Hello, everyone, and thank you for joining us today for our 20 21 Half Year Results Announcement. Before I address the key financial challenge of delivering our essential services, enabling regional and global supply chains to remain open and ensuring the continued flow of life's essentials to communities around the world. Now turning to Slide 3 and the key messages of our half year performance. In the half, we delivered strong sales revenue growth of 6%, in line with our objective for mid single digit growth, this performance reflected strong volume growth and price realization in the global pallet businesses and the rollout of a large Australian RPC contract, which offset COVID-nineteen related declines in automotive and KegStar. Our underlying profit increased 5%, including a US8 $1,000,000 one off compensation benefit for service center relocation in Australia.
Excluding this one off benefit, underlying profit increased 3% despite COVID-nineteen related impacts and input cost pressures. We also recorded a significant improvement in cash flow, reflecting higher earnings, a disciplined approach to capital expenditure and effective management of working capital as well as some timing benefits. Our return on capital invested increased 0.8 points to 19 percent at constant FX, driven by the strong performance in underlying profit growth and asset efficiency improvements across the group. Metrics, during the half, we reinforced our sustainability leadership by launching our 2025 targets. I'll discuss this in more detail on the next slide.
More recently, we announced the consolidation of our KegStar business with U. S. Market leader MicroStar. The combination of these businesses will create the global leader in beer keg management and is expected to expand global growth opportunities significantly. Moving to Slide 4.
Our world leading sustainability program defines not only what we do, but who we are. In September, we updated our sustainability ambition, outlining a vision to pioneer truly regenerative supply chains, leveraging the power of our share and reuse business model to create more positive impacts beyond our business for the benefit of future generations, Bramble's commitment is to be nature positive, restore forests, go beyond 0 waste and draw down more carbon and create regenerative supply chain for our customers. This regenerative concept means restoring, replenishing then creating more value or capital for society and the environment that the business takes out, we believe this vision is ambitious and right now we don't have all the answers. However, through the commitment of our people and partners, we will collaborate to find the solutions. This vision forms the basis for our 2025 sustainability targets, which include our forest positive commitment to plant 2 trees for every one we use.
In the half, our sustainability credentials continue to be recognized by leading industry groups and publications, with Corporate Nights, the world's largest circulation magazine focused on sustainable business ranking us at number 18 as the most sustainable Australian company in their Global 100 list with only one other Australian company in the top fifty, I'd now like to take a moment to address the impact that COVID-nineteen has had on our business on Slide 5, as you know, consumer staples account for 80% of Brambles revenue and underpin the resilience and defensive qualities of the business, despite the ongoing challenges of COVID-nineteen, this again proved true in the first half. Measures, during the half, we experienced elevated pallet volumes as retailers responded to increased levels of at home consumption and the need to provide greater contingency against changes in consumer demand by raising levels of inventories. While revenue increased with the elevated volumes, we also experienced higher costs, including transport, handling and repair costs, while managing changes in demand patterns across the network. In addition, lumber, transport and wage inflation rose sharply in key markets, particularly in North America. In our automotive business, the recovery of production levels has been stronger than anticipated.
However, customer demand remains below prior year levels and we maintain a cautious outlook for the business in the second half of the year. Now turning to Brexit on Slide 6. After many years of negotiation, as of the 1st January 2021, the UK is no longer part of the EU. However, although an UK EU trade agreement is in place, certain supply uncertainties remain, including around the implementation of border checks and transport availability. These uncertainties have been accentuated by disruptions related to COVID-nineteen, in response, UK manufacturers and retailers have lifted their levels of inventories, increasing the demand for pallets in the first half, this is likely to be a temporary swing in demand and may reverse in the second half.
After a substantial period of preparation, we are well positioned to meet the ongoing logistical challenges presented by Brexit. Metrics, during the year, we continued our trials of plastic pallets within Costco's U. S. Supply chain. Though the trials have been delayed due to COVID-nineteen, we still have 3 active trials underway, and we expect to start a pilot of significant scale with a large customer later this year.
The purpose of these pilots is to test various product and business model parameters within COSCO's end to end supply chain, such as pallet durability in different operating environments, 12 times and efficacy of asset control mechanisms, our technology enabled business model, which is a combination of RFID and smart assets and customer value pricing and operational complexity from multiple platforms. As we have always maintained, any decision on implementation will be subject to strict financial and return criteria. In line with our dividend payout ratio policy, we have declared an interim dividend of USD 0.10 which will be converted and paid as AUD0.138 This represents a payout ratio of 50%. This ratio is consistent with the prior year and within our targeted payout ratio range of 45% to 60%. During the period, we also continued with our share buyback program.
