Brambles Limited (BXB) Earnings Call Transcript

Hello, and welcome to the Deutsche Bank Depositary Receipts Virtual Investor Conference, dbVIC. I'm pleased to announce that our next presentation will be from Brambles, headquartered in Australia. Before I introduce our speaker, a few points to note. Please remember that after the presentation, you'll be directed to the Brambles booth, where you can submit questions via e-mail. On a final note, all of today's presentations, where recorded, can be accessed via Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome back Raluca Chiriacescu, Director of Investor Relations of Brambles, which trades on the ASX under the symbol, BXB, and in the U.S. on the OTC market as BXBLY. Over to you, Raluca.

Thank you very much, and good morning, everyone. In my presentation today, I will provide a high-level overview of who Brambles is, what it is that we do, and how we are positioned to continue delivering value of short, medium and long term. Starting with an overview. Brambles is the world-leading provider of supply chain logistics solution with #1 market positions in 60 countries and over 70 years' experience in helping customers transport their goods through supply chains around the world. Primarily operating through the CHEP brand, we are a pioneer in the sharing economy. Our circular business model promotes the share and reuse of our pallets, crates and containers among multiple supply chain participants. We have a defensive customer base, primarily serving customers in the fast-moving consumer goods, fresh produce, beverage and retail industries. Brambles is one of the largest companies on the Australian Stock Exchange, although 90% of revenues are derived outside of Australia. Our purpose as a company is to collect -- connect people with life essentials every day. Our 330 million pallets, crates and containers form the backbone of the global supply chain with leading positions in every region in which we operate. Our network advantage reflects our 750 service centers and the strength of our customer relationships in every market in which we operate. This superior network advantage allows us to move products to more places more efficiently and sustainably than anyone else. It also allows us to be more agile and responsive to our customers' changing needs, which is the reason why the world's leading brands trust us with the products that matter. At the core of what we do and who we are is our sustainable circular share and reuse model. This circular model delivers value not only to our customers but also to our employees, shareholders and the environment. For our customers, we guarantee superior and consistent platform quality, which reduces product damage and improves employee and customer safety. By outsourcing their supply chain platform needs to Brambles, customers eliminate the need for equipment purchases and repair costs associated with proprietary equipment pool. They also share in the efficiency of Brambles' network advantage, which reduces transport costs, and by participating in the share and reuse model, customers significantly reduce the environmental footprint of their supply chain. For our shareholders, we offer sustainable growth and attractive returns. And for our employees, we offer the opportunity for challenging and rewarding work in over 60 countries. And we do all this in a way that benefits the environment by reducing the use of scarce resources and eliminating waste. So how does our share and reuse model work? Starting on the left-hand side of this slide, in its simplest form, Brambles delivers standardized pallets, crates and containers to customers as and when they need them. Customers then use these platforms to transport their goods through the supply chain. And once the products come off our platform, customers either arrange for their return to one of our service centers or transfer that platform to another supply chain participant for reuse. When the platform is returned to one of our service centers, we inspect it and, if necessary, repair it before it is reissued to another customer for reuse. At every stage of this circular model, we retain ownership of our equipment at all times, inspecting, cleaning and repairing it in order to maintain appropriate quality levels. In this share and reuse model, we generate sales revenue predominantly from rental and other service fees that customers pay based on their use of our platforms and services. In most markets, Brambles' share and reuse model replaces an incumbent solution for transporting goods through the supply chain. For example, Brambles' pool of pallets replace whitewood, recycled or single-use pallets, while our RPCs replace cardboard or proprietary pools of crates. The right-hand side of this slide outlines the 5 key factors that need to be present in a supply chain to support this kind of pooling model. The first element is that there must be a need for a common platform for multiple parties in the supply chain to use, be it a pallet, a crate, a type of container or some other type of standardized unit load equipment. Secondly, that equipment needs to flow freely at relatively high velocity to multiple points in the supply chain, creating complexity within a network that