Welcome to our fiscal 2019 results presentation. As usual, I will do a brief overview. We will hand over to Nessa, then I will come back again and do a bit more about strategy. If we look at the 2019 results, sales revenue growth 7%, and I think that is reflecting both our performance on pricing, but also very strong volume momentum across all our regions. The underlying profit up 2%, again, strong revenue driving that, but also offset by group-wide cost inflation pressures, as well as continued challenge in the Americas. A few things there. One is the changing customer retailer behavior, which we talked about before, as well as U.S. network capacity constraints, which we have talked about before, and the stringer to block conversion in Canada, and higher cost to serve in Latin America. Nessa is going to talk about that in a bit more detail later on.
Our self-help strategy in the U.S. has been working. You can see we've made good progress on the automation, on lumber procurement, productivity and pricing initiatives. They're all on track to deliver progressive margin improvement through to the end of fiscal 2022. We had a very good year on free cash flow in fiscal 2018 in terms of plowing up cash to pay the dividend and investment. In 2019, you can see we were down just under $90 million, and that's largely due to the $73 million we invested in the U.S. automation program, which clearly was funded by the divestment of businesses like HFG in prior years, but also only having 11 months of IFCO cash flow. ROCE of 19.5% remains very strong and well above the cost of capital. Let's moving on to IFCO. We sold IFCO in June.
That completes the program we have of selling the major assets and leaves us in a sort of a very streamlined and focused place going forward. The sale of IFCO provides us with just under AUD 2.5 billion net proceeds. It leaves us in a very unique, I think, opportunity to reshape where we're going in terms of direction, making us, I think, fit for the future and in a strong position going into the 2020s and beyond. I'll talk about that a little bit more later on. If you just look at what we're doing with the cash proceeds. As I said, there are AUD 2.4 billion net proceeds. As we explained previously, under AUD 2 billion we're going to return back to shareholders in two ways. The first is the on-market share buyback of AUD 1.65 billion, which we started in early June 2019.
We've purchased 6 million shares so far at a cost of AUD 77 million. We expect, based on sort of normal run rates of what we'll be buying, that program to be finished in about early fiscal 2021. The second element of the share proceeds going back to shareholders is around a capital return special dividend. There's a capital return of AUD 0.12, which is subject to our shareholder approval in the 2019 AGM, together with a special dividend of AUD 0.17 per share. The balance, which is about AUD 2.4 billion, is going to be used to pay down debt. Again, we talked about that previously. I think all of these things leave us in a position where we're very much focused on maintaining a strong balance sheet and investment-grade credit profile.
One of the other things we talked about when we announced the divestment of IFCO was that we would, as a board, reassess our dividend policy. As a result of that review, we've decided that from starting with the FY 2020 interim dividend, we'll be moving to a payout and ratio policy. The main reason for doing that clearly is to align shareholder payments with movements in earnings, but also to support future growth opportunities, all the time maintaining the strong investment-grade profile. The way we'll do that then is target a payout ratio of between 45%-60% of underlying profit after finance costs and tax, and of course, subject to our cash balances. The dividend will be declared in USD cents and then paid in AUD cents.
Because of the ongoing share buyback program, we're going to continue to suspend the dividend reinvestment plan. As I say, the whole point about this is we continue to be committed to a strong balance sheet and investment-grade credit profile. Just moving on a bit to the operating landscape and the outlook for fiscal 2020. It's not all bad news in terms of the operating environment. If you look at the first couple of points there, those are positives in terms of we still have large addressable opportunities both in developed and emerging markets. Competition, whilst it's robust, is still very rational. Again, I think that's an important point to remember when we're looking at competitor activity. Now, we are seeing a slowdown in major economies.
Yes, I might be British and therefore Brexit might be top of mind, but it's not just about Brexit in Europe. I've been saying this for some time to you, that we thought there was a slowdown coming in GDP, particularly in Germany, France, and we're now seeing that. I think Italy, we're seeing they've had a snap election that's going to take place very soon. I think across Europe, we're seeing a slowdown. It's not just related to Brexit. On top of that, whilst nothing's happened yet, I think it's the contagion that could come from a U.S.-China trade war is something we also have to bear in mind. Both of those things, the European slowdown is definitely going to be something we have to face in fiscal 2020, and it's possible that a wider contagion could also be fiscal 2020.
