Earnings Transcript for BXBLY - Q4 Fiscal Year 2021

Graham Chipchase: Hello, everyone, and thanks for joining us today for our 2021 Full Year Results Announcement. I’d like to apologize in advance for my croaky voice. I suspect it was from yelling at the TV during the England cricket team’s very poor performance against India yesterday. Before I begin with the key financial messages, I’d like to acknowledge our people, whose efforts have been outstanding, given the unprecedented challenges our business and indeed the world have faced over the last 2 years. I’m really proud of their achievements. Now turning to the key highlights from our fiscal ‘21 results. We delivered strong sales revenue growth of 7% at constant currency, in line with our objective for mid-single-digit growth. This performance reflected price realization and volume growth in the global pallet business and a recovery in our automotive container business. Our underlying profit was up 8% at constant currency as contributions from pricing, surcharge income, asset compensations and supply chain efficiencies offset cost to serve increases and investment in future growth initiatives. This performance was ahead of the guidance we provided at our third quarter trading update and delivers on our commitment to achieve operating leverage in fiscal ‘21. At our Investor Day in 2018 and in subsequent reporting periods, we’ve outlined a number of initiatives to increase margins in our U.S. Pallets business. These initiatives included the accelerated service center automation program, the lumber procurement program and a number of productivity and pricing initiatives. I’m pleased to report that these initiatives delivered a 1% margin improvement in the period. This improvement follows on from the 1% margin improvement achieved in fiscal ‘20. During the year, we had recorded another significant improvement in cash flow driven by increased earnings, effective working capital management and higher compensations, partly offset by higher capital expenditure. While this improvement benefited from the delay of pallet purchases due to lumber availability and the timing of tax payments, the net positive result was still a very strong outcome in a challenging operating environment, characterized by volatile demand patterns and rampant lumber inflation, both of which I’ll talk more to in the next slide. Return on capital invested was 17.8%, up 1.1 percentage points and remains very strong. And importantly, in fiscal ‘21, we reinforced our sustainability leadership by achieving carbon-neutral status across our own operations, whilst also launching our ambitious 2025 sustainability targets. I would like now to take a moment to address the impact that COVID-19 and inflationary pressures have on our operating environment during the period on page -- on Slide 4. As you’ll be aware, COVID-19 and, to a lesser extent, Brexit, continues to create volatility and uncertainty across global supply chains. In particular, in fiscal ‘21, our business was impacted by volatile and unpredictable demand patterns as manufacturers and retailers responded to elevated levels of at-home consumption and COVID-19-related disruptions by moving from a just-in-time approach to inventory management to a just-in-case approach, significantly increasing overall inventory levels in order to provide greater contingency against unforeseen circumstances and disruptions. Lumber supply constraints during the period produced a shortage in pallets across the globe and impacted all pallet industry players, leading to a longer cycle time, affecting service levels and causing further disruptions to supply chains. In the period, we also saw historic levels of lumber inflation due to both global supply issues, mostly COVID-19-related, and demand challenges due to robust housing construction markets, particularly in the U.S. Lumber inflation also impacted our capital expenditure through higher new pallet prices and increased asset losses and, to a lesser extent, operating expenditure through increased pallet repair costs. Finally, higher transport costs reflected freight cost inflation and increased transport miles due to additional pallet collections and relocations in response to changes in customer demand patterns and pallet availability strength across the network. Now turning to our dividends and capital management program. In line with our dividend payout ratio policy, we have declared a final dividend of USD 0.105, which will be converted and paid at AUD 0.1424. This brings the total ordinary dividends declared for fiscal ‘21 to USD 0.205. This represents a payout ratio of 54%. This ratio is broadly in line and within our targeted payout ratio range of 45% to 60%. In June 2019, we commenced our AUD 2.4 billion on-market share buyback related to the sale of IFCO. To date, we have repurchased 158 million shares at a cost of AUD 1.8 billion, representing 74% of the share buyback program. When combined with the AUD 453.8 million return to shareholders of the capital return and special dividend in 2019, AUD 2.2 billion have been returned to shareholders, representing 78% of the AUD 2.8 billion IFCO-sale-related capital management program. Turning to our sustainability and ESG credentials on Slide 6. As a group, we remain committed to our sustainability leadership position. Our vision is to contribute to a more sustainable future by pioneering regenerative supply chains. This vision formed the basis of our 2025 sustainability targets, which were launched in September 2020. The full list of our 2025 sustainability targets is available on our website and outlined in our 2021 annual report. In the first year of our 5-year program, we have made significant progress towards meeting our targets. From an environmental perspective, as I mentioned earlier, in June 2021, we achieved carbon-neutral status in all of our own operations. Additionally, in our efforts to achieve our 2025 target of planting 2 trees for every 1 we use, we have initiated multiple afforestation projects across the globe. From a social perspective, we are proud to state that 32% of our management roles are held by women, with this number increasing over the year in line with our objective to have at least 40% of management roles held by women by 2025. Furthermore, our platforms and logistical support contributed to delivery of donated food to over 15 million people around the world. And from a governance perspective, we released our modern slavery statement in March and continue to be recognized for the clarity and effectiveness of our ESG reporting. Finally, as you can see in the blue section of the slide, we continue to be recognized as a global leader in sustainability by multiple global organizations. Now turning to Slide 7. Over the past couple of years, as part of the Shaping Our Future program, dedicated teams from within our business have developed a range of initiatives and identified new opportunities to drive transformation business and to deliver a step change in our financial outcomes. For financial ‘22, we will be recognizing increased investments in these opportunities to strengthen our competitive advantage while maintaining our global leadership position in sustainability. These opportunities focus on increasing the efficiency and resilience of our operations by improving asset and network productivity; developing industry-leading standards for customer experience, service quality and innovation; deploying digital technology and data analytics capabilities to unlock significant value across the organization; and aligning our organization, technology and processes to be simpler, more efficient and effective. These investments are expected to deliver significant and sustainable uplift in shareholder value by supporting revenue growth with consistent delivery of operating leverage and free cash flow generation from fiscal ‘23 onwards. To ensure appropriate context and full transparency, the details of our Shaping Our Future transformation program, which is still being finalized, will be addressed as a whole at our upcoming Investor Day next month. Also, to be addressed at our Investor Day will be detailed guidance for fiscal ‘22, including transformation program costs and updates from our regional business. Finally, there will also be a progress support on our plastic pallet trials, including the strict financial criteria to use to ensure that the project, if it proceeds, delivers shareholder value. I hope you’ll be as excited by this opportunity to really transform our business as we are. And with that, I’ll hand over to Nessa.