expands well beyond the control or influence of any of the individual supply chain participants. Thirdly is that owning those assets shouldn't be a point of competitive differentiation for the user that is our customer. The fourth is that pooling of assets needs to be able to create a network advantage; and lastly, that the efficient and sustainable utilization of those assets should create a superior economic profit for the pooler that is up. The next slide provides some examples of the equipment we manage. We have the largest range of pooling platform. We provide customers with full-sized wooden and plastic pallets as well as a range of smaller fractional pallets, which can be used for in-store replenishment and promotions. Our bins and containers are used to transport bulk raw materials into the FMCG and manufacturing supply chain. In addition, we also have specialized containers used to transport component parts in the automotive manufacturing supply chain. Our RPCs are predominantly used to transport fresh fruit and produce, and we also offer specialized crates for the egg, meat and deli industry. While our pallets, crates and containers come in various shapes and sizes, the common theme is that they can be standardized and managed in a way that drives sustainability and efficiency benefits for our customers. Looking at our network advantage in more detail. There are 3 key components to our network advantage. The first is our service centers where we inspect, repair and reissue pallets to our customers. In addition to full service centers, we further optimize our network with smaller service centers known as total pallet management facilities, or TPM, which are located at customer sites. These TPMs allow us to inspect pallets and reissue equipment straight to the customer, which eliminates the need for us to transport perfectly good pallets back to our service centers. The last 2 components and what really sets us apart are our manufacturing customer and retail partner locations. Our manufacturing customers include the world's largest household names such as Unilever, Procter & Gamble and Nestlé; while our retail partners include the major players in each region such as Walmart, Kroger, Tesco and Carrefour. This network density enables high-volume, short-distance movements, which allow for the efficient share and reuse of our assets. In real terms, this means a manufacturing customer can ship their products to any point within our network, and we can pick our equipment up when it is empty and move it a very short distance back to a service center or to another customer that is very close by. In addition to being integral to our value proposition for all stakeholders and the key driver of the attractive returns we derive today, our network advantage is also a key point of competitive differentiation as it is very difficult for competitors to replicate a network of this scale and density, which has taken us decades to create. Thanks to our network advantage, our circular share and reuse business model and our industry-leading sustainability program, we are recognized as a global leader in sustainability. Most notably during the year, Barron's Magazine recognized Brambles as the most sustainable international company. MSCI awarded us a maximum AAA rating. And we were ranked in the 96th percentile of our industry category in the Dow Jones Sustainability Index. Our sustainability leadership position has been reinforced by our success in achieving many of our 2020 sustainability goals. In 2015, we set a series of ambitious targets that were material to our business and extended throughout our value chain to build a better business, a better planet and better community. 5 years later, we are extremely proud of what we have achieved, including 100% sustainable sourcing of timber across our global operations, significant environmental savings, including 33% reduction in CO2 emissions and the elimination of 1.2 million (sic) [ 1.3 million ] tonnes of waste and 76 million kilometers of trucking haulage from customers' supply chain. We are also extremely proud of the greater gender representation across our organization with over 30% of Board, executive leadership team and management-level roles being held by women. As we look to the next phase of our sustainability journey, we have announced our 2025 sustainability vision, which is to pioneer a regenerative supply chain by improving our circular model every year, increasing the environmental benefits in our customers' supply chain. We have also committed to be nature-positive by restoring forests, going beyond zero waste, and drawing down more carbon than we produce, ultimately becoming a regenerative nature-positive business. Through our communities program, we will seek to rebuild -- to build resilience, promote circularity, and account for the connections between society, the economy and nature. Turning to our strategy. As a company, Brambles strives to be a global leader in platform and insight-based solutions for FMCG supply chains around the world. We seek to do this by achieving and maintaining #1 positions in all markets in which we operate. We seek to lead the industry in customer service, innovation and sustainability and to be an employer