Brambles Ltd

ASX:BXB

Earnings Call Transcript 2023-Q2

[Operator]

Thank you for standing by. And welcome to the Brambles Limited 2023 Half Year Results Briefing. All participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to Graham Chipchase, CEO. Please go ahead.

[Graham Chipchase, Chief Executive Officer]

Good morning, everyone. And thank you for joining us for our 2023 half year results. Before discussing our half year results, I’d like to address the announcement we made earlier this morning regarding Nessa’s intention to retire from Brambles and step back from full time executive life.

Over the past six years, Nessa has been instrumental in delivering our strategy and moving our company forward during a period of significant volatility. It has been quite the journey and I want to thank her for her dedication and for the leadership she has brought to our finance function during this time.

As most of you have seen, Nessa has been an outstanding CFO, setting high standards and ensuring robust governance, while also demonstrating mastery of the fine detail. As noted in the announcement, we will now commence a search for her successor. Nessa has agreed to work with us to ensure a smooth transition.

Turning now to our result. Today I will start by providing a summary of our performance for the half year then give an update on progress against our transformation program and the revised FY 2023 outlook statement before Nessa takes you through the detailed financials.

Turning to slide three and the key messages from our half year performance, I would like to start by calling out an outstanding result for Brambles in what continues to be a challenging operating environment. The business delivered revenue growth of 14%, which is driven by pricing to recover both operating and capital cost-to-serve increases.

Volumes were slightly down in the half, with early signs of slowing consumer demand in the United States and Europe, as well as pallet availability challenges, which limited growth with new and existing customers.

Underlying profit growth of 25% on a constant currency basis included benefits relating to deferred plant and transport costs due to lower pallet return rates and one-off insurance proceeds. Excluding these benefits, underlying profit increased 16%, with the business delivering operating leverage as pricing and surcharge income more than offset input cost inflation, higher pallet losses and incremental overhead investments to support growth and transformation initiatives.

Cash flow from operations decreased $42 million as higher earnings and compensation recoveries were more than offset by an increase in cash capital expenditure. This is largely due to the timing of payments for pallet purchases, which also included $170 million impact of lumber inflation on the cost of new pallets.

Free cash flow after dividends was in line with the prior year, as the decline in cash flow from operations was offset by proceeds received from the repayment of a loan receivable relating to the divestment of the Hoover Ferguson Group investment in 2018.

Earnings per share growth of 24% on a constant currency basis is in line with earnings performance and also benefits from a reduction of shares on issue compared with the first half of FY 2022, following the completion of the share buyback in June 2022.

The strong earnings performance has given us confidence to declare an interim dividend of US$0.1225 per share, an increase of 14% on the prior year. This represents a payout ratio of 49%.

Finally, our return on capital invested of 19.8% increased 1.2 points as the strong profit performance more than offset the increase in investments in higher cost pallets over the past 12 months.

Turning to the next slide, this strong performance was delivered in challenging operating conditions with ongoing disruptions and uncertainty across global supply chains. As outlined on slide four, the inflationary cost pressures and supply chain dynamics experienced in FY 2022 continued into the first half, adding both costs and inefficiencies across customer supply chains and our own operations.

Input cost inflation was persistent during the first half across key inputs including lumber, labor, transport and fuel in all regions. However, some of these pressures began to moderate towards the end of the half.

Importantly, while we expect transport and fuel cost to continue moderating, labor costs are expected to remain elevated with wage inflation in many regions, reflecting increasing cost of living pressures.

Lumber and pallet prices continue to remain well above historic levels, despite moderation in some markets. Nessa will provide more detail on lumber and pallet pricing dynamics in her slides, but the key points to highlight are, despite moderating lumber and pallet prices the Group weighted average pallet price is up 14% in the first half and while we continue to expect lumber and pallet prices to moderate, the FY 2023 average price per pallet is expected to remain higher than FY 2022.

Turning to supply chain dynamics, elevated inventory levels across retailer and customer supply chains continue to impact cycle times and plant stock levels in all regions. While Australia remains challenging with no material signs of destocking, we started to see early improvements in pallet return rates in North America and the U.K. at the end of the first half.

While phasing will vary between regions, we are expecting pallet return rates to continue improving in the U.S. and Europe, as supply chains in these regions progressively reduce inventory levels through the second half of FY 2023.

As pallet return rates improve, this will continue to benefit our plant stock levels, which have been operating below optimal levels due to uncertainty in supply chains. Combined with our many asset productivity initiatives, plant stock levels have started to improve in most regions at the start of the second half and with the progressive destocking anticipated, a gradual lifting of allocations in the U.S. and new business activities being pursued in Europe is expected in the second half of the year.

Turning to the next slide, I want to now take some time to provide you with a framework, which outlines the potential impacts to our business of the progressive destocking scenario we are anticipating. This underpins a number of our second half expectations and the updated FY 2023 guidance we have provided today.

Our forecast scenario is for a progressive destocking of inventory levels across supply chains, which is expected to result in an additional 5 million to 6 million pallets gradually returning back to our network in the second half of the year.

Our expectations of a progressive destocking scenario are informed by the various discussions with customers and other supply chain participants that are ultimately dependent on a number of factors as outlined on the slide.

Before getting into the details, I want to emphasize that our business is well placed to manage a progressive destocking scenario, considering the challenges and net inefficiencies and increased inventory levels and supply chains have induced into our operations.

While we expect pallets returning to be a net benefit to the business, there are a number of variables to consider. On volumes, the increased pallet returns will allow us to redeploy these pallets and pursue pent-up demand, including net new business, which has been challenged due to pallet availability across our network. However, we anticipate that there may be challenges to like-for-like volumes, which are subject to macroeconomic conditions, as well as the one-off impact on volumes of destocking.

Looking at plant stock, we have been operating at suboptimal levels for some time. A progressive destock and associated pallet returns are likely to improve plant stock levels, which will increase the efficiency of our network. The increased pallet returns should result in a reversal of the deferred net repair and transport cost benefits called out this period.

However, any cost headwind would be partially offset by improved network efficiency with less relocation of pallets between service centers to align to customer demand patterns and better utilization of our plants by maximizing the throughput capacity of fixed cost investments.

Destocking will arguably have the greatest benefit to our pooling CapEx and cash flow as pallet return rates improve, reducing our requirement to invest in new pallets for the pool. While we expect destocking to occur in the second half, the cash flow benefit is weighted to FY 2024, largely due to a delay in realizing the cash benefits associated with any CapEx avoidance.

Finally, we expect rational competitive behavior to continue over the medium-term. With many pooling networks across the world having experienced challenges in their plant stock levels, a gradual destocking event is likely to replenish pallet supply to more optimal levels and gives us confidence that rationality will be maintained.

As you can see, there are a number of moving parts in a destocking scenario that can impact the business. However, on balance, we believe that a progressive destocking scenario is likely to be a net positive for Brambles.

Turning over the slide, the continued challenges to supply chain dynamics, including inflationary cost pressures and increased inventory holdings reinforces the importance of our transformation program. One of the core goals of the transformation program is to increase the efficiency and resilience of the company.

Considering the asset productivity headwinds the business has experienced, our continued efforts and discipline on asset efficiency has assisted in offsetting some of the challenges we have experienced.

During the first half, we made improvements to our commercial terms to reward collaborative approaches to asset use and efficiency. This has supported our strong profit performance in the half and created greater alignment of outcomes, ensuring our pallets are used properly and returned in a timely manner.

Combined with the continuation of the successful activities from FY 2022 to improve asset productivity, an additional 5 million pallets were made available for customers in the last six months, with further details on these specific initiatives outlined in Appendix 1 of today’s presentation.

Across our network, we have now commissioned nine integrated repair cells and expect this to reach 23 by the end of FY 2023. This is one less than initially forecast, although we expect the timing delay to be minimal.

In addition to the nine sites already commissioned, we currently have an additional four sites where the installation is either nearly complete or awaiting commissioning, which gives us confidence of the continued ramp-up expected in the second half of the year.

Improving our network is not just about automating repairs, but also working on ways to improve the durability of our pallets. We improved our damage rate by 35 basis points against FY 2022 through improved pallet design, repair techniques and investments in quality, which means they can be reissued more quickly to our customers.

I will provide further detail on our digital transformation on slide eight. So we will move now to customers where we continue to prioritize improvements to their experience and the quality of interactions we have each day. Our goal remains to make Brambles the natural partner of choice today and tomorrow.

Improvements during the period include further rollout of our dynamic delivery notifications, which provides greater visibility of orders to allow customers to better plan their daily production activities.

Multiple process improvements to our myCHEP portal, a key touch point for our customers to make orders and manage their accounts. And the simplified commercial model for smaller customers in Canada, which streamlines the fee structure and also provides them with greater certainty of overall fees.

Finally, we continue to support our customers in keeping supply chains moving as pallets return, as well as increased investments in countries like Australia.

Turning to the next slide, our shaping our future scorecard outlines the metrics and measures we are targeting and the building blocks of our transformation program. Each metric contributes to the strength of our sustainable business model to transform the business and unlock value for customers and shareholders.

As you can see, some metrics have already been achieved and others are progressing ahead of target, while most are progressing and are on track. However, in challenging operating conditions and amid uncertainty across global supply chains, some metrics are tracking below target.

Consistent with FY 2022, supply chain dynamics led to higher cycle times, increased misuse of pallets and pallet availability challenges across our major regions, which impacted volume growth and customer Net Promoter Scores.

While pallet availability challenges are a large reason for the Net Promoter Score tracking below target, we are not relying solely on the improvements in supply chain dynamics to increase our NPS score and customer satisfaction.