Nessa O’Sullivan: Great. Thank you very much, Graham. And good morning or good evening, everybody, depending on where you’re dialing in from. And turning to Slide 9 and an overview of the FY ‘21 results. Constant currency sales revenue increased 7%, and that was driven by both pricing actions to recover higher cost to serve and higher volumes in the Pallets and Automotive businesses. Underlying profit increased by 8% in constant currency and reflected 1 point of profit leverage as pricing, surcharges and compensation income as well as supply chain efficiencies from capital investments and procurement initiatives offset inflationary pressures, higher operating costs overall and increased asset loss charges in the U.S. Profit after tax increased 5% with the tax expense increasing 15% as we included a $22.7 million significant item expense associated with the revaluation of the deferred tax balance in response to announced increases in the U.K. corporate tax rate from 19% to 25%, taking effect in April 2023. Finance costs increased in line with the progressive filing of the share buyback program, but partly offset by the very strong free cash flow generation in the year and lower year-on-year borrowing rates. Underlying EPS of $0.378 increased 15%, which included 5 percentage points benefit from the share buyback program. Turning to Slide 10 and group sales revenue. All segments delivered revenue growth in the year, contributing to the 7% sales growth. Pricing contributed 4 points to this growth, reflecting the recovery of inflationary cost pressures and the higher cost to serve through contractual price increases in all regions as well as indexation in Europe. Like-for-like volume growth accounted for 2% of the group revenue growth, which reflected increased pallet demand from existing customers to support elevated levels of at-home consumption and a return to volume growth in the Automotive business, which has been severely impacted by COVID in the fourth quarter prior year. New contract wins also contributed 1 point to group growth, and that was largely driven by the conversion of new customers to pallet pooling in Central and Eastern Europe as well as the benefit from a large RPC contract won in the prior year. Turning to Slide 11. And before we get into the group profit performance, I’ll provide some context on the lumber market dynamics as well as some commentary on the impacts of lumber inflation and pallet shortages on our business during FY ‘21. The impact of global lumber inflation was particularly evident in the second half of the year, with the increased cost of lumber impacting both the capital investment cost of pallets and, to a lesser extent, the cost of repairs and client costs. The increase in costs were driven by both supply and demand factors, and they are outlined on the left-hand side of the slide. Higher inflation costs were most marked in the U.S. with the housing and DIY sectors driving higher demand and sawmill capacity constraints due to COVID-19 closures and labor availability driving supply constraints. Globally, demand for lumber increased as economies reopen postpandemic closures with supply further impacted by transport and shipping container shortages. This supply-and-demand imbalance resulted in lumber scarcity and record levels of lumber inflation in the U.S. market and supply challenges globally, which have flow-on implications for pricing and supply in other regions. As you can see from the middle part of the chart, U.S. lumber prices rose sharply in the year, reaching peak levels in May before some moderation in June. We continue to see European prices increasing in line with ongoing availability constraints. The impact on our business of lumber inflation was primarily weighted to capital expenditure with 80% of the cost of a pallet driven by lumber costs. Lumber inflation accounted for approximately $150 million of the increase in capital expenditure in the year. In addition, lumber scarcity meant we also delayed $180 million of new pallet purchases into FY ‘22. From an OpEx perspective, we saw higher costs of repair lumber, which accounts for 20% of group plant costs. House availability constraints also drove further cost into our P&L with additional repair and relocation costs to service demand from the existing pallet pool. In terms of cost-recovery mechanisms. Over the last 3 years, we’ve implemented lumber surcharges into over 80% of the U.S. contracts. The U.S. surcharge, which is linked to market indices, contributed $60 million to group income in the year, partly offsetting the CapEx inflation included in fixed assets and lumber inflation for repair lumber in the operating costs included in plant costs in the P&L. In Europe, contractual indexation does include a component for lumber. However, contributions from indexation in FY ‘21 were minimal with inflation ramping up in the region in the second half of the year and annual indexation reset not occurring until the 1st of July for the majority of our customers. In addition to these pricing mechanisms, efficiencies from investments in service center automation, lumber procurement and pallet durability initiatives also helped offset P&L plant costs in the year. Moving to the group profit performance on Slide 12. Collectively, the combined contribution of $295 million from sales revenue growth and the lumber surcharge contribution offset both operation cost increases and increased P&L investment to support Shaping Our Future initiatives. Plant costs, net of supply chain efficiencies, increased $74 million in the year driven by the higher cost of repair lumber in line with inflation and additional repair and handling costs to service demand in the context of pallet availability constraints and changes in network flows. Cost increases were partly offset by efficiencies from lower damage rates in key markets and benefits from supply chain procurement and automation programs, largely in the U.S. Net transport costs increased $56 million, net of efficiencies and the North American fuel and transport surcharges, with driver shortages and truck availability challenges in all markets driving higher costs. In addition, we incurred additional transport miles across our operations as we collected and relocated existing pallets to support customer demand and to rebalance the pool in response to changes in network flows. IPEP increased $39 million in the year, reflecting higher asset charges in the U.S., split between lower pallet recovery rates and higher FIFO unit costs. Pallet recoveries and increased losses in the U.S. were impacted by a range of factors, which we’ll cover later in the presentation. Outside of the U.S. and across the rest of the group, lower asset losses and improved pallet pool efficiencies fully offset increased FIFO pallet costs. Shaping Our Future costs, which includes investment in BXB Digital, increased by $25 million, and other costs increased $19 million, reflecting higher unit cost of compensation and scrap pallets and additional overheads to support growth across the group. Looking at the segments in more detail, starting with CHEP Americas on Slide 13. Sales revenue growth of 7% was strong driven by price realization to recover higher cost to serve and volume growth across the Pallets and Containers businesses. Underlying profit in the Americas region increased 15% at constant currency with a 1-point improvement in the region margins. The U.S. business delivered on the 1-point margin improvement target for FY ‘21, and that was despite the inflationary pressures and cost increases due to demand volatility and pallet availability constraints. The Canadian business delivered strong revenue growth and improved operating performance, including benefits from the stabilization in the mix of stringer to block pallets in the region, with stringer pallets accounting for 35% to 40% of the pool. In Latin America, better commercial terms with increased pricing reflected recovery of higher cost to serve with increased transport costs in the market supporting asset recollections and relocation of pallets to service customers. Successive years of improvements in asset efficiency also supported another year of strong cash flow generation in Latin America. The Americas profit bridge on Slide 14 highlights the success in recovering higher cost to serve through better pricing and commercial terms across the region and efficiency benefits from the increased investments we’ve been making to improve supply chain efficiencies in the U.S. business and asset control in Latin America. We experienced a number of operating cost pressures from lumber and transport inflation, and additional costs were incurred to manage variability in customer demand, changes in network flows and cash availability challenges, particularly in the fourth quarter. In addition to pricing and surcharges, benefits from lower damage rates and increased network capacity from U.S. automation and improved lumber procurement and processing practices across our supplier base helped further offset plant and transport cost increases in the year. Latin America asset control initiatives continue to reduce losses in that business and have delivered a range of initiatives now being rolled out to other markets to support improved asset efficiency and lower losses in other markets. IPEP in the region, however, increased $39 million, recognizing higher FIFO pallet costs and lower pellet recoveries in the U.S. market. I’ll now cover this in more detail on Slide 15. As outlined on the left-hand side of Slide 15, there are several factors impacting pallet recovery and loss rates in the U.S. market. There has been an increase in gap between recycler incentives for the return of our pallets and both their cost to recover pallets and the value of pallets to third parties. The collection of pallets has also been impacted by labor and transport capacity constraints and, in some cases, access to sites have been restricted due to COVID-19. Both the scarcity of pallets in the market and increased value of pallets driven by lumber inflation has disincentivized the efficient return of our pallets and has led some manufacturers and retailers to increase pallet safety stock levels across their supply chain to manage pallet availability challenges and demand variability, which has further reduced returns. In response, we are progressively implementing actions to increase pallet recovery rates. We do, however, note that the market dynamics impacting pallet recoveries in FY ‘21 are expected to persist in FY ‘22. Some examples of the actions being taken include increasing the use of smaller trucks to enable higher-frequency collection of smaller pallet quantities, changes to recycler incentives and where appropriate, we’re also taking legal action to enforce our legal title and contractual terms with market participants, and we are also working collaboratively with retailers and manufacturers to reduce inefficient buffer pallet stock holdings and to reduce flows to higher loss lanes. We’re also progressively implementing higher pricing in these lanes with pricing implemented to date on approximately 25% of these flows. We anticipate improving pricing to reflect these higher costs on the coverage to be progressively implemented over the next 12 to 24 months as contracts come up for renewal. In addition to actions already being implemented, we also have a number of initiatives under development to drive