by, and welcome to the Brambles Limited Full Year twenty twenty Results Conference Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer I would now like to hand the conference over to Mr. Graham Shipchase, CEO. Please go ahead.
Good morning, everyone, and thank you for joining us today for our twenty twenty full year results announcement. I'd like to start with a few key messages about the full year performance. Overall, the performance reflected the efforts of our people, the agility of our network, and the resilience of our share and reuse business model. We delivered strong sales revenue growth of 6% at constant currency, in line with our objective for mid single digit growth. This performance reflected volume growth with new and existing customers across the pallet operations and ongoing price realization, primarily in the Americas segment.
Our underlying profit, including the impact of AASB sixteen, was up 4% as the strong pallets performance offset a three percentage point impact due to earnings decline in the Automotive and KedStar businesses. This performance was in line with the guidance we provided at our first quarter update. We also made good progress across our Americas segment. Previously, we outlined a number of initiatives to restore margins in our U. S.
Pallets business. These initiatives included the accelerated service center automation program, the lumber procurement program, and a number of productivity and pricing initiatives. I'm pleased to report that these initiatives delivered a 1% margin improvement in the period, which is in line with our commitment to lift US business margins by two to three percentage points by fiscal twenty two. Our initiatives in Latin America also continued delivering results. The business delivered strong revenue growth including price realization to offset the higher cost to serve in the region.
In addition, asset efficiency improved significantly. During the year, we recorded a significant improvement in cash flow driven by increased earnings, lower capital expenditure and improved cash collections across the group. Our return on capital invested of 16.7% remains strong. During the year, we reinforced our sustainability leadership by achieving most of the 2020 objectives. On the next slide, I will discuss this in more detail.
When we first set our 2020 targets in 2015, the goals were considered very ambitious and in many cases, we did not have fully defined pathways to achieve the objectives. As such, it is extremely pleasing to report that we have achieved the majority of our key targets. I would like to highlight the following achievements. We are able to report that 100% of our wood comes from certifiable sustainable sources. We have reduced our carbon dioxide emissions by 33% since 2015, surpassing our goal of 20%.
We helped remove 1,300,000 tons of waste from customers' supply chains, and we have eliminated 76,000,000 kilometers of trucking haulage through transport collaboration with our customers. As a group, we remain committed to our sustainability leadership position. As we look forward, our vision is to contribute to a more regenerative future. This vision will form the basis of our 2025 sustainability targets, which will be launched as part of our sustainability review scheduled for publication in September 2020. Now turning to our dividends and capital management program.
In line with our dividend payout ratio policy, we have declared a final dividend of US dollars 9¢, which will be converted and paid as Australian dollars 12.54¢. This brings the total ordinary dividend declared for fiscal twenty twenty to US dollars 18¢. This represents a payout ratio of 53%. This ratio is consistent with prior year and within our targeted payout ratio range of 45 to 60%. During the period, we also conducted significant capital actions relating to the proceeds of the sale of ISCO.
In June 2019, we commenced our Australian dollar $2,400,000,000 on market share buyback. To date, we have repurchased 91,700,000.0 shares at a cost of AUD 1,050,000,000.00, representing 44% of the share buyback program. In October 2019, we returned AUD453.8 million to shareholders comprising a capital return of AUD0.12 per share and a special dividend of AUD0.17 per share. As of June 30, AUD 1,500,000,000.0 has been returned to shareholders, representing 53% of the AUD 2,800,000,000.0 capital management program. I would now like to take a moment to address the impact that COVID-nineteen has had on our business.
Consumer staples account for 80% of Brandvold's revenue and underpin the resilience and defensive qualities of the business. The impact commenced in mid March with the outbreak of the virus in China, spreading across Europe and North America and more recently, our emerging markets of Mexico, South Africa, and Brazil. In the initial phases of the pandemic, from March to April, the business experienced significantly heightened levels of customer activity as pantry stocking and changes in consumer purchasing patterns prompted a surge in demand for consumer staples. Following this initial surge in demand, we have seen high levels of volatility in customer demand as regions across the globe progress through the different phases of the pandemic with government responses varying from country to country. While revenues increased in line with elevated pallet volumes, servicing the additional demand and managing the associated volatility and disruptions across the network led to higher transport, handling, and repair costs.
Our most severely impacted businesses were the automotive container and kegstar businesses, which collectively account for approximately 5% of our revenue. Underlying profit in these businesses in fiscal twenty twenty decreased US23 million dollars driven by the significant decline in revenues in the fourth quarter. In addition, our U. S. Service Center accelerated automation program was deferred in mid March due to travel restrictions and broader safety concerns before commencing in July.
Now turning to our response to COVID-nineteen. Throughout the pandemic and going forward, the health and safety of our employees and the communities in which we operate in this is our highest priority. From the very start of the pandemic, we worked with a leading global safety and public health consulting group to ensure our processes and responses were in line with best practice. In our global service center network, we were swift to deploy additional hygiene and safety procedures, sharing best practice and insights across the more than 60 countries we operate in. For office based workers, we quickly transitioned to working from home arrangements, providing our workforce with the necessary tools and support to adapt successfully to completely new ways of working.
Operationally, our focus has been on ensuring the continuity of supply to our customers, thereby ensuring the flow of life essentials for communities around the world. This was an exceptional achievement by our people who overcame significant challenges to ensure uninterrupted service and supply of pallets, crates, and containers across our markets. In addition, we drove improved cash generation and increased our focus on cost minimization. With the easing of restrictions across the globe, our automotive container and Keg businesses are now back up and operating, though volumes remain well below pre COVID-nineteen levels. Finally, as I previously noted, our U.
S. Service center accelerated automation program recommenced in July 2020 and we expect to meet our original FY 2021 implementation targets including the completion of site upgrades delayed during fiscal twenty twenty. Now turning to slide eight and our strategic priorities. Our long term strategic goal remains unchanged. We are committed to being the global leader in platform pooling solutions and insight based solutions to fast moving supply chains delivered through our circular share and reuse model.
We have redefined our focus across four strategic themes to ensure we are agile and responsive to changing needs driven by increasing uncertainty and volatility. These strategic themes guide our decision making across the group and are integral to delivering superior and sustained value for customers, shareholders, and employees. We are committed to improve the customer experience through simpler processes, additional services, and enhanced platform quality. We continue to invest in digital transformation, including through the group's in house technology hub, BXP Digital, to create distinctive new capabilities. We are constantly seeking to improve asset and network productivity with ongoing programs of automation and process standardization to enhance the efficiency and resilience of our operations.
In our quest for business excellence, we are reinventing our organization, technology and processes to be simpler, more efficient and effective. We are confident that the heightened focus on these strategic themes will deliver benefits to shareholders over the longer term. Now turning to our full year 2021 outlook. The COVID-nineteen pandemic has introduced significant operational and macroeconomic uncertainty, which is likely to last for an extended period. Our outlook for fiscal twenty twenty one assumes ongoing demand volatility in the context of a weaker economic environment and recognizes the inefficiencies which arise across our network during periods of volatility.
Within this context, the FY 2021 outlook is: Sales revenue growth between flat to plus 4% at constant FX rates with improved underlying profit margins underlying profit growth between flat to plus 5% at constant FX rates free cash flow expected to fund dividends and core business CapEx with investments to support new business opportunities within the core business and to further develop digital and efficiency objectives. Dividend payout ratio to be consistent with our dividend payout policy of 45% to 60% and share buyback program to continue subject to the ongoing assessment of the group's funding and liquidity requirements in the context of increased volatility and economic uncertainty. Given the unprecedented nature of the COVID nineteen pandemic and resulting volatility, it is difficult to forecast with accuracy the likely impact on Bramble's business in fiscal twenty one. For this reason, Bramble will update its internal fiscal twenty one forecast after the first three months of trading and review guidance in this context. While July may not be representative of the full year due to the phasing of government economic stimuli and the timing of known changes in customer contracts, group revenues in July increased on a like for like basis 4% on the prior corresponding period with high levels of volatility continuing across all regions.
