Hello, everyone, and thank you for joining us today for our 2021 half year results announcement. Before I address the key financial messages, I'd like to acknowledge the efforts of our people, who when faced with a global pandemic, have risen to the 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 three 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-19 related declines in automotive and Kegstar.
Our underlying profit increased 5%, including an $8 million one-off compensation benefit for service center relocation in Australia. Excluding this one-off benefit, underlying profit increased 3% despite COVID-19 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% at constant FX, driven by the strong performance in underlying profit growth and asset efficiency improvements across the group. 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 four. 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. Brambles' commitment is to be nature positive, restore forests, go beyond zero waste and draw down more carbon and create a regenerative supply chain for our customers. This regenerative concept means restoring, replenishing, then creating more value or capital for society and the environment than 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 two trees for every one we use. In the half, our sustainability credentials continued to be recognized by leading industry groups and publications with Corporate Knights, 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 50. I'd now like to take a moment to address the impact that COVID-19 has had on our business on slide five. 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-19, this again proved true in the first half. 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 demands 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. Customer demand remains below prior year levels, and we maintain a cautious outlook for the business in the second half of the year. Turning to Brexit on slide six.
After many years of negotiation, as of the 1st of January 2021, the U.K. is no longer part of the EU. Although a 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-19. In response, U.K. manufacturers and retailers have lifted their levels of inventories, increasing their 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. Moving to slide seven for an update on the plastic pallet trials. 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-19, we still have three 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 Costco's end-to-end supply chain, such as pallet durability in different operating environments, dwell 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. The decision to move beyond trials to implementation is not expected to occur in FY 2021. As we have always maintained, any decision on implementation will be subject to strict financial and return criteria. Turning to our dividend and capital management program on Slide eight.
In line with our dividend payout ratio policy, we have declared an interim dividend of $0.10, which will be converted and paid as AUD 0.1308. This represents a payout ratio of 50%. This ratio is consistent with the prior year, and within our targeted payout ratio range of 45%-60%. During the period, we also continued with our share buyback program. To date, we have repurchased 128 million shares at a cost of AUD 1.4 billion, representing 61% of the share buyback program. Our expectation is that the buyback program will continue into FY 2022. Turning to Slide nine and our full year 2021 outlook. While the COVID-19 pandemic and Brexit has introduced significant operational and macroeconomic challenges and uncertainty, the strong first half result has allowed us to upgrade our FY 2021 sales revenue and earnings guidance.
We now expect sales revenue growth to be between 4% and 6% at constant FX rates, with improved underlying profit margins, including an increase in U.S. margins of just about one percentage point. Underlying profit growth is to be between 5% and 7% at constant FX rates. 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 to be within the 45%-60% range, in line with Brambles' 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, Graham, 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-19 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 profit, supply chain efficiencies, and indirect cost control, which offset cost increases due to COVID-19, 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 AUD deposits. The effective tax rate of just over 30% is broadly in line with the prior year. Basic EPS of $0.198 increased 10%, reflecting the higher earnings and includes a $0.01 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% was driven by pricing in the Americas and indexation in the EMEA region, noting that the surcharges in the U.S. 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-19 lockdown restrictions in key markets, and European volume growth also benefited from stockpiling in preparation for Brexit. Net new business growth of 1% reflects ongoing momentum, winning new customers in the Central and Eastern Europe Pallets business, and the contribution from the new Australian RPC contract.