step changes in end-to-end processes and controls by improved use of data and integrating new digital capabilities to specifically tackle asset control in higher-loss lanes. These initiatives are being developed with plans for progressive implementation during FY ‘22 and with the expectations that some of these initiatives will have application beyond the U.S. market. Specifically, in the short term, we plan to increase the use of data analytics in the U.S. and improving processes, leveraging best practice developed in other markets such as Mexico and Latin America to detect anomalies in customer and retailer declarations, enabling more timely interventions for indicators of loss and inefficiency. This will support more informed and timely collaboration with customers to improve supply chain efficiencies and lower costs. Experience in other markets has proven that timely and frequent communication with the market participants improve asset accountability and recollection rates in the market. Building on this, and under development, the global assets team is now working with the U.S. team to implement initiatives including the use of advanced data analytics using existing data to more efficiently deploy our asset collection engine and facilitate better action plans and communication with our customers, retailers and restockers to improve asset efficiency and reduce losses. The planned initiatives will be supported by the accelerated deployment of digital assets to further illuminate areas of higher loss in the supply chain that will help us to improve asset returns with more granular flow insights. We’re also developing plans for the use of artificial intelligence and machine learning tools using our data to support predictive iterative tools that further improve the efficiency of our collection engine and overall asset management resource allocation. Turning to Slide 16. The U.S. revenue performance was driven by a 5-point contribution from pricing as the business aligned contractual pricing with the higher cost to serve in the region. Like-for-like volume growth of 2% was driven by demand from existing customers in the consumer staples sector. The rate of growth moderated in the second half of the year as the business cycles record levels of demand linked to panic buying following the outbreak of COVID-19 in the fourth quarter of the prior year. New business was flat to prior year, reflecting the focus on servicing elevated levels of demand with higher -- and with higher levels of variability in demand patterns from existing customers, while managing network and transport capacity constraints and changes in pallet flows due to multiple lockdowns and pallet availability challenges, which were weighted to the fourth quarter. Turning to Slide 17. The U.S. business has delivered on the objective of increasing margins by 1 percentage point, with the combined benefits from pricing and supply chain initiatives contributing to the cumulative 2 points of margin improvement over the last 2 years. In the second half of FY ‘18, we commenced repricing of our contracts, recognizing the need to increase U.S. pricing to recover higher cost to serve and also recognizing the need to have surcharge mechanisms in place to manage overall cost recovery in inflationary environments. Since 2018, the business has successfully renegotiated contract pricing and improved coverage of cost inflation with over 80% of contracts now containing lumber and transport surcharges. We also, as we had recognized in FY ‘18 and recognizing the need to improve the overall cost efficiency of the business, invested in supply chain automation programs and other initiatives to reduce damage rates and improve lumber procurement and supply processes. Both the lumber procurement strategy and the first phase of U.S. automation program announced at our Investor Day in 2018 have been completed, with both initiatives delivering benefits ahead of expectations. On automation, the 52 automated service centers have added 20% of additional repair capacity and 30% of additional inspection capacity to the U.S. network. We will be outlining further plans for the next phase of supply chain automation and efficiencies across the group at our Investor Day. In addition to the U.S. businesses delivering a 1-point margin improvement in the year, it should be noted that the overall Americas region also delivered a 1-point margin improvement in the year. Moving to CHEP EMEA on Slide 18. The region delivered margin expansion and improved returns despite significant operating challenges resulting from both COVID-19 and Brexit. The region delivered strong revenue growth of 6%, with operating leverage as the revenue contribution to profit and supply chain efficiencies offset input cost inflation and the additional cost of managing changes in network flows and supply chain disruptions associated with COVID-19, Brexit and scarcity of transport and lumber in the region. ROCI increased 1.8 points, reflecting the strong profit performance, disciplined capital control in the Pallets businesses and lower CapEx spend in the Automotive business. Turning to Slide 19. EMEA sales revenue increased 6%, with price and volume momentum across all businesses. Price realization was 2% with higher contractual pricing and indexation to recover accelerating input cost inflation and Brexit-related heat treating costs, primarily in the second half of the year. Ongoing customer conversions in Germany and the rest of Central and Eastern Europe region were the main driver of the 2% increase in net new business wins in the year. Higher levels of at-home consumption, customer stockpiling and reopening of the economies in the latter part of the year, resulting in increased levels of demand from existing customers, as well as the recovery in the Automotive business also contributed to the 2% increase in organic volumes in the year. Moving to Slide 20, CHEP Asia-Pacific. CHEP APAC delivered a strong ULP contribution with revenue momentum across the Pallets businesses and increased contributions from the large Australian RPC contract won in the prior year. Underlying profit increased 12% with 0.7 points of margin improvement driven by $10 million of one-off income, including $8 million of site compensation related to the mandatory relocation of service center, which offset start-up costs associated with the large Australian RPC contracts. ROCI increased 1.2 points as improved margins offset higher capital investment to support the new 10-year RPC contract and ongoing upgrades across the pallet service center network, which are delivering operational efficiencies across the network. Turning to cash flow on Slide 21. Cash flow for the year is a highlight of the results with very strong free cash flow generation of $341.2 million. Excluding timing benefits expected to reverse in FY ‘22 related to delayed pallet purchases of $180 million and $35 million of tax payment timing benefit, free cash flow after dividends was a positive $126.2 million. Operating cash flow of $901.1 million increased by $146.3 million over prior year driven by earnings growth and increased compensation across the group with working capital also delivering further improvements in FY ‘21, cycling an exceptionally strong contribution in the prior year. These increases were partly offset by higher cash CapEx, capital expenditure, despite improved payment terms as lumber inflation impacted the cost of pooling capital investment. Looking at capital expenditure and asset efficiency in more detail on Slide 22. Asset efficiency momentum across the group was impacted by lumber inflation and changes in customer and retailer behavior driven by pallet shortages particularly evident in the U.S. market. Group pooling capital expenditure increased $228 million in the year, resulting in a 3-point increase in the group’s pooling-to-CapEx sales ratio, which was 20.6% for FY ‘21. Lumber inflation accounted for $150 million, or 2.9 points of this increase, with the balance of the increase reflecting $80 million of additional equipment purchases to support volume growth. Lumber availability constraints in the second half of the year resulted in $180 million of delayed pallet purchases, which will be recognized in FY ‘22 and are, therefore, not reflected in the FY ‘21 expenditure profile. As you can see from the regional chart in the bottom half of the slide, the impact of lumber inflation and pallet scarcity was most acute in North America, where pooling CapEx to sales increased 6.7 points in the year. Lumber inflation accounted for 5 points of this increase with $140 million of pallet purchases, equivalent to 6 points of CapEx to sales deferred into FY ‘22 and reflecting higher losses in the year. In Latin America, the enhanced asset management program further reduced loss rates, supporting asset efficiency benefits, which largely offset the 6-point impact of lumber inflation in the year. And in EMEA, lower year-on-year CapEx spend in the Automotive business offset the impact of COVID-19- and Brexit-related stockpiling on Europe asset productivity. With lumber inflation in Europe accelerating late in the year, the impact on capital expenditure is minimal and offset by delayed pallet purchases into FY ‘22. Turning to Slide 23 and our balance sheet. Our balance sheet is in a very strong position and is well supported by strong free cash flow generation during the year. And as of the year-end, Brambles had $1.4 billion of undrawn facilities and over $400 million of cash deposits and is well-placed to recommence and complete the AUD 2.8 billion capital management program during FY ‘22. We maintained our strong investment-grade credit rating and our financial ratios remain well within our policies with anticipated net debt-to-EBITDA of 1.6x on a pro forma basis, post the completion of the buyback and the reversal of highlighted FY ‘21 $215 million of cash flow timing differences. Turning to Slide 24 and in summary and concluding. The resourcefulness, engagement and agility of our people, combined with our network advantage, allowed us to deliver our FY ‘21 commitments despite variability in demand as well as high levels of lumber and transport inflation and a range of supply constraints. Top line growth and profit leverage reflected the resilience of our business in an inflationary environment with efficiency benefits and improved recovery of higher costs, including investment in shaping our future to unlock future value. We also delivered strong free cash flow in the year driven by increased earnings, working capital improvements, both of which supported investment for growth across the business as well as the funding of our dividends. Our conservative balance sheet positions us well to continue with the buyback program, which is scheduled to recommence on the 15th of September after Investor Day. We continue to strengthen our leadership position in sustainability by achieving carbon-neutral status in our own operations in FY ‘21 and are setting ambitious 2025 vision to regenerative goals. Finally, through our Shaping Our Future program, we are looking forward to the next phase of value creation for our customers, employees, shareholders and for the communities in which we operate in. We are continuing to develop our plans and the details of these will be outlined at the 2021 Investor Day on the 13th and 14th of September 2021. I’ll now hand back to the moderator for question.