I'll now hand over to Nessa.
Thank you, Graham, and good afternoon everyone. Starting with an overview of our FY twenty twenty financial performance on Slide 11. Group sales revenue growth of 6% was driven by our pallets businesses, which offset COVID-nineteen related challenges in the automotive container and kegstar businesses, which arose primarily in the last quarter of the year. Group underlying profit increased 4% and included a three percentage point benefit from AASB 16. Excluding this benefit, Pallet sales contribution to profit more than offset the US23 million dollars earnings decline in Automotive and Kegstar, COVID-nineteen inefficiencies and other cost increases.
The significant item expense in FY 2020 of $28,000,000 is a non cash impairment of the Kegstar business in response to the uncertainties about on premise consumption of beer due to COVID-nineteen. Net finance costs decreased significantly during the year. Excluding the $27,800,000 of lease interest recognized due to the implementation of AASB 16, net finance costs decreased $35,500,000 reflecting interest income from Australian dollar deposits and lower debt funded by the IFSCO sales proceeds received in May 2019. The after tax loss in current year discontinued operations of 29,200,000.0 largely reflects the significant item $26,800,000 after tax impairment charge relating to the long term receivable from First Reserve and is based on the fund's exposure to the oil and gas sector and other uncertainties. This receivable is due to be repaid by First Reserve in 2026, and we will continue to monitor this with a view to full recovery of the balance and related interest.
The current year loss in discontinued operations compares to a profit in the prior year of over $1,000,000,000 which reflected the eleven month contribution to earnings from the IFSCO business as well as the gain on sale related to its divestment in the second half of FY twenty nineteen. This is the key driver of the 68% decline in profit after tax. Excluding the impact of IFSCO, profit after tax increased 5% at constant currency over the prior year, and underlying EPS of zero three two five dollars increased 8% including the benefit of the share buyback program. Turning to slide 12 to outline the operational and financial impacts of COVID-nineteen on our businesses. As shown in the chart on the left hand side of the slide, over 80% of our revenues are derived from customers in the consumer staples sectors, primarily serviced by our global pallets businesses.
COVID-nineteen led to spikes in demand for pallets during the March and April as our largest markets across Europe and North America went into lockdown and consumers stockpiled essential foods and household products. This initial spike in demand and subsequent volatility, which carried through into May and June, resulted in higher revenues and additional costs associated with servicing this unexpected surge in demand and changes in network dynamics. These costs included additional transport miles and repair costs to service this demand, and further transport miles were also required to rebalance the pool in response to changes in network flows. During this period, we made a conscious decision to prioritize the efficiency and utilization of the existing assets and to minimize the capital expenditure required to service temporary spikes in demand, which added transport and repair cost overall. This focus on disciplined management of capital and further improvements in cash collection has been key in maintaining strong cash flow generation and managing business risks, and this will continue to remain a key focus during FY 2021.
Our automotive container and kegstar businesses, which account for approximately 5% of the group revenue, have been significantly impacted by COVID-nineteen. From April through to June, revenues declined significantly in both businesses. In automotive, this reflected the impact across the global automotive industry, while in Kegstar, lockdown measures in key markets restricted on premise consumption of beer. Despite cost reduction measures to offset these headwinds, the lower revenue in both businesses resulted in a $23,000,000 reduction in group underlying profit. We expect FY 2021 underlying profit in these businesses to be below FY 2020 levels, with a progressive return to pre COVID-nineteen levels expected by FY 2022.
Moving to slide 13 and the group sales performance. We delivered growth in every segment as the strong performance in the Pallets business offset the decline in Automotive and Kegstar revenues, which is recognized in CHEP EMEA segment. Price growth of 3% was driven by pricing initiatives in Chef Americas reflecting the cost to serve in the region, as well as contractual price indexation in Europe and EMEA regions. Volume growth of 3% reflected ongoing expansion with new customers in all regions and like for like volume growth in The Americas and Asia Pacific regions. These increases offset lower like for like volumes in EMEA due to lower demand from existing customers in the automotive and Kegstar businesses.
Slide 14 provides an overview of the group underlying profit performance. The strong sales contribution to profit of 191,000,000 largely driven by the Pallets businesses, offset cost inefficiencies due to COVID-nineteen and other cost increases across the group. Depreciation costs increased $19,000,000 in line with the growth in the asset pool and investment in The U. S. Supply chain efficiency programs.
Net plant costs increased 44,000,000 including labor and property inflation in all regions and additional pallet repair and handling costs associated with higher pallet volumes and demand surges, particularly in the fourth quarter following the outbreak of COVID-nineteen. These cost increases were offset by efficiency benefits from U. S. Supply chain programs. Net transport costs increased $16,000,000 reflecting additional transport miles relating to the Latin America asset management program and higher pallet collections and relocations due to COVID-nineteen.
Despite lower loss rates overall, IPEP expense increased by $33,000,000 reflecting higher FIFO unit pellet costs in all major markets. Other cost increases included an $18,000,000 increase in corporate costs, reflecting investments in infrastructure and sales tools and the global digital transformation, customer experience, and other group wide efficiency initiatives. The balance of the increase reflects investment in resources to support growth, network efficiencies, improved asset management and commercial outcomes across the group. Turning to Slide 15 and our segment results, and now starting with CHEP Americas. The Americas region delivered strong sales growth, margin expansion and underlying profit leverage in the period.
Sales growth of 10% was driven by the pallets business, which benefited from pricing initiatives, ongoing expansion with new and existing customers and elevated levels of customer demand in the fourth quarter due to COVID-nineteen. Excluding the impact of AASB sixteen, underlying profit growth was 13% and margins increased by 0.3 points, including a one point margin improvement in The U. S. Business, which was in line with guidance and delivered despite COVID-nineteen related cost pressures. The strong sales contribution to profit and supply chain efficiencies more than offset COVID-nineteen related plant and transport cost increases, property and labor inflation in The U.
S, additional costs relating to the Stringer to Block pallet transition in Canada and the asset management program in Latin America. Despite lower asset loss rates in the segment, IPEP expense increased due to higher per unit pellet costs, while overheads included costs associated with incremental resources to support growth and improved asset management and commercial outcomes in the region. Return on capital investment increased 0.9 points before AASB sixteen, driven by increased earnings and material asset efficiency improvements. Turning to slide 16, looking at the components of the Czech Americas overall margin improvement. The one percentage point increase in U.
S. Margins translates to 0.8 points increase in the overall segment margin. This increase was driven by benefits associated with pricing, service center automation and lumber initiatives over the past two years. And while moderating transport inflation also contributed to the margin improvement during the year, that was pre COVID-nineteen before we saw increases in transport costs. The margin decline in Canada decreased overall segment margins by zero five point.
This is despite strong sales growth, which included increased price realization. Earnings, however, were impacted by additional costs associated with the Stringer to Block Pallet transition, which was flagged to the market at the FY 2019 and first half twenty twenty results. Latin America full year margins were flat to prior year and despite additional costs in the fourth quarter following the outbreak of COVID-nineteen. Margins increased significantly in the second half of the year, driven by benefits from asset management, commercial pricing initiatives, and the phasing of higher costs in the prior year. It should be highlighted, however, that the Latin America business delivered double digit revenue and earnings growth while generating strong cash flow driven by asset efficiency, which also resulted in improved overall returns.
Finally, AASB 16 contributed 0.6 points increase to the overall segment margins. As we look forward, we expect Czech America's margins to increase in FY 2021, driven by the additional point of margin improvement in The U. S. Business. Slide 17 provides an update on The U.