of choice through best-in-class safety, diversity and talent development programs. While our strategy remains robust and positions us well to manage near-term volatility, the COVID-19 pandemic has introduced significant uncertainty, which is likely to last for an extended period of time. For this reason, we have redefined our focus across 4 strategic themes to ensure we remain agile and responsive to changing needs driven by increasing uncertainty and volatility. Firstly, we are committed to delivering unrivaled customer value by providing exceptional service and improving the customer experience through simpler processes, additional services and enhanced platform quality. We also work with our manufacturing customers and supply chain partners to enhance the sustainability and efficiency of the end-to-end supply chain through collaboration on new solutions and innovative ways of working. Secondly, we continue to invest to transform information and digital insights into new sources of value for ourselves and for our customers. This includes our in-house technology hub, BXB Digital, which works closely with the operating businesses to translate technology into business outcomes. We see data and technology as a core strength and source of future competitive advantage. Thirdly, we are constantly seeking to improve asset and network productivity with ongoing programs of automation and process standardization to enhance the efficiency and resilience of our operations. We also work with our customers and partners to align physical network and working practices in order to improve asset utilization, reduce equipment loss and lower equipment damage rates. Lastly, we seek to achieve business excellence by reinventing our organization, technology and processes to be simpler, more efficient and effective. We are committed to fostering the culture of agility, innovation and continuous improvement. Successfully attracting, retaining and empowering high-caliber people is integral to our ongoing success and will become increasingly important as new skills are acquired in areas such as digital service and automated supply chain. Turning to our investment value proposition. As a company, Brambles generates value through a virtuous cycle that leverages its network advantage of scale, density and expertise to achieve superior operational efficiency. These operational efficiencies, in turn, generate cash flow that can either be returned to shareholders or reinvested in the business to fund growth, innovation and the development of our people. By providing customers with supply chain solutions in 60 countries, Brambles offers shareholders exposure to geographically diversified earning streams primarily from the global consumer staples sector. For the shareholder, this offers an investment that displays both inherent defensive quality with real opportunities for growth. By executing on our strategy, we expect to deliver sales revenue growth in the mid-single digits, underlying profit growth in excess of sales revenue growth through the economic cycle, strong return on capital invested, and strong cash generation to fund growth, innovation and shareholder returns. Our investment value proposition is underpinned by the inherently defensive characteristics of our business, which position us well to deliver shareholder value through all stages of our economic cycle. Firstly, we derive over 80% of our revenues from customers in the consumer staples sector. We are a very profitable business with strong cash flow generation that is particularly resilient during periods of economic downturn. We generate returns well in excess of the cost of capital, and our operations are supported by a conservative and flexible balance sheet as well as a strong funding and liquidity position. I will spend the next few slides highlighting these defensive characteristics in the context of our COVID-19 experience, our most recent financial results, and our outlook for the 2021 financial year. Starting with the COVID-19 impact on Slide 12. Our pallets business, which largely generates the 80% of revenues that we derive from the consumer staples sector, has been particularly resilient and defensive in response to the COVID-19 pandemic. During March and April 2020, the pallets business has experienced strong levels of customer demand across global grocery supply chain, driven by lockdown measures in all major markets and subsequent changes in consumer behavior, which included pantry stockpiling in developed markets and a shift to at-home consumption across all regions. This initial surge in activity has been followed by a period of high volatility in demand as regions across the globe progressed through different phases of the pandemic. While revenue growth has increased in line with higher pallet volume, servicing the additional customer demand and managing volatility has resulted in higher supply chain costs, largely related to additional transport, handling and repair costs required to ensure continuity of pallet supply while minimizing the level of capital expenditure to service these temporary spikes in customer demand. Our automotive containers and Kegstar keg-cooling businesses, which account for approximately 5% of revenues, were significantly