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

Jakob Cakarnis: Apologies if it’s breaking up a little bit. The line was a little bit unclear when the handover started. Can we just focus firstly on the IPEP charges? There does seem to be an acceleration of those IPEP charges in the Americas. So just bear with me one second. The first half, they were $12 million. In the second half, they jumped up to $27 million. They seem to be increasing as a proportion of the revenue for the division. Just let us know how those IPEP charges will reverse. It seems as though you’re guiding for that to continue into FY ‘22. And what are some of the behaviors that you’re seeing from retailers that are making you less confident that you can recover those pallets in the future?

Nessa O’Sullivan: Thank you very much for your 2 questions, Jakob. So in terms of the IPEP increase, so I think for us, if we look at outside of the U.S. business itself, every other region had improved asset efficiency. So we had lower losses everywhere else around the group. So as we look to the U.S., the amount of the increase of that, about 1/4 of the full year increase was at the first half, which was roughly half [5] or half loss. So nothing too alarming at the first half in terms of what we saw loss rates. What we started to see is as lumber costs accelerated in the second half and in the fourth quarter as well as scarcity of pallets became more evident, we saw that the pallets that we expected to come back, our flow-through ratio reduce, which meant we got less pallets back relative to those that we were issuing, and we could see there were a number of factors. One was scarcity of transport and labor to do as regular recollection. Secondly was the value of the pallets relative to the recycler incentives had widened further, and their cost to go and collect the pallets had gone up. So there was a market dynamic that made it less of an incentive for recyclers to return pallets as quickly. We, at the same time as we had heard there was a general scarcity across the market, you talk to anybody in the market, our competitors, everyone, we were having lots of people, new potential customers who are coming to us saying, can you service us, but we were very focused on making sure we looked after our existing customers. So all of a sudden, there was a big pallet scarcity across the entire market. So what was happening was that there were some of the manufacturers, particularly, decided that they would hold on to additional safety stock to ensure that while they will still experience some volatility in demand, that they also had extra stock. So for us, that meant if everybody keeps it in their buffer stock, you lose efficiency in your network. And so as you think about what are some of the things that we’re doing to address it, it’s, first of all, making sure that people aren’t holding inefficient levels of buffer because that means that limits our ability to be able to service everyone efficiently. We had a lot of work done by the U.S. team on that. They’ve also deployed more transport more frequently going out to the market and saying there’s less pallets out there, intercept them quickly and bring them back more quickly. So we have smaller trucks going out to pick up the pallets. We’re also, as we looked at changes in network flows and seeing that they’re going to regions where we may not have had a strong recollection engine, we’re also looking at changing pricing. So if you are a customer who flows into those areas we’re experiencing higher loss, we’re putting on higher pricing. Working with those customers saying, well, in some cases, this would be an increased cost or in other cases, is it appropriate to use a pool pallet for this particular flow if losses are high. So they are some of the things that we’re doing. But because we haven’t yet seen supply come back into the market because sawmills, so if you look at well, what would unlock the supply because we have to defer actually buying pallets. It’s not that we didn’t have the cash to buy the pallets. You can see that even if we bought the pallet, we still have had a really good, strong cash flow generation. So we need to see more supply come back into the market before that scarcity factor comes back out. And that’s a combination of supply all the way through the supply chain because there are bottlenecks currently and not all of the sawmills getting all the labor back to be able to get capacity back in and getting all the transport flowing again. Look, we have seen some moderation now in the lumbers future. We have seen a little bit of a drop in the pallet prices over the last month. But we’re saying, we haven’t seen enough to say we would expect to see a big step change in improvement in recollections over FY ‘22. But you see there’s a whole range of things that we’ve put in place and there’s other things that we’re doing that we are doubling down and focusing on this in terms of recollections. Hopefully, that gives you a sense for the first half, second half and some of the key dynamics.

Jakob Cakarnis: Yes, Nessa. Just to follow on then, focusing on the U.S. margin expansion of 100 basis points that you reported. I imagine that those lumber surcharges started from the second half. This is the first commentary that I can see from that is the third quarter. It seems as though if you take that $60 million of lumber surcharge that you got in the second half, you would have had a margin benefit of around 6 percentage points. If I add in the IPEP charges that you just described, it would detract from margin around 200 basis points. Am I right in thinking that the remaining difference to get to the 100 basis points of margin expansion was a combination of labor and transport cost increases?

Nessa O’Sullivan: So I think you know what you need to do is, I suppose, get a bit up in the helicopter. So as we’ve said, the lumber inflation is weighted towards the CapEx. So there was a big increase in CapEx in the U.S. business in terms of spend. So we had over $100 million extra in the U.S. itself. And we also had increase in lumber repair costs. So as we recovered the lumber surcharge, we also had going against plant cost, efficiencies. Remember, we -- from procurement, and we also had efficiencies coming from the investments in service centers and from investments we did in processing efficiencies in the sawmills. So you can see that there’s a slide in the deck that sets out all the components, which is Slide 17. And that really is the same slide we’ve been showing for the last 3 years, saying, actually, it’s a whole combination of these, and we committed we would get pricing, we would get better surcharge recovery. And it’s never an exact science to how good a surcharge is in terms of the actual cost recovery. And in the first half of the year, you may recover -- you may recall that we talked about that we had higher transport costs, but that -- not all of it have been reflected in the cap index. So we had lower recoveries relative to the costs we were incurring in terms of transport. So I don’t think you can look just at one item by itself. I think you need to look at all of the costs on a combined basis. And transport, when there’s volatility in demand, you’re buying a lot of spot. The cap index that we get a surcharge recovery on may not react and may not be at the same level to recover that. So hence, why we’ve broken out the components and, I guess, from your perspective, you can move the numbers around and look at it in different ways. But I think you have to say we’re in an inflationary environment. We said in 2018, we’re going to get much better surcharge recovery. We’re going to have better pricing discipline. And I think it’s pleasing to see, when we’ve gone through a period of mass disruptions to our network and record levels of inflation, that we’ve managed to deliver margin improvement.

Jakob Cakarnis: And so one final one for me. The second half trend in organic volumes for the U.S. Pallets business, the right trend to extrapolate as we look into FY ‘22. I know that there’s some COVID comps that you guys are cycling. Is there anything that could move around, i.e., lockdowns restarting that could move that number from the second half, please?

Nessa O’Sullivan: Well, I think there’s a couple of things. First of all, we’re not giving guidance today. So we’ll give you more granularity when we get to Investor Day. But I think it was interesting. If you look at the U.S. Pallets business and the chart that we always put in, in the first half, we showed 7% growth, which is the same as the full year except in the first half, 2% was price and 5% was like-for-like volume. We swing to the second half, and it’s 2% in like-for-like volume, while on a full year basis, and 5% on pricing. And that really is the cycling where we had in the second half of the really big cycle volumes, organic volumes, generally at a lower rate, but also reflecting some increased pricing as contracts have come up for renewal in a higher-cost environment.

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

Matt Ryan: Just focusing again on the U.S. market. Obviously, the backdrop seems really supportive for price changes for a number of different reasons. Just wondering whether you think you can speed up any of those contract discussions to make the most of the current conditions.

Graham Chipchase: I mean as you know, most of the contracts on average, 3 years. There’s a cadence to negotiations. In some instances, customers who want to start negotiations earlier and others, they don’t. So they’re probably not going to do it right now. But I think what we’ve been talking with customers about is how can they help us to improve pallet recollections. And in some instances, we’ve obviously said, and if you continue to send pallets down higher cost-to-serve lanes, we have to increase pricing for those lanes because our cost to serve are getting much higher, or let us help you find a supply of whitewood, where it might be a much more appropriate platform. So those conversations are going on. In terms of the general pricing environment, one could argue that with massive pallet scarcity, this is a good time for price increases. I wouldn’t do that. I think we can -- I think we said this back in our half year results, the environment for price increases is still good because we’re in a high-cost-inflation environment. There is still tightness in supply/demand, if anything, even tighter, and there’s still disciplined competition. So yes, the environment is still good as we’re looking forward over the next 12 months. But we’ve also got to balance the fact that our customers are having a very tough time supplying their own customers. So this is not the time to get too aggressive. And I think what we’re trying to do now is work with our customers to try and create value and efficiencies for both of us rather than us going in with big price increases. So I’m not saying we’re not going to do it, but right now, I think we will be very careful because we’ve got to look after our customers rather than making them feel like we’re just taking advantage of the situation.

Matt Ryan: Okay. And then maybe just looking at your comments around pallet recoveries. I’m not sure whether I’m interpreting your comments, Nessa, correctly that it seems to be, I guess, a greater focus on that than I would have expected. Just curious as to how much worse that seems to be getting at the moment. And I think you made some comments about the recyclers specifically. Can you just talk about the change -- changes that you might be looking at? And I assume you must be referring to the asset recovery program that’s sort of been reduced over the last few years.