As an example, we are gathering feedback in real time, engaging the quality of our customer interactions with approximately 7,000 completed surveys this half, providing us with actionable insights.

The market conditions continue to create challenges for asset efficiency metrics with both the pooling CapEx to sales ratio and uncompensated pallet losses tracking below the scorecard target. Despite the challenging operating conditions, the Group’s pooling CapEx to sales ratio improved in the first half of FY 2023 by 2 points, and we expect further improvements for the full year.

Importantly, comprehensive plans are in place and being implemented to mitigate any headwinds from the metrics below target and successfully deliver on the benefits of the transformation program. We are also beginning to see early signs of improvement in the operating conditions, which should have a positive impact on a number of the metrics currently below target.

Turning to the next slide, we continue to make strong progress on our digital transformation, utilizing data and technology to provide better visibility of our assets and network, as well as underpinning new customer experience trials.

We now have over 300,000 smart pallets across our network. More than 50,000 are live in over 25 countries having been injected into the network in a targeted manner to test a specific hypothesis. In the period, we expanded the targeted diagnostics program to five additional countries.

We also have over 250,000 smart pallets deployed to deliver continuous diagnostics more widely across our network. This includes 200,000 deployed in the U.K. and on our stringer pallets in Canada, which continue to deliver insights on unauthorized activities and flows of our pallets.

We have also progressed the rollout of continuous diagnostics in North America and in Chile as part of the serialization plus trial. The serialization plus trial, which aims to uniquely identify every pallet is progressing well, and as of December 2022, we had approximately 180,000 pallets serialized. The process ramped up significantly in January 2023, with a step change improvement in the tagging rate, giving us confidence that we are on track with our FY 2023 priorities.

Turning to customer experience, we are excited about the trial of three solutions, which are all designed to remove inefficiencies across customer’s supply chains. These trials leverage our unique visibility across the supply chain to generate customer value.

On the right-hand side, we have our FY 2023 priorities for each initiative outlined. I don’t propose to go into detail on each of the FY 2023 priorities, but we continue to make progress with each priority on track and I look forward to providing a further update in August 2023. Importantly, we remain disciplined in our approach of deploying capital with future investments in FY 2024 and FY 2025 conditional on demonstrating value and scalability.

Turning to our sustainability highlights, we are extremely proud of our track record in delivering improvements against our 2025 sustainability targets. Some highlights for the first half year includes an improvement to our injury frequency rate and a 2-point increase in the representation of women in management positions, which reached 35%.

We have also reduced our Scope 1, 2 and 3 emissions during the half, which represents a positive step forward since our June 2022 commitment to net zero emissions by 2040. There was also an improvement to our waste diverted from landfill across our owned and third-party sites, another step towards our 2025 commitment of zero product material is being sent to landfill.

Finally, we have further enhanced our leading ESG assessment credentials in the first half, including the top position in the Dow Jones Sustainability Index in our industry category being named the world’s third most sustainable company by Corporate Knights and being recognized as a global top employer.

Turning to the outlook, Brambles has upgraded its FY 2023 sales and earnings guidance, which reflects better than expected price realization, driven by both commercial actions and customer mix, combined with improvements to both our pipeline of productivity initiatives and outlook on the macroeconomic environment.

For the year ended 30th of June, 2023, Brambles now expects sales revenue growth of between 12% and 14% at constant currency, underlying profit growth of between 15% and 18% at constant currency, including US$25 million of short-term transformation costs. We expect free cash flow after dividends to benefit from the upgraded earnings guidance and to be an improvement on FY 2022, albeit still a net outflow.

The level of underlying improvement is dependent on lumber and pallet pricing, normalization of inventory levels and flows across global supply chains and other productivity improvements in the asset pool.

Dividend payout ratio to be consistent with the dividend payout policy of 45% to 60% of underlying profit after finance costs and tax in U.S. dollar terms. The outlook is dependent on a number of factors as outlined on the slide.

I will now hand over to Nessa to provide the financial update.

[Nessa O'Sullivan, Chief Financial Officer]

Thank you, Graham, and good morning, everyone. Starting with our first half results, the Group delivered strong sales revenue growth of 14%. Other income of $181.5 million increased by $80 million at constant currency, with almost half of the increase due to higher surcharge income in North America with the balance due to increased asset compensations and one-off flood insurance proceeds in Australia.

North American surcharge income is linked to market indices for lumber, transport and fuel, with the increase in the first half, largely driven by fuel surcharges. Lumber surcharge declined year-on-year, in line with the decline in lumber prices in the U.S.

Underlying profit growth of 25% at constant currency included 7 points of deferred plant and transport cost timing benefits associated with lower pallet return rates and a 2-point benefit from one-off insurance proceeds relating to Australian floods. Excluding these timing and one-off benefits, underlying profit increased 16% at constant currency and delivered operating profit leverage.

Profit after tax for the Group increased 20% at constant currency. The net finance cost increase was driven by increased interest rates on variable rate debt and higher average net debt over the period, and the effective tax rate remained broadly in line with the prior comparative period. The first half results also included a hyperinflation charge of $12 million, reflecting Brambles’ operations in Türkiye, Argentina and Zimbabwe.

Brambles’ basic EPS increased by 24%, reflecting the Group’s profit after tax growth of 20% and includes a 4-point benefit from the share buyback program which was completed in June 2022.

Turning to the revenue growth on slide 13, Group sales revenue increased 14% at constant currency, driven by strong pricing in all regions to recover both operating and capital cost to serve increases.

Group volumes declined 1% as net new business growth was offset by a decline in like-for-like demand. Net new business volume increased 1% as pallet availability limited the business’ ability to pursue new contract wins in the half. Growth in the period reflected rollover contributions from prior year contract wins in the European pallet business. Like-for-like volume decline of 2% reflected pallet availability constraints and softening demand across key markets.

Looking at the Group profit analysis on slide 14, sales growth in the North American surcharge income contributed $454 million to Group profit, which more than offset the impact of cost inflation and other operating cost increases in the period.

Plant costs increased $126 million, reflecting input cost inflation, including repair lumber of $92 million and inefficiencies associated with the scarcity of pallets with the balance of the increase driven by additional repair costs associated with the manufacturing of 1 million pallets that would otherwise have been scrapped. These plant cost increases were offset by approximately $20 million of plant cost benefits due to repair cost deferrals relating to lower pallet returns and includes damage rate improvements in the U.S. and European businesses and automation benefits.

Transport cost increases of $72 million included $48 million of fuel and transport inflation, increased relocation costs driven by less than ideal plant stock levels and incremental cost to increase asset collections, which yielded approximately 4 million pallet recoveries in the half. The transport operation cost increases were partly offset by a $15 million benefit of deferred costs due to lower pallet return rates.

Depreciation increases of $36 million largely reflects the impact of lumber inflation on pallet purchases. IPEP expense increased $21 million in the half, largely due to higher pallet losses in the U.S.

Finally, other cost increases of $86 million reflect overhead investments across the Group to support growth and the delivery of the overall transformation program. These investments in increased capability were partly offset by higher asset compensations and a reduction in the short-term transformation costs, which is in line with the fiscal year 2023 expectations we outlined at the full year FY 2022 results presentation.

Now turning to slide 15 and taking a closer look at the market lumber inflation and our pallet price evolution in our largest regions. After a prolonged period of extraordinary lumber inflation, including historic highs over the past two years, we have started to see market lumber cost moderating.

Looking at the lumber market dynamics in our key regions on the left-hand side of the chart, U.S. market lumber prices peaked in the second half of last year, and we are seeing lumber costs moderating, reflecting improved supply and lower demand for lumber in the market. While U.S. market lumber prices are currently well below the peaks in the prior year, they remain above pre-pandemic levels.

European market lumber pricing increased in March 2022 due to the Russia and Ukraine war impacting global lumber supplies. More recently, lumber prices have begun to moderate. And in Latin America, pallet prices have stabilized, but remain high due to the strong demand for lumber from Latin America across the globe.

Turning to the impact of these lumber market dynamics on our pallet prices, the charts in the middle of the slide show the movement of Brambles pallet prices for the primary pallet in each region since June 2020. Prices have been rebased to June 2020 to capture the movement of pallet prices during this period of elevated lumber inflation.

As you can see, the dynamics in all three markets vary as does the average pallet price we are paying each month across the regions. However, overall, our pallet prices in all three regions are following the general downward market trend, noting there will always be a delay in the flow-through of market lumber rates into our pallet prices given how we source lumber.

Despite this trend, pallet prices in all regions increased over the first half of the prior year. Combining the various factors across the regions, the Group weighted average pallet price increased by 14% over the prior year first half, with a mix impact due to the higher number of pallets purchased in higher priced markets and also impacted by the mix of where the lumber has been sourced.

Looking to our expectations for the rest of this financial year, in line with our outlook in August 2022, we continue to expect the full year Group weighted average pallet price to increase over FY 2022 due to the region and sourcing mix. However, in terms of the second half year-on-year pallet price outlook, given the prior year half two peaks in lumber, we expect the weighted average pallet price to be below the prior year half two level.

Despite these significant increases in pallet prices which have impacted cash flow and pooling CapEx in recent years, we are confident we will be able to deliver appropriate returns on these higher priced pallets through a combination of pricing and surcharges, noting that the recovery of appropriate returns is phased over multiple years given the related assets have a 10-year life.

Now turning to slide 16 and the Group’s asset efficiency performance in the period. Pooling CapEx to sales, which is the Group’s asset efficiency metric, improved with the ratio decreasing by 2.2 percentage points despite a 3 percentage point impact of lumber inflation in the period. The improvement in the poly CapEx to sales ratio was largely due to both the revenue growth and an overall reduction in the number of pallets purchases compared to the prior corresponding period.