On top of that, not something else which hasn't changed, but is still present, is that the retail landscapes is changing. Of course, that means that the business models of our customers are changing, and it's putting more and more pressure on the supply chain and us as suppliers. We continue to see inflationary cost pressure. Although the rate of transport costs is moderating in some markets more than others, we still expect to see inflation in our main markets, particularly Europe and the U.S. Finally, if we look at the financial outlook, so if we take into account what we've been talking about around inflationary pressures and the macroeconomic pressures, but also take into account AASB 16, which even though I'm an accountant, I'll be more than happy to let Nessa explain in a minute.
Our view is that the revenue growth in fiscal 2020 will be at the lower end of our mid-single-digit growth objective. I think that is particularly valid when you think about Europe and the automotive sector. Again, we've talked a bit about automotive. If you read any paper, you see more and more of the large automotive OEMs are cutting production, and that has an impact because we have a reasonably sized automotive business, particularly in Europe. With that sort of revenue growth, we're anticipating underlying profit growth, including the impact of AASB 16, to be in line with the revenue growth or slightly above. I do think that would be a very creditable performance in the context of the larger macroeconomic position as we go into fiscal 2020. With that, I'll hand over to Nessa to go through the numbers.
Thanks, Graham, good morning, everyone. Now to go into more detail for the results release. Before getting into the FY 2019 results, I'd like to take a moment to outline how the new accounting standards introduced during the year and the sale of IFCO are presented in our financial statements. We'll also come back to the impact of AASB 16. Starting with the accounting standard changes, the new revenue standard, AASB 15, and financial instrument standard, AASB 9, both came into effect on the 1st of July 2018. The 2019 income statement and balance sheet have been prepared in accordance with AASB 15, and the 2019 balance sheet has also been prepared in accordance with AASB 9. It should be noted that neither accounting standard had any impact on cash flow.
Following the completion of the sale in May 2019, IFCO has been classified as discontinued operations in FY 2019, with the prior year comparatives in the income statement being restated. The FY 2019 balance sheet reflects the sale of IFCO. The FY 2018 comparative balance sheet has not been restated, and that's in line with the accounting standards. To assist with your review of the year-on-year comparisons, we have added additional footnotes in the accounts this year. From a cash flow perspective, IFCO cash flows were included in the group cash flow for 11 months up to the date of divestment at the end of May, and that's in the 2019 cash flow. The prior year, the cash flows for the group are unchanged and therefore include the full 12 months of the IFCO cash flow. Turning to our FY 2019 results on slide nine.
Group sales growth of 7% is ahead of our objective to deliver annual revenue growth in the mid-single digits. Underlying profit growth of 2% was driven by the strong sales performance and productivity gains, which more than offset ongoing input cost inflation and broader cost challenges across the group. Significant items for FY 2019 includes $ 945.7 million gain on the sale of IFCO. That's reported in discontinued operations. Significant items expense in continuing operations of AUD 62.8 million includes IFCO sale-related items and expenses related to Latin America. We'll cover that in more detail in the presentation.
Net finance expense decreased by just under $15 million during the year, that was largely due to the debt refinancing that we did in FY 2018, as well as having lower debt balances following the divestment in FY 2018 of HFG and CHEP Recycled, as well as the benefits for the last month of the year when we had the $2.4 billion proceeds from the IFCO sale banked. The tax expense increased to $76.5 million, the increase is largely due to us cycling the $65 million one-off credit that we reported last year relating to the change in the U.S. tax regulations. In FY 2019, we had the introduction of U.S. BEAT tax, that drove increased tax expense and contributed to the higher underlying full-year effective tax rate of 29%.
Profit after tax and statutory earnings per share both increased by a very impressive 112% due to the IFCO gain on sale of $945.7 million, which is recognized in discontinued operations. Turning to slide 10. Sales revenue growth of 7%, pleasingly, it reflected meaningful contributions from all the CHEP segments globally. As you can see from the chart on the right-hand side of the slide, volume growth remained in line with the prior year, despite increased price realization in FY 2019. Price mix growth increased to 3% in the year, up from 1% in FY 2018, and that's reflecting pricing actions taken across the group in response to input cost inflation and higher cost to serve in certain regions. Volume growth was driven by net new business growth of 3% and 1% organic like-for-like growth.
Our pallets business continued to win new customers as well as expand into new lanes with existing customers. Volume growth was particularly strong in European pallets as well as in the European automotive business, noting that the European automotive sales contributed one point to the overall group revenue growth following a large contract win in FY 2018. Looking at the group underlying profit in more detail. The sales contribution of AUD 177 million was strong, reflecting sales growth net of volume-related costs, with the exception of depreciation and IPEP, which are not shown net of volume. Depreciation increased AUD 34 million due to the growth of the pool to support strong volume growth across the group, as well as increased investment in supply chain initiatives such as the U.S. automation program.