To date, we have repurchased 128,000,000 shares at a cost of AUD 1,400,000,000 representing 61 percent of the share buyback program, our expectation is that the buyback program will continue into fiscal 2022. Now turning to Slide 9 and our full year 2021 outlook. While the COVID-nineteen pandemic and Brexit has introduced significant operational and macroeconomic challenges and uncertainty, the strong first half result has allowed us to upgrade our fiscal 2021 sales revenue and earnings guidance, we now expect sales revenue growth to be between 4% 6% at constant FX rates with improved underlying profit margins, including an increase in U. S. Margins of just about 1 percentage point.
Underlying profit growth is to be between 5% 7% at constant FX rates. And in addition, we expect free cash flow to fund dividends and core business CapEx to support growth, the impact of lumber inflation on pallet prices and investments to further develop digital and efficiency objectives, the dividend payout ratio is between to be within the 45% 60% range, in line with Bramble's dividend payout policy and the share buyback program to continue subject to the ongoing assessment of the group's funding and liquidity requirements in the context of increased economic uncertainty. I'll now hand over to Nessa to take you through the financials.
Great. Thank you very much, Graeme, and good evening, everyone. Starting on Slide 11 with an overview of our first half results, sales revenue increased 6% with price growth of 2% and strong volume growth of 4%, which was reflecting increases in pallet demand in part due to COVID-nineteen and Brexit related demand and the first time contribution from a large Australian RPC contract won in the second half of the prior year. Underlying profit increased 5%, including a 2 percentage points, which were due to a site compensation relating to a service center in Australia. The balance of the earnings growth was driven by the sales contribution to profits, supply chain efficiencies and indirect cost control, which offset cost increases due to COVID-nineteen, inflationary cost pressures and higher repair and asset relocation costs to support customer demand, asset productivity and cash generation in the first half.
Profit after tax increased 4% with operating profit growth of 5%, partly offset by higher net finance costs, reflecting deposits utilized to fund share buybacks and lower interest on Australian dollar deposits. The effective tax rate measures of just over 30% is broadly in line with the prior year. Basic EPS of US0.198 dollars metrics, increased 10%, reflecting the higher earnings and includes a US0.01 dollars benefit from the share buyback program. Turning to Slide 12. Group revenue growth of 6% was driven by strong pallet demand in all regions and the onboarding of a large RPC contract in Australia.
Revenue in our automotive and kegstar businesses, which accounts for less than 5% of group sales declined. Automotive revenues decreased 6% and kegstar revenues decreased 56% as both businesses cycled pre pandemic demand in the prior year. Looking at the composition of sales revenue growth on the right hand side of the chart. Pricing growth of 2% measures are recognized as an offset in the related cost lines rather than in the revenue line. Like for like volume growth was exceptionally strong in the half, driven by increased levels of at home consumption and retailer stockpiling due to COVID-nineteen lockdown restrictions in key markets And European volume growth also benefited from stockpiling in preparation for Brexit.
Net new business growth of 1% of 3% included rollover sales revenue from a large U. S. Pallets contract
that was won as well as
a new automotive contract. Moving to Slide 13 and the group profit performance. As you can see from the chart, the sales revenue contribution to profit of €92,000,000 more than offset direct cost increases and ongoing investments in productivity initiatives across the group to deliver earnings growth. Looking at each cost in turn, the CHF 12,000,000 increase in depreciation expense was in line with the growth in the asset pool and the investments we have been making in supply chain productivity initiatives over the last 12 months, including U. S.
Service center automation, which remains on track to deliver strong financial returns and operational benefits. Net plant costs increased CHF 14,000,000 measures driven by additional repair and handling costs due to changes in network dynamics and unpredictable demand patterns, which drove the need to enable us to deliver on the dual objective of supporting our customers and driving asset productivity while limiting incremental pallet purchases. Wage inflation added further cost to plant operations and lower damage rates across the major regions. Consistent with the increase in plant costs, the CHF 26,000,000 increase in transport costs which drove material improvements in asset productivity and very strong cash flow generation due to the success of the asset management program. IPEP expense increased €14,000,000 despite lower loss rates in the half, with the increase weighted to the first half Largely due to year on year step up in pallet FIFO values, we would expect the full year charge to increase broadly in line with the full year revenue growth.
Finally, other costs increased CHF 12,000,000 reflecting investments as well as $6,000,000 decline in gains on compensated and scrapped assets, largely due to higher pallet unit costs. Turning to Slide 14, taking each segment in turn and starting with Chep Americas. Pallet's revenue growth was exceptionally strong at 8%, driven by COVID-nineteen related demand, retailer stocking in North America and ongoing price realization in the U. S. And Latin America businesses, higher pallet revenues more than offset revenue declines in the North American IBC business.
While there is still uncertainty about customer demand patterns over the balance of the year, we expect year on year revenue growth to moderate in the second half as the business cycles record volumes in the prior year following the initial COVID-nineteen outbreak in our major markets. Underlying profit in the Americas segment increased 3% and increased activities associated with relocating and repairing pallets to service demand and improve productivity of the asset pool. While wage increases, higher U. S. Lumber prices and capacity constraints in U.