Pallet purchases were made to support cycle time increases, replace scrapped and lost assets and to increase plant stock. They were offset by lower issue volumes in the period and successful asset productivity initiatives detailed in Appendix 1 of the ASX slide deck, which resulted in 5 million additional pallets recovered and refurbished.

On a full year basis, we previously guided to the market despite pallet price inflation in the year. We expect the pooling CapEx to sales ratio to improve by 3 points to 4 points versus FY 2022 levels, reflecting ongoing sales revenue growth, as well as the expected improvement in pallet return rates as U.S. and Europe supply chains progressively destock and benefits are delivered from our asset productivity initiatives.

Turning to the segment results for CHEP Americas. The Americas segment delivered sales growth of 15% at constant currency, reflecting strong pricing growth to recover cost-to-serve increases across the region. The region also delivered both margin and ROCE improvements despite inflationary cost pressures and higher asset losses due to challenging supply chain dynamics.

Underlying profit growth of 26% at constant currency included a 12 percentage point timing benefit with the lower pallet return rates, driving lower transport and plant activity costs. Excluding this timing benefit, underlying profit increased 14%, reflecting strong sales flow through to profit, as well as the incremental North American surcharge income and pallet durability benefits. These benefits were more than sufficient to offset plant and transport cost inflation, additional asset recovery and remanufacturing costs, higher asset charges and overhead investments to support future growth and the transformation program.

The North America surcharge income, which delivered $38 million of incremental income in the period is combined with the headline pricing intended to recover the inflation impacts on operating costs and to enable delivery of appropriate return on increased capital cost of pallets.

Return on capital invested improved 1.4 percentage points at constant currency, driven by the increased earnings, partly offset by a 17% increase in the average capital invested, which reflects the impact of lumber inflation on pallet purchases over the previous 12 months.

Turning to slide 18 for the revenue profile of the U.S. business. Sales revenue for the U.S. business, which excludes surcharge income, increased 13% with pricing growth of 19%, reflecting rollover contributions from prior year pricing actions and additional pricing initiatives to recover operating and capital cost inflation in the first half.

Volumes in the period were down 6%, half of which was due to softening consumer demand, with the balance reflecting constrained pallet availability impacting both like-for-like volumes and net new business volumes, which was in line with the prior year.

Turning to the EMEA region on slide 19. CHEP EMEA delivered sales growth of 14%, reflecting strong pricing to recover operating cost to serve increases and progressively recover the impact of lumber inflation on the capital cost of pallets.

At constant currency, underlying profit increased 16%, with margins improving by 0.5 percentage points as the sales flow through to profit and higher pallet compensations more than offset the impact of input cost inflation across plant, transport and overhead costs. In addition to inflation, overhead investments in the period included additional resources to support growth and the transformation program.

Looking at CHEP EMEA sales growth on slide 20. Overall sales growth in the region was 14%, driven by pricing growth of 12% to recover operating cost-to-serve increases and progressively deliver a return on the capital cost of pallets, noting that the pallets have a 10-year useful life. The increase in price in the region includes indexation.

Volumes were up 2 percentage points with the rollover from prior year contract wins, partly offset by a 1 percentage point decline in like-for-like volumes, largely due to the softening of demand. Pallet availability constraints in Europe continue to impact both like-for-like volumes and net new business wins in the period.

Turning to the Asia-Pacific region on slide 21. The business delivered revenue growth of 10% in constant currency, driven by both pricing and volume growth in the pallets business and growth with existing customers in the Australian RPC business.

Underlying profit growth of 31% included $8 million of one-off benefit from insurance proceeds relating to floods in Australia and a $6 million timing benefit on deferred repair costs due to lower pallet return rates.

Excluding these one-off and timing benefits, underlying profit increased 13% as sales growth and automation benefits delivered in the Australian RPC business were sufficient to offset inflationary cost pressures.

The 5.4 percentage point increase in ROCE in the period was largely due to the one-off and timing benefits recognized in the underlying profit, which accounted for just under 5 points of ROCE growth, with the balance of the ROCE improvement driven by underlying earnings growth more than offsetting the impact of an 11% increase in the average capital invested. The ACI increase relates to pallet purchases and the increase in per unit cost of a pallet, impacted by both domestic lumber inflation and the sourcing of higher-cost offshore lumber.

I will now take you through the corporate segment on slide 22. Overall costs in the corporate segment increased $3 million at constant currency, as a reduction in transformation spend of $4 million was offset by an increase of $7 million in corporate costs, reflecting both labor inflation, as well as additional resources and other employee-related costs.

Shaping our future spend decreased $4 million at constant currency, with the $11 million reduction in short-term transformation costs, largely consulting fees, partly offset by $7 million of additional investments to support the digital transformation and other Group-wide initiatives, including improving the customer experience. It’s important to note that there are additional ongoing transformation costs that are reflected within the regions and not included in the corporate segment.

Turning to our cash performance on slide 23. Cash flow from operations decreased $42 million at actual FX rates, driven by $154 million increase in cash CapEx, largely due to lumber inflation and the timing of pallet payments, with approximately $170 million outflow in the first half due to lumber inflation on pallets relating to the purchases in the final quarter of FY 2022 and in the first quarter of FY 2023.

Free cash outflow after dividends of $147 million was in line with the prior year, with the decline in cash flow from operations and $8 million incremental outflow on financing costs and tax, offset by a $51 million increase in cash flow from discontinued operations.

The increase in discontinued operations reflected a $41.5 million final settlement from First Reserve, with the balance of the increase relating to cash flows from CHEP China now recognized in discontinued operations following the proposed transaction announced in November 2022.

Dividend payments remained broadly in line with the prior year as an increase in the DPS on the final FY 2022 dividend was offset by the benefit from the share buyback program which was completed in June 2022.

Turning to our balance sheet. The balance sheet remains strong with $1 billion of undrawn committed bank facilities and cash balances of $188 million. We maintained our strong investment grade credit ratings with our financial ratios remaining well within our policies. During the half, a Green Finance Framework was established alongside a euro medium-term note shelf program to facilitate bonds issuing in a green format.

To provide some further context for the upgraded guidance which Graham outlined earlier, I will finish by outlining some updated considerations which underpin our FY 2023 outlook. We expect sales revenue growth to be weighted to pricing as we continue to focus on recovering cost-to-serve increases in all regions, particularly in the EMEA and the Americas segment.

Price realization in half two is expected to include rollover contributions from pricing in the first half, half two pricing initiatives to recover cost-to-serve increases, as well as customer mix benefits.

Group volumes are expected to be broadly flat to prior year with ongoing downward pressure on like-for-like volumes due to macroeconomic slowdown and one-time impacts of destocking offset by the reissuing of return pallets to service existing customers and to pursue new business.

Timing benefits of approximately $35 million are expected to reverse in the second half of 2023, in line with 5 million to 6 million of pallet destocking expected in the second half.

The North America surcharge income is expected to decline year-on-year in the second half, reflecting anticipated year-on-year decline in lumber costs. For shaping our future, we expect full year short-term transformation costs of approximately $25 million, down from $48.4 million in FY 2022.

Ongoing corporate transformation costs are expected to include digital transformation operating costs of approximately $80 million, in line with the guidance provided at the full year FY 2022 results presentation.

Overhead costs, excluding shaping our future costs are expected to increase at the same run rate as in the first half of this year, reflecting the impact of the first half headcount increases and additional investment to support transformation.

Full year margins across all regions are expected to be above FY 2022 levels, despite a moderation in the second half margins, including the reversal of deferred plant and transport cost timing benefits.

Pooling CapEx in the second half is expected to be below the second half 2022 levels, reflecting improved pallet return rates including anticipated progressive destocking. Asset efficiency is also expected to continue to improve in the second half with the full year CapEx to sales ratio expected to reduce by 3 points to 4 points over the prior year. Cash flow benefits of lower pooling CapEx related to higher pallet return rates are expected to be weighted to FY 2024.

The level of underlying improvement in the CapEx to sales ratio is dependent on a number of unknown factors, including lumber and pallet prices, destocking and the rate of reduction of inventory levels across supply chains and other productivity improvements in the asset pool.

ROCE is expected to remain broadly in line with FY 2022, reflecting the full year ACI impact of second half 2022 and first half 2023 pallet purchases at elevated pallet prices and reversal of first half 2023 timing benefits impacting the second half underlying profit.

I will now hand back to Graham.

[Graham Chipchase, Chief Executive Officer]

In closing, I’d like to reiterate a strong first half performance in challenging conditions. We continue to support our customers in navigating supply chain challenges with increased investment and acceleration of transformation initiatives to restore pallet availability and pool efficiency in all regions.

The strong revenue and earnings performance supports our FY 2023 guidance upgrade. Our conservative balance sheet with US$1.2 billion of undrawn committed facilities and cash is a great competitive advantage for the business. The transformation program continues to deliver benefits, and we are making strong progress against our 2025 sustainability targets, including a reduction in direct and indirect emissions.

Thank you. And I will now hand over to the operator for Q&A.

[Operator]

Thank you. [Operator Instructions] The first question today comes from Matt Ryan from Barrenjoey. Please go ahead.

[Matt Ryan, Barrenjoey]

Thank you. Hi, Graham. Hi, Nessa. I just had a question on the anticipated destocking that you have sort of outlined on slide five, the 5 million to 6 million. Can you compare that to how many pallets you got back in the last major destocking event back in late 2016? And then secondly, just looking at that slide, I am just hoping if you can clarify whether we are to read your comments to suggest that if you do get the 5 million to 6 million back, you will have sufficient demand to redeploy the pallet straight away?