The strong net new business growth in the prior year first half 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 million 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 $12 million 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 $14 million, driven by additional repair and handling costs due to changes in network dynamics and unpredictable demand patterns, which drove a need for higher plant handling and repair costs, as well as increased transport miles to relocate pallets 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, with overall cost increases partly offset by supply chain and procurement benefits, which included automation benefits and lower damage rates across the major regions. Consistent with the increase in plant costs, the $26 million increase in transport costs reflected more pallet relocations in servicing customer demand spikes, and notably, higher costs in Latin America, 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 million 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 $12 million, reflecting investments in new sales tools, IT infrastructure and productivity projects, including digital asset trials, as well as a $6 million 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. Pallets revenue growth was exceptionally strong at 8%, driven by COVID-19 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-19 outbreak in our major markets. Underlying profit in the Americas Segment increased 3% as the strong sales contribution to profit and supply chain efficiencies more than offset the impact of the higher cost environment 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 all put additional pressure on plant and transport costs, we successfully offset these inflationary cost increases 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, while also cycling lower FIFO pallet values. Margins in the first half were also impacted by higher costs supporting the asset productivity program in Latin America. I'll now turn to slide 15 and address CHEP Americas' margin performance and outlook in more detail. This slide outlines the contribution each business made to the CHEP Americas margin performance in the first half. As you can see, Latin America was the key driver of the 0.6 point reduction 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 associated with the enhanced asset management program, which delivered a seven-point improvement in pooling CapEx to sales and also resulted in a year-on-year cash flow improvement of approximately $25 million over and above the strong cash flow benefits in the prior year. Margins also reflected the impact of higher pallet unit costs in line with the increased pallets. This increase is weighted to the first half of the fiscal year. The U.S. and Canadian businesses delivered very strong revenue growth 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, including surcharge contributions, offset higher costs due to COVID-19 inflationary pressures and higher unit FIFO pallet costs.
We expect CHEP Americas' margin to improve in the second half and on a full year basis, largely driven by the guided increase in full year U.S. margins of approximately one point over the prior year. Higher second half margins in the U.S. are expected to reflect supply chain efficiencies, including benefits from the U.S. automation program and ongoing cost recovery through pricing and surcharges. Margins in Canada and Latin America are also expected to improve in the second half as both businesses cycle higher cost in the second half of the prior year. Moving to slide 16 and a more detailed look at the U.S. pallets revenue growth in the half.
U.S. pallets revenue increased 7%, which includes two points of pricing growth and five points from exceptionally strong like-for-like volume growth, which compares to the historic norm of one to two points of growth of organic like-for-like volumes per annum. This increase reflected COVID-19 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 2020 following the outbreak of COVID-19.
Turning to slide 17 and an update on the U.S. automation program. The program remains on track to deliver strong financial returns and material operational benefits. 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 sortation capacity by 30% and repair capacity by 20% across existing facilities. We have identified 24 sites for automation in the second half of this year and are on track to achieve the full run rate of efficiencies in FY22. 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-19 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-19. Underlying profit increased 7% in the first half with the sales contribution to profit 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. ROC increased 1.6 points, reflecting asset productivity improvements and margin expansion driven by indirect cost control, higher compensations, 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-19 panic buying and the anticipated reversal of Brexit-related demand in half two of this fiscal year.
Full year margins are expected to be broadly in line with the prior year. 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, price indexation, and includes demand in the second quarter relating to Brexit stockpiling. Like-for-like volumes remained in line with the prior year, despite higher pallet demand in response to COVID-19 lockdowns, with underlying demand for pallets reflecting weak economic conditions in the region.
These COVID-19 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 2020. For the full year, we expect pallets revenue growth to moderate as the business cycles record levels of pallet demand in the second half of the prior year, following the initial outbreak of COVID-19. First half Brexit-related demand is expected to reverse in the second half, and underlying pallet demand is expected to remain subdued in line with economic conditions. In the automotive business, we expect year-on-year revenue growth to improve in the second half as the business cycles lower revenues in the second half of the prior year, following the COVID-19 outbreak.
Notwithstanding the second half improvement, FY 2021 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. CHEP Asia-Pacific, which includes Kegstar, delivered a solid first half performance. Pallets delivered strong revenue growth of 6%, reflecting COVID-19 related demand and price realization in Australia and ongoing growth in the China timber pallet business. Kegstar revenue declines offset strong growth in the RPC business, which benefited from a large Australian RPC 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 AUD 8 million one-off compensation benefit in Australia, more than offsetting lower Kegstar earnings and additional costs associated with the onboarding of a large Australian RPC contract and COVID-19 related costs.
