By Glenn Dyer | More Articles by Glenn Dyer

Logistics multinational Brambles has upgraded its June 30 guidance, forecasting better than previously expected sales gains and a sharp improvement in earnings as it battled through supply chain problems and rising costs, especially timber (lumber in the US).

In an extensive trading update on Thursday the company said that it now expects (in constant currency terms) revenue growth by June 30 or 8% to 9% over 2020-21, up from the previous guidance of 6% to 8%.

That was supported by the nine months sales figures up to the end of the March quarter which Brambles said rose 7% (at actual currency values, not constant) to $US4.07 billion from the first 9 months of 2020-21.

Shareholders loved the update and sent the shares up almost 8% to $10.82, the highest they have been since the start of the year. They especially loved the news that the company was managing to recoup cost rises.

On a constant currency basis, sales were up 8% which Brambles said “reflected ongoing strong price realisation to recover cost-to-serve increases in all regions, including sustained high levels of input cost inflation and increased capital cost of pallets.”

“Group sales volumes were broadly in line with the prior corresponding period. This represents net new business wins in European pallets and Australian RPCs offsetting lower like-for-like volumes with existing customers in North American and European pallets as these businesses cycled strong demand in the prior year.

“Pallet availability constraints also continued to limit current period growth with new and existing customers in all regions,” Brambles said in its update

More importantly was an upgrade to the company’s guidance for growth in underlying profit of 6% to 7%, up from 3% to 5% “including approximately $US50 million of short-term transformation costs.”

Excluding those one-off costs, Brambles said underlying profit would be up by between 11% and 12%, from the previous guidance of 8% to 10%

The company said its free cash flow would see a small improvement – from $US350 million outflow previously to a new estimate of $US300 to $US350 million “with improvement in net outflow expectations reflecting increased earnings and working capital reductions.”

“As outlined at the 1H22 result, the FY22 outflow expectation reflects the part reversal of US$215 million of FY21 timing benefits, extraordinary levels of lumber inflation and additional pallet purchases due to extended cycle times and lower pallet returns in all regions,” Brambles explained

Brambles hinted at a higher payout at June 30, stating “dividends are expected to be in line with Brambles’ policy to pay out between 45-60% of Underlying Profit after finance costs and tax in US dollar terms.” If

The company said its on-market share buy-back program is expected to complete in this financial year with ~$A120 million of the $A2.4 billion on-market buy-back remaining to be completed.

“The completion of the buy-back is subject to the ongoing assessment of the Group’s funding requirements, broader market conditions and alternative investment opportunities consistent with Brambles’ approach to capital management” which also leaves open the suggestion that a new buyback could emerge if all the boxes are ticked.

Commenting on the third-quarter performance, Brambles’ CEO, Graham Chipchase said: “Strong sales revenue momentum continued in the third quarter resulting in year-to-date growth of 8%. The sales performance in the third quarter was driven by pricing actions in response to operating cost inflation, pallet scarcity and increased pallet costs driven by extraordinary lumber inflation. The benefits of the commercial discipline to recover the significant cost-to-serve increases were particularly strong in the US business.

“The supply chain dynamics and inflationary pressures we noted in the first half of the year were further exacerbated in the third quarter by the conflict in Ukraine and Russia. Ongoing disruptions in global freight and lumber markets continue to impact the flow of goods across supply chains resulting in higher costs across our business,” he added.

Looking to the future the company said it continues “to face pallet availability challenges with ongoing constraints on new pallet supply and lower than normal pallet returns in all regions. As a result, we are continuing to see lower pallet repair activity across our network which we expect to normalise in FY23. Our teams are working around the clock to improve asset efficiency and secure new pallets to service our customers and create capacity for new business growth.

“Despite all these headwinds, the success of pricing and business efficiency initiatives supports the upgrade of our FY22 guidance for sales, earnings and Free Cash Flow after dividends. This upgrade reflects our focus on recovering the increased cost-to-serve and generating appropriate returns on the capital investments needed to service our customers and support future growth.

“Our plastic pallet trials with Costco are ongoing and we remain on track to make a decision by the end of FY22. Any investment in plastic pallets will only be made if returns are not dilutive to Group return on capital invested after an initial ramp up period and will be subject to ongoing review as part of the Group’s disciplined capital allocation process.”

Despite these assurances, there remains a great deal of analyst concern about plastic pallets and their costs and reliability.

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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