[Nessa O'Sullivan, Chief Financial Officer]

Hi, Matt. Thanks for the question. A couple of things to note, look -- and I think if you look at the first half FY 2017 results, which you are referencing the destocking, you will see that was a relatively small component of what we saw in terms of overall impact.

Really, what the issue was is we -- as in that year is that, we came into the year with high levels of pallet stocks coming into FY 2017 and then the anticipated growth did not eventuate. So while there was some destocking, that wasn’t the major event. It was really just due to underlying demand.

And look, and as we are thinking about destocking for this coming next six months and as we look forward, it’s been based on in each of the markets we have had input from customers and retailers about what they plan to do, it’s not an exact science.

But it’s fair to say how we -- how you should think about it is that we don’t anticipate going back, certainly, not in this half, to pre-pandemic levels of lower inventory. There is still a sense out in the market of need to hold additional inventory to manage supply chain risks globally and we would expect to see progressive destocking to continue certainly into the first half of FY 2024.

Hence, why we are giving you where we landed and what it is and then the related cost of getting those extra pallets back. You can think roughly that’s about the $35 million that you see reversing in the second half that we have -- that equates to the timing benefit that we had in the first half.

[Matt Ryan, Barrenjoey]

So how do we think of dwell time looking forward? Are you sort of expecting any change to customer behavior or are you thinking that the pallets coming back through the destocking is just related to sort of demand and inventory levels changing?

[Nessa O'Sullivan, Chief Financial Officer]

So, Matt, we do see that we would expect cycle time to come down progressively. But we don’t expect at least as we go through. Certainly the level of destocking we see will reduce cycle time, but it won’t reduce back to the quantum.

So we would expect really how we are thinking about it currently, but we will have to revise our views depending on what happens. But if you think about what we expect in the second half of this year and potentially going into next year, we would expect probably to at least half the cycle time increase that we saw since the pre-COVID times.

[Matt Ryan, Barrenjoey]

Okay. That’s really helpful. And just last one for me, if this all happens, I guess, faster than expected, are you sort of anticipating any bottlenecks in regards to repairs or transport or anything else that we need to think about?

[Nessa O'Sullivan, Chief Financial Officer]

So I think there’s a couple of things to note. First of all, we come into this period where we don’t have sufficient plant stock to operate efficiently across our networks and we have referenced 5 million to 6 million as sort of the level of pallets that we have been short, particularly if we think up to the first quarter trading update.

We would expect by the end of the year that we still would be about 2 million, 2.5 million pallets short of ideal levels. So if we start getting a lot more destocking, then we would have the opportunity to return to more optimal levels of plant stock earlier.

The second thing and depending, because it’s varying by market, we are in some markets now already gearing up to go after new business wins and looking at that pipeline, which hasn’t been feasible. In other markets, it would accelerate our ability to take people off destocking.

And then remembering we have the ability to change the pattern of how many the quantum and how many pallets we buy month-by-month when we order pallets. You should think about a lag of about a quarter.

We would then reduce our pallet purchases if we ended up with more pallets coming back quicker than we expected and because of the payment lag time, we would expect to see that benefit more flow into FY 2024 rather than in current year in terms of cash flow. I don’t know if you want to add anything, Graham.

[Graham Chipchase, Chief Executive Officer]

No. I think, I mean, Matt, the only thing I think we are looking at is, whether in some areas we have got enough labor to repair the pallets and labor is tight in some of our markets, but other than that, I think we are in pretty good shape to deal with varying rates of destocking. So I think we are in much better shape than they were last time there was a destocking.

[Nessa O'Sullivan, Chief Financial Officer]

Yeah. And I think also the added capacity that we put into the U.S. networks with the automation program, that was completed more than 12 months ago where we sort of saw an increase of about 20% in capacity, really gives us a lot more agility in our network to be able to handle that.

[Matt Ryan, Barrenjoey]

That’s helpful. Thank you.

[Operator]

The next question comes from Reinhardt van der Walt from Bank of America. Please go ahead.

[Reinhardt van der Walt, Bank of America]

Yeah. Good morning, folks. Congratulations on the result. I am conscious that we haven’t got a free cash flow guidance number just quite yet. Can you provide maybe just your thinking around omitting that little element from the guidance? What’s the one question that you need to have answered before you can give us a firm number?

[Graham Chipchase, Chief Executive Officer]

So I think one of the things we would say is, there were quite a few, and I think, we necessarily didn’t have a presentation there are quite a few big moving pieces here. So clearly it’s going to be things like the rate of destocking. It will also depend a little bit on macroeconomic conditions.

I think what we were trying to get across, if we can look at the glass half full here is, we have obviously had a very impressive upgrade on earnings in the outlook. We are expecting that to drop through into the cash flow.

And if you remember, when we did the guidance, we sort of said it was going to be better than 2022, which was minus $200 million and something, and it was going to be -- but it wasn’t going to be positive, so, i.e., not zero. So you have got a $220 something million range there.

And what we are sort of implying and saying is that the earnings drop through is going to come through to the cash flow. So we are obviously going to be a lot closer to one end of the range than the other.

But we can’t -- but because the numbers are quite big and lots of moving pieces, we would rather wait and see a few more months of activity and see whether the destocking is progressing at the rate we have assumed or not and it may be fast and it might be slow and I think those do have a big impact.

So, clearly, we are going to come back and update the market for trading in April and we will give a bit more of a view then, and obviously, it will depend on where we end up by the end of June. But I think we will have a clearer idea when we get to April. Anything you want to add to that?

[Nessa O'Sullivan, Chief Financial Officer]

No. I think that’s fair.

[Reinhardt van der Walt, Bank of America]

Got it. Thank you very much and I appreciate it’s a very narrow glide path. Just on the slowing like-for-like volumes that you are seeing specifically in the U.S. Could you maybe just give us a little bit of color around what kind of supply chains you are seeing that in, is there a sort of specific supply chain partner types where the volume slowdown is a bit more pronounced?

[Graham Chipchase, Chief Executive Officer]

It’s pretty much across the Board. Remember though that we are very much largely weighted to consumer staples. So it’s not like we are at risk and I think that’s one of the things when you are looking at market statements from retailers about inventory levels.

They have got a bigger mix than we have in terms of general merchandise versus consumer staples and you will see perhaps more of a destocking in general merchandise first rather than staple. So we are not seeing it being focused in one particular area.

And of course, we are also subject to quite seasonality in terms of things like beverages, which will be much more weighted to building up towards the summer period versus food and so there are a lot of moving pieces here. But we would say it’s across the Board.

And I think just, yeah, to put a bit of color on it, in the U.S., we think half of it is down to a slowing down of consumption of the 6% we saw and the other half we think is because we just haven’t had the pallets to either enable our existing customers to grow a bit faster, but also to go after net new business wins, which obviously we normally do 1% or 2% per annum. So that’s, I think, how we are looking at the volume decline at the moment.

[Reinhardt van der Walt, Bank of America]

Got it. Thanks. That’s very helpful. And maybe one just final question, given that you are starting to see that moderation in U.S. lumber prices, especially relative to LatAm, is there an opportunity now for you to start actually bringing your lumber procurement back to the U.S. and start relying a little bit less on the LatAm market?

[Nessa O'Sullivan, Chief Financial Officer]

Look, we source lumber globally. It’s a key part of our global IP that we manage low -- lumber sourcing. And remember also that we stick to making sure that we have 100% supply of certified sustainable lumber.

So we will continue to look at where is the best place to buy lumber to meet our needs and that can vary over time, noting that the indices and the type that gets quoted isn’t necessarily the exact species that we buy at any given time and it does depend on supply availability and other factors that determine where we buy the mix from.

But it is something that we have expertise in and something that we continue to review. And we -- there are a range of things that we do to make sure that we will continue to beat the market in terms of lumber costs.

And if you remember, lumber costs in the market went up to 300%. Our pallet prices did not go up to the same extent as the lumber market did because of our ability to manage those sort of global supply of lumber into our business.

[Reinhardt van der Walt, Bank of America]

Got it. Excellent. Thanks a lot and congratulations on your tenure again, Nessa. I wish you all the best.

[Nessa O'Sullivan, Chief Financial Officer]

Yeah. Thanks, million.

[Operator]

The next question comes from Justin Barratt from CLSA. Please go ahead.

[Justin Barratt, CLSA]

Hi, guys. Congrats on the solid results and well done, Nessa, again on your time with Brambles. I was just wondering if I could also ask about the pallet destocking. So I think in FY 2022 you noted you made an additional investment in 8 million pallets during the period to support your customers. If you get 5 million to 6 million pallets back in the second half of 2023 and the destocking continues. Is there a chance that you get some more pallets back into FY 2024 as well?

[Nessa O'Sullivan, Chief Financial Officer]

Yeah. That’s exactly what we think. So when I talked about when we look at pre-pandemic levels, we think the world has changed and I don’t think that we would go -- we don’t see at least in the short- to medium-term us going back to those levels because we are hearing from retailers and customers that, because of risks in supply chain that they still are looking to hold higher levels than they have historically.

So what we have put in the 5 million to 6 million pallet destocking that we see in the second half, we would expect to see similar levels of destocking potentially going into early FY 2024. We will evaluate that and reassess that depending on what we see, but that would not take us back to the pre-COVID level.

So, yeah, we see it as more progressive, and remembering though, what’s very different to other times when we have had pallets coming back is that, we are short of pallets in our network, which means that we have inefficiencies currently.

And the second point is that we have not been able to go after net new business for two years now in the U.S., but actually then one in Europe and we are seeing the suppliers giving us that opportunity as well. So progressive destocking, yes, we see continuing into FY 2024.