Transport costs, net of efficiencies and U.S. transport surcharges, increased $44 million, and that was driven by third-party freight inflation in all markets, as well as additional relocations in the U.S. related to service center capacity constraints, as well as changes in retailer and customer behavior, which meant that we had additional transport lanes. Net plant costs increase of $44 million reflected additional repair and handling costs associated with both the U.S. pallet quality investment program as well as impacted by the automation projects. We also had costs associated with the stringer to block transition in Canada, which includes the impact of an inherently higher damage rate in relation to block pallets. IPEP expense increased $31 million during the year. $18 million of this increase related to volume growth, market mix changes, and higher unit pallet costs, particularly in Europe.
The balance of the increase of AUD 13 million relates to Latin America and EMEA regions, where additional expenses were booked to reflect assessments of higher risk of asset recoverability in these regions. Other costs increased AUD 8 million as investment and additional resources were made to support commercial and asset management initiatives across the group. This was partly offset by a year-on-year benefit as we cycled an operating loss in the HFG joint venture from the prior year. Let's look in more detail at cost inflation. One of the key things that we highlighted last year when we talked about FY inflation was that largely the impacts of inflation were weighted to the second half of the year.
The net inflation impacted an underlying profit in FY 2018 was $19 million. That was primarily driven by transport inflation, with lumber inflation largely impacting CapEx and increased the FY 2018 pallet purchase cost by $21 million. In FY 2019, we had a full year impact of the higher inflation cost. Offsetting the higher cost, we actually had higher recoveries from pricing and surcharges, which were being progressively put in place through FY 2018 and FY 2019. The net inflation impact on the FY 2019 operating cost was $10 million, which is $9 million lower than the impact in FY 2018. In FY 2019, transport cost inflation continued in all markets. The rate of inflation did slow down in the second half of the year.
Lumber inflation also moderated during FY 2019, and this is reflected in the full-year impact on CapEx, which is reduced from $21 million in FY 2018 to $8 million in FY 2019, and this is set out in more detail in the capital expenditure slide, which we'll get to later. In Europe, our primary mechanism, when you think about inflation, our primary mechanism for recovery is the price indexation. This is present in all the contracts that we have and covers labor, lumber, and fuel. When you think about it, the indexation is largely reset once a year and at the start of the year. One July is traditionally our reset date. In the U.S., however, how we recover inflation is different in that it's largely through transport and lumber surcharges, which are recognized as an offset against the related cost in the income statement.
As we consider then, having looked at what's happened in FY 2018 and the exit rates in FY 2019, and looking at the potential impact of inflation in FY 2020, we expect transport inflation to continue in all markets, although we do expect the rate of inflation to be lower than in FY 2019 in line with industry trends. In terms of lumber inflation, which is predominantly a driver of CapEx, moderate inflation is expected to return to the U.S. following deflation in FY 2019. In Europe, we expect lumber inflation to continue, albeit at a lower rate than the current year. In addition to transport and lumber, we also expect wage inflation to increase given unskilled labor shortages in most markets. We also expect to see increased property inflation in line with higher demand for industrial warehouses, particularly from the e-commerce players.
Turning to our segment results and starting with CHEP Americas on slide 13. Sales revenue of 7% was driven by solid volume growth, including U.S. volume growth of 2% and ongoing expansion with new and existing customers in Latin America and Canada. Price growth improved in the period, with the U.S. effective price being at 4%, and that's including of the surcharges that offset against the costs. An increased price realization was also delivered in both Latin America and Canada, reflecting price recovery of higher cost to serve in both businesses. Segment margins declined by 2.2 points during the year, with the U.S. accounting for one point of the decline and the balance driven by Canada and Latin America. Price realization and efficiency gains were insufficient to offset input cost inflation and broader cost challenges in all three pallets businesses.
I'll outline this in more detail in the next few slides. Overall, ROCE declined by 2.2 points, driven by the lower earnings and increased capital investment to support volume growth and supply chain initiatives in the region. We look to FY 2020, we expect U.S. pallet margins to improve by approximately 1 point, in line with our FY 2022 margin improvement expectations. We anticipate cost headwinds in Canada to continue, reflecting higher ongoing costs associated with running 2 pallet pools and recognizing the higher damage rate associated with block pallets. We would expect to see progressive improvement, however, in Latin America over the next 3 years through improved pricing, cost recovery, reduced flows into higher risk areas of supply chain, and improved asset collection and asset management across the supply chain.