S. Transport measures, all put additional pressure on plant and transport costs, we successfully offset these inflationary cost increases metrics through a combination of pricing, surcharges and benefits from investments in supply chain productivity and procurement initiatives. Segment margins decreased 0.6 points in the half as the business cycled the prior year pre pandemic trading in the region, performance and outlook in more detail, this slide outlines the contribution each business made to the Chep Americas margin performance in the metrics in segment margins in the first half. The decline was largely due to higher pallet collection and repair costs in the first half of this year measures associated with the enhanced asset management program, which delivered a 7 point improvement in pooling CapEx to sales And also resulted in a year on year cash flow improvement of approximately CHF 25,000,000 over and above This increase is weighted to the first half of the fiscal year. The U.
S. And Canadian businesses delivered very strong revenue growth metrics, while maintaining margins in line with prior year despite material cost headwinds in each business. In the U. S, disciplined cost control, supply chain efficiencies and ongoing price realization, metrics, largely driven by the guided increase in full year U. S.
Margins of approximately 1 point over the prior year. Metrics as both businesses cycle higher cost in the second half of the prior year. Moving to Slide which includes 2 points of pricing growth and 5 points from exceptionally strong like for like volume growth, which compares to the historic norm of 1 to 2 points of growth of organic like for like volumes per annum. This increase reflected COVID-nineteen related demand from customers in the consumer staples sector and retailer inventory stocking in response to higher levels of at home consumption. Net new wins in the first half were flat on the prior year, with the prior year comparative period including higher than normal net new win volume growth of 3% due to the rollover benefit of a large new contract win in the prior year.
For the full year, we expect a moderation in both price and volume growth as we come to the end of our repricing program and the business cycle's record demand in the second half measures 2020 following the outbreak of COVID-nineteen. Turning to Slide 17 and an update on the U. S. Automation program. We are making good progress with the implementation of service center automation across the U.
S. Network. To date, we have automated 39 sites, which are performing in line with the investment case and have collectively increased miss. We have identified 24 sites for automation in the second half of this year and are on track measures to achieve the full run rate of efficiencies in FY 'twenty two. Moving to Slide 18, CHEP EMEA.
Chep EMEA delivered strong top line growth and margin expansion despite a challenging operating and cost environment in the half. Pallet revenues increased 6%, driven by strong demand from existing customers in response to COVID-nineteen and Brexit related stockpiling, growth in pallets offset the year on year decline in automotive revenue, Notwithstanding a faster than expected recovery in automotive production levels since the outbreak of COVID-nineteen, Underlying profit increased 7% in the first half with the sales contribution to profit measures and effective cost control, particularly in automotive, more than offsetting additional transport and handling fees to support asset productivity improvements and strong pallet demand in Europe, which included Brexit stockpiling. ROCE increased 1.6 points, reflecting asset productivity improvements and margin expansion driven by indirect cost control, higher compensation and lower scrapped assets in the first half. For the full year, we expect sales and underlying profit growth to moderate from first half levels, given the strong second half comparative period, which benefited from initial COVID-nineteen panic buying and the anticipated reversal of Brexit related demand Turning to Slide 19. Chep EMEA revenue growth of 4% in the first half reflected volume growth of 2% and pricing growth of 2%.
The revenue growth was driven by strong growth with new customers in Central and Eastern Europe, like for like volumes remained in line with the prior year despite higher pallet demand in response to COVID-nineteen lockdowns This COVID-nineteen and Brexit related volume demand increases were partly offset by lower volumes in automotive, which accounts for 9% of the region's revenue as the business cycle pre pandemic levels of customer demand in the first half of twenty twenty. For the full year, we expect pallets revenue growth to moderate as the business cycles record levels of pallet demand measures to remain subdued in line with economic conditions. In the automotive business, we expect year on year revenue growth measures to improve in the second half as the business cycles lower revenues in the second half of the prior year following the COVID-nineteen outbreak. Notwithstanding the second half improvement, FY 'twenty one growth is expected to remain subdued in the automotive sector and subject to production levels as well as component availability in the global automotive industry. Moving to Slide 20.
Chefs Asia Pacific, which includes KegStar, delivered a solid first half performance. And ongoing growth in the China Timber Pallet Business. Kextar revenue declines offset strong growth in the RPC business, which benefited from a large Australian OPC contract win and ongoing growth in the New Zealand business. Underlying profit increased 4% with the strong sales contribution to profit from the pallets business and the €8,000,000 one off compensation metrics in Australia, more than offsetting lower KegStar earnings and additional costs associated with the onboarding of a large Australian OPC It's progressing well and performing in line with the investment case. For the full year, we expect revenues from this contract measures to progressively ramp up, while pallet growth should moderate as the business cycles strong COVID-nineteen related demand in the second half of the prior year, cost control and supply chain efficiencies are expected to continue, supporting underlying profit growth, Notwithstanding RPC contract start up costs in the second half.