ROCE increased 0.9 points, driven by profit growth. ACI had remained broadly in line with the prior year, as lower CapEx in Kegstar and pallets was offset by increased RPC investments. The Australian RPC contract, which commenced in October 2020, is progressing well and performing in line with the investment case. For the full year, we expect revenues from this contract to progressively ramp up, while pallet growth should moderate as the business cycle strong COVID-19 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 AUD 332.2 million as we cycled the AUD 183.2 million special dividend payment in the prior year.
Free cash flow after ordinary dividends increased $149 million, which included $80 million of first half timing benefits, largely related to CapEx payments, which are expected to reverse in the second half. Operating cash flow increased $101.8 million, driven by higher earnings and a $41.5 million 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 to accelerate refund funds working directly with several European tax authorities. Financing costs and tax payments reduced $20.8 million, primarily due to the prior year financing costs relating to the early termination of the U.S. $500 million 144A bond.
On a full year basis, despite increased lumber costs driving higher per unit pallet costs and non-pooling CapEx, which is weighted 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 million despite strong volume growth in the global pallets businesses. The pooling CapEx to sales ratio improved one 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 of $21 million. Volume growth and price mix impacts on CapEx were $36 million in the first half.
Automotive and Kegstar investment spend fell by AUD 28 million as we cycled prior year spend to support new contract wins, partly offsetting growth investment in pallets and RPC businesses. Non-pooling CapEx increased AUD 15 million in line with investments in facilities to support the Australian RPC 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 to increase by approximately 0.5 points from FY 2020 levels, largely due to lumber inflation, while non-pooling CapEx is expected to be weighted to the second half of the year, in line with our implementation plans 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 2021. Turning now to slide 23.
Our balance sheet remains strong with over $2 billion 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. We remain committed to maintaining our current investment-grade ratings of BBB+ from Standard & 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-19 and Brexit across our businesses through 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. Our strong balance sheet positions us well to continue with our share buyback program. Thank you. I'll now hand over to the operator for Q&A.
Thank you, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speaker phone, please pick up your handset to ask your question. Your first question comes from Anthony Moulder with Jefferies. Please go ahead.
Good morning or good evening all. 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?
What we'd always do is ensure that 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. Obviously, a premium for risk relating either to which country it's in or if it's a new line of business. We don't publish the hurdle rates, as you would expect us not to, because it's commercially sensitive. What we're saying is we're not going to do this at any price. The key area still to test out is the scaled-up operational benefits, which we think there are from having smarter pallets and with Costco's investment in RFID throughout their system to try and plug the gaps in terms of leakage.
The other piece of that is also the premium that our customers, the manufacturers, will have to bear. Obviously a plastic pallet is three times more expensive than the wooden one. There's an element of premium which we have to test in the market, and there's also the operational benefits, which we think are there and have come out through the smaller scale trials, but we have not done them at scale across multiple 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.
The point is that your return on invested capital is of the wooden pallet, and you would expect to drive a higher return on invested capital from more expensive equipment than these plastic pallets. That's the point though, right?
No, we're not saying that. What we're saying is that if we're going to invest new capital, depending on what the alternatives are, again, this depends on what your baseline is. If you're saying that you want to replicate in the short term margins or returns you're getting with wooden pallets, I think that's going to be extremely difficult to do. If your option is that you lose all that wooden business, clearly you might have a different baseline. What we're saying is that even in that situation, we're not going to do this at a marginal improvement over WACC. We'll do it to ensure that we're getting a decent return on the new capital spend.
We've always said that, one has to take a view about what you think the alternatives are, we're not prepared to go through what we think they are. Obviously, there are a limited number, everyone's debating what those are throughout the industry.
Sure. 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 pallets?
We've always said that when we started the buyback program on the sale of IFCO, 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. We determined at that time that there wasn't, and we would still be of that view, i.e., that we're still committed to the buyback. 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 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. Right now, we're saying, no, we're continuing to go ahead with the buyback program.