S. Automation program. Despite delays due to COVID-nineteen and travel restrictions in the fourth quarter, the program remains on track to deliver on the objective of improved efficiencies, increased capacity and strong returns on the investment. Since the start of the second half twenty eighteen, we have automated 28 sites, which are performing in line with expectations. We have identified a further 24 sites for automation in FY twenty twenty one, including nine site implementations, which were delayed in the fourth quarter of FY twenty twenty.
Turning to slide 18 and the strong increase in U. S. Pallets revenue in FY twenty twenty. U. S.
Pallets sales growth of 9% included price mix growth of 4%, which was driven by contractual price increases in line with the higher cost to serve. The effective price, which includes surcharges, was one percentage point lower at 3% due to lower contributions from lumber and transport surcharges in line with the moderating rates of inflation during the year. Like for like volume growth of 3% was above historic rates due to a surge in demand from existing customers in the fourth quarter following the outbreak of COVID-nineteen. Net new business growth of 2% included the rollover impact of a major contract win in FY 2019. As we look to FY 2021 and notwithstanding uncertainties, we expect price growth to moderate as we complete the final stages of our three year U.
S. Repricing program, which commenced in FY twenty eighteen. FY 2021 like for like growth is expected to return to more normal levels, assuming no further spikes in demand due to COVID-nineteen and subject to prevailing macroeconomic conditions and the at home versus on premise consumption patterns. And we also expect ongoing net new business momentum in the range of 1% to 2%. Turning to CHEF EMEIA on slide 19.
Going into FY20, we highlighted to the market that the overall economic challenges and Brexit related uncertainty would impact outcomes in the region before COVID-nineteen. Overall segment sales revenue increased 3% driven by strong growth in the pallets business. Excluding the impact of AASB sixteen, underlying profit decreased 3% largely due to the $23,000,000 decline in Automotive and Kegstar earnings, with pallet business costs also impacted by additional inspection, handling and transport costs to manage the surge in pallet demand and service our customers while we minimized capital spend to support temporary spikes in demand. IPEP expense increased due to higher pallet FIFO unit costs in the region, while higher depreciation expense reflected asset pool growth, which included the prior year investment in automotive to service a large contract. We also invested in additional resources in the region to support business growth in response to more challenging economic environment before COVID-nineteen.
Margins and returns in the region remained strong despite declines in earnings of the Automotive and Kegstar businesses. Slide 20 looks at the components of CHEP EMEA growth in more detail and provides an overview of our expectations for FY 2021. FY 2020 sales revenue growth of 3% included a two percentage point contribution from pricemix, largely driven by contractual indexation in the Pallets business, in line with the inflationary cost environment in the region. Like for like volumes decreased 2%, driven by lower demand from existing customers in Kegstar and in the automotive businesses. In the pallets business, like for like volumes were flat to prior year, reflecting the challenging macroeconomic conditions flagged to the market going into FY 2020.
Net new business growth was however strong at 3% and reflected current and prior year pallet contract wins, primarily in Southern, Central And Eastern Europe. As we look forward to FY 2021, automotive revenues are expected to remain subdued and subject to production levels in the global automotive industry. Growth in Kegstar will depend on COVID-nineteen developments and their implications for on premise consumption of beer. And in Palace, we expect weak macroeconomic conditions in Europe and Brexit related uncertainty to impact volume demand and price realization. Turning now to Czech Asia Pacific on slide 21.
Revenue growth increased 1% as the strong growth in the Australian Pallets business offset the rollover impact of a large Australian OPC contract loss in the prior year. Excluding the impact of AASB 16, the strong Pallet sales contribution to profit coupled with cost control and plant efficiencies in Australia, delivered underlying profit growth of 1% and margin expansion of 0.1 points. ROCE remained strong with the 0.4% reduction, partly due to investment in service center upgrades. Key considerations for FY 2021 include the onboarding of a new large Australian RPC contract, which is expected to drive higher revenues, start up costs and capital expenditure in the year. Pallet's revenue growth is expected to moderate as the business cycles strong growth in FY 2020.
We also expect ongoing investments in plant infrastructure and supply chain initiatives to support growth and deliver efficiencies. Turning now to cash flow on Slide 22. Free cash flow generation increased significantly during the year. Free cash flow after ordinary dividends increased $261,100,000 However, this includes $114,000,000 AASB 16 benefit to the reported cash flow. Excluding this AASB 16 benefit, free cash flow after ordinary dividends increased by 147,000,000 This is despite the prior year comparative, including $138,000,000 of operating cash flow from the now divested IFSCO business.
The IFSCO sales proceeds did, however, support lower funding costs during the year. The strong year on year improvement in cash generation reflects higher earnings, lower capital expenditure despite volume growth during the year, and improved working capital. Financing and tax payments also decreased during the year. Lower net interest payments reflected the benefit of the IFCo sales proceeds, and the decrease in cash tax reflected lower installment tax payments. As you'll see on the slide, we delivered a strong free cash flow result after ordinary dividends.
The $183,200,000 special dividend was funded by the IFSCO sales proceeds received in FY 2019. We have now fully funded CapEx and dividends for the third year in a row, as you can see on Slide 23. Excluding and this is excluding the impact of timing of core business investment outflows being funded by $252,000,000 of proceeds from the exit of underperforming assets in FY 2018. These proceeds of $252,000,000 are being progressively invested in high returning U. S.
Automation and lumber projects. Dollars 163,000,000 has been reinvested to date across the FY 'eighteen to FY 'twenty period. To further understand our true normalized cash flow performance in the current and prior years, it's important to adjust for the impact of AASB sixteen, which is a reporting benefit and not a real cash flow increase. So going down the page and starting with AASB 16 in FY 2020 and noting that the prior year cash flows were not restated for AASB 16, so the first adjustment required to normalize is to reverse out the FY 2020 reporting benefit of $114,100,000 of principal lease payments now treated as financing from FY 2020. Secondly, we reverse out the FY 2018 HFG loan proceeds included in the free cash flow in FY 2018, which is part of the $252,000,000 proceeds ring fenced in FY 2018 to fund the high returning investments in U.
S. Supply chain initiatives. Then for each of FY 2018, 2019 and 2020 cash flows, we added back the spend on these projects given that they are funded from proceeds from the repayment of the $150,000,000 HFG joint venture loan and $102,000,000 proceeds from the sale of The U. S. Recycled businesses in FY 2018.
Finally, in 2018, we highlighted a working capital timing benefit of $30,000,000 which was included in the FY 2018 cash flow and which reversed in FY 2019. Hence, it is adjusted out of FY 2018 and added back to FY 2019 to reflect the real underlying cash flow for both years. So on a normalized basis, free cash flow after ordinary dividends was positive in all three of the FY 2018, 2019 and FY 2020 years and was particularly strong in FY 2020. Turning to Slide '24. A key contributor to the cash flow is asset efficiency.
We set ourselves an objective in the 2018 to deliver a two point improvement in pooling CapEx to sales with the lead time required to change commercial models and asset management across the group. We have made significant progress with a 2.8 decline in the FY 2020 group pooling CapEx to sales ratio, driven by underlying changes in our processes, business models and commercial terms, as well as improvement in asset management and overall pallet costs. Absolute pooling CapEx decreased $82,000,000 during the year despite volume growth. This reflects asset efficiency improvements across the group, including in the Latin American Pallets business. It also reflects pallet cost benefits associated with U.
S. Lumber efficiency investments and the cycling of $48,000,000 of FY 2019 CapEx to support Brexit related retailer stocking and automotive spend in Europe, neither of which repeat in FY 2020. We have made a concerted effort to ensure we do not add unnecessary CapEx to support COVID-nineteen temporary spikes in demand and have instead focused on getting more efficiency from the existing pool of assets. This has added higher repair and transport costs across the major markets as we ensured our customers were served without adding to the size of the pool. In North America, FY 2019 CapEx to sales ratio, I.