Nessa O’Sullivan: So yes, few things. First of all, we haven’t had an asset recovery program that’s been reduced over the last few years. So that’s been a key focus of ours to go for asset efficiency. And in the year where we’ve got asset efficiency improvement in every market, except for the U.S. certainly, changes in circumstance and not where we want to be, but we recognize the value in having an efficient asset pool for everybody as well as lead to our sustainability goals. So when we see something going out of whack and not going in the direction of travel that we want, we’re going to double down and make sure we’ve got best practice -- focus on best practice. So with recyclers in some cases, we’ve increased recycler rates. And it’s as set out on Slide 15. And we are focusing on recollecting assets. The asset is even more valuable in scarcity. If you can’t buy new assets, you want to send out more trucks to go and pick up the pallets more often. But we’re just saying we expect to do -- as we make these changes, you won’t see an overnight change in terms of a high return of pallets because there’s other factors in the marketplace that are impacting the return of pallets. So we’re recognizing the need to take further actions to address it and say if the markets change and we continue to see volatility in these other dynamics and if we see higher costs ongoing, then investing in further improved automation of how we communicate, further enforcement of legal title in places where we’re not getting our assets back as well as how can we use the data better and leverage our network better so that we’re in a better cost and service position for our customers.

Operator: Your next question is [Indiscernible].

Unidentified Analyst: It’s Blake, can you hear me?

Nessa O’Sullivan: Yes, we can hear you.

Unidentified Analyst: Just a question on the new business wins in the U.S. market. Obviously, you’ve been busy servicing your existing customers pretty much for the last 2 years. When do you anticipate being able to take on new customers? And I imagine there’s a fair bit of pent-up demand there. I just wanted to get a sense of the opportunity there.

Graham Chipchase: Yes. So it’s not that we haven’t been going off for new business for the last 2 years. If you go back to Slide 16, you can see in fiscal ‘20, we had a 2% growth in new business. It’s only really been over the last year, as we’ve obviously -- as Nessa has been talking about with the pallet scarcity. Now I mean, in reality, I think we saw towards the end of the second half a tiny, tiny pick-up in the -- in a couple of net new business wins, but it was really lost in the roundings. And I think what we’re saying is until we see the availability of new pallets and the supply of new pallets become a lot easier in the U.S., which we’re not calling yet, then I don’t think our priority should be to go after new business. It needs to be making sure that our existing customers are fully satisfied. They deserve that, and that’s where our focus is going to be. So the answer to the question is when we see how the lumber prices declined significantly and when we see people getting back to work, so that the sawmills can get up to full capacity, then we might be able to start looking at some of the situation differently, but we don’t know when that is yet.

Unidentified Analyst: Right. But you’ve got extra capacity, haven’t you, from the automation of the plants that you’ve done in the U.S.?

Graham Chipchase: Yes.

Unidentified Analyst: Is it just simply the lumber that’s the constraint?

Graham Chipchase: Oh, no. There are 2 things. One is there is -- the lumber is a constraint. There is a -- it’s not getting to the sawmills. And the second thing is the sawmills haven’t had to run at full capacity because they haven’t got the people. People aren’t going back to work yet in a lot of the sawmills. So it’s a combination of the 2. But we’ve got the capacity to handle the pallet in the service centers. We just haven’t got the ability to get the pallets into the system because there’s not enough wood and there’s not enough sawmill capacity.

Unidentified Analyst: Right. And just -- it seems in the U.S. business, that there’s a string of things that go wrong in terms of -- I mean, you’re highlighting today that manufacturers are building more safety stock. It’s harder to recover the pallets. It seems like there’s always something going on there, but there are things that don’t seem to occur to the same level of frequency in, for example, in your European business. I’m just wondering, is there something that you can do to get in front of driving the behavior of your customers in the supply chain rather than sort of, to some extent, having to react to what they decide to do in each period?

Graham Chipchase: Well, I mean -- so I think my first response to that question is I think the work we’ve done over the last couple of years has been exactly that, to get in front of what’s going on in terms of making sure the contracts were changed to accommodate potentially inflationary cost increases and to adjust the cost to serve -- recognizing our cost to serve had increased over a long period of time and haven’t been reflected with the customers, then to address the automation capacity issues or the issues in certain parts of the automation as well as, I think, being really innovative in how we’ve disrupted the sawmilling -- the network in the U.S. So I think that -- if that wasn’t getting in front of the curve, I don’t know what it is. So that was really, really innovative and has given us huge benefits. So -- but the U.S. is -- and I think we’ve talked about this in the past, is a very different market to Europe. Europe is a very fragmented market. It’s a more complex market, and therefore, it’s much easier to maintain good margins, whereas in the U.S., you’ve got much more consolidated customer base, you’ve got a much more consolidated retailer network, and therefore, the balance of power, if you want to use those phrases, is somewhat differently distributed. So I don’t think it’s something that there’s always something going on with the U.S. It is a massively complicated region and business. And I think the other way I look at it is despite all the confusion and turmoil that the U.S. has been through over the last 12 months, we still were able to increase the margins by 100 basis points. So I think that’s a good sign that actually we are getting on top of these things in front of them, not that we’re always being reactive. And I think we’re just trying to be transparent here and say, look, yes, it’s obvious if you look into the numbers, there is a change in the recovery of the pallets in the U.S. It appears to be for really, really understandable reasons. And you’ve got no pallets available and the value of them has rocketed. People -- humans are -- our customers and retailer are only human, it’s obvious that they’re going to want to hold on to those pallets for longer. So that’s all we’re calling out. And I think it’s incumbent on us share with you what are we going to do about it, which I think Nessa went through in a great amount of detail. So I think that’s what we’re trying to do. And I mean I think we’re all well-aware in Brambles as a supplier. This isn’t a case of whack-a-mole. I mean we’ve got -- we’re in 62 countries, there are lots of things going on. If you think about the exposure to macroeconomic and specific supply chain issues because we’re never going to have all those cylinders running perfectly all the time. I think it’s how we react to them. And what we’re doing about it is more important, which I think in the U.S., we are -- we’re doing the right things and it’s going to take a little bit of time to come through. But we’ve shown, I hope, over the last few years that when we spot these sorts of things, we get on them and we sort them out. I mean Latin America is a good example.

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

Owen Birrell: I’m probably just going to ask kind of another similar question to the hoarding issue in the U.S. Can I just ask just firstly, the $180 million of pooling CapEx that’s been deferred this year, is that going to be incremental to what you would have otherwise spent next year? Or is it just $180 million of CapEx is effectively just going to be lost or pushed down the road into perpetuity?

Nessa O’Sullivan: So it doesn’t get lost into perpetuity because we’re not operating efficiently at the moment because we’ve got less pallets than we’d ideally like. We’re not going after new business the way we would to grow the business further if we had more pallets. And so that’s why we called out that if you -- we had $341 million of free cash flow, we’re saying we should really ideally have spent another $180 million and bought those extra pallets. That’s where ideally we would and it’s spread across the markets, but the biggest piece of it is in the U.S. And on that slide, where we set out the asset efficiency, it’s the CapEx slide, we actually have shown by market, but -- Slide 22, we’ve shown the amount in each market that’s been deferred. So we should assume it’s an add-on because we need to buy that, and then we’ll have the normal ongoing growth.

Owen Birrell: And is it fair to say the -- I guess, the pooling CapEx to CapEx ratio should be sort of back at around that sort of 20-odd percent going forward? Or should we -- or what you’re saying that we get a bump on that next year?

Nessa O’Sullivan: Well, you’ll have to factor in. So we’re not going to give guidance. That comes in September. But you should assume, which I probably shouldn’t be going into the future piece, but you should assume that what you might have thought we would spend for next year, you need to add on this additional amount.

Owen Birrell: Yes. Okay. Did you have a sense of -- you talked about the hoarding of pallets. Can you give us a sense of what percentage of the pool is being, I guess, held back? Just give us a sense of, I guess, how material this issue is and what percentage of the pool effectively gets released when it stops.