Yep, understood. The last question on this, I promise, for 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?
It's a sort of joint conversation, a tripartite conversation between us, Costco, and the customer. Fundamentally, it has to be between us and the customer. 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. It has to be a meaty customer to do that, and it just took a little while to make sure we could get the right one on board in the right circumstances, and I think we've got.
Perfect. Switching into lumber pricing. We've seen lumber pricing escalate fairly significantly in the U.S. market, and it looks like that hasn't really come through in this first half 2021 results, but obviously it's a consideration for next half or the current half. What kind of escalation in lumber pricing could you guys expect in that second half, please?
Maybe I'll take that. 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-over-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. 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.
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. I think if you looked at where we were three years ago on contracts, we didn't have coverage for surcharging. We do now.
Just to be clear, that surcharge is for the OpEx into repair, right?
That's right.
That's at a higher capital cost.
For us in the first half, part of how we managed lumber costs, I talked about asset productivity. We also managed different mix of pallets, some from Latin America, some from the U.S. We also, if you remember, have invested in sawmills, jointly invested, bringing new technology where we get better yields on lumber. We have some benefits from that. 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've put in place. That's really the extent that we would really comment on it is built into our outlook considerations.
Understood. Lastly, if I could, you've talked to very good indirect cost control in this half. Is the scope to repeat that in the second half?
As we finish the first half, there are a number of initiatives we put in place that we would expect 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.
Oh, hi, Graham. Hi, Nessa. Just wondering if you could comment on your confidence levels around getting higher group margins under the current strategy of prioritizing CapEx ahead of OpEx?
Perhaps I'll start, and Nessa can add.
Yeah.
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 demands from our customers because of the COVID lockdown and people stockpiling and panic buying. We feel that there's a cycling in the second half on the cost front, which will give us a benefit. In addition to that, some of the programs like automation, and you've seen this in previous year or two, are much more back-end weighted to the second half. 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.
We want to be able to deliver the margin improvements in a way that represents the right outcome for shareholder value. Our drive to make sure that we don't overinvest 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&L outcome in the shorter term, but it doesn't give the right longer term economic outcome. There is always looking at, do we have that balance right? 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 in to the temptation to solve the problem by just throwing a lot of CapEx at it. We're going to keep pretty disciplined.
We've been talking about this for the last few years. I think as you're seeing in the results now, that we are getting the balance right. We are being careful about how we allocate capital. 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. I think you should draw some confidence from the results and the actions that have led to them.
Thank you. There's still a lot of comments around cost inflation, particularly in the Americas. Are we to sort of think that the surcharges are actually working in these markets at the moment?
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&L, from a repair standpoint, labor costs and transport costs. 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'll be linked to a calculation and an index that may or may not directly reflect the cost that you're facing at any given time.
I would say if you looked at where we were three years ago in the U.S. with surcharging, where we really didn't have effective clauses in place, and look at where we are now, we're seeing that that 75%-80% coverage is really enabling us to still deliver the earnings growth despite all the challenges that we've got. It's never going to be perfect. We have the surcharge mechanisms. They are working. 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. 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?
This is particular to in our South African business where we have had challenges in the region, accessing the level of sustainable wood supplies. This is a further add-on to, we already own forestry assets and we also own a milling operation. We vertically integrated, bought forestry assets, had them certified, and they're continuing to that annual certification process. It's all part of our commitment to making sure that we have 100% of our lumber supplies are from sustainable sources. 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.
The amount involved was $60 million. Yeah.
Your next question comes from Anthony Longo with CLSA. Please go ahead.
Good morning, Graham. Good morning, Nessa. Just a quick question I had to clarify the guidance. Just wanted to get a bit more comfort around the second half volumes for Brexit, expecting them to unwind and also the COVID-19 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?
I don't think we want to give you the second half numbers ourselves. 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. That's not wholly surprising when you think about the high levels of demand we saw in the fourth quarter last year as people were panic buying and stocking up, as we've talked about a bit earlier on. 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.