E. In the prior year, was abnormally high despite underlying improvements in pool efficiency. This was due to investments in The Canada a stringer to block transition and also due to a large U. S. Contract win, which resulted in pallet purchases late in the year in quarter four, which created a mismatch between CapEx and associated revenue.
The North American FY 2020 pooling CapEx to sales ratio declined 1.6 points, reflecting asset and lumber efficiencies. In Latin America, pooling CapEx to sales ratio declined eight points and reflects the progressive improvement driven by Mexico Asset Efficiency and Control program. In the EMEA region, pooling CapEx decreased 4.5 points due both to the cycling of the FY 2019 Brexit CapEx and automotive CapEx, and importantly, is as a result of the focus on asset efficiency in the pool during the year to support volatile demand. This has resulted in higher transport and pallet repatriation costs from The UK and higher repair costs to enable higher efficiency ratio of existing pallets to support demand. Turning now to Slide 25 and the balance sheet.
We enter FY 2021 with a strong balance sheet and significant liquidity with €2,100,000,000 of cash, deposits and undrawn committed bank facilities. We have no major refinancing obligations over the next twelve months. And on a pro form a basis, following the completion of our share buyback program, our net debt to EBITDA ratio is under 1.7 times, well within our revised financial policy of less than two times, aligning with our objective of maintaining our BBB plus Baa1 ratings. Turning to Slide 26 and in conclusion. In conclusion, our FY 2020 results reflects the defensive nature of our business, the progress we've made with operational initiatives across the group and our focus on cash flow generation.
We delivered sales revenue and underlying profit growth in line with our FY 2020 guidance despite challenges associated with the outbreak of COVID-nineteen. Cash flow generation improved significantly, reflecting disciplined capital allocation, asset efficiency improvements and improved cash collections. We have a strong balance sheet and a strong liquidity position, which will continue to support future dividend payments and the continuation of our share buyback program. And finally, notwithstanding current uncertainties and challenges, we have provided guidance, and we expect to deliver sales and earnings growth in FY 2021. We'll now hand back to the operator to open the call for Q and A.
Thank
you. Thank
Your first question comes from Jacob Cakornes with Citi. I
just wanted to unpack some of the components of the guidance you've given today. You've that there's probably a slowing revenue growth environment. Can you just highlight for us which market's the most concerning for you at the moment? And then just secondly, in the operating costs in the guidance, can you just give us some indications around IPEP, for example, and whether or not you expect those network inefficiencies to continue into FY 2021?
Hi, Jake. So I'll deal with the market's point and then Nassau will talk about it. Hi, Pat. So I think when we're looking at markets, our major markets around the world and we sort of alluded a little bit to what we've seen in July, I think it's a good indicator as well. The US is holding up quite well at the moment.
But again, we made the comment in the July numbers about economic stimuli. You've got to be really, really careful looking at current trends because there's a lot of stimuli in places like The US and European economies, which are all going to start coming off in October, November time. So yes, US is doing well at the moment, but we're quite careful on that one. The one that I think is consistent with what we were saying pre COVID is Europe where we called out that we saw the economy slowing down in Europe and sure enough as Nessa said in her section, the like for like volumes in Europe the across the whole of fiscal twenty were flat. And that's sort of yeah.
You can then imply that probably they're slightly below flat right now, because, you know, because we are seeing a a slowing down of the economy in addition to the volatility from from from the COVID nineteen impact. So those those those will be the two extremes, I guess. I mean, Australia is doing very well at the moment, but again, you know, we all you know better than we do that what's what's what's going on right now in Australia. There's a lot I think there's gonna be a lot more volatility going forward in Australia. And then LatAm, again, think that is one which is is is from a pandemic perspective has been hit harder than a lot of other markets.
So I think, of course, they went into that pandemic cycle later than places like Europe. So, whilst we had an okay, in fact, good fiscal twenty twenty, we are seeing much more subdued numbers coming out of LATAM right now. So, if I had to sort of rank them in order, would say, at the moment, we're probably most comfortable with The U. S. But subject to the stimuli point and Australia, New Zealand.
And then you would start saying, okay, Europe is flat and then some of the others are now looking a little bit more negative. That would be the sort of breakdown. And then, Nessa, do you want to take on the IPEP point?
Yes, sure. So we'd expect IPEP this year to be broadly in line with what we saw in FY 2020, maybe a slight moderation down. We won't have the big jump up in the unit IPEP costs, which came as a result of us doing additional write offs through Latin America. We're starting to see big improvements in that market in terms of loss rates, which takes some of the pressure off that. And also as we transition to some some amounts in there as we transitioned in Canada from stringer to block.
So we don't expect the same step up. So if you're sort of thinking forward, broadly flat to this year is probably how you should think about factoring in some volume growth. You asked too about what we were seeing in costs and what the outlook for that is. The real challenge for us is that volatility totally changed the cost profiles for us on a number of areas. So just if I take the example of transport, for instance, in The U.
S, we've been enjoying a moderation in transport costs year on year. But as we went into spikes in demand and the transport capacity came under pressure and the spot rates attracted a premium. We also, as we had a dramatic change in our network, so normally our network flows and how we price, you know, where we have surplus pallets, you know, the pricing mechanism will be different where you to where you have deficit pallets. And and our network helps to to move pallets around the total network to balance it. So one of the issues for us is that as long as we see volatility and disruptions, we will incur increased costs to transport pallets and rebalance the pool.
We don't want to get into a position where we put in a lot more CapEx just to service temporary spikes. So as a result of that, when you look at what the impact was, and we called out that Cagstar and Automotive combined were about a €23,000,000 impact. And while we saw higher sales in Pallets, we're sort of saying net net in Pallets, the benefits that we got from increased sales are really broadly offset by spikes across the whole network and the increased costs that we saw.
Thanks, guys. One final one for me. In the corporate line, there is an item shaping the future costs, which you've indicated at $12,000,000 in the period. Can you just give us an idea whether or not they're continuing into FY 2021 under the Shaping the Future? And whether or not we should expect any margin benefits or any cost benefits to flow from this investment moving forward?
So, the costs that were in the fiscal twenty twenty numbers are largely related to a new sort of sales relationship management tool, which will give us better view on the pipeline of managing contracts, etcetera, etcetera going through into future years. It was more about making sure we had to we upgraded an old tool. But going forward, the name is indicative of the shape of the cost and the benefits. Shaping our future is about digitizing the company, improving the customer experience as well as doing all the things we have talked about around making processes more efficient and the company more effective. So we would anticipate spending as much if not slightly more in fiscal twenty twenty one rather.
The reason we can't be definitive about the numbers is there are a lot of proofs of concept that we want to go through in fiscal twenty twenty one and trials. And therefore, estimate of what those investments will bring in the future, we don't know yet because we haven't done the trials. So, yes, more cost in fiscal twenty one, no margin improvement in fiscal twenty one from this particular investment, but we would anticipate, if it's if the proof proof of concept are successful, then we'll be investing more in '22 onwards, but we'll also be getting, you know, benefits in in '22 onwards. So that that's the sort of the shape of that program. But just stepping back a bit on margin improvement, one of the things that we have said and I think the guidance the outlook guidance sort of implies it is that at whatever point you want to draw the revenue increase, we are expecting some leverage flow from that because of what we're doing around cost generally and also coming through that inflationary spike that we talked about in 2018 and 2019.
I think that's our view. But clearly, it's really, really hard to be predicting what's going on in the next twelve months. And I think the mere fact that we're giving guidance at all should give you some sort of comfort around the resilience of the business. We have seen that over the last few months. It's a resilient business and we are able to generate more cash through this period.
All the things we said we thought would happen, but actually giving really detailed predictions about margins and ULP, etcetera, is quite hard now at this point.
Thanks, Graham. Thanks, Peter.
Thanks, Ryan.
Your next question comes from Matt Ryan with UBS Investment Bank. Please go ahead.