Breaking down CHEP Americas' underlying profit and margins further, the waterfall chart on the left-hand side outlines the key drivers of the underlying profit in the region, which largely reflect the inflationary pressures and broader cost challenges outlined in the previous slide and in the group profit bridge on slide 11. I would draw your attention to the margin performance chart on the right-hand side. This chart breaks down the segment and contribution to margin decline from the three regional businesses, U.S., Canada, and Latin America, across the first half of the year, second half, and the full year. Year-on-year, CHEP Americas margin, the region margin, decreased 2.4 points in FY 2019, with a relative improvement and shift in business mix contribution to the margin decline in the second half of the year.
Taking each business in turn, starting with the U.S., which is represented by the dark blue in the chart. The U.S. business accounted for one point of the FY 2019 Americas full-year margin decline and only 0.4 points of the second half decline. The moderation in the second half reflected increased cost recovery through pricing initiatives, supply chain efficiency, and more favorable comparatives as we cycled higher levels of lumber and transport inflation in the second half of 2018. Latin America and Canada, represented by the other bars in the chart, collectively accounted for 1.3 points of the FY 2019 Americas margin decline and accounted for most of the margin deterioration in the second half of the year. In Canada, margins were impacted by the stringer to block transition, which reflects additional costs associated with managing two pools and higher damage rate on block pallets.
In Latin America, the margin deterioration in the second half reflects increased cost to recognize a higher risk of loss in the region and investment in overhead and other resources to improve commercial and asset management outcomes. Looking at Latin America in more detail and providing context for that, and specifically at the cost pressures in the region and the mitigating actions we're taking to improve asset management, pricing, and improve commercial terms to reduce costs, increase cost recovery, and drive behavioral changes across the supply chain to improve asset accountability. If we start with the context of the historical operating model. Cycle times in Latin America have historically been high for two key factors. Firstly, the wide geography and lack of network density both contributed to longer cycle times in the region.
The ability to control retailer and customer behavior in developing markets tends to be challenging with longer cycle times before scale efficiencies occur. Given our experience in other regions, we would expect cycle times to reduce over time as the business grows and network density increases. Despite strong growth, however, and increased density in Latin America over the last number of years, we weren't seeing a commensurate reduction in cycle times. In light of the extended cycle times, we changed our accounting methodology to recognize increased cost to serve in FY 2018 with a higher IPEP charge in underlying earnings and significant item expense relating to asset flows in prior periods. Recognizing the need to address both costs and cost recovery in the market, a new management team was put in place.
The new president and CFO have extensive commercial supply chain and asset management experience. In the first half of FY 2019, a detailed three-year business improvement plan for the region was developed, which we started implementing in the second half of FY 2019. The plan itself focuses on transforming asset control processes to reduce capital intensity in the market, increasing the level of asset re-collections direct from stores and from higher risk channels, market mapping to identify new collection points to enable us to establish commercial relationships and to also include those in our collection network. We are also focused on implementing pricing to recover cost to serve and to improve asset accountability across the supply chain and active management of flows to reduce the flows going into the higher risk areas of the supply chain.
We've invested in overheads to enable the asset recovery controls and improved commercial terms to be implemented. Since activating the plan in the second half of 2019 financial year, we've gained improved insights into the market, specifically around asset collection risks. These insights have informed an updated assessment of the risk to recoverability of assets in certain parts of the market and have resulted in an AUD 11 million increase in FY 2019 IPEP expense in underlying earnings relating to the current year flows, and an AUD 21 million significant item expense relating to historic flows. Importantly, we've taken actions to actively reduce higher risk flows and increase pricing to reflect the higher cost to serve. Despite the implementation only beginning in the second half of the year and therefore having a short time to have an impact, the business improvement plan is already delivering strong results.
We're seeing enhanced asset controls and a strengthened commercial capability being evident within the team, but also in terms of the commercial actions being taken. Higher pricing has been implemented in the fourth quarter at a level of increase well above inflation and supporting cost recovery. We've also seen record levels of asset re-collections in the market in the FY 2019 year. Importantly, we've already seen a material improvement in the FY 2019 CapEx to sales ratio, which is evidencing lower capital intensity in the business, and we've also identified other opportunities to further improve the business model. These early wins are giving us confidence in our plan and the ability to deliver progressive improvements over the next three years, which are embedded in the plan. Turning now to the U.S. Pallets business.