As you pointed out yourself, the unwinding possibly of some Brexit stocking from H1 going and coming back out in H2. We think the revenue line here is likely to moderate, but still show some growth, but moderate. I think that's kind of mathematically you can see that if you just do what I suggested, full year guidance versus first half actual performance. I think the trickier one to get your head around is the margin/ULP piece. What we're saying again is we would expect the margin effectively to increase even though 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 also makes sense because, again, our margins are, as we've pointed out in the U.S., should be increasing, and also in Americas generally increasing based on being able to cycle the higher costs we experienced at the end 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. Other than that, 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. Ness, is there anything I've missed out there?
Yeah. That's obviously 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. If you sort of strip out, we said Central and Eastern Europe net new wins was good, but the underlying was weaker. If you strip out the COVID and the Brexit, you should expect a fairly material moderation in Europe in the second half in terms of the revenue line. The comments Graham is making on the margins was from a group perspective driven largely by that U.S. improvement. I just make that point from a full year perspective.
No, that's great. Look, thanks. I certainly wasn't asking you to give us your numbers, 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?
I mean,
Well, Yeah, Sorry, go ahead, Graham.
I was going to 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. I think there's another trend, which is 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. 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. As a result of that, we haven't really got the capacity in the short term to start going out and trying to convert current whitewood users into pooled.
I think that's a sort of temporary thing, but that's certainly been the case over the last six to nine months. We know for a fact that we are doing probably better than some of our competitors in keeping people supplied. 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. That's particularly true in the U.S., I would say.
Okay, great. I'll leave it there for now. Thank you.
Thanks.
Your next question comes from Cameron McDonald with E&P. Please go ahead.
Oh, good evening and good morning. Just a question going back, Graham, on your comment around the plastic pallet trials. You sort of intimated that you would have to look at the alternatives there in the worst case scenario, losing the wooden trade. Is there a secondary or a second order impact here where the implementation of plastic pallets potentially also drives down the wooden pallet returns as a defensive measure because people say, "I want a cheaper price to stay on wood or otherwise I will go to plastic"?
We don't think that's going to be the case. Let's just step back a little bit from that level of granularity. This is something that is very specifically being requested by Costco and not necessarily driven for financial reasons. It's driven by their view on health and safety in their particular network because if you go into a Costco store, you have pallets fully loaded, stored in high bay racking, which you don't see anywhere else, and therefore they are looking at the integrity and the appearance of the pallet. As a result, we feel that and because plastic pallets are so much more expensive than wooden ones, 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.
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. We are looking at, obviously, what would the impact be if we didn't have the current wooden pallets in the system for Costco, they're being replaced by plastic pallets because that obviously has an impact on our network and the efficiency of the network. We're factoring all of these things into the decision-making process to try and make sure that we're not taking the wrong step. 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 think all you should take from us is we're not going to do this in a way that's going to destroy value over the medium to long term for our shareholders. We just wouldn't do that. 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 we are the biggest plastic pallet operator in the world around the rest of the globe. We should be in a good position to make this work if anyone can make it work. 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, and I think people shouldn't over-worry about it.
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. Nessa, can I ask just on, and in particular, CHEP Americas? You've indicated that you are de-emphasizing the CapEx spend and more spending on OpEx to make sure the pool is balanced, and I get that and the underlying impact that has on margin. We've seen a degradation in return on capital invested as well. Why have we got both those measures going backwards?
From an overall business perspective, you've seen the productivity across the total pool. 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 massive increase in COVID-related demand. If you look at the outlook, that's why we're saying on slide 15, where we outline 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 to get to the full-year result, which we would expect to see margin expansion in.
Okay, so what?
If you had seen this volume increase in any other period in going back a number of years, the CapEx spend would've been materially higher. 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 being done on an accruals basis because, as you know, we had a timing benefit from the pooling cash. 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. Just to follow up on an earlier question around the guidance. At your first quarter trading update, which you remodeled the full-year number for, you did indicate that the second half would be stronger than the first half. Are we to view that not only in?