Thank you. Hi, Graham. Hi, Nessa. I just want to be clear on on what you're trying to convey with your guidance. And I guess, in particular, trying to understand a scenario where you got to a flat revenue outcome.
And maybe just to help us, can you sort of quantify what you mean by auto and kegstar being lower in FY 'twenty one versus 'twenty? And then I guess reading between the lines on what you've just said, are you sort of assuming the greatest risk to get you to that flat outcome would be EMEA going negative, and and there's a pretty low likelihood that that The Americas and Asia Pacific would be negative? Is that sort of how we're we're supposed to interpret what you're saying?
So I think I think what I would say is I wouldn't interpret too much detail because that's exactly why we've given quite large ranges. And and but, you know, the flat implies, that we will see a a impact on consumption driven by both the, consumer behaviors changing through COVID, but also as you just mentioned, the fundamental underlying decline in GDP in a lot of our big markets, the European ones. So if you I I don't want to put your words into my mouth, but I mean, I think you're you're you're right. I mean, if you were based on what we're seeing right now, the markets look more likely to be problematic are are gonna be Europe because they're already at flat. And if so, things get worse, and, yes, they will go negative.
But that's you know, remember, that's what happened in 08/00/2009. So we're we're still we we know based on what we're we're saying now that we're we think we're in a better shape than we perhaps were in 02/08/1929 in terms of how we can manage the costs and generate more cash. But it is just incredibly difficult to start making predictions about the full year now. And that's why we've we've said that we're gonna have to to look at, the trading after three months and do another sort of, big reforecast and then we'll reflect more on the guidance we've given. And and the comments around automotive, what we're saying is, you know, there was a a significant impact in q four because basically all the automotive OEMs stopped producing.
We've seen them come back up now, but, you know, the the way the the the level at which they've come back is nowhere near what they were at before, and we expect that level of inactivity to continue for most of the year. So you'll be you'll be getting activity, but it will be lower in total than than than fiscal twenty. It has to be because you had three quarters of, you know, normal activity and one quarter of of zero activity. I think that's what we're trying to we're trying to point out. Is there anything else you want to add to that one?
No. I think that's a good summary.
That's great. And, maybe a question for Nessa. Slide 14, which is just the bridge of of your group profit, it's got a a reasonably large, other line of 49,000,000, which it looks like about three quarters of that came in the second half. And there's a lot of things which you've sort of talked about driving that number, but just hoping on if you could sort of break down what the biggest things were and if those things are finished now or whether there's a continuation of those into next year?
Okay. So how you should think about this is, first of all, we totally changed the business model in both our Mexico business but also in Turkey, which is a smaller part of the business. In both markets, we have added additional overhead. But as a result of that, we are now realizing higher pricing, getting higher profitability and generating better cash flow from both of those businesses. But to do that, we have added in extra resources.
As we saw in EMEA, as you saw that we got good new business growth despite the declines in the existing core business from like for likes. We also have additional resources, which is seeking to deliver growth, is quite successfully developing in new areas, new lanes, etcetera, to deliver growth to the business. And we've also put resources into investing in the digital programs, the sales force tools and basically getting ourselves in a position where we are better managing efficiencies in the business and developing new concepts that will give us future efficiencies. So you shouldn't expect to see a big decline in the overhead costs. These are costs that are put into the business and supporting the business growth and the outcomes.
Thank you.
Your next question comes from Owen Birrell with Goldman Sachs. Please go ahead.
Just a couple of questions around, I guess, firstly, pricing. You mentioned that this year, in particular, in The U. S. Is your final year of your price reset program. Is it fair to say that you can continue to push pricing going forward if your major competitors are pushing price as well?
Or are you sort of actively going to make a decision to hold price beyond this FY 'twenty one year?
So if you recall what we said when we started the pricing reset program in The U. S, there have got to be three things that come together to give you that environment where it's I'm not gonna say easy because it's never easy, where it's more likely to be able to get price increases. So the first one is high inflation because clearly, can then go to our customers with a sort of a a reason for having to increase prices. The second one is tight capacity. And the third one is rational competitive behavior.
And we're still seeing rational competitive behavior, which is good. But, of course, inflation is is coming off. And as we are automating more of the plants, our supply capacity balances is becoming less tight as is the industries as well. So I think some of the factors are not helping and one of them is. But the other thing we also said is, and as you pointed out, because of the nature of the term of the contract, it was going to take us three years just to get through all of the contracts.
We still got a bit more to do. We So would expect to see perhaps a little bit more pricing, but this will probably be the last year where that big surge will come through. Now, if some of the other factors change, so if we have a big spike in inflation again and we find the industry capacity is tight, well, of course, we will. We'll see if we can we'll get more pricing. But I think you we've we've got to sit back a little bit and reflect that The US business has done an absolutely spectacular job over the last couple of years given the history of not getting any price increases at all.
And so I think, yeah, to to to expect that to be a constant is is is unrealistic. And if you go back, remember the the slide that Nestle, you know, has with the the the dots around The US. When you look at what was going to get the margin improvement in the early years, was around a lot of it was through the pricing. But as we go into fiscal twenty twenty one, 2022, it's all around the delivery from the automation program and the lumber program. So again, that's where the benefit is going to come from going forwards rather than yet more pricing.
Can I just draw you on the inflation comments that you made there? Putting, I guess, this, what do you call, the volatile spike in in transport costs, What are your assumptions for transport cost inflation and labor cost inflation going forward over the sort of the next two to three years given that, you know, we're likely to see unemployment in The US more than 10%? So I'm just wondering, wanting to get a sense of have you reset those, that cost inflation expectations?
So we certainly had been flagging that we expected transport moderation, which we saw pre COVID. So our expectations are for the shorter term and what we factored into the outlook is obviously a range, hence the range in the guidance. But for shorter term, we're expecting volatility to continue through this year. So we're expecting that as we see some increased volumes as a result of the spikes that we will continue to see some increased costs. It's a capacity issue in The US.
We're not seeing that inflation issue in Europe. It's it's quite interesting. There there is a lot of conjecture that because of the stimulus that's happening in The US, that a lot of the sort of transport workers and lower paid workers that are are not going back to the labor market, which means that there are capacity shortages in for in trucking. So this is unique to The US. And the sim similarly has happened in lumber.
Their production is way down, but the demand is high. Housing is still going well in The US, particularly in in in Texas. DIY has taken off, But, they they don't have enough capacity to turn out higher levels of lumber. So I think we would expect to see more you know, to get a better view for this when we see stimulus packages come off because you would think it's more challenging economically that you would expect to see some moderation in both transport and labor inflation, but we're seeing the opposite at the moment.
Okay.
That's and know that's The US comment. Europe is different. Europe is different to us. We're not seeing the same transport challenges.
No, understood. Understood. Can I ask, with that the lumber comments that you made, we've seen the lumber prices spike in the recent months? Has your lumber procurement program helped to, I guess, shield you from that lumber price? Or is it still coming through?
So look, over a long period of time, as you imagine, it doesn't matter what you've got in place, any commodity, you're impacted. But where we have a big benefit is we've invested in the efficiency of processing. So it's not purely transactional. What we've done because we've we've jointly invested with sawmills is we have new technology in the sawmills which reduces wastage, which therefore gives us gives us a bit less ex exposure in terms of we are not we you know, per pallet, the the unit cost of a pallet, we will get a benefit because we will waste less lumber because of the investment that we've put into processing. Obviously, great for our sustainability credentials as well.
But, yes, we do get some benefits from that, but we're not fully insulated. And, you know, we we we do have a lumber surcharge in place, the same way we have inflation surcharges in place, so that as these costs get higher that we do have mechanisms to recover that.
You called out the the volatility, you know, causing that spike in in transport costs and plant costs. If we find the market settles down and we don't get that volatility that you're expecting, is it fair to say that some of that additional volatility led cost increase you sort of exhibited on Slide 14 effectively reverses?