[Justin Barratt, CLSA]

Great. And then maybe just one on pricing, in the U.S. commentary, you noted that you undertook additional pricing initiatives to cover the cost-to-serve. I was just wondering if you could expand on those initiatives. Are they just extensions of what you have done over the last couple of years or is there anything new in those initiatives?

[Nessa O'Sullivan, Chief Financial Officer]

Look, as you see, when we talk about investment and you see some of the overhead increases, some of that has been improved commercial and analytics capability into our organization, which means as we have been re-pricing contracts, we are in a better position now to identify and align our pricing better with the risk profiles and the real cost-to-serve of our customers. And that’s as we do more and more in the digital space and analytical space, we expect that to even improve further.

But you can expect some of it’s due to, as we have seen sort of we have looked at loss rates, that we are in a better position to identify where that source from and to price accordingly. We have continued, but a lot of it is more of the same in terms of consistency across the contracts, having surcharge mechanisms in there and also varying as the price of pallets has gone up, also varying the terms that we have in place that flows through to compensations to reflect the changes in pallet prices.

So a little bit it’s more insights as we go to re-price the contract. It’s continuing the disciplines that will have delivered benefits to us like the surcharge mechanisms continuing to do that and it’s also looking at trying to align accountabilities and objectives of customers with ours in terms of asset accountability have really been the key areas of focus.

[Justin Barratt, CLSA]

Great. Best of luck. Thank you.

[Operator]

The next question comes from Andre Fromyhr from UBS. Please go ahead.

[Andre Fromyhr, UBS]

Thanks. Good morning, Graham and Nessa. Just staying on the topic of pricing, can you help us understand on the increase in EMEA pricing? How much of that is explained by indexation versus like proactive pricing initiatives?

[Graham Chipchase, Chief Executive Officer]

So, I mean, we estimate it’s about 50-50 between indexation and proactive pricing, if you want a rough guide.

[Andre Fromyhr, UBS]

Great. And then if you relate the pricing environment to availability, am I right in understanding there’s sort of a different context between Europe and Americas. But maybe you could talk through how you think destocking and high return rates might change the availability environment and therefore how you have those pricing conversations with customers?

[Graham Chipchase, Chief Executive Officer]

Yeah. I mean, I think, we would say that, the severity of the impact has been greater in the U.S. and it’s gone on for probably a year longer than we have seen in Europe, something like that. But having said that, I think, if you look at the complexity of what’s going on in Europe at the moment.

I think the way it resolves will also be different. Some of the issues in Europe are somewhat more deep seated than just macroeconomics. We all know what’s going on in parts of Europe right now.

So I think there’s been a lag between Europe and the U.S. But I also think that the impact has not been as great on Europe. So already we are seeing availability improving in both the U.S. and the U.K. and beginning to start improving in Mainland Europe.

So it feels like the impact is going to be lower in Europe and we will get out of it quicker than in the U.S. But in both we are seeing an ability now to, in the U.S. take more customers off of allocation and in Europe start actually looking at converting whitewood customers into pool customers. So I think in both of them we are heading in the right direction going forward.

[Andre Fromyhr, UBS]

Okay. And then last one for me, just relating to CapEx. It looks like in the half you spent about 650 odds on maintenance CapEx, but I understand your -- that’s about a $1.3 billion run rate for the year. If lumber sort of stabilizes even just where it is right now and you complete your asset efficiency program, where does that $1.3 billion go to in the next couple of years?

[Nessa O'Sullivan, Chief Financial Officer]

Well, look, we are not giving multiyear outlooks. But when we talked originally back at Investor Day and we talked about where we were going to go with CapEx to sales by 2025, we feel confident that as we look at the initiatives we are putting into asset productivity and we think about the outlook for lumber, we would be confident that we can get to those levels of efficiency, which was a key ambition.

And look, the work that we are doing in digital, that presents additional opportunity we believe over and above that, because we are getting such strong results already from the analytical insights and we just haven’t seen the flow-through yet to the extent of the value that we are getting from it yet, largely because of the lumber inflation that’s been quite extraordinary.

[Andre Fromyhr, UBS]

Okay. Thank you.

[Operator]

The next question comes from Anthony Longo from JP Morgan. Please go ahead.

[Anthony Longo, JP Morgan]

Okay. Good morning, everyone. Look, first question for me was just with respect to -- I appreciate the pallet loss rates in the half, but to take your commentary early in the second half where you saw the return rates improve for manufacturers. Are you able to potentially provide a bit more color on to what extent that has actually improved, like in percentage rates or some sort of order of magnitude, so we can probably put that into a bit of context?

[Nessa O'Sullivan, Chief Financial Officer]

So, look, at this point of the year, you tend to obviously see, seasonally you see pallets return, us working out what is an increased return through flow-through underlying versus what is part destocking it’s a little hard to actually split out those components.

I think in terms of the run rate of returns, we are seeing -- we are seeing early improvements, but I think we need to go further through the year to be able to be more definitive on what is destocking ongoing, particularly given we came into the seasonal destock with much higher stock than out in the across supply chains than we would normally have.

[Anthony Longo, JP Morgan]

Yeah. Understood. And so, in terms of, I guess, incentives for manufacturers to get on top of and return that stock back. I mean what sort of discussions have you been having and what is ultimately seen more of an improvement that you have seen at the turn of the second half?

[Nessa O'Sullivan, Chief Financial Officer]

Well, look, I think we have to also appreciate what do our customers want from us and in terms of them having concerns about some other supplies unrelated to us, like, their input cost to their products, being able to supply the retailers what they want and keeping buffer stock that retailers want them to keep. That’s one component that we hear them saying, we are not going back to pre-COVID levels at this time.

The other piece we are doing is certainly as we work with our customers, where we have seen stock levels increase or demand increase. We have certainly been working with them to understand what’s the rationale for that, working with them as we are re-pricing contracts, we obviously have to reflect if the cost to serve if you -- generally, if you are holding on to pallets for longer, generally the cost to serve has gone up, because we need more pallets to service the same volume. So that is part of what we factor into how we price our contracts.

We also have been, as we have redone contracts, the compensation for pallets has gone up, recognizing the value of the pallets, and therefore, the cost of holding on to the pallets for longer is also a key input that we have to make a return on are all things that we have identified.

But we are also more broadly working with individual customers to look for inefficiencies where we can get pallets back and identify where they may have longer cycle times in their supply chain, using the analytics that we get, we have also been working with retailers and improving our ability and frequency of how we pick up pallets that are being returned.

So we started off doing a whole load of more localized vehicles pick fleets in the U.S., which has been really successful in getting pallets back to us. But we are also now for instance we are rolling that out in Europe as well, because we have seen some really, really good returns from doing that.

And we are also collaborating with retailers, specifically looking at inventory they might have and working out with them how we can work with them to improve supplies back to their customers so that the flow works for retailers and us.

So our job has been joining a lot of dots with people across supply chain to understand the role everyone pays in keeping supply chains flowing freely, that we need to eliminate collectively inefficiencies because there’s a cost to us collectively of holding additional stocks.

And so, it’s been a pretty comprehensive set of collaborations across supply chains to work on improving the cycle times. But some of its inevitably just based on the risk view of manufacturers and retailers in terms of what they want to hold to be able to service their own end customers.

[Anthony Longo, JP Morgan]

That’s fantastic. And so earlier in the conference call Graham did mention about the competitive landscape and then being reasonably rational at the moment, so just following on from pallet returns. Is that something that your competitors are also seeing in terms of those return rates improving, because I am just trying to get a sense as to what that ultimately then means and I know you have given some commentary around that, your CapEx to -- pooling CapEx to sales into the second half. But I just want to get a sense as to how permanent this sort of trend is such that we can better sort of put that through our numbers as well?

[Graham Chipchase, Chief Executive Officer]

So there haven’t been many statements from our competitors, and clearly, we don’t talk to each other about what’s going on with pallet returns. But I think we can anticipate and be reasonably confident that we are all seeing the same pressures and are behaving in the same ways in response to those pressures, partly because there’s been no big market share changes amongst the pooled competitors and with whitewood. So I think everyone is behaving in a similar way.

And we know that because the availability of lumber and the availability of getting new pallets purchased is tight for everybody. We would anticipate that our large competitors are also having a shortage of pallets in their networks to run efficiently.

So when we do see a destocking, we would expect people to behaving in the same way that we have outlined, which is we need to get pallets back in to run more efficiently and then there will be an opportunity to serve existing customers better and to continue to convert white wood into pool.

And that would happen equally, we clearly would say that we are investing a lot now in terms of our digital capabilities to provide additional value for our customers and to allow both us to run our business better, but for them to run their business more effectively. That’s something clearly we think we can do and it’s based on our much bigger network that we have in our network advantage.

So we are confident about where we stand, but we are also confident that our competitors are facing the same challenges, and therefore, there’s no reason for them to want to behave irrationally, particularly as they have -- the pallets they have purchased over the last couple of years would be super expensive and they will need to get a return on that just like we do. So I think that’s the basis for our statements.

[Anthony Longo, JP Morgan]

Yeah. Sure. That’s fair and that’s perfect. That’s exactly what was out there. And then final one for me before I over stay the welcome, In terms of the returns on the Americas, that actually looked quite strong and I suppose that 20% ROIC has proved elusive of late. How far away are you from that just in the -- to the extent to which some of these business improvement initiatives has come through in a pretty supportive pricing environment and notwithstanding from that destocking that you have flagged?

[Nessa O'Sullivan, Chief Financial Officer]

So, look, we are very pleased with the progress that we have been making. I think if you go back three years or four years, there was a lot of concerns and skepticism about could we deliver on pricing, could we price that reflected the expertise we have and the market leadership position in that market, and particularly, obviously, the U.S. is a big piece of that Americas region.