In terms of growth.
Yeah. That's my question. In terms of growth, not in absolute dollars.
Yes. Correct.
Yeah. Okay. Thank you.
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? At what level of pre-COVID production levels does it break even?
Let me just make a couple of comments.
Shall I do the cost reduction? Okay, go. No, Nessa, go.
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 12+ 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 in automotive assets after a big contract win, and we're seeing the scale benefits of those. The timing issue for us of COVID was 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.
The business responded exceptionally well to that, reorganized their activities and took out costs to make the business more efficient. 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, and 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, just echoing Nessa's comments about the business have been incredibly proactive right from last June in managing the costs and being ready for the next 12 months. I think the other really great attribute is they've been winning new business in the last six to nine months, which is not entirely what one would have expected in the automotive sector. I think the business is set up to do very well going forward.
Are you able to give us a sense of what the earnings contribution is likely to be going forward?
No. It's less than 5% of group earnings at the moment, and it makes a good return on capital.
Okay. Just turning to the Asia Pac business, just wanted to confirm that if you remove that $8 million one-off benefit that you got in that business, that that business' earnings actually went backwards during the period?
Yes. That's correct. If you remember in the prior year, we'd lost an RPC contract, and then we won an RPC contract. 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 becoming onboarding. As we said, that started in October, so that'll progressively ramp up. We expect in the first year, we'll have startup costs and then as we progress through the contract, that's where it starts to contribute more to the overall earnings. We're very pleased with where it's tracking in relation to its investment case, which justified the investment, but also gives us opportunity for growth. There's a timing issue.
To try and, I guess.
Coming off one RPC and winning another one.
I was going to say, just to try and help us work out what the underlying cost base of the Asia Pac business has been doing. Are you able to give us a sense of what those startup costs have been for that new-
What you have to just assume is that it's contributing to revenue this, broadly, really high level. Assume it'll make a contribution to revenue, but won't make a contribution to earnings until next year, is the way you should think about it.
Okay. 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 will have an investment that'll be accounted for, where we will be bringing to account our share of the after-tax earnings every period. I think you should assume on a full year basis, we're sort of assuming, given that Kegstar revenue is less than 1% of the group revenue, putting that in context, you should 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. You have to assume if 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.
You're going to lose the 1% of revenues, and the losses in the earnings are still going to be broadly consistent.
If you want to take a really.
Be accounted for in the Asia Pac business?
I can't. In the first half, it's in continuing, which is in Asia Pac. As we go forward, it'll be for the full year, it'll be in discontinued. It'll be shown as you'll have an investment and we'll take it to account as our share of the after-tax earnings.
Is that going to be allocated to one of the divisions?
The after-tax earnings anyway.
Will that be allocated?
Sorry?
In the future to Asia Pac?
No.
Okay.
Yep.
Excellent. That's the only questions that I had. Thanks.
Great. Thank you.
Thanks.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Jakob Cakarnis with Jarden Australia. Please go ahead.
Hi, guys. Just a question on the outlook for the CHEP Americas 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 2020. Are they some of the higher costs that you're calling out in the FY 2021 margin expectations?
Included in our total outlook, first of all, let me take in the helicopter first. IPEP overall, the increase year-on-year charge, which is largely FIFO driven, is weighted to the first half. When you think about full-year IPEP, you should think about it as 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 too. 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. What's driving then margin improvements as we go forward, there is that phasing.
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 higher COVID costs across all three parts of the business. The bigger driver is we get some more efficiency benefits, and we cycle COVID from prior year.
Okay. Thanks, Nessa. Appreciate the color there. Finally, you've had some other costs for investing for growth in the past. It seems as though the corporate costs are a little bit lower. I assume some of that's 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?
As you look at the first half, you're right. We've put in some, you'll see we've 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. We would also expect to still see good cost control across the business. All of that, again, factored into the outlook comments that we've put together.
Thanks, guys.