Turning now to Slide 21 and the group cash flow. Free cash flow after dividends increased €332,200,000 as we cycled measures, the CHF183,200,000 special dividend payment in the prior year. Free cash flow after ordinary dividends increased €149,000,000 which included €80,000,000 of first half timing benefits largely related to CapEx payments, which are expected to reverse in the second half, operating cash flow increased 101,800,000 driven by higher earnings and a €41,500,000 reduction in cash CapEx, largely reflecting the timing of capital payments. We continue to improve working capital management, which was reflected during the half with better cash collections, Noting that we are cycling exceptionally strong VAT refund inflows in the prior year following a concerted effort measures to accelerate refunds working directly with several European tax authorities. Financing costs and tax payments reduced $20,800,000 primarily due to the prior year financing costs relating to the early termination measures of the U.
S. $500,000,000 144A bond. On a full year basis, despite metrics, increased lumber costs driving higher per unit pallet costs and non cooling CapEx, which is weighted to the second half, we expect to fully fund both CapEx and dividends from operating cash flows. Moving to Slide 22 and looking at capital expenditure. Capital expenditure in the first half reflected disciplined management of capital spend and asset efficiency improvements despite strong volume growth and customer demand variability.
On an accruals basis, Pooling CapEx only increased €5,000,000 despite strong volume growth in the global pilots businesses. Metrics, the pooling CapEx to sales ratio improved 1 percentage point, decreasing to 18.6% despite both lumber inflation and high volume demand, asset productivity improvements delivered a year on year first half CapEx savings metrics, CapEx were €36,000,000 in the first half. Automotive and KegStar investment spend fell by €28,000,000 as we cycled prior year spend to support new contract wins, partly offsetting growth investment in pallets and RPC businesses. Non cooling CapEx increased $15,000,000 in line with investments in facilities to support the Australian OPC contract and the ongoing investments in U. S.
Service center automation to support growth and deliver productivity benefits. In terms of the full year CapEx outlook, we expect the FY 2021 pooling CapEx to sales ratio measures to increase by approximately 0.5 points from FY 2020 levels, largely due to lumber inflation, metrics, while non cooling CapEx is expected to be weighted to the second half of the year, in line with our implementation plans metrics in the U. S. Automation program. Notwithstanding these anticipated increase in CapEx, we expect free cash flow to fully fund both CapEx and dividends in FY 'twenty one.
Turning now to Slide 23. Our balance sheet remains strong with over $2,000,000,000 of cash, deposits and undrawn committed facilities, we're well positioned to fund the remainder of our share buyback program and have no major debt refinancing due in the next 12 months, our key financial ratios remain well within our financial policies and we remain committed to maintaining our current investment grade ratings of BBB plus from Standard and Poor's and Baa1 from Moody's. Turning to Slide 24. In closing, our first half performance was strong. During the first half, we successfully met our customers' needs and offset the cost impact of COVID-nineteen and Brexit across our businesses to disciplined cost control and the delivery of supply chain efficiencies, including benefits from strategic investments in automation and procurement initiatives.
Our disciplined approach to capital spend and our focus on asset productivity delivered capital efficiency improvements across the group despite the need to service strong demand growth and the change in both network dynamics and demand patterns, which added to asset productivity challenges in the half. Free cash flow generation was strong, fully funding dividends and CapEx, and we remain on track to fully fund CapEx and dividends on a full year basis. We are also now upgrading our sales and earnings guidance and reconfirming our commitment to delivering around 1 point of full year margin improvement in our U. S. Business and our strong balance sheet positions us well to continue with our share buyback program.
Message. Your first question comes from Anthony Mulder with Jefferies. Please go ahead.
Good morning or good evening all. If I can start, Graham, perhaps with that plastic slide, you've talked to your strict financial and return criteria. Can you just remind us as to how you're thinking about both of those and what that criteria is still, please.
Well, so what we would always do is ensure that there is, if we're going to make a large capital investment, we're going to get a return on that investment, which is above our weighted average cost of capital, as you would expect, plus obviously a premium for risk relating either to which country it's in or if it's a new line of business. So message, we don't publish the hurdle rates as you expect us not to exist commercially sensitive. But what we're saying is we're not going to do this at any price and the key areas still to test out is the scaled up operational benefits, which we think there are from having smarter pallets and with Costco's investments in RFID throughout their system to try and plug the gaps in terms of leakage, but the other piece of that is also the premium that our customers, the manufacturers will have to bear because obviously a plastic pallet is is 3 times more expensive than the wooden one. So there's an element of premium, which we have to test in the market and there's also the operational benefits, which we think of them have come out through the smaller scale trials, but we have not done them at scale across customers multiple geographies, and that's the bit we've still got to get the data on and that's going to take some time.
But the point is that Your return on invested capital is off the wooden pallet and you would expect to drive a higher return on invested capital More expensive equipment than these plastic pellets, that's the point there, Ryan?