impacted by COVID-19. Customer demand in the automotive business was impacted by the closure of the global automotive manufacturing industry. While in Kegstar, lockdown laws significantly reduced on-premise consumption of beer in served markets. Collectively, these 2 businesses reduced group underlying profit growth by $23 million or 3 percentage points in FY '20. In response to the COVID-19 pandemic, we swiftly introduced additional hygiene and safety procedure across our global service center network with best practice and insights shared across more than 60 countries. Office-based staff were transitioned to working from home and provided the necessary tools and support to adapt to new ways of working. Operationally, our employees have responded to the extreme demand volatility by changing shift patterns, processes and site protocols to deliver record levels of output. Their exceptional efforts allowed us to provide uninterrupted service to our customers, ensuring the flow of life's essentials and strengthening our position as a supply chain partner of choice around the world. Financially, we maintained our focus on disciplined capital allocation and cost minimization as we responded to the various impacts of COVID-19 across our portfolio of businesses. Looking at our recent financial performance, starting with our FY '20 result on the left-hand side of the slide. We delivered strong sales revenue growth of 6% at constant currency, in line with our objective of mid-single-digit growth. This performance reflected strong volume growth across all pallet operations and ongoing price realization primarily in the Americas segment. Our underlying profit, including the impact of AASB 16, increased 4% as the strong pallet performance offset a 3 percentage point impact due to the earnings decline in the automotive and Kegstar businesses. Excluding the benefit of AASB 16, free cash flow after ordinary dividends increased $147 million on the prior year, largely driven by higher earnings, improved cash collection and asset efficiency. In the first half of FY '18, we set a target to improve our key asset efficiency metric, the pooling CapEx to sales ratio, by 2 percentage points. We made significant progress with a 2.8 point decline in FY '20, driven by underlying changes in our processes, business models and commercial terms as well as improvements in asset management and overall pallet cost. Our return on capital invested remained strong at 16.7%. Turning to the right-hand side of the chart. Revenue momentum continued during the first 3 months of FY '21. Sales revenue growth at constant FX rate and on a days-adjusted basis increased 5%, driven by elevated levels of customer demand and ongoing price realization across the global pallets businesses. While first quarter revenues in the automotive and Kegstar business has improved on the previous quarter, they decreased 20% on the corresponding period in the prior year, reflecting the impact of COVID-19. We entered FY '21 with a strong balance sheet and significant liquidity. We have no major refinancing obligations over the next 12 months. We maintained our investment-grade credit rating of BBB+ from Standard & Poor's and Baa1 from Moody's. On a pro forma basis, following the completion of our share buyback program, our net debt-to-EBITDA ratio is 1.7x, well within our revised financial policy of net debt-to-EBITDA below 2x. Before closing, I will outline the updated FY '21 guidance range we provided at our first quarter trading update at the start of November. Following an extensive review, which took into account our performance in the first 3 months of FY '21 and recent economic and COVID-19 development, we increased our FY '21 expectations towards the upper end of our previously disclosed guidance range. We now expect sales revenue growth between 2% to 4% at constant FX rate with improved underlying profit margins, including a 1 percentage point increase in U.S. margins. Underlying profit growth is expected to be between 3% to 5% at constant FX rate. Free cash flow is expected to fund dividends and core business CapEx despite increased investments to support new business opportunities and to further develop digital and efficiency objectives. Our dividend payout ratio is expected to be consistent with our dividend policy to pay out between 45% to 60% of earnings. And lastly, we expect our share buyback program to continue subject to the ongoing assessment of our funding and liquidity needs. This FY '21 guidance range is underpinned by the assumptions outlined on the right-hand side of the slide. In conclusion, Brambles has a strong business underpinned by market-leading positions, network advantage and defensive characteristics. We have refined our strategic focus to ensure agility in times of economic uncertainty. Our balance sheet is strong with high levels of liquidity, supporting the payment of dividends and continuation of our share buyback program. We have provided FY '21 guidance to sales revenue growth and underlying profit leverage, and we are well positioned to deliver sustainable growth and returns well in excess of the cost of capital over the long term. Thank you very much for your time today, and do let me know if you have any questions.