Nessa O’Sullivan: Well, as you know, this isn’t going to be overnight. Everyone’s now stopped and given back all the pallets. There’s always some level of inefficiency where people have pallets staged. But if you’re -- if there’s volatility of demand and everyone’s moving pallets around and you think you’re going to need extra pallets next week, then unlikely you’re going to read your -- you will want to have an additional safety stock for the new with some buffer. The problem is that everybody gets the idea at the same time, you end up with this extra inefficiency. So look, if you think about the U.S. market, about 100 million pallets, it’s not going to be 10 million pallets that are tied up on it, but you can imagine it’d be a couple of percentage of the pool at any given time.

Owen Birrell: Okay. And just one final question on EMEA. Look, the growth rates out of that market look significantly better than, I guess, what you -- against the dire commentary that you guys were providing at the end of the last calendar year. I’m just wondering what has changed so materially in EMEA that the growth rates that have actually been delivered are some much stronger than, I guess, what you were sort of alluding to previously.

Nessa O’Sullivan: A couple of things, I guess, have been. So in Europe, there’s been a bit more of relaxation of lockdown, although there’s been lockdowns. There’s been periods where it’s actually had the supply chain refills and you’ve had some pull-through and we’ve sort of had good performance from beverage as well. We have also seen a bit more inflation, which as you get to indexation, adds also a couple of points on your pricing. And it’s fair to say that we’ve also managed to have some pretty impressive wins in Germany and Central Eastern Europe ahead of where we thought we would be is probably accumulation of it. And I think there was a lot of discussions if you look back at the press, economic commentators. But a lot of people were saying we expect this to be an economic downturn. We expect to see more serious downturn. We have actually seen, because we’ve had a good offering for our customers and because we’ve got the strength of our network, that others have looked to get support from -- particularly in consumer staples, and we’ve been very well positioned to be able to take advantage of that.

Owen Birrell: Right. And can we assume that I guess, I mean, obviously I don’t need you to provide guidance, but just that the operating environment is still moving back to a normalization over the course of the next 6 to 12 months?

Graham Chipchase: I don’t think I would say that for the next 6 months. I think we’d have to look at it for calendar ‘22, it might be a reduced -- if you just think about what we do know. So again, we’re not looking to the future. But we know, at the moment, your home country is going through more lockdown rather than less. Europe is doing the reverse at the moment. U.S. is a bit of a mixed bag. In some parts of the U.S., it’s actually quite bad and others, it’s not. You’ve got -- we had massive floods in the summer in Central Eastern Europe. We had civil unrest in South Africa. It’s a real hotspot. And I think trying to sort of say it’s definitely getting better, directionally, globally, it’s quite a hard thing to say. So I think also -- and we’ve been saying this for 12 months now, we still don’t know what the real impact of, when a lot of government subsidies comes off in certain countries, what that will do for consumer demand. So we’re planning, at the moment, on things are as volatile and difficult to manage as they have been for the last 12 months. The good news is we did okay in the last 12 months where yes, I think in the model, you can now show the resilience and can cope with that level of volatility and uncertain demand. So we’re in as good a place as we’ve ever been so -- to cover what’s ahead.

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

Sam Seow: Maybe an easy one to start. Am I right in assuming corporate costs are up $50 million half on half? I mean could you provide us with some color on that and I guess the returns on that spend?

Nessa O’Sullivan: So yes, we highlighted that we had -- our Shaping Our Future costs were up by $25 million, including BXB Digital. And we also said that we increased corporate costs overall $19 million, which was other costs, which was also to support growth. But look, we’ve got the same inflationary environment that others have got, say, some of the higher costs you’ve got like insurance and other costs are in there. And we will go into more detail when we talk in September about what the shaping of future investment we expect that to unlock. But I guess the major thing to note is that we delivered leverage, including those costs, and the costs are being used to support growth and also a big focus on the increase in the cost has been about towards this transforming the business that we’ll be able to talk more at Investor Day about. I don’t know if you want to add anything.

Graham Chipchase: No.

Nessa O’Sullivan: No.

Sam Seow: Yes, okay. Sure, sure. And I guess a similar question to the prior one, but just more on America. I guess previously, you talked about a slowdown in sales in the second half. But your 3Q and I guess your 4Q run rate haven’t softened at all really. I guess what was the difference to your initial expectations? And what do you put that down to?

Nessa O’Sullivan: Are you talking the U.S.?

Sam Seow: Yes, the U.S. health, yes.

Nessa O’Sullivan: If you’re talking to the U.S., yes, we did. So the first half, we had 5% volume growth in the first half. And then on a full year basis, we have 2% growth, if you look on Slide 16. But if you look at the same chart we released at the first half, the makeup of 7% revenue growth was 2% price and 5% volume. So we have seen that and we knew that was coming. Sorry?

Sam Seow: So I was talking to the 7% sales growth. So really price has been a lot stronger than you were thinking? Or were you always expecting to push through 5% kind of prices?

Nessa O’Sullivan: We were highlighted to the volume. We always knew the volume is going to be a challenge as we were cycling. It’s fair to say that as there’s been more inflation in the market, and as we’ve been repricing contracts, it’s been reflective of the environment with higher cost to serve. But it’s really, we anticipated that we’ll be cycling. But remember the big cycle we had last year, meant that we had much higher volumes in the second half. So if you look at the half one, half split last year, you’ll see that. So hence why, on a full year basis, as we had indicated, the volume is lower. And also a lot of that increased cycles with major customers. And so therefore, there is some pricing mix benefit as well as some increased pricing because of the higher cost-to-serve environment.

Sam Seow: Cool. Cool. And I guess the results showed pretty good operating leverage. I mean part of that was automation in the second half. Can you maybe help us understand how much full year annualization of benefits, I guess, are left to roll into FY ‘22?

Nessa O’Sullivan: So look, we outlined the investment and we outlined that we’d get a 20% return. We just sort of don’t detail by half. But it’s fair to say we’ve -- that the programs are completed. You can think the benefits are included in. There’s a small amount of additional benefits still to come on the cycling year-on-year into next year, which is from the ones that we’ve converted in the second half.

Sam Seow: Great. Great. And I guess finally for me, you’ve had great success with the pass-throughs and reducing, I guess, the impact of rising input cost. Could you maybe talk to leverage to declining input costs? I mean I imagine that’s less than previous years? Or am I missing something?

Nessa O’Sullivan: Sorry, could you just repeat that? You broke up a lot in the question there and we couldn’t quite hear what you asked us.

Sam Seow: Yes, no worries. No, I was just talking about you’ve had success in the pass-throughs, which have reduced the impact of rising input costs. I was just hoping maybe you could talk to the leverage to declining input cost, if the delta slows and goes backwards from there.

Nessa O’Sullivan: Right. So look, as -- generally, when you look at surcharge and I’ll just talk high level, and obviously we can give you more context around what it means in terms of outlook in September. But generally, there’s a trigger level at which the surcharges come into play. And so usually, there’s a -- you absorb some costs up to a certain level, then the surcharge comes into play and you collect the surcharge. So -- and on the way down, there’s usually a delay as well in terms of the surcharge. In indexation in Europe, though it tends to be more -- there’s an annual index point, which reflects an accumulation of increased costs in those indices that’s taken in pricing. And so there can be a timing lag. And so to your point, you can have either some benefits if you just reindex and then there’s a deflation that comes through in the following year. Or alternatively, with those industries, generally have sort of a lag, maybe think 60-day sort of lag, but it varies. Usually you suffer some pain on the way up and you get a bit of benefit on the way down. But obviously, then cycling year-on-year, you have to look to see what happens with each of the indices because you could have a situation like we had this year, which we talked about in the first half, where we were in the lumber -- we were in the transport market buying transport, but our costs were higher than what the index was saying because we were buying a spot rate because they were lanes that we don’t normally travel on. And secondly, everyone because of volatility demand, want to transport at the same time, but it didn’t get fully reflected into the cap index. So they’re not perfect. So the same happens either way. And hence, we tend to give that clarity when we do the results at the half year and full year to give you some insights as to exactly what’s happened.

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

Cameron McDonald: Just looking at the European business, you’ve said there’s an improvement in the Automotive. Can you give us a sense of where the scale up in your Automotive business is at the moment relative to, say, it’s normal operational performance say, in 2019?