Well, we would expect yes, look, the we called out that as we got additional volumes through pallets, basically, the benefits was offset by higher costs. Part of that is a conscious decision where we didn't want to put more and more CapEx in just to service that. So we're we're if you like, we're running higher repair costs and higher handling costs than you would have. If you go back to more normative, flows in the in the network and you have less spikes, then yes, our costs will come down.
That's correct. I'll leave it there. Thanks.
Thanks. Your
next question comes from Anthony Longo with CLSA. Please go ahead.
Yes. Hi, Graham. Hi, Neta. Just wanted to have a just had a quick question on the cash flow. So it looks like your working capital was you got a benefit this time around.
Are you able to perhaps give a bit more color as to what ultimately went through that cash flow and the working capital? I noticed your receivables to sales look like they've improved. So just want to get a sense of customer health and credit on that side of things.
Yes. Yes. Anthony, I'll take that question. So you'll have noticed for the cash flow over the last two years that we had some benefits in working capital from that had been more sort of in the from the supplier side as we sort of centralized procurement, put in more controls. This is actually more on the receivable side as you know.
And if you look at the aging of our debtors, it's improved a lot. We've actually spent a lot of time over the last twelve to eighteen months improving our processes, improving the data analytics that we do when, you know, and dispute resolution. So we're doing a lot more and more frequent tracking of where we see any abnormalities or any issues outside of terms that occur. So that we now also have a new process that has the finance team working very, very closely with the sales team. And so it's a lot more about resolving root cause problems.
So where there are issues or disputes, making sure that we're actually solving those so they don't reoccur. And we have actually spent a lot of time building new reports, using data analytics across the business. And on a weekly basis, CFOs are discussing where we are with cash collection. So I would say we have sort of upped our game further. We sort of started from suppliers focused on the assets, which is also delivering, but we did have a big push this year.
Is so in terms of as you look at what you might look at year on year, will we get all of that working capital benefit? You know, will you get another year of that? No. Or would we expect to retain what we've got? Yes.
And maybe there's a little bit more to go. But essentially, we have made a lot of changes in processes to enable us to get into this healthier position, which the timing of COVID nineteen, has actually made that even more valuable to us than, just pure cash flow. It obviously, helps reduce risk in our business too.
That's great. Thanks. I'll leave it there for now. Thank
you. Thanks.
Your next question comes from Cameron MacDonald with E and P. Please go ahead.
Good evening. Can I just ask about where you're at with the plastic cost pellet trials?
Sure. The trials continue. They've been delayed a little bit in terms of both Costco and the suppliers into Costco, our customers because of COVID-nineteen. As you can imagine, the focus was on keeping the supply chains open and getting products on the shelves in the supermarket. So the trial was has been delayed a while, but we are starting to commence them again with the same objectives we've always had, which is we still want to test out the pricing levels because clearly a premium to wood has to be charged to offset or to recover the higher per unit cost of a plastic pallet versus a wooden one, but also understanding that it's not what some think, which is, you know, because it costs a lot more, the premium has to be a lot more because there are other, benefits of using the plastic pallet and the associated infrastructure which Costco are putting into their, stores and distribution centers around tracking and tracing.
That if we can get the loss rates down and the damage rates down, the premium doesn't have to be a one for one relation with the cost differential to work. But the fundamental unproven piece right now is what is the price premium that will the market will stand. And as we've been, I think, very consistent in saying, if the financials don't work for us, we won't do this. But at the moment, you know, so far, the trials are ongoing. Not much more I can say to it other than the operational aspects of the pallet we've got in place are are as good as we've hoped for.
So it's now all about the sort of the the commercial base.
And did you have you decided on a, on a solution I think last time you were still talking about a a hybrid type pallet. Have you moved away from that, towards a more holistic plastic solution?
So at the moment, we we are looking at all plastic because that's what Costco are are are, prepared to support. The hybrid pallet, we still think might have some application in other markets and other in other instances. But, again, it's we're now sort of going back and saying, We've got to focus on plastic. It really it's about over time, can you engineer a lighter plastic pallet than than is current in the market? And that's gonna take you know, that's not gonna be a short term fix.
That's a longer term project. So, now we're we're focusing on an all plastic one at the moment.
Great. And, miss, a question for you just on The Americas and The US margin slide or the Americas margin slide on on slide 16. So now that we've transitioned from string of the block in Canada, should that now be sort of a a rebase margin so that that margin might have a drag or could potentially improve in 2021? And then, you know, Latin America is flat this year. You know, what what's the outlook for Latin America?
And then I think you did say that the margin outlook for The Americas in total will effectively be the benefit coming through from The U. S, which would be that sort of 80 basis points. Is that the way to think about it?
So a couple of comments. So in terms of Canada, yes, we have had a rebate to a lower margin, which has been that region had been on exceptionally high absolute margins and returns. And you know, the block is a higher damage rate. If we were looking at it, we're not going to forecasting by each subset section here. I wouldn't expect the Canada margins to get any worse.
We might expect to see a bit of improvement, but that remains to be seen what transpires during the year. As we think about Latin America, I think the key focus for us as how we evaluate Latin America should be about cash generation and growth. Are we getting growth and good cash generation? Because normally growth is very capital intensive because that'll tell you that we're actually getting a high returning business in place. So, you know, we've gone from being a cash user two years ago to being a big cash generator.
Challenge for us was predicting Latin America. So we're on a great path, you know, with cash gen, but we don't know what's gonna happen with COVID in this this year in particular. We we know it's impacted now, and we've seen issue volumes declining, but we're seeing good still good revenue realization. So that market is a real uncertainty for us to be able to give a better view, but we're very positive with the progress we've made.
Your
next question comes from Anthony Moulder with Jefferies. Can
I start with leverage in the Pallets business? I mean, obviously, you've given details around the earnings impact through auto and Kingstaff. But can you talk to how you saw the leverage through the pellets business, particularly in that fourth quarter of twenty twenty, please?
Well, I think, you know, Anthony, as I talked about, we we had spikes in demand that gave us extra earnings. But we basically, the benefits of that were offset by extra costs across the entire network. So volatility has a disproportionate effect, and it's across the entire network. So while you get some additional volume, the additional costs are spread across the network. So you should think broadly, net, we had higher revenues, but they were offset by higher net network cap costs when you think about pallets.
Right. So so going forward, I I guess the volatility in some of that cost base won't continue. So is that the hope for fiscal twenty two? You return to some level of operating leverage to the pellets business?
Actually, as we get to '22, we would, yes, hopefully be beyond all this volatility. And I think, you know, we're all waiting to see what happens. You know, maybe it'll it'll start changing as we get into the second half, maybe even second quarter. It's really hard to tell, but right now, we're still seeing through July and into August, we're still seeing volatility from week to week.
The US inventories seem like they're a lot lower. At the same time, we've seen a big increase in ecommerce. Are you seeing any impact on your business from some of those changes and whether or not they're structural or will continue through this pandemic? Just interested as to how that's playing out through your business.
Yeah. So, I I think, you know, we we we have we have seen the trends. I think everybody's been seeing, which is less people going out to eat in restaurants and bars, and therefore, they're doing more at home consumption. And as a result, also, less people going to buy the ingredients for those those meals in supermarkets and more online. I think, yeah, we've seen that in a lot of places.
But if you recall back here back before all this happened, we also talked about online retail and the impact on the business. And and fundamentally, it doesn't make a huge difference to our flows because an online retailer's fulfillment center is no different. It might be a little bit more automated, but no different to a lot of the retailers' distribution centers in the the the product that's coming in on our palettes to Amazon's, performance centers the same way that comes into a bricks and mortar retailers distribution center. It then gets taken off the palettes and and taken on other platforms to stores as far as retailers are concerned or to consumers' homes as far as Amazon is concerned and other online retailers. We don't play in that space going down to, the the very last mile.