I think pleasingly, we have seen that discipline of pricing across all of the components of the Americas segment, which also includes Canada and Latin America. I think the commercial mechanisms have made that business a lot more resilient and able to cope with changes in cost pressures.

And particularly, the surcharges that we have got in, it’s -- I think, as our leader in the U.S. was talking about interacting with customers and she was referencing that as you put the surcharge income in, that the customers are seeing that as an equitable way to do pricing, because that component will obviously vary as inflation comes down, but it gives us that insurance in terms of us managing our cost base that we have that in place.

So, look, while we don’t give specific guidance going out for ROCE, we have delivered progressive margin improvement and are very pleased with where we are. And the pricing, et cetera, we do is about recovering the cost-to-serve and it’s about getting a fair and appropriate return for what we are investing in the business. So that’s really how we evaluate it.

[Graham Chipchase, Chief Executive Officer]

Yeah. And I think the only other thing I’d add to that is that clearly the challenge for us in the U.S., in particular, but it’s around the Group is trying to reduce the losses and that’s where I think the investment in technology and everything we are doing around asset efficiency. That’s what will get us to the slightly higher ROCE level in the future. But that’s -- we are not there yet and we have got a lot of work to do, but yeah, we are working -- we think we are working on the right things to make that happen.

[Anthony Longo, JP Morgan]

Okay. Thanks, Graham. Thanks, Nessa, and congrats on the results and also thanks for the help on Brambles, Nessa, over the past couple of years.

[Nessa O'Sullivan, Chief Financial Officer]

Thanks.

[Operator]

The next question comes from Niraj Shah from Goldman Sachs. Please go ahead.

[Niraj Shah, Goldman Sachs]

Hi, Graham and Nessa. Just a couple of ones for me, just firstly on the pooling CapEx to sales guide for this year. You have obviously seen sort of a price led upgrade to sales and at least directionally the profile on pallet cost seems consistent with how you were thinking about and talking about things three months and six months ago. So just wondering why you are not more optimistic than the 3-point to 4-point improvement in pooling CapEx to sales for the year.

[Nessa O'Sullivan, Chief Financial Officer]

So, Niraj, I think, what you have to take into that is, if you notice, we have caveated to say it depends on a lot of factors in terms of number of pallets that you get back. What the actual pallet price is and we try and balance that with what’s our best balanced view about where we are going to go.

And we set a target for ourselves, which we communicated and gave a lot of transparency to the market to say we are going after 3 points to 4 points of pooling CapEx to sales improvement in the year. We have delivered over 2 points of that in the first half and we believe we are in a good place to be able to deliver on the 3 points to 4 points.

If we get to a better place then that’s something and if we feel more confident on that as we get to the next quarter trading update, we are very happy to provide commentary. But at this point, it’s based on a lot of assumptions to get to that number and we are confident of the 3-point to 4-point improvement is probably how you should think about it.

[Niraj Shah, Goldman Sachs]

Fair enough. That makes sense. And then the second one, just on IPAP, first half, second half phasing is always sort of tricky. So just keen to get your thoughts on how we should be thinking about that in the second half and for the…

[Nessa O'Sullivan, Chief Financial Officer]

Well, basically, how we are thinking about it for full year is basically assume run rate for first half is where we are for second half. That’s our go-in position.

[Niraj Shah, Goldman Sachs]

Got it. Thank you.

[Operator]

Thank you. The next question comes from Sam Seow from Citi. Please go ahead.

[Sam Seow, Citi]

Good morning, guys. Thanks for taking my question. Just interested in, I guess, the implied volume decline in the U.S. there in the second quarter. It appears it could have been close to double digits. Just wondering if, one, that was right and interested in any comments or color there?

[Graham Chipchase, Chief Executive Officer]

So we are not giving the quarter-by-quarter volume declines. But, I mean, I think, if you look at what we showed for the back end of 2022 and then now the first half of 2023, I don’t think there’s a massive difference in the volume decline.

And I think we asked for sure saying that whilst half of that decline is driven by pallet availability or obviously the lack of availability, half of it is driven by a slowing down of consumption.

That maybe has got a little bit higher in the last month or two, but -- and the impact from the pallet availability has improved a little bit. But roughly I don’t think there’s a big change in direction here between the first six months of this year and the last six months of last year.

[Sam Seow, Citi]

Okay. And then maybe just following on from that, am I right in assuming your guidance implies circa 2% volume growth in the second half and then maybe could you perhaps talk to the split on where you see that coming from new expenses and the like?

[Nessa O'Sullivan, Chief Financial Officer]

Yeah. No. We haven’t given guidance by each of the segments in terms of where we see the growth. But we have said that the second half growth in revenue we believe will be weighted to pricing, and as we look at it, we think potentially broadly flat in terms of volumes.

But a lot has yet to be played in terms of destocking versus issues, will we get enough pallets back to reissue them quickly enough as well to go after new volume growth. So that’s the factor to think about, but I’d be thinking about second half of the revenue growth largely driven by pricing, and probably, volumes broadly flat. But that’s the go-in position and we will provide updates as we trade through the second half.

[Sam Seow, Citi]

Sorry. And just one more, just interested in the strong kind of price realization despite uncompensated pallet tracking below your scorecard and kind of the operational leverage also despite automation well behind. Just looking forward, how should we think about margins coming in, with some of those benefits to come and layer in, but also anything unwinding potentially in FY 2024?

[Nessa O'Sullivan, Chief Financial Officer]

So we have been ask -- as we put the guidance together, what we have tried to do is sort of give a view as to what we do and what we expect and we do expect full year margins across all the regions to be above FY 2022 levels and that factors in that we had timing benefits in the first half that we see reversing fully in the second half.

So hence and we have try to -- if you look at the segment slides, we show you the quantum that we have estimated for each of the regions that you can build into what you expect to see and how that might come together. But essentially think about year-on-year, despite timing in the first half, the reverses in the second half, we expect overall margin improvement.

[Sam Seow, Citi]

Okay. Thanks for that. Appreciate the color.

[Operator]

Thank you. The next question comes from Anthony Moulder from Jefferies. Please go ahead.

[Anthony Moulder, Jefferies]

Hi. Good morning, all. If I can start with pricing, obviously, pricing in the U.S. is very strong, 19% for the half. Are you able to break down how much of that, obviously, a component of that is given the higher capital cost, the higher cost-to-serve. The rest of it would be potentially adjustable down if the inflationary aspects of the business start to reverse. Are you able to put us to how much of that pricing increase potentially could come down as inflation eases?

[Graham Chipchase, Chief Executive Officer]

Simple answer, none of it really, because the surcharge income is treated separately, Anthony. So the number that we are showing there is purely sort of the price increases we get to reflect either the increased cost to serve or when we are looking at change in commercial terms to ensure that good behavior is being rewarded and bad behavior of our assets is not.

The whole thing we are doing in terms of being much more specific around what’s happening to the pallets and how we can commercialize and make sure that we are being compensated for transfers, which we weren’t in the past.

That’s all that work we are doing, with smart pallets in the U.S. is helping us get those sort of price increases, as well as recognizing that the cost-to-serve has increased systemically for the business over the last couple of years.

And the rolling process we have of going through the contracts as they roll off every three years on average to make sure that we are getting compensated for that increased cost to serve. The lumber surcharge and the other fuel surcharges are shown separately.

And you are absolutely right, as we see a lowering of those cost inputs then the surcharges will drop away, which I think is a good sign for our customers, because they are knowing that there is some benefit as cost inflation mitigates.

[Anthony Moulder, Jefferies]

And we talk to lumber, obviously, slide 15, that’s slide is very helpful, but we are seeing U.S. lumber pricing particularly come back to where it was pre-COVID. That’s obviously not what you are seeing or what you are buying. Is there a delay in how you are transacting on lumber relative to some of the indices that we are seeing and is that a contractual delay or how do we think about the delay that we see in index pricing on lumber versus what you are paying?

[Nessa O'Sullivan, Chief Financial Officer]

Well, you should start from the, Anthony, that we didn’t go up by the same quantum as the market. We have a big competitive advantage that we buy lumber globally. And even when lumber costs went up, we stuck to our credentials of buying only 100% sustainably sourced and certified lumber and we were able to do that consistently.

So our mix is going to be different to others. But you can see we are very well insulated, our investment in sawmills in the U.S. meant that we actually have a competitive advantage in terms of we didn’t see the same increase in pallet prices as others saw, because we have more efficient processing of lumber and we have more strategic partnerships to get supply of lumber.

So all of that means that we -- and the species of lumber that we buy relative to the quoted market indices is going to be different. And there’s various criteria I could -- if we had a supply chain person on here, they could go into a lot of detail about the different species, durability, all those things that we weigh up on total asset cost of life, which determines where we source lumber from, who we source them from, have they got the right credentials that we want to buy them for.

But you should start from a point of we didn’t go up by market. Therefore, as you see -- and we are not buying exactly the same amount. You should expect we will continue to have a competitive advantage on how we source lumber and our pallet pricing overall taking total life of asset into account.

So you could get a lower price, less well constructed pallet, but relative to what we buy and purchase, we still would outperform the market on that. So hence while we give specific transparency and we have over the last results and now so that as you are going through this, it sort of helps people to understand how we are thinking about it.

And at the full year, we did advise the market we expected to have lumber inflation and I know the view was, but markets are coming down, but hence we will continue to do that as we work through this till we see lumber costs get back to a more normalized state.