No, we're not saying that. So what we're saying is that if we're going to invest new capital, then depending on what the alternatives are, so again, this depends on what your baseline is. If you're saying that you want to replicate in the short term margins or return to getting with wooden pallets, I think that's going to be extremely difficult to do. However, if your option message, you lose all that wooden business, then clearly, you might have a different we have got a different baseline. What we're saying is that even in that situation, we're not going to do this as a sort of marginal improvement over WACC.
We'll do it with to ensure that we're getting a decent return on the new I think they are, but obviously they're very limited number and everyone's debating what those are throughout the industry.
Sure. And the timing seems understandably pushed into next year. How does that overlap with the remainder of the buyback? Is the buyback locked in? Or could some of those proceeds be used as a push into plastic pellets.
So we've always said that when we started the buyback program on the sale of ISCO, we said that we would look out several years at whether there were large capital or uses of capital, which would make us question whether the buyback should go ahead in its entirety, and we determined at that time that there wasn't and we would still be of that view, I. E, we're still committed to the buyback. Now clearly, the thing that might change that and I'm not saying that it does, but we have to give the caveat is if general economic conditions can change significantly and liquidity tightened up a lot, then clearly we'd have to look at the group's balance sheet and make sure we were still comfortable, but right now, we're saying, no, we continue to go ahead with the buyback program.
Yes, understood. The large last question on this, Pravos, the today, the large customer that is about to start trials with plastic, is that Driven by Costco or how does that large customer go into this trial?
Message, so it's a
sort of joint conversation between a tripartite conversation between ask Costco and the customer, but fundamentally, it has to be between us and the customer. And what we were trying to find is a large enough customer that would give us really good data across multiple geographies, multiple lanes going into various parts of the Costco system. So it has to be a so it has to be a meaty customer to do that and that just took a little while to make sure we can get the right one on board in the right circumstances messages now
that we've got. Perfect. Switching into lumber pricing, we've seen lumber pricing escalate Fairly significantly in the U. S. Market, it looks like that hasn't really come through in this first half 'twenty one results, but obviously it's a consideration for next What kind of escalation in lumber pricing could you guys expect in that second half, please?
Miss?
So maybe I'll take that. So Anthony, we did have lumber cost impacts in the first half, the fact that we managed the asset productivity well meant that we didn't spend as much on pallets as you might expect for the volume, so we got a benefit from that. We also year on year, as we've been repricing all the contracts in the U. S. Where most of the lumber has been, we now have lumber surcharging in the vast majority of our contracts in the U.
S. So We have the surcharging helps to recover costs in relation to that. We are expecting some further increases in lumber in the second half, which is why we've guided to say, expect that we think full year CapEx to sales ratio will be higher than prior year while we get underlying productivity. Activity, we do think these abnormally high lumber costs that we're seeing at the moment, we're expecting that to continue into the second half. But I think if you looked at where we were 3 years ago on contracts, we didn't have coverage for surcharging, we do now.
Just to be clear, that charge is for the OpEx into repair, right? It's not you're obviously if you're building More pellets than that.
That's right. That's on a higher capital cost. Yes. So for us in the first half, part of how we manage lumber costs, I talked about asset productivity. We also managed different mix of pallets, some from Latin America, some from the U.
S. Measures, we also, if you remember, have invested in sawmills, jointly invested bringing new technology where we get better yields on lumber. So we have some benefits from that. And we also have some procurement arrangements that are in place as a result of some of those agreements, which means that while we suffer increases, we do have a scale advantage and we do have some benefits from those investments that we put in place. And that's really the extent that we would really comment on it, but it is built into our outlook considerations.
Lastly, if I could, you've talked to very good indirect cost control in this half. Is this Scott to repeat that in the second half?
So we would so as we go into as we finish the first half, there are a number of initiatives we put in place that we would metrics to continue into the second half.
Very good. All right. Thank you very much.
Your next question comes from Matt Ryan with UBS. Please go ahead.
Hi, Graham. Hi, Nessa. Messages, wondering if
you can comment on your confidence levels around getting higher group margins under the current strategy of prioritizing CapEx ahead of OpEx?
So I'll pass I'll start and Melissa can I'd add, we are confident. And I think part of that is because if you remember, we had a lot of inefficiencies in the system in the sort of latter half of fiscal 2020 because of the volatility of demand from our customers because of the COVID lockdown and people stockpiling and panic buying, so we feel that there's a cycling in the second half on the cost front which we can which will give us a benefit. Mix and in addition to that, some of the programs like automation and you've seen this in previous year or 2 are much more back end weighted second half. So I think on just even those two items, we think we're pretty confident that we'll be able to get to where we're committing to.