Looking at U.S. sales revenue in more detail, you'll note the quality of the sales growth with a well-balanced volume and pricing growth being realized. Price realization improved to 3% in FY 2019, up from 1% in the prior year, and that's reflecting the pricing actions we've taken to offset inflation and higher cost to serve in the business. Volume growth was solid at 2%, which was particularly pleasing in light of the improved price realization. Turning to slide 17 and our U.S. Pallet margin improvement initiatives. You'll be familiar with this slide, which we've shown before, which outlines the key initiatives we're implementing to improve margins over the next three years. We have made good progress in FY 2019 in relation to both pricing and the automation and lumber projects, which remain on track to deliver the expected margin improvements to FY 2022.
Our annual network and transport optimizations delivered incremental supply chain efficiencies in FY 2019, and we expect ongoing savings from this initiative over the next three years. After 18 months of inflation, we're now well progressed through renegotiating our portfolio of contracts to better capture the cost to serve through contract repricing and surcharge clauses, which helps to insulate our business from future inflationary pressures. In FY 2019, we delivered effective pricing of 4% if you take the price realization on the top line and add the surcharging realized that's netted off against the cost line. As indicated by the progressive darker green circles in the table, we expect increasing benefits from pricing actions over the next two to three years as we further renegotiate our contract portfolio, bearing in mind that the average length of a contract is three years.
The largest contributor to the outlook margin improvement is expected to be delivered from the return on investment net of related depreciation from our U.S. automation and lumber initiatives. Both remain on track. These programs are funded from the FY 2018 asset actions which were undertaken to reallocate underperforming capital invested in the business to be reinvested in high returning investments in the core business. The FY 2018 asset actions delivered $252 million in proceeds. $102 million came from the sale of the U.S. Recycled business, $150 million came from the shareholder loan repayment as part of the exit of the HFG joint venture. These funds are now being progressively reinvested in high returning projects. Summarizing the slide, collectively, we're confident that these initiatives will deliver 2 to 3 points of margin uplift from the first half 2018 levels by FY 2022.
Given the phasing of benefits from each initiative, we expect margins to improve at a rate of approximately one percentage point per year in FY 2020, FY 2021 and FY 2022. Given that the weighting of the improvement is towards the automation project, looking in more detail at that project. The overall project was a planned investment of around $160 million over three years to increase automation level in the U.S. from about 50% today to 85% by FY 2022. The project will automate between 50 and 60 plants between FY 2019 and FY 2021, and is expected to have a five-year payback, which is consistent with other automation projects undertaken in both Europe and previously in the U.S. The funding from the projects, as referenced earlier, is coming from the asset actions which we completed in FY 2018 from the sale of Recycled and the exit of HFG.
Since the launch of the project, we have now automated 20 sites, and we're pleased with the performance of the automated sites, which are broadly in line with the investment case. A further 17 sites have been identified for automation in FY 2020, and we remain on track to deliver the plan and associated benefits over the next three years. Turning to CHEP EMEA. CHEP EMEA once again delivered a strong result despite increasing revenue and cost headwinds, largely linked to macroeconomic uncertainty in the region. Revenue growth of 8% was driven by net new business wins in the European pallet and automotive businesses and inflation-related price increases in the region. It should be noted that the region benefits from two points of growth was from the automotive business. The sales result was achieved despite a notable slowdown in like-for-like volumes, particularly in Europe.
Underlying profit margins declined by 0.7 points as improved pricing and supply chain efficiencies were insufficient to offset direct cost increases, including transport inflation, Brexit-related pool inefficiency, and increased repair and handling costs associated with Brexit. Additional IPEP charges were taken in the year, recognizing both a higher unit cost pallet cost in Europe and also a higher incidence of loss in the EMEA region. ROCE remains strong at over 24%, despite inflationary pressures, Brexit-related cost and capital inefficiencies, as well as increased investment to support volume and new market development. As we look to FY 2020, we expect volume growth to be impacted by lower like-for-like volumes in Europe and a broader slowdown in the global automotive industry. Whilst we continue to prepare for Brexit, the exact impact of a hard Brexit outcome remains uncertain.
Looking at the EMEA sales growth in more detail, the chart on the slide outlines the composition of revenue growth over the last three years. In FY 2019, price mix contributed 2% to growth, up 1% from FY 2018, and following no contribution in FY 2017. This increase reflects the increase in contractual price and indexation driven by inflationary pressures in the market over the last two years. Like-for-like volumes were flat in FY 2019, reflecting the economic slowdown in Western Europe and the global automotive industry. Net new business growth remained strong at 6%, reflecting growth in pallets with new and existing customers across the region, and a two percentage point contribution to EMEA growth from the automotive business following a large contract win in the prior year.