[Anthony Moulder, Jefferies]

Sure. I guess it is more as to what or maybe more of a guidance to what’s happening in the white pallet market over time. The second question I had was around serialization that trial in Chile, it’s continued, but I think you are now targeting 30% of the poll. Is that a high enough penetration to make a call on that investment as early as June?

[Graham Chipchase, Chief Executive Officer]

So you don’t need to do 100% of the market to make a call on some of the elements of what we are trying to do there. So if you think about serialization plus, it’s testing out many different hypotheses, and our view is that we will -- by the time we get to August, so when we actually talk to the market and every month helps there I think.

We will be able to say, yes, this is what we think is happening here is, where we see value and here’s where maybe we don’t. And I think -- and it’s going to be across a number of different value hypothesis.

And I think one of the key things is there is no silver bullet here. It’s not one thing and then we are going to be able to do everything we thought of. There is a number of different things and we probably will find some don’t work, and we will have to pivot and go and look at something else and others will.

So I think that’s how we are looking at it. The 30% is about enough for us to get what we need to get out and come up with some views. Would it be nice if it was more? Yes, it would. But I mean, I think we are sort of reasonably comfortable that 30% is enough.

And we got to be clear, there is -- it’s quite a challenge to get to the 30% as well. We are doing a hell of a lot in Chile right now and we are actually in real time starting to come up with new ways of applying QR codes to pallets, making sure we can read all the information. It’s very much a sort of a big and live experiment. We are learning as we go along.

[Nessa O'Sullivan, Chief Financial Officer]

And I think it’s probably fair to say that the analytics side of this capability investment, we are probably going faster with that. And while the serialization, as Graham said, we haven’t been able to get to digitize as fast because of some semiconductor shortages and other aspects that we feel good about where we are overall in terms of impacting asset productivity.

We will wait to read the results of those trials and we are looking at what makes commercial sense before we make any wholesale major step ups in investments. And we will continue to show capital discipline, that we have a good track record of doing that, looking at investments, assessing it, et cetera.

So we see this as an important piece to change the game and continue to provide competitive advantage. But we are very mindful of capital allocation that will continue to be a key input as we look at the results of the trials.

[Anthony Moulder, Jefferies]

Very good. Thanks.

[Operator]

Thank you. The next question comes from Owen Birrell from RBC. Please go ahead.

[Owen Birrell, RBC]

Thank you. Good morning, everyone. I just first like to thank -- just wanted to thank Nessa for your contribution to the improvement of Brambles over the last six years. It’s a -- I just want to say it’s been very impressive to witness in the time that I have been covering Brambles. I have got two questions. The first one is around, I guess, pallet purchasing behavior through the last sort of six months to 12 months and then going forward. Have you been purchasing pallets through the first half and then into the second half on just a very steady basis or are you trying to time your pallet purchasing to align with the destocking activity? That’s the first question. And then, I guess, in terms of the purchasing for pallets going forward, you have clearly been holding back purchases given the higher prices and that’s obviously impacted your volume growth. With the pallet prices falling, just wondering how much further they have to fall before you start to pick up purchasing back to, I guess, more normalized levels?

[Graham Chipchase, Chief Executive Officer]

I think the first thing to say is, I mean, A, it’s different by region, number one, I think it’s the first thing to say. So somewhere like Australia, we have not been holding back at all and the issue is just trying to get the right number to make the pallets, because it’s clear that our customers are, desperately need more pallets and we are trying to do everything we can to meet those needs. So we are not holding back at all there.

In Europe and in the U.S., we haven’t been holding back for a period of time. We were definitely not holding back, because the allocation issue was severe in the U.S. 18 months ago and we were trying to get every single pallet we could even though they were significantly elevated prices, as you can see from some of these charts on page 15.

At the moment though and places like the U.S. is a good example. I think we are being mindful of trying not to go hell for leather on pallet purchases, when we all know there’s a destocking happening. We just can’t call when and the extent of it. So we are being mindful.

But we -- one of the -- going back to Nessa’s point about us outperforming the market on cost, part of that is, because we have commitments to make with the sawmills and so there’s a certain level we will take anyway, because that’s part of the long-term strategy to have a sustainably cost and competitive advantage in pallets.

So we are not -- it’s not as simple as just turning the tap fully on, fully off. It’s about tweaking it as we go through. And at the moment, we are in the tweak of, yeah, let’s buy a bit less and a bit more in the U.S. because we think there is a destocking event going to take place.

But currently there is still a shortage of pallets. So we are now --we are still having to be mindful of keeping our customers supplied. So it is a balance and I say it’s quite different between different regions.

[Owen Birrell, RBC]

That is very clear. And just one last question for me, just looking at the transformation program, we are most of the way through 2022 and 2023. The first gate is approaching for the investment in FY 2024. I am just wondering whether the program has been sufficiently successful to-date to proceed with the program into FY 2024.

[Graham Chipchase, Chief Executive Officer]

So the program has been very successful, first statement. But I think the mix of where the benefits have come from have come more from what we call the track one things, which are let’s use data and make the existing business better than it is. I think that is what we have been doing, and it’s been working really well.

The track two, which is the more transformational stuff is always going to be longer tail, some of that’s 2024 CapEx is based on things like these customer solutions trials. We are doing the three that I talked about to my slides, where we haven’t got the final solution yet. We are still working with one or two customers. We don’t know how scalable it will be and we still got to go through that process of, A, working out just what the true value is before we push the button on rolling it out.

So some of the things around customer experience, things that we are talking about in terms of better notification, all those things, I think, the value is sufficiently there, we will roll them out. But the big ticket CapEx items we are relating to customer solutions, and we are not there yet to say whether we are going to do it or not.

And if anything, it might be pushed out. I think the 2024 numbers would go -- would be pushed out a bit, I think, to 2025. But we don’t know for sure because we haven’t seen the results of the customer solutions. But I think you want to take a slightly more prudent view of those CapEx numbers. I don’t think that compared to the Investor Day we are going to be quite there for 2024.

[Nessa O'Sullivan, Chief Financial Officer]

Yeah. I think you should think about a more CapEx light version as we go into 2024, and probably, early 2025, because we have seen the commercial terms very successfully deliver. We are seeing the analytics deliver really, really well. So you sort of factor those, we have probably got more value from those things than we had anticipated and some of the other things.

We want to test and make sure we roll out the right solutions and that when we invest and make the big step change that if it’s in customer solutions, it’s something the customers want and that they will value, and similarly, with the investment in digital, that we can see sustainable benefits from doing it.

And scalable because it’s about making sure as you get the insights, how can you scale these and can you make it work efficiently. And as we are doing that, some of the analytics has sort of overtaken as well and given us more insights and more value than we probably expected.

[Owen Birrell, RBC]

Yeah. That’s very good color. Thank you.

[Operator]

Thank you. The next question comes from Cameron McDonald from E&P. Please go ahead.

[Cameron McDonald, E&P]

Good morning, Graham and Nessa. Just one question for me, just relating back to the destocking in the pallet, so you said last year that you were 5 million to 6 million pallets sort of short in terms of safety stock. You are investing to try and restock that level and now you are getting another 5 million to 6 million coming back to you in second half returns. So why do you need so many pallets, so going back to the CapEx to sales ratio. And then, secondly, are you also implying that you think that given the pallets that are returned and you have highlighted increased repair costs, are you actually anticipating a larger write-off of some of the pallets, because they are the more damaged pallets that are returned?

[Nessa O'Sullivan, Chief Financial Officer]

So quite a few things in that. So let me start with, we are -- we have seen an improvement in the asset efficiency metric in the first half, down by more than 2 points. We expect to be on track to deliver a 4-point full year reduction which is an improvement in the CapEx to sales. So we see ongoing efficiencies.

So when you think about these numbers, they are not the same numbers, because, remember, assets have a 10-year life. So within our pool, we have assets that go for scrapping every year that it’s their end of their useful life that we replace.

We are doing things. You will see our scrap rate is going down. So that’s helping us with asset efficiency. Depending on the timing of when we get more pallets back, that will also further help with asset efficiency because we believe it does mean that overall cycle time will come down.

What we have seen in terms of pallets coming back is, we have seen less damage in terms of the damage rate overall, but we were seeing higher levels of repair per pallet. And part of the reason is because over the last three year or four years or five years, we have actually been investing in a range of things to help reduce the damage rate in our pallets.

Most recent one as we talked in Europe, where we saw -- where we changed the pallet design, where the front boards were butted together, which gave the pallets more rigidity. So in both the U.S. and in Europe, despite early returns, we are seeing damage rate come down. We also have some quite innovative solutions that we have that are in the pipeline that we are going to do more work on.

So on balance, from what we have seen from the initial levels of return, we factor that into, as we say, the deferred repair costs and what we see coming. But, thankfully, a lot of the pallets that have been out there have probably been sitting stable and not necessarily moving around as much.

We are seeing some higher damage, but when you look at the net-net, it’s not something that we are concerned about or we see as a particular trend. Automation helps us to repair those pallets more efficiently anyway and we have factored into inflation into the repair costs that we put into forecast and also into that reversal of timing benefits.

[Cameron McDonald, E&P]

So, just when -- if we just unpack that, so you have got 5 million to 6 million of destocking, 5 million to 6 million safety stock, does that sort of give you then the ability to significantly grow market share or net new wins in a quite aggressive manner, given that you sort of then end up potentially being double the amount of surplus pallets…

[Nessa O'Sullivan, Chief Financial Officer]

So Cameron…

[Cameron McDonald, E&P]

… you would normally carry through the cycle?

[Nessa O'Sullivan, Chief Financial Officer]

Cameron, just to qualify and make sure we clarify. So we were saying that if you looked at from where we were up to the first quarter as well of this year and last year, we said ideally if we would like 5 million to 6 million more pallets globally across our networks to support our customers and enable us to operate as efficiently as possible.