And therefore, it doesn't really impact as much if the if the difference is is going more towards online versus versus bricks and mortar. Now if that you know, I I am sure that if that trend extrapolates a lot over the next few years and with no one knows whether it will or it won't, then we'll have to rethink here about our our our model because clearly, you're putting more and more business into fewer and fewer channels and there will be more and more pressure on us, I suspect, on cost. But then again, if we've got less complexity in our business model, we should be able to lower our cost more. I don't I don't see it as a threat. It's more of something we have to keep an eye on, attention opportunity.
But at the moment, we're sort of a bit ambivalent about whether it's online or bricks and mortar.
I appreciate that. And I and I guess it's less pellets are going down to store level or less reuse, then potentially the cycle time is lower, which means that you would need less pellets to service the same number of issues in in key markets, wouldn't you?
Yeah. I mean and as I think we said before, you know, Amazon is a a great customer for us because we get our palettes back quickly. So, you know, in that in that in in that sort of very high level analysis, yes, I think we would agree with you.
So but I wondered as to whether or not that was also a function or a factor in the lower replacement CapEx through second half twenty. Clearly not.
Not not really. No. It's more about us looking at fundamental processes and being much applying much more discipline and best practices. It's not it's not really a factor of online versus, versus, bricks and mortar.
Just a question on Brexit. It looks like the transition, yeah, goes through to the end of the year. There's some talk of heat treating pellets between the continent and The UK. Where are you at Spurs needing the heat treat pellets and and any discussions with customers as to how easily that will absorb that cost?
Yeah. So, I mean, again, the the the the debate around heat treatment has been going on for a long time now. So as a result, we took a decision to invest in units within our such big service centers in The UK that could do the heat treating, recognizing that, yeah, it's not a huge capital cost, and that, there would be an opportunity, I suspect, to get a premium for, pallets for the heat treated. You know, we we did a little bit of that, about nine months ago and and and got a bit of a premium. But in terms of wide scale, every pallet must now be heat treated.
We're not there yet because as you say, there's still a bit of opportunity for for negotiating and getting short make trying to get the UK government to negotiate that that that Palestinians be heat treated. But to be honest, it is not top of their agenda and things they need to negotiate with the EU. So our working assumption is we need to be ready to heat treat ourselves, and then we'll have to take the commercial decision. But when I say the CapEx involved is is probably $10,000,000 at most, you know, you can the the actual, cost and free depreciation is not that big for us. So, yeah, I don't I don't think it's a big issue.
The bigger issue around Brexit is as ever is gonna be what's gonna happen if there is no deal. And, again, we've had plenty of practice at this now because there have been several force, you know, force force deadlines. So the business is well used to coping with having to see stockpiling from our customers. It might it might mean a bit of CapEx in the short term, but then we'd expect that to unwind past the deadline. The bigger issue is gonna be is there is there gonna be a real problem at the ports in terms of bottlenecks?
And again, you know, we are talking to our customers regularly about their plans because we have to effectively, try and support the customers we've got. But at the moment, you know, we've had plenty of dry runs on this. I don't we don't see it as a big issue, but something we just have to keep our eyes, you know, keep alert to. Thank you.
Thanks.
Your next question comes from Scott Ryle with Raymore Equity Research. I
was wondering just a follow-up question on the EMEA margins, please. Am I right in the second half? It looks to me like underlying profit was for the pallets only once I strip out the impact that you've called out for the automotive business and the Kegstar business, that the margin or underlying profit, sorry, was maybe flat, maybe slightly down, maybe slightly up on a constant currency basis just depending on the currency mix. Does that sound about right? And just to Anthony's question just now, yes, I'm just interested in your commentary on the second half pickup in costs as a result because clearly, it's lower than your 5% constant currency revenue growth.
So I'm just wondering if you could comment a little bit about the lack of operational leverage during that time in a bit more detail focused on EMEA, please.
Yes, hi, Scott. Look, for your first question, yes, your summation is right about the Palace business adjusting for that, taking directionally flattish second half. When you're talking lack of leverage, that's why I was saying across the businesses, which is the same. So in Europe, we've had a lot of pallet repatriations from The UK, additional repairs as we really focus saying, look, we think this is going to be economic the markets are going to be economically challenged. We don't have loads of excess pallets.
So we've actually you can see repair costs have gone up and also so have handling costs gone up. And that was, you know so so it's it's the same in The US that in response to volatility, if we'd responded to our normal algorithms, we would have added in a lot more pallets to both sets of businesses. So, you know, until we get through through this to a more normative stage, it's going to be challenging for us to work out the the cost. Uh-huh.
Okay. So that leads on nicely some oh, sorry. Go ahead.
Sorry, Scott. Before you finish that, and and that's where sort of, you know, in particularly in that region, we had very high cash generation. So EMEA was a was a high cash generator for us.
Yes. Yes. So that's that does lead on perfectly to my next question, which is on your slide 24 and asset efficiency. Yeah. How can I just get an update in terms of your thinking as to how low across the group, how low you can get CapEx to sales?
And I guess I maybe more traditionally look at CapEx to depreciation. In that second half of the year, you got and this is just going off your accruals data in your main release, CapEx to depreciation was about one:one in EMEA and Asia Pac for the first time that I can remember. I have to go back to my my numbers to check. But, America's stays higher, half of which I make due to the automation program, and you've obviously still got some slightly higher spend in Americas. But can you can CapEx under your overriding manual overriding of your algorithms, can you keep CapEx to the level of depreciation?
I guess that's do do you envisage that in a in a new capital efficient brambles?
I think you need to look at DIN in total as sort of our replacement model. So, you know, we have to every year, there's a number of pallets that get scrapped, which is usually sort of around 3% or so of of the pool. There are sort of uncompensated losses of about 8%, but that's been coming down. And then we have compensated losses of about 3%. So as we think about it and why we don't group all of the CapEx together but we manage it in a disciplined way is that from year to year, depending on what you invest in, in the non pooling CapEx, there are usually specific initiatives that you can appoint to which will have their own return case.
Where we focused in to get the cash out of the efficiency has been looking at pooling CapEx to sales. And you can see that if you even look at on that chart at North America, FY twenty nineteen was actually tracking better than we ended up because we got a new customer in the very last quarter, which meant we had to buy a load of pallets that we'd rather not have bought then, but we had to buy them because we had a new customer coming on and other losses hadn't yet rolled off. So you'll have some timing benefits. But we are seeing that underlying trend, as you can see across your major markets coming down as we're dealing with how do we better utilize our pool. And Latin America, obviously, that specific asset program that we've had to really focus on how do we make this a cash generative business, which which we're, you know, in a good space.
If you're thinking, therefore, about where do you go to on a kind of run run rate, You know, for us staying in business is kind of about 14% odd that you put in, in terms of replacement. And then you usually need a point just over a point for each part of growth. So we think an efficient level is sort of around this sort of 17.5 points. We're looking to use digital and technology to see what are the game changers could we put to change some of those truisms. And I think we've successfully taken now out a couple of points by actually going through and being really focused on the on the allocations within the, within the pool spend.
If you look at non pool spend, it can it can sorry.
No. I guess I I
was gonna say that that I was looking at depreciation including the IPIP. So that was one of the things that you you've done in terms of your disclosures this time around that that, I guess, helped benchmark benchmark that. But I'll take your point on on the kind of 14% that what's the the additional 1% that you talked about for each for each growth area? Is that in each region?
I'm giving you a helicopter view just to help you. This is not an exact science. This is a roughly roughly. If you're going to then get a point of volume growth, you'll need maybe one point, two points out of CapEx add in terms of pooling CapEx to sales. But I'm saying how you look at the capital investment in the pool pallet business, we've got to an efficiency level down.
As you can see, we've come down now x number of points. We've come down to 2.8 points in FY twenty, but sort of by two points over the over the last three, three years. We're now saying we need technology and other enablers to help us to be able to change some of those dynamics. So, you know, I think we'd feel comfortable where we are right now without a game changer in the technology. It's sort of around that sort of 17.5% would be the right pooling CapEx to sales.