As we look to FY 2020, we expect like-for-like volume growth to continue to be impacted by broader economic uncertainty, particularly in the European pallets and automotive businesses. The rate of net new business growth is expected to be lower, particularly in automotive, while pricing growth is expected to be in line with the inflationary cost environment. Turning now to CHEP Asia-Pacific. The Asia-Pacific region delivered another strong result in FY 2019. Sales growth of 3% was driven by solid pricing and volume growth in the Australian pallets business. Underlying profit margins and ROCE both improved, reflecting sales mix benefits, effective cost control, and a number of one-off items, including a one-off infrastructure grant in Asia and favorable asset recovery in Australia.
In terms of outlook and how you should think about it for FY 2020, we expect revenue and profit headwinds from the loss of a large RPC contract in Australia. We also expect a reduction in margin and return, reflecting the cycling of benefits from one-off items in FY 2019, and also we expect increased investments in FY 2020 to support new business growth across the region. Turning to significant items. In discontinued operations, we recognized the $946 million post-tax gain on the sale of IFCO, the proceeds from which were received on the 31st of May 2019. In continuing operations, we recognized $42 million of IFCO-related costs, which included $8 million of restructuring costs and $22 million of asset write-offs. It also reflects $12 million related to the early repayment of the U.S. 144A April 2020 bond, which was repaid with IFCO sale proceeds in July 2019.
The interest expense benefit and the cash outflow associated with this early repayment will be recognized in FY 2020. The balance of the expense of AUD 21 million reflects the provision taken in Latin America in light of the updated assessment of risk of assets being irrecoverable, which I outlined earlier in the presentation. Moving now to slide 23 and our cash flow performance. Cash flow from operations declined to AUD 293 million year-on-year, and that was largely due to the mismatch of the timing of receipt of funds from the underperforming assets in FY 2018 and the related reinvestment into core business high returning projects in FY 2019. The FY 2018 cash flow shown here includes the receipt of proceeds from the repayment of HFG shareholder loan of AUD 150 million, and the FY 2019 cash flow includes AUD 73 million of reinvestment of these funds into the U.S. automation and lumber projects.
The investment into these programs increased year on year by AUD 56 million. As highlighted in our FY 2018 results, the FY 2018 working capital benefits of AUD 30 million reversed in FY 2019, that accounts for an additional AUD 60 million of the year-on-year decline. The current year outflow also included AUD 18 million of additional CapEx to fund Brexit related retailer stocking levels in the U.K., which drove higher cycle times and requirement for more pallets. Free cash flow after dividends also includes the impact of only 11 months of IFCO cash flow contribution compared to the prior year, which had a full 12 months. This was partly offset by lower cash dividend payments due to a weaker Australian dollar. FY 2020 will reflect the payment of the FY 2019 final dividend, which remains in line with the first half 2019 interim dividend, without any cash contribution from IFCO in FY 2020.
Turning to slide 24, if you take out the noise from the cash flow, given that we had a mishmash of funds to understand our true normalized free cash flow performance, it's important to adjust for the timing differences of exiting the low returning businesses in FY 2018 and the progressive reinvestment of the capital into the high returning U.S. accelerated automation and lumber projects. In FY 2018, we collectively received over $250 million in proceeds from the exit of the HFG joint venture and the sale of the CHEP Recycled business. The repayment of the $150 million shareholder loan was included in cash flow from operations, while proceeds from the sale of the CHEP Recycled business was not included in the cash flow from operations. As announced to the market at the 2018 Investor Day, these proceeds would be reinvested back into high returning projects.
In FY 2019, we invested AUD 73 million of the proceeds received in FY 2018 into these programs. The final normalization adjustment is the AUD 30 million working capital timing benefit received in the second half of FY 2018 that reversed in FY 2019. This was highlighted to the market at the FY 2018 results presentation. Once you've made these adjustments, you'll see that on a normalized basis, we've met our positive free cash flow objective for the last two years. Looking at capital expenditure in more detail and reading this in conjunction with appendix nine, total CapEx investment in FY 2019 was AUD 1.1 billion. That represents a constant currency increase of AUD 91 million over prior year.