Nessa O’Sullivan: So Cameron, probably the best way to look at it and think about Automotive is in the fourth quarter of last year, basically the Automotive business stopped. And so we had very little contribution. So if you look overall to the EMEA region, you sort of get roughly the increase as you come year-on-year, we’ve got -- because we saw some progressive recovery. But overall, it’s contributing about 1 point to earnings and 1 point to ULP growth, in the region.

Cameron McDonald: Sorry, you broke up. Last year?

Graham Chipchase: Over the whole of last year. Yes, yes, yes.

Nessa O’Sullivan: Yes, the whole of the year, yes, yes. Sorry, year-on-year because while it stopped in quarter 4, then we started recovering as we came into this year, but it wasn’t full recovery. So we were running at an index to prior year. So we were down year-on-year. And then as we got through the fourth quarter where we were cycling Automotive was the moment we had a much easier comp because we basically stopped trading for that or very, very little activity in that last quarter. So hence, on a full year basis, we ended up where it contributed about 1 point to the region growth and 1 point roughly to earnings growth, just to put it in context.

Cameron McDonald: Okay. That’s year-on-year. But what about relative to, say, 2019?

Nessa O’Sullivan: Well, if you went down and now you’re back 1 point, so your sort of recovery -- net-net, you’re up relative to ‘19, but marginally, it’s not a major step up. And in other -- sorry, go on.

Cameron McDonald: Okay. And then -- sorry, I was just going to ask, what is your total spend to date on shaping the future. Am I right in thinking that it’s $38 million? So it’s $12 million or $13 million from last year, plus $25 million this year? Or is it plus $25 million over the -- another $13 million?

Nessa O’Sullivan: Yes. So that’s the level of increase that we talked about with the $25 million. So yes, you’re correct. And it’s in footnote in the corporate segment in the stat accounts as well. You can see the split out of that, if you want to have a closer look, Cameron.

Cameron McDonald: So it’s closer to $50 million so far.

Operator: Your next question comes from Justin Barratt with CLSA.

Justin Barratt: I just don’t want to harp on the corporate segment, but just in terms of the BXB Digital cost and Shaping Our Future costs, appreciating that they’re pretty important strategical drivers for you going forward. Is this like a level of investment that we can expect year-on-year going forward?

Graham Chipchase: I think perhaps one of the reasons that we want to talk about it in the Investor Day because I think, obviously one of the things over the last few years we’ve been doing is doing a lot of testing and experimenting, testing different technologies as to where we think we can transform the business and disrupt ourselves before we get disrupted by anyone else. That was the whole point over the last few years. I think what we’re looking at now is we’re in a position to have had some of our ideas validated externally and start thinking, okay, how do we really now put this into action. So I think that’s why we want to put the whole of the transformation program into context when we speak to everybody in September.

Justin Barratt: No worries. Just in relation to my next question, and I apologize if I missed you -- your making a comment at the beginning of the call, I just missed the commencement. But I just wanted to just double-check on the plastic trial with Costco. I appreciate that there’s been no update in the presentation, but just wanted to see if you have any comments in relation to that trial.

Graham Chipchase: The trials is ongoing. I mean that’s all I can say. What we’re going to do is what we said in the presentation around -- in September. So we’re going to give an update on the trial. We’re going to talk about the strict financial criteria we would apply before we made any decision to try and, at least, give some confidence that if we do go ahead to the trial, it will add shareholder value. But I think we also want to talk about the sort of the various drivers of returns within that system because as we said before, it depends a lot on what you assume about loss rates, what you assume about the cost of a pallet, what you assume about the premium you charge in the market for the superior pallet. So that’s what we have to look at, and we want to put that together, so it gives some people confidence that we’re not just doing this at any cost and at any return because I know we said it consistently that we wouldn’t do that, but it appears that people still don’t really believe us. So that’s what we want to try and get across in September. We won’t be giving -- we don’t know yet the outcomes of the trials, and we don’t expect that until early calendar year next year, and that’s consistent with what we’ve always said.

Justin Barratt: Great. And then just one final one for me. I’m not sure if you can make any comment, but just in relation to Australia or the APAC business. I appreciate that margins and performance there has been impacted to different levels by the new RPC contract onboarding from October 20, and then the benefit from the service center benefiting FY ‘21. How should we think about, I guess, the earnings and margins of that business into ‘22 and longer term? Should they largely revert back to sort of FY ‘19 or FY ‘18 levels?

Graham Chipchase: I think we’d rather not talk about that. We’re trying desperately hard not to give any guidance today. So if you can wait for 3 weeks, we’ll talk about it then.

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

Scott Ryall: I just want to talk quickly about the U.S. business, which in line with more than a decade, looking at the company, this is certainly the most resilient earnings performance in the CHEP Americas business to -- that I’ve seen in response to the inflation. So is it just -- so I just want to be really clear. Is it purely the combination of all those factors you put on Slide 17 that contribute to this resilience? Is that the way to take away?

Nessa O’Sullivan: I’m looking at -- so I’m making sure I’m looking at the right slide. But yes, that is the right way to think. I mean if...

Scott Ryall: U.S. margin progress, yes, is the title.

Nessa O’Sullivan: So yes, U.S. margin progress. And pricing and surcharges have played a really big role, but so too has all the work that we did in investing in our service centers because we wouldn’t have had the capacity in the network to deal with all of this disruption and volatility and spikes in demand if we hadn’t got ahead of us. So the benefits have been a lot bigger than we expected. We’ve got the financial benefits but we’ve been able to support our customers much better. Similarly, we invested in sawmills and there’s a big sustainability benefit in terms of yields and usage. But it also meant that we were in a good position that we had good relationships to be able to access lumber supply when it first became scarce, and also that we were able to manage costs in a challenging environment and where there was a limited capacity. So we had financial, but there were other also facilitating things that came out of those initiatives that we put in place. So yes, I think it’s fair to say, as we looked at the business from 2018, the value of the lumber surcharges and things that we put in place, we couldn’t have anticipated it was going to get to this an extreme level and therefore, give us a much bigger, I guess, hedge against the costs than we would have expected. And there’s no doubt that the -- it’s pleasing to have completed the programs in line with what we said we would do, getting the financial benefits, but also getting real operational support and enablers for our business to be able to support our customers in a challenging environment. So I think there’s unquantified pieces in there that have enabled us to support the revenue.

Scott Ryall: Okay. And then last year, in your full year presentation, on Slide 29, your ongoing commitment was to deliver annual margin increases of 1 percentage point in fiscal ‘21 and fiscal ‘22. Appreciate you’re not talking guidance today, but am I right to assume that, that doesn’t change?

Nessa O’Sullivan: Scott, as Graham said, we’re not giving guidance at the moment. We’re just releasing to the market to say, over the last 2 years, we’ve got 1 point of margin improvement in each of the last 2 years. So that gives us this 2-point of margin improvement. I think, Scott, we’re going to have to leave our commentary on FY ‘22 to September.

Scott Ryall: All right. Okay. It’s worth a try. In terms of the delayed CapEx, is it literally just you didn’t get to buy as many pallets as you would have liked? Is there anything else in there that was missing or delayed?

Nessa O’Sullivan: So we didn’t get to buy as many, but the reasons were many. In some cases where we could get lumber, we couldn’t get the shipping containers. And so, in other cases, people were outbidding us for lumber, and we ended up prepaying for some lumber or doing cash to get lumber where we normally have longer payment terms. So the combination of all that, plus the sawmills don’t have the capacity, then when you do get the lumber, you can’t all of a sudden make all the pallets you want because there’s pallet manufacturing constraints as well. So yes, literally, we’re running our stocks across our group below the ideal level that we will hold because if you hold less pallets, it costs you more money because you have to relocate more pallets. You have to run plants more inefficiently because you’ve less of the new pallets coming into the flow, so we’re doing more quantum on repairs. And overall, you’re doing more transport miles. So it is literally, if we had been able to -- and you can see from our growing cash results that we had plenty -- it wasn’t the case that we were saying we couldn’t afford to buy these pallets and we were trying to make the cash look good. We actually had a lot of cash, and it would have -- we would have much preferred to start off the year having paid out that cash and have those pallets on hand.

Scott Ryall: No, sure. I was just trying to figure out if it was literally just CapEx or -- sorry, pallets or whether there was other CapEx that was also delayed outside of pallets, but it sounds like it was principally pallets.