Yes. And we want to be able to deliver the margin improvements in a way that represents the right outcome for shareholder value. So our drive to make sure that we don't over invest just to serve as temporary peaks in demand to make sure that we don't push for, if the lever is open to continue to spend on CapEx, that's an easier solution to get a better P and L in the shorter term, but it doesn't give the right longer term economic outcome. So there is always looking at do we have that balance right. And I think the market should get some confidence that at a time when we had spikes in demand and lots of pressure that we didn't Give into the temptation to solve the problem by just throwing a lot of CapEx at it.
So we're going to keep pretty disciplined. We've been talking about this for the last few years. Metrics, I think the as you're seeing in the results now, that we are getting the balance right. We are being careful about how we allocate capital. Miss?
We'll continue to look at what's the right mix because there will always be an amount of new pallets you put in to maintain the health of the pool. But I think you should draw some confidence from the results and the actions that have led to them.
Thank you. And There's still a lot of comments around cost inflation, in particular in the Americas. A way to sort of think that the surcharges are actually working in these markets at the moment.
So if you have a look at the U. S. And you have a look at what's happening in relation to lumber costs, you think about from a P and L from a repair standpoint, labor costs and transport costs. Message. The mechanisms that we have in place, they never cover you 100%.
It won't be in every single contract. The other thing that you have to bear in mind is that the surcharge mechanisms are never fully aligned with the exact cost that you get Because they have been linked to a calculation and an index that may or may not directly reflect the costs that you're facing at any given time. So I would say if you looked at where we were 3 years ago in the U. S. With surcharging where we really didn't have effective clauses in place I look at where we are now, we're seeing that 75% to 80% coverage is really enabling us to still deliver the earnings growth despite all the challenges that we've got.
So it's never going to be perfect. We have the surcharge mechanisms. They are working. But I think it's a fair conclusion to say that it has been a good contribution to offsetting costs in the Americas, you got to remember the surcharges are netted off against the cost lines.
Thank you. And just a quick one to finish. The acquisition of forestry assets that went through the cash flow, can you just explain what that is? And is this sort of something you think we're going to see more of?
Look, this is particular to in our South African business where we have had challenges in the region Accessing the level of sustainable wood supplies. So this is a To further add on to we already own forestry assets and we also own a milling operation, we vertically integrated that we have 100% of our lumber supplies are from sustainable sources. So a relatively small acquisition in total, but that's all part of our Global lumber supply initiative to ensure that we have access to sustainable lumber. Thank you. And the amount involved was $60,000,000 Yes.
Your next question comes from Anthony Longo with CLSA. Please go ahead.
Good morning, Graeme. Good morning, Nessa. Just a quick question I had to clarify the guidance. So I just wanted to get a bit more comfort around I mean, the second half volume for Brexit, expecting them to sort of unwind and also the brought forward COVID-nineteen brought forward demand. Can you perhaps talk as to how we should think about that second half number, just in the context of some of those thematics playing out?
So I don't think we want to give you the second half numbers ourselves. But if you were to take the midpoint of the guidance, which is not an unreasonable thing to do on the top line and the bottom line, I think clearly, we are anticipating a moderation of revenue growth in the second half compared to the first half, and that's not wholly surprising when you think about the high levels of demand we saw in the Q4 last year as people were panic buying and stocking up as we've talked about a bit earlier on. So we think we're obviously going to be cycling a much higher prior year number as we get towards the back end of this year. And therefore, you'd expect year on year half on half to slow down revenue and as you pointed out yourself, the unwinding possibly of some Brexit stocking from H1 going in coming back out in H2, so we think the revenue line here is likely to moderate, but still show some growth, but moderate, and I think that's kind of mathematically you can see that if you just do what I suggested for your full year guidance versus first half actual performance, I think the trickier one to sort of get your head around is the margin stroke ULP piece.
Mix and what we're saying again is we would expect the margin effectively to increase even if you did a sort of half on half profit number that would possibly not increase just to make the numbers all work, of course, that makes also makes sense because again, our margins, as we pointed out in the U. S. Should be increasing and also Americas generally increasing based on being out of the cycle, the higher cost we experienced at the end of the of last year and the fact that some of the efficiency programs are back end weighted towards the second half, there's a sort of bit of phasing of costs as well. But other than that, I mean, if you put all that together, then I think we're pretty comfortable that revenue moderates, but we can still improve margins in the second half. Lesa, is there anything else I missed out there?
Yes. So that's obviously message from a group, from a Europe perspective, as we guided to on the slide, expect margins, although they did increase in the first half, to be broadly in line with prior year. We also called out that underlying demand in Europe was weak. So if you sort of strip out, So we said Central and Eastern Europe net new wins was good, but the underlying was weaker. So if you strip out the COVID and the Brexit, you should expect metrics, a fairly material moderation in Europe in the second half in terms of the revenue line.
The comments Graham was making on the margins was from a group perspective driven largely by that U. S. Improvement, so I'll just make that point from a full year perspective.