Based on this 5 million to 6 million coming back and what we plan to spend in CapEx, we think by the end of the year we will still be 2 million to 3 million pallets short of the ideal level. So if we get more pallets back, that will help us to get efficiency level.

And then Graham was talking about what are we going to do as we see -- as we have seen the supplies start to improve. In the U.S., it’s allowing us to take more of the existing customers off allocation and then in the -- which should help with organic -- support organic growth. And then in Europe with the returns, we are now starting to be able to say, look, if this rate continues, we are now able to get it, go after net new business wins.

And in Australia, as we do it, we will buy about 1.8 times the number of pallets that we would normally have bought at any other peak. So we have significantly ramped up the new pallets that we are putting in because of their shortages. Again, the availability is a key challenge in Australia.

So all of those factors. In some cases it’s about getting back to more normalized and efficient operations and in other places it’s about restarting growth on net new business. So that’s probably the context you should think about it.

But I think the component that you might be confusing a bit is, you are not thinking that we buy pallets anyway, which covers the pallets that end-of-asset-life pallets that we need to buy or lost assets that we need to buy. So this is a component of that and so we are just highlighting those pieces. So hopefully that clarifies for you.

[Cameron McDonald, E&P]

Great. Thank you.

[Operator]

Thank you. The next question comes from Jakob Cakarnis from Jarden. Please go ahead.

[Jakob Cakarnis, Jarden]

Good morning, Graham. Good morning, Nessa. I might start with Nessa. Can you just give us a sense of what the seasonal destocking or return rates look like over the quarter in a typical year and maybe you can let us know how that’s turned out, I guess, over the course of fiscal 2023, please?

[Nessa O'Sullivan, Chief Financial Officer]

So as you can imagine through the year, there’s a normal level of destocking and stocking up that you will see seasonally and those who have kind of looked at our business year-on-year, you sort of would see that normality. We are having higher levels of pallet returns than we would have said would be just seasonal.

But as I said earlier, it’s too earlier -- it’s too early to know the extent to which that is destocking of excess pallets that’s been held or for us to know how sustainable that is over the full year in terms of rate of destocking that we can expect for the half. But we are seeing early signs of increased levels over and above what you would say is seasonal from U.S. and Europe, less so in Australia, but still a little bit in Australia that we are starting to see.

[Jakob Cakarnis, Jarden]

Sorry, I guess, what I was getting at there is third quarter you would probably get a higher return rate, I think, after customers unwind after the holiday period.

[Nessa O'Sullivan, Chief Financial Officer]

Yeah.

[Jakob Cakarnis, Jarden]

How do we think about then with the destocking commentary that you are giving us today, the progress would be as we get to the first half of 2024 maybe or if you just want to give us a sequence through the year, obviously, there’s a buildup again in the fourth quarter. Just interesting in the shape of what the destocking could potentially look like over the second half of 2023 into the first half of 2024.

[Nessa O'Sullivan, Chief Financial Officer]

Okay. Well, look, we are not going to go season-by-season, month-by-month, but just roughly, roughly some of the things that you should look at. If you come into, as you get into globally Black Friday sales, there tends to be a stock up. You get into the U.S., you come Labor Day, that’s usually a stock-up event. Christmas is, and sorry, and U.S. Thanksgiving tends to be just as big as Christmas, sometimes bigger.

And then Christmas tends to be a big stock-up period and again, you would expect that to be kind of six weeks to eight weeks out is sort of where you come and sometimes even if there’s big velocity going into that, you also end up with extra stocking. Post-Christmas, you get a destocking event.

And then as you come into the European summer particularly, and Graham alluded to it, because of our exposure to beverages in particular that we tend to have a big stocking up. Easter is also another peak through the year.

So when we look at this, there’s a lot of moving parts. We look at what does seasonality look like, what are we hearing from our, the retailers, what are we hearing from our customers, what do we expect will happen if there’s a recessionary environment, remember we are consumer staples, if people eat more at home.

So it’s not a single I can give you, this is up by 6 points, that’s down by 6 points. We do look at the historics. We look at based on what we get from feedback and that’s where we come back with, based on what we are hearing and what we are seeing initially, we think it’s 5 million to 6 million pallets is destocking in this half.

And then I alluded to if we will have a better view, so don’t take it as specific guidance, but if we were to guess, we would probably say around the same quantum going into the first half of FY 2024. But we have to wait and see what happens with market dynamics and we will factor that into the outlooks when we do the full year. And if there’s any other comments, if we see something different to what we expect, we will comment on that too on the quarterly trading update.

[Jakob Cakarnis, Jarden]

Helpful, Nessa. Thank you. Just one for Graham quickly, just on the pricing front, obviously taking price now across key markets in the U.S. and Continental Europe. You just talked to some of the potential elasticities or issues that you might face, firstly, from the existing contractual increases that are going through, but maybe as a second derivative whether or not you expect as you go for market share from these returned pallets, whether the pricing intensity or competitive intensity could increase. Maybe if you could just stratify the answer over the U.S. and Europe, please?

[Graham Chipchase, Chief Executive Officer]

So, given that there is still a demand internally for pallets, in terms of optimizing our own efficiency and we think competitors are in a similar position. I do think that the sort of -- we shouldn’t be worried about a flow back of pallets leading to a desire for people to go after market share.

I just don’t think, A, there are going to be enough coming back in the short- to medium-term for that to be an issue. But on top of that, I am hoping and expecting that everyone is going to behave rationally because -- and it’s not because it’s a philanthropic desire.

If you think about the fact that all of us have had to invest in significantly higher cost pallets over a two-year to three-year period now, we need to make a decent and acceptable return on that investment over time.

I think this is the other thing we have got to remember, that the spike in costs that we have incurred has been over a short period of time, but yet the asset life is over a long period of time. We don’t want to pass on big price increases over a short period of time to customers. We need to make sure that where -- it’s fair, reasonable, rational and relating to the usage of the assets as far as they are concerned.

So that’s what I think will happen and we certainly are not going to go out there and try and grab market share if we end up with pallets coming back. We will behave as rationally as we always do and we would expect to get our share of the conversion market from whitewood into pool, but we are not going to try and go for any land grabs, that’s for sure.

[Jakob Cakarnis, Jarden]

Okay. Just, historically, when this has occurred, there’s been some storage charges, just to your comments there Graham acting rationally, should we interpret the difference between where the market demand ends up and the pallets that you guys get back that there might be some storage in the near-term until demand swings around again?

[Graham Chipchase, Chief Executive Officer]

Yeah. I mean I think we do think that some things and when we talk about some of the cost avoidance we have had around repair costs, when we are talking about some of those costs coming back, it does factor in a little bit for storage costs.

We -- again, I think, the difference to previous times is that, we are not going in with those big surplus of pallets that we had in the last time around. So the pallets that come back certainly in the first few waves of destocking, we need them back into our own systems.

So we don’t need the external storage, which was not the situation back in 2016, 2017. So I think that would be my first point. But eventually, if everything came back, then, yes, we would have some storage costs to incur, but I don’t think it would be as material as they were last time.

[Nessa O'Sullivan, Chief Financial Officer]

Yeah. And also we would adapt and we would then change the plans for pallet purchases ending up with more pallets. I mean I think the last time this is really a bigger issue was really 2008, 2009, which was the case going in with high levels of pallets going into the market and there wasn’t pent-up demand.

We haven’t been able to go after net new business, as well as being short of pallets within our own system, which is very, very different and if you look at what happened to the overall business in that time, relatively resilient.

The bigger issue was, as you go into 2010, if you were looking at historics going, what could happen, it’s really when you had the factor of iGPS who subsequently went bankrupt, because they were pricing plastic pallets the same price as wooden pallets.

So I think we are just in a fundamentally different place. We have pent-up demand. We don’t have enough pallets in the storage and we can turn off the CapEx at a short-term. So we are not going in with excess pallets.

[Jakob Cakarnis, Jarden]

Thanks, guys. Helpful.

[Operator]

Thank you. The next question comes from Paul Butler from Credit Suisse. Please go ahead.

[Paul Butler, Credit Suisse]

Hi. Thanks for taking my question. Just one, Graham, you have talked about the digital transformation enabling you to identify unauthorized activities in the supply chain with your pallets. Given the insight that you have from that, what’s your estimate of the quantum of revenue leakage within the business?

[Graham Chipchase, Chief Executive Officer]

Good try, Paul. So we are not going to give details about that. However, I think, when we talk about the -- when we talked at the last Investor Day about the margin improvement and the ULP improvement. Clearly some of that is coming from our ability to stop the leakage that was taking place.

I don’t think it -- I mean, it’s not -- to use one of Nessa’s favorite phrases, CHEP stations. But in some markets and over the last year or two, somewhere like the U.S. where we know that we have got higher losses and therefore it’s not that pallets are disappearing and being destroyed. We know that there’s more unauthorized usage.

And I think you can see one of the components of the improved U.S. performance has been us starting to address some of that. But, again, it’s not the biggest item, it’s a factor, but there are a lot of other things as well that we need to address, not just that.

[Paul Butler, Credit Suisse]

Okay. Thank you.

[Operator]

Thank you. At this time we are showing no further questions. I will hand the conference back to Graham for any closing remarks.

[Graham Chipchase, Chief Executive Officer]

Okay. Well, thank you all for your questions. And as I say, we are very pleased with these results and it’s a great set of results. But I would just like to thank our people, because they have had to do a tremendous amount of work to get these results and we are in very, very difficult operating conditions. So I am obviously very pleased for all of them as well. Looking forward to seeing most of you I think over the next week in various meetings. So thank you very much for your time today.