Nessa O’Sullivan: No, we had some movement -- yes, we had some movement in nonpooling CapEx from first half to second half, which came about with some of the COVID closures. But the reason why the nonpooling is a bit lower is really about the completion of some of those bigger projects that we outlined in Investor Day in 2018.

Scott Ryall: Okay. And then can I just ask in Graham’s sustainability slide -- sustainability achievement slide on Slide 6, I think it is. You mentioned the first closed-loop upcycled plastic platform in the market. Could you just give a little bit more detail? I’m not sure if you skipped over that for a reason. But what market, what -- can you just talk a little bit more about that, please?

Graham Chipchase: It was in Europe. It’s called the [poly] Q+, which I knew you wanted to know that. So what the whole thing about upcycling is about is making sure that you’re producing products from waste plastic, which have a higher utility than the waste that it comes from. So that’s all it is. It’s a -- as you might know, it’s quite difficult to create, particularly for things like a pallet, so structural plastic out of wholly recycled plastic is quite tricky to do. And this is the first example, one where we’ve actually done it and launched in the market.

Scott Ryall: Okay. And sorry, which market is it?

Graham Chipchase: Europe.

Scott Ryall: Yes, but you said before that’s a whole bunch of different markets. Have you got a particular country that you’ve launched it in? Or is it just lots of different countries?

Graham Chipchase: I think it’s in a couple. I don’t know off the top of my head which ones it is but it’s in a couple in Europe.

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

Andre Fromyhr: Just curious about the increased pricing for higher-risk lanes. How material is that relative to base prices? And how receptive are customers to find out they’re paying more because they’re considered higher risk?

Nessa O’Sullivan: So you as a consumer, if anybody tells you, you have to pay more for stuff, you’re not going to be overjoyed. So I think it’s fair to say customers don’t like paying more. So for us, it’s about going through the economics and explaining why the cost to serve are higher. In some cases, it makes sense and they put it on the whitewood pallet or they don’t use a pool pallet. If the losses are higher, they still -- it may be that they accept the premium, they’re prepared to take a premium and then they price their products accordingly, factoring in it’s a higher cost to serve in that market. Every business has different markets where it’s higher cost to serve, and most people have got regional or other prices, zone pricing, et cetera, that reflect what the costs are to serve. So in terms of our business, we sort of always sort of run the NPD or what we would call as those nonparticipating but tend to be higher risk as a sort of 7% to 8%. And you might say with flows changing and dynamics changing, somewhere under 10% of our total flows. So for us, it’s about when people recognize what the real cost to serve is, they sometimes then change behavior as a result. So we would rather not lose the pallets or else we have to charge appropriately for the pallet. So hence, it’s a bit about collaboration with customers, retailers, et cetera. It’s also looking at how can we get -- how can we talk about paying more in terms of the extra collection engines, having some higher recyclers enforcing legal title. So we’re doing our bit from our end to improve recovery from those so that they’re not as high loss. But we do have to reflect cost to serve. And you should -- the premium that we charge is commercially sensitive, and it is tailored depending on the loss experience for each particular customer. So that’s not something that we would talk about.

Andre Fromyhr: Got it. Is it sort of a step in the direction of even more price discrimination across your portfolio such that you’re considering the characteristics...

Nessa O’Sullivan: I’d say differentiation -- I would differentiation, not discrimination. So I think it’s more aligning pricing more closely with the actual cost to serve. And in some cases, the increases are material.

Andre Fromyhr: Sure. Just one final one for me. The -- and as much as you’re not talking about FY ‘22 guidance, there is a comment about increased investments and initiatives in FY ‘22 with the benefits to yield in ‘23. Am I right in assuming that that’s referring to continued spending under the Shaping Our Future program? Or is there sort of another layer on top of that?

Graham Chipchase: Yes. I mean if you go back to what I said, it is absolutely about the fact that we’re recognizing some of those investments that we need to make to deliver the Shaping Our Future transformation program. So yes, that’s exactly what it’s going to be about.

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

Anthony Moulder: Just a couple of questions for me. If I start with surcharging the $60 million that went through the U.S. or the Americas business, I should say, I understand surcharging is for the higher cost of lumber through the repair process. But you’re also surcharging on the cost of new pallets for customers that were demanding those new pallets?

Nessa O’Sullivan: So our lumber surcharge that we charge, Anthony, is linked to the actual -- an index that’s part of their contract. So it is reflected in what gets negotiated and linked to that. But yes, lumber impacts us in 2 ways

Anthony Moulder: And so all customers would pay that -- the surcharging for the higher CapEx of pallet?

Nessa O’Sullivan: No, we haven’t actually -- so -- we have it in about 80% -- we have surcharge flows in about 80% of the contracts. And lumber has to go above a certain threshold before you start charging it. So there’s -- and so for us, as it comes in, there’s a time lag before we do that. We try and get surcharge closely into all our contracts. It hasn’t always been commercially possible to get it into every, but I think we’ve done a good job getting 80% coverage.

Anthony Moulder: Understood. And the -- I think about the pricing increases for the U.S. the right way, 2% in the first half, or what was it, 5% for the year or maybe 8% for the second half, and that’s across 25% of the contracts that you’ve renegotiated that, to your earlier point, some of them obviously significant increases. But relative to the increases that you were pushing through between FY ‘18 into earlier this year, is it a similar kind of quantum? Is that fair to assume a similar level?

Nessa O’Sullivan: I think there’s 2 -- so first of all, if you remember from FY ‘18, quite rightly, we were doing the repricing, which we said would take roughly 3 years. We actually -- so from the first half, you’re right that price was plus 2%, and the volume was plus 5% of the 7%. And in the second half, you did see an escalation in the pricing mix. Part of that’s a function of what we’re cycling in prior year. And part of that is a function of the higher cost environment as some of the costs have come up as the level of increase has been a bit higher, reflective of the cost to serve to those businesses.

Anthony Moulder: But that’s still net of surcharges, isn’t it?

Nessa O’Sullivan: It’s -- this -- the pricing that you’re seeing in the U.S., this is pre-surcharges, absolutely. This is the top line pricing that’s negotiated in the contracts.

Anthony Moulder: Yes, okay. And last question I have is that given that focus on getting pallets out of inventory, out of retailers, distributors, is it now time to renegotiate the Walmart contract?

Graham Chipchase: Wouldn’t that be lovely. I think -- yes. The other way of looking at it is, I think, many have tried before and failed on that one. I think what we’re doing actually is probably more likely to be successful, which is to work with Walmart and collaborate with them to try and start looking at the pinch points and get them to help us solve some of the problems, which I’m sure we’ll talk about a bit more in September, but we have done quite a lot over the last 2 years particularly around using data -- digitally enabled pallets to work with them. And for example, a small anecdote, I think 2 or 3 years ago, there was -- most meetings would then start us up about arguing whose data was correct, ours or theirs. Now they’ve seen digitally enabled pallets we put into their system, they start now saying, okay, we’ve got one version of the truth. Yes, we agree this is now happening in the system. There’s leakage here. There’s stuff going on there, which is not in our contract. We need to fix it. So they’ve actually been very supportive in trying to sort things out. I agree, it would be a nice time to make that change. But again, they are, if not a customer, clearly an advocate and to go back to them now and say, "Yes, yes, we don’t want you to use those wooden pallets," I think it would go down probably badly. So I think our approach is probably more likely to yield results than trying to renegotiate the whole contract.

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

Graham Chipchase: Thanks very much, everyone, for dialing in and for all the questions. I guess just to conclude, we’re obviously very pleased with this result. I think it’s showing the resilience of the business in very, very difficult operating environment and times. I think to be able to deliver the above mid-single-digit revenue growth, have a great cash performance, finally get some operating leverage on the bottom line, maintain the ROCI in the high teens and, at the same time, do all that and achieve some really great recognition and results around sustainability, I think that’s a really, really good performance. So very, very happy to discuss it with you. Looking forward to the Investor Day. I know it might feel like a long wait before we can talk about FY ‘22. So I just pray for your indulgence and patience that we wait until then. But we’re really excited about what we’re going to tell you about in September. So hopefully, you’ll all be able to dial in and join us. Thanks very much.