That's great. And look, thanks. I certainly wasn't asking you to give us your number. So I just wanted to get your confidence around that, please. Second one, you did call out in the presentation that there were a lower level of conversions this time in the Americas.
Any particular reason for that? Was that competition, inertia or anything like that?
Message, I would say that the main reason is that we've been absolutely flat out servicing our existing customers, making sure they don't run out as much as a lack of competitiveness compared to previous years, so I think there's another trend, which if you look at what's been happening with consumers in the U. S, as they've been going into large supermarkets to stock up and maybe an element of panic buying, they've tended to go for the sort of respected and renowned brands, the bigger brands. And as a result, we've had our existing large manufacturers, large customers have done incredibly well and that's what's driving most of the growth. And as a result of that, we haven't really got the capacity in short term to start going out and trying to convert whitewood current whitewood users into pool, I I think that's a sort of temporary thing, but that's certainly been the case over the last 6 to 9 months. We know for a fact that we are doing probably better than some of our competitors in keeping people supplied.
So I suspect we'll see this is an industry wide trend that no one's really converting new customers at the moment because everyone is really trying to keep the existing customers fully supplied at the moment. And that's particularly true in the U. S, I would say.
Okay, great. I'll leave it there for now. Thank you.
Thanks.
Good evening and good morning. Just a question going back, Graeme, on your commentary on the plastic pellet trials. You sort of intimated that you would have to look at the alternative there in the worst case scenario What is is there a secondary or second order impact here where The implementation of plastic pallets, particularly also drives down the wooden pallet returns As a defensive measure because people say you will, I want to check the price to stay on wood or otherwise I will go to plastic.
So we don't think that's going to be the case. And if
you just let's just step
back a little bit from that level of granularity. This is something that it's very specifically being requested by Costco and not necessarily for driven by financial reasons, it's driven by message to you on health and safety in their particular network because if you go into a Costco store, you have pallets fully loaded, sawed in high bay racking, which you don't see anywhere else and therefore they are sticking at the integrity and the appearance of the pallet, and as a result, we feel that and because plastic pallets are so much more expensive than wooden ones, measures, we feel that if this is a solution for Costco, we don't think it's likely to spread across the whole system quickly because of the price premium that's concerned, so on that basis, we don't see that it's going to drive down wooden pallet prices because we don't think the demand is going to be widespread for plastic across the whole system. Now we are looking at, obviously, what would the impact be if we didn't have the current wooden pallets in the system for Costco that are being replaced by plastic pellets, because it obviously has an impact on our network and the efficiency of the network, but we're factoring all of these things into decision making process, to try and make sure that we are we're not taking the wrong step.
And as I say, we are a long way from making that decision, there are still a lot of assumptions and scenarios to look at before we actually make a decision, I know I think all you should take from us is we're not going to do this in a way it's going to destroy value over the medium to long term for our shareholders. We just wouldn't do that. So but at the same time, we've got to put our best foot forward on this because we wouldn't want a competitor to come in and show that they can do it where we can't because message, we are the biggest plastic pallet operator in the world around the rest of the globe. So we should be in a good position to make this work if anyone can make it work. And I think if I leave it at that, because as I say, there is a lot more data we have to collect.
We are a significant period of time away from making a decision. Myth and I think people shouldn't over worry about this, I know people seem to be, but our view is that this is something we have to explore, but at the same time we haven't made a decision yet.
Okay. Thank you. And Nessa, can I ask just on and in particular, Chep Americas? Message, you've indicated that you are deemphasizing the CapEx spend and more spending on OpEx to make sure the pool is balanced and I guess that and the underlying impact that has on margin. Why haven't we we've seen a degradation return on capital invested as well.
So why have we got both those measures going backwards?
So from an overall business perspective, you've seen the productivity across the total pool, but in the Americas region while the Latin America piece showed a major improvement in the productivity, we didn't see the same productivity improvement yet in the U. S. And that's primarily because they took the brunt of that message. Massive increase in COVID related demand. So if you look at the outlook, that's why we're saying on Slide 15, where we outlined, This is what we expect to play out in the second half and giving more granular insights as to why the first half is more challenging versus the second half If you had seen this volume increase in any other period and going back a number of years, the CapEx spend would have been materially higher.
And by the way, we're measuring that CapEx to sales efficiency gain that we set out on the CapEx slide on Slide 22. That's been done on an accruals basis because as you know we had a timing benefit from the pooling cash. So Overall, Latin America, the big generator of the unleashing of the cash for them has been definitely a big improvement in asset
Productivity. Okay. Thank you. And then just on to follow-up on the earlier question around the guidance. At your Q1 trading update, which you remodeled the full year number for, you did indicate The second half would be stronger than the first half.
We didn't view that in terms
of growth.
Yes. So that's my question. So in terms of growth, not in absolute dollars?
Yes. Yes, correct.
Your next question comes from Owen Birrell with Goldman Sachs. Please go ahead.