The increase was driven by the increased investment in growth, including $30 million investment in the European automotive business, $18 million on Brexit-related pallet purchases, and a further increase of $8 million driven by lumber inflation, as well as $37 million increase in non-pooling CapEx to support supply chain initiatives. The increased investment required was partly offset by $34 million of pooling capital efficiencies. In FY 2020, we expect a reduction in pooling CapEx to sales driven by asset efficiency, while investment in U.S. supply chain programs are expected to remain at current levels and broadly in line with the program presented to the market in 2018.
Graham spoke earlier about how we'll use the IFCO sale proceeds, and what I'd like to do here is give you an overview of how these are being recognized in our balance sheet and the implications for net debt and interest expense in FY 2020. We received net proceeds after transaction costs and net cash of approximately $2.4 billion. We placed $2.1 billion on deposit in Australia, and we have already bought back $54 million of shares up to June 2019. You'll see Graham referenced the Australian dollar amount in the earlier slide. We used a further $500 million for the early repayment of the April 2020 US 144A bond. Collectively, the use of IFCO proceeds significantly reduced net debt in FY 2019.
As we look to 2020, we expect net debt to increase following the AUD 0.3 billion capital return in October 2019 and as a result of the continuing share buybacks over FY 2020. In terms of interest, the early repayment of the 144A bond will deliver interest savings in FY 2020, and we will receive interest income on funds in deposit in Australia. Net interest expense is expected to progressively increase in line with net debt increasing as we progress through capital management over the next 12 to 18 months. We expect FY 2020 interest to be somewhere between $90 million and $100 million. In line with the outcome of our capital management structure review, we expect our financial profile after capital management actions to remain in line with our financial policies, which support a conservative balance sheet and investment-grade credit ratings. Turning to slide 27.
Our balance sheet remains strong as we enter FY 2020, with additional financial flexibility following the IFCO sale. Net debt decreased to AUD 98 million as of the 30th of June 2019, and our net debt to EBITDA decreased to 0.08 times, reflecting the receipt and subsequent use of IFCO sale proceeds, as outlined in the previous slide. Net debt levels and consequently leverage levels will progressively increase over the next 12-18 months as the IFCO proceeds are used to fund the capital management initiatives. The increase will be consistent with our renewed commitment to maintaining both a conservative balance sheet and our current investment-grade credit rating of BBB+ from Standard & Poor's and Baa1 from Moody's. Turning to AASB 16. There's been a couple of questions on this.
As we look to FY 2020, we wanted to provide you with an overview of the expected financial implications of the new lease accounting standard, which comes into effect in FY 2020. From a balance sheet perspective, we expect a reduction in net assets of approximately $100 million as we recognize lease liabilities of between $740 million and $760 million and lease assets of between $640 million and $660 million on our balance sheet. We expect a $25 million benefit to underlying profit as lease asset depreciation expenses of $115 million will replace current operating lease charges of $140 million. The impact on profit after tax will be a small shortfall, as the underlying profit benefit will be offset by $30 million of additional interest expenses associated with lease liabilities recognized on the balance sheet.
We expect $110 million benefit on the reported cash flow, as the removal of $140 million of operating lease payments is partly offset by $30 million of additional interest expense on lease liabilities. The remaining $110 of lease payments will be treated as repayment of financing liabilities. Finally, to finish on the FY 2020 outlook. Turning to slide 29. This includes the impact of AASB 16. Taking into account the ongoing slowdown in global economies and automotive industry, constant currency sales revenue growth is expected to be at the lower end of our mid-single digit growth objectives. Underlying profit is expected to be in line with or slightly above sales revenue growth.
Our effective tax rate is expected to be around 30%, while net interest expense is expected to be between $90 million-$100 million, as interest savings of the early redemption of the 144A bond and lower net debt are expected to be offset by the impact of AASB 16 and other funding impacts. I'll now hand back to Graham. Thank you.
Thank you, Nessa. Well done. What I'd like to now just go through a bit of a strategy update, and talk a little bit about the progress we've made, but also what we're expecting to do going forward. Our strategy starts from a clear understanding of what we do and why we do it and why people come to work every day. Our purpose statement. I think anyone who's covered the company for a while knows that we play a critical role in the global supply chain, and we're determined to make the supply chain safer, more efficient and more sustainable. Our circular share and reuse model is absolutely fundamental to what we do. Just one example, we've been getting a lot of recognition for the model and how we are in terms of its sustainability.
