost to serve that we capture that and work out ways to recover it. And you should get some comfort, obviously, from Slide 11 on showing what we manage to recover and how we’re also now kind of grouping higher losses that are impacted by some of the changes in market dynamics, that we’ll continue to look at it that way and challenge ourselves.

Operator: [Operator Instructions] Your next question comes from Justin Barratt from CLSA.

Justin Barratt: Look, a lot of my questions have already been asked, but I just want to ask one. Just in terms of your update on your free cash flow post dividends. I just wanted to ask how we should think about your dividends over sort of FY ‘22 and ‘23. Just given that free cash outflow expectations, could the dividend, I guess, be at the lower end of your policy range? Or can you use your sort of stronger balance sheet to support dividends sort of being at the middle end of -- middle part of that range, sorry?

Nessa O’Sullivan: So I have to start by caveating everything by saying it’s the Board makes -- obviously has to approve the dividend that we propose. Every interim and final dividend requires approval. We have got a policy out there. Needless to say, you need to put the net free cash flow outflow of $148 million in the context of $341 million of positive free cash flow post dividends last year with some timing that we knew was going to reverse. You need to factor in the cyclical impact this year and say, we build our business to be able to invest and reward shareholders along the way and have ourselves enough buffer that we can cope with cyclical changes in some of these costs, particularly as it relates to long-term term asset investments. So as we sit today, we see no reason why the Board would not be predisposed to continue to reward shareholders. As at the end of this half, we have $1.1 billion of undrawn committed facilities and $200 million are -- it’s $194 million, $200 million of cash on hand, and we have very, very conservative net debt-to-EBITDA and other ratios. So I think you should get some comfort from that, that we are committed to rewarding shareholders. And you’ve seen -- we’re continuing with the buyback. You see the strong EPS growth as a result of that.

Operator: There are no further questions at this time. I’ll now hand back to Mr. Chipchase for closing remarks.

Graham Chipchase: Great. Well, thanks very much. And yes, you’re right, we brought the lovely sunny weather with us from London. So -- but it is great to be back here after two years. And I think we’re hoping to see some of you, I’m sure, over the next week or so, and we’re really looking forward to that. So thanks for your questions, and thanks for all your time today.