Hi, guys. Just a couple of, I guess, peripheral questions now that everyone has asked all the juicy ones. Just looking at the autos business in Europe, you mentioned some cost reductions in that business over the recent quarter, I was just wondering, is that business now profitable again? And at what level of pre COVID production levels is it maybe? Does it breakeven?
Okay. I was going to say, yes, it is a profitable business. One of the changes that we've done is really over the last sort of 12 plus months is that we've turned our automotive business into much more of a global business and we're seeing benefits of we also last year if you remember we invested measures. Quite catastrophic because it was just a full stop in terms of demand, which was in the last quarter of last year. We're seeing volumes up to indexing as high as 80% on prior year.
Not sure what's going to happen with the shortage in semiconductors as we go forward, But the business responded exceptionally well to that full stop, reorganized their activities and took out costs to make the business more efficient. So I think that places us in a good position with the team that we're setting up a global business and global reach. They've now optimized the cost base. And I think very much looking at what are the new opportunities on the horizon. We definitely see that business as being something that can be a stronger contributor, already a positive contributor over time.
Graham, I don't know if there's anything else you want to add?
No, I think what I would add is, I mean, echoing Ness' comments about the business have been incredibly how active right from last June in managing the costs and being ready for the next 12 months. But I think the other really great attribute is they've been winning new business in the last 6 to 9 months, which is not entirely what one would have expected in the automotive sector, so I think the business is set up to do very well going forward.
Miss? No. It's less than 5% of group earnings at the moment and it makes a good return on capital.
Just turning to the Asia Pac business, just wanted to messages, just confirm that if you remove that $8,000,000 one off benefit that you got in that business, that business earnings actually went backwards during the period?
Yes, that's correct. So if you remember in the prior year, we'd lost an RPC contract And then we won an RPC contract. So the timing of it is such that we've had the earnings roll off from the contract we lost. We then won a bigger contract, But that's only coming on boarding. So as we said, that started in October.
So that will progressively ramp up. And we expect in the 1st year, We'll have start up costs and then as we progress through the contract, that's where it starts to contribute more Justified the investment, but also gives us opportunity for growth. So there's a timing in
terms of
coming off one or we see and winning another one.
I was going to say just to try and help us work at what the underlying cost base of the Asia Pac business has been doing. Are you able to give us a sense of what those start up costs miss, have been for that new No.
What you have to just assume is that it's not it's contributing to revenue this broadly really high level Assume it will make a contribution to revenue, but won't make a contribution to earnings until next year is the way you should think about it.
And then just I guess trying to split out KegStar within that, obviously that was quite loss making during the period as well. Can you give us a sense of what that loss was given that that will effectively evaporate going forward?
Well, it won't evaporate going forward because we were part now of a bigger we will have an investment that will be accounted for where we will be bringing to account our share of the after tax earnings every period. So I think you should assume on a full year basis, we're sort of assuming given that KegStar Assume a material impact in terms of year on year growth from the change, because we will still be booking to account our share of earnings or loss. And you have to Assume as you're in a keg pooling business in the middle of a global pandemic when there is minimal on premise consumption That the business is going to be challenged at least in the short term.
So you're going to lose the 1% of revenues
I can't so it won't in the first half, it's in continuing, which is in Asia Pac. But as we go forward, it will be for the full year, it's been discontinued. And it will be shown as you'll have an investment and we'll take it to account as
Will that be allocated in the future to Azure Pack?
No. Okay.
Excellent. That's the only questions that I had. Thanks.
Great. Thank you.
For the Ship America's margins, can you describe to us the dynamics that are happening there with some of the IPEP charges, just noting that those were higher in the second half of 'twenty, are they some of the higher costs that you're calling out in the FY 'twenty one margin expectations?
So included in our total outlook, we factored in. So if you sort of first of all, let me take in the helicopter first. So IPEP overall, metrics, the increase year on year charge, which is largely FIFO driven is weighted to the first half. So when you think about full year IPEP, should think about it increasing broadly in line with revenue growth. Can't tell you exactly what it's going to be, but if you're looking for a directional guide to.
Across each of the businesses, we continue to book Ipep, it's factored into the outlook. The major driver of what's giving an improvement we've highlighted that we think that the increase as we look at Latin America and Canada, that's weighted towards the first half in terms of the charge. But what's driving then margin improvements as we go forward, there is that phasing, but it's really more to do with as we start in the U. S. Getting some automation benefits and as we are as a group cycling measures, higher COVID costs across all three parts of the business.
So the bigger driver is we get some more efficiency benefits and we cycled COVID from prior year.
Okay. Thanks, Nestor. Appreciate the color there. Just finally, related to travel, can you just talk to how we think about that for the balance of the year and what's happening with the Investing for Growth initiative, please?
So as you look at the first half, you're right. We've put in some you'll see we split out. There is some spend as we look at our Digital initiatives, and we've got a number of digital trials underway. We would expect to see some increase in that in the second half, but we would also expect