And the other spend is dependent on what projects you've got. For instance, we generally run that at 1% to 2% of sales. For instance, now we're finishing off or doing more of the automation in The U. S, which is delivering. Those projects are giving us 20% plus returns on those investments.
We're going to do a number of proofs of concepts over the next twelve year twelve not twelve years, twelve months with a view to bringing the next iteration of efficiency. And for us, we are looking for high returns for that investment. And obviously, we once we get through proofs of concept, there are things we talk to the market about. But we are looking for good we we kick out cash. We have a very strong balance sheet.
We can find good ways to to invest shareholders' money. We'll look to do that. But, you know, currently, we have a very good model now of self funding both CapEx and dividends.
Your
next question comes from Paul Butler with Credit Suisse.
Hi. Most of my questions have been asked and answered. But can I just ask, given given that you're expecting the volatility to continue for, you know, at least some time yet? Is there is there are there things that you can do to get better at managing that that volatility that you're seeing, or is it a is it a or is it a case that you gotta wait till contracts expire and then price them appropriate for for the type of volatility that's that there's been?
I think I mean, I think there are a few things we can do. So so in The US, for example, one of the things that causes the cost to be a a a significant problem, the volatility is the lack of capacity. So as we go through The US automation program, one of the reasons for doing it is that you have that bit of spec capacity. You can make sure your palettes are in the right place at the right time in advance. But I think some of the sort of the longer term projects are, can we use data analytics and machine learning to make better predictions about where the surpluses are gonna take place and react, you know, faster?
So that's a project we are looking at. There's obviously a longer term project. I think just having an even greater focus on cost control, it will help us mitigate the impacts of the spikes, but it's not a it's not a structural solution. That's just us being managing on a on a short term basis what needs to be managed. But I think, you know, I think it's been a it's been a perennial problem with the business model, which is it it doesn't function as effectively when you've got spikes in demand.
And I think one of the things we've got to try and do is find a way to to manage that better because undoubtedly, you know, volatility will probably be with us in some form or another for quite a long time. I think the other comment to make though is, you know, the one of the things that has always been a, I think, a challenge with, with the business model is trying to get higher ULP and higher cash gen at the same time is quite difficult. And, you know, you've heard Nessa say that one of the things that we've done and it helped with how we've managed the the the the volatility and to make sure our customers are satisfied is we've actually managed to keep a a good check on CapEx, but it popped up again in terms of having to do more repairs, and that's where it hits the p and l. So getting those you've gotta find try and find the soft the optimal point between both those things to solve for the the right you know, to and also the customer needs to get the other the the best solution. I think we're just continually, a, looking at the short term fixes around what I've talked about, but also now we have to start looking at more technology and data and how we can, be better predictively managing the business.
Yeah. And I think another point that I just throw out there too is that as we went through all these spikes in demand, we know that all our competitors were not able to service their customers in the same way that we did because we are this happens, which is one of the things where we create competitive advantage. We will invest, and we do have an extensive network and footprint that allows us to react to be able to service customers. So, you know, there is a capability. There is a piece that gives us a competitive advantage through this, which which doesn't come through in the numbers, but is something that I think should be called out.
Are there any particular markets where you've you've outperformed the competitors on service?
I would think definitely Europe and almost certainly US were the two I would I would definitely say.
Yep.
Okay. And just just one more from me. You've called out higher repair costs because of the volatility. I mean, I understand the higher transport cost, but can you just explain why the higher repair cost? Is it because you're seeing higher damage?
Or is it just more handling? Or So
normally, when we see increases in volumes, we'd be adding in more pallets into the mix as well as you get growth. We've said, no, we're not going to add in extra pallets just to service a peak in demand. We're going to get the balance right economically, which has meant that we've had to change our approach. So hence, you repair more pallets. Plus, given volatility, we have through our plants in a very short period of time done a lot more repairs.
So when it's spread over a longer time, it's a much lower cost. We have ended the year with higher levels of repaired pallets in our plants as well because we're expecting volatility to continue. It's a function of doing a lot of repairs all at the same time and the normal increase is not including new pallets, so you're actually proportionately repairing more pallets.
Thank you very much.
Thanks.
Your next question comes from Harfan Venn with Rebecca. Please go ahead.
Can you hear me? Good afternoon.
Yes.
A couple of questions for me. Maybe start off with that volatility question, the topic that we're on. You know, you expect volatility to remain for the rest remain or for for this fiscal year, but what's the magnitude of the volatility, let's say, in July versus, say, in March? I mean, I would suspect that, you know, March would be a peak and people are used to living in the environment where and then the volatility should die off.
Yeah. No. Let let me explain what we're saying. So, no, it hasn't worked like that. When lockdowns happened initially, we saw peaks through March and April as people stockpiled, there was the initial view.
As we've seen various levels of lockdown and easing and and then reinforcing, we've seen a lot of volatility. I mean, you've seen on premise was it's supposedly opening in The UK, then some slowdown, then some rules changing to do with that. So we have seen we are seeing still month to month categories go from being double digit negative to being double digit positive. And so that's what we're currently dealing with. So the normal flows we would have in our network just aren't occurring, and it's not just they've they've now settled down and we can predict where we're going to be so we can make economic decisions or we could, you know, we could take out more of the fixed cost cost base.
We're still getting significant volatility and a real asset for us relative to others is that we have a big network and therefore that we can we can manage volatility better than others. But it comes at a cost Because ideally, when you have flatter demand, you know, in terms of your labor costs running your plants, how you run your transport, all those things, you can run to a lower cost. In terms of what we expect, we're currently still seeing volatility. So, you know, for us, as we looked at the range, while we would expect things to get progressively better before we got into FY '22, we just don't know yet, and that's why
we're continuing to monitor it. Don't know if you wanna add
anything else. It's clear. And now second question I have is about your wording around the share buyback program in your presentation. It says the share buyback program to continue subject to ongoing assessment. This word subject in there is a bit puzzling to me.
Does that also mean that it's a possibility that the buyback is no longer a guarantee?
So there's never a guarantee about a dividend or a buyback, but we have a very strong balance sheet that supports dividends and buybacks. It's kind of it's the usual language you would expect given that it goes to the board every six months for approval. But we're in a good place with the dividend declared and we're back on the buyback. So that's all that language is doing.
You. Your
next question is a follow-up from Jacob Kakarnes from Citi. Please go ahead.
Just one follow-up quickly. Graham, just the upside case in the guidance that you provided to the market, is there
anything in that for a vaccine globally at all?
I know that you're in a pretty interesting position with your involvement with AstraZeneca. I just wanted to get a sense if that upside case does assume a vaccine at all.
No. I think we're we're we'll stick to being a logistics company rather than a pharmaceutical company and taking bets on vaccines. But I mean, mean, clear I mean, I think, clearly, one of the things that will help economies stabilize and go back to more normal levels is if there is, less fear, around catching COVID nineteen and a vax a successful vaccine would probably help that, but we've made no assumptions. We've just said, here's the range. If things return, you know, quicker than expected, we're at the upper end.
If they if they don't, we're at the lower end. I think that's all I think that's all we're trying to signal that. Thanks a lot. Thanks.
There are no further questions at this time. I will now hand back for closing remarks.
I just want to say thanks very much everybody for the questions. Yeah. I think we're we're we're we're proud of what our employees and the company have done during this pandemic in terms of how we've reacted and been able to support our customers. But clearly, it's still very uncertain times. So we'll absolutely come back to you after the first quarter and and, talk about the guidance a bit more once we've seen a bit more trading.
So but but thanks very much for your questions. And, hopefully, before not too long, we're about to do this in person rather than, from from the other side of the world. Many thanks.
That does conclude the conference for today. Thank you for participating. You may now disconnect.