The one example of several bits of external recognition is Barron's have just voted the second most sustainable international company in the world for 2019. It's a great testament not only to the strength of what we do in the model, but also the way we actually go about it as a company and as people. This you've seen before. We set this out two years ago in terms of our strategic priorities. There's nothing new there, but we've made significant progress against each of these priorities, and I'll talk about those in a minute. I think the important thing is if we deliver on these strategic priorities, it will then deliver what's on the right-hand side of the slide, which is the financial objectives through the cycle. Again, we've talked about this before. Nothing new there.
This is something that we shared at the Investor Day in terms of the first 3 steps of this stairway, if you like. We've been doing this for the last couple of years. If you look at the first 3 steps, first one is fixing the fundamentals, then investing for excellence, and the third one is delivering results. There is always more to do, but we've made strong progress on all of these areas. Simplifying the portfolio and our business structure, we've done a lot on. Sharing best practices across the whole group, across the whole world in procurement, automation, and lumber, adapting successfully to high and variable inflationary environment. We've done all that, and you can see in the deliver section in terms of pricing, improved network capacity and improving quality.
We've done a lot on that. The last step is what we'd like to talk in more detail in May at Investor Day. It's really around shaping our future. As we become a more focused business, we think we can do more around making the customer experience more frictionless and less painful, transforming our value proposition, and simplifying the way we actually operate as a company. I'll talk a little bit about that now, but there'll be more to come in May. Before I do that, let's just go back to the external market dynamics. We talked a lot around the changing face of retail and fast-moving consumer goods, so I'm not going to do more of that. We've also talked about the macroeconomic uncertainty.
I will reiterate that just to make sure everyone's very clear around our views are that in Europe, we are facing, I think, significant uncertainty. It's not just Brexit, and I think it's harder to call about what the impact of a U.S.-China trade war might be, but it's certainly something out there we've got to take into account. I think the third one, though, is important to talk about. I mentioned a bit of it from an internal perspective about sustainability, but there's an increasing importance of sustainability and the social license to operate for all companies. We're all seeing consumer pressure for more sustainable products and a more sustainable supply chain. From a regulatory and investor perspective, there's a need for more transparency, more understanding about what companies are doing to do good in the world.
I think one of the strengths of Brambles is we've always been a good, sustainable company, but it's becoming increasingly relevant now. I think the benefit of that is not just from our own perspective and how it sits with the regulators or with investors, but with our customers, because we're now in a very strong position to support our customers deliver on their sustainability objectives and the need for them to show that they are doing good in the world. I think, I'll talk a bit more about this in a minute, it's giving us an opportunity to engage with customers and actually deliver more value, never mind for ourselves, but also for our customers. One of the questions that we got on the sale of IFCO was, when you go exit IFCO, does that mean all the growth opportunities are going to go away?
The short answer is no. I'll try and expand that a little bit. We think we've got strong growth opportunities across a multiple of time horizons. We've split them up here into three buckets. In the shorter term, if you look at enhancing the core with strong organic growth, you've seen the slide that Nessa had put up in terms of breaking out the price element, still a continuing growth coming from converting users of whitewood pallets into pooled solutions. We're expanding new lanes, doing a lot on first mile and last mile. I'll come on to one of the products that helps us with last mile in a minute, as well as automotive, notwithstanding in the short term, there's clearly some volatility there. We're also investing in technology. I'll talk about that in a minute as well.
In the medium term, we can talk about extending the core. That's really developing in emerging markets. We're already investing in Latin America, Middle East, China to a lesser extent, and India to a lesser extent. As we've talked about in the past, over the next 10 years, five to 10 years, we should be seeing some growth in those markets and our presence in them. We're investing in new products and platforms, and I'll talk about that more in a minute, as well as additional services. We've started already doing things around transport collaboration, but there'll be more to come in terms of goods availability for customers, for example. If you go to the longer term, I think we can start looking at creating future business models. Reshaping the pooling model using the data and the information we get from digital.
Looking at maybe other insight-based offerings from digital we can then give to our customers and create value from. Partnering. There's going to be a lot more collaboration supply chain, which will also lead us to value opportunities for us and for our customers, and I'll talk about that more in a minute. All of this is underpinned by the fundamentals around the need for consumer growth, the need for more goods to deliver to more consumers, the development of emerging markets. That underpins all of it. I think the only sort of thing I would say is that we do need to learn from the investments we are making in emerging markets when we go to new emerging markets.
That's something that Nessa has talked about already in terms of what we've been doing in Latin America, that we need to continue to learn from those experiences as we go forwards, and we will. If we look at four new sources of value, I'd like to talk about each of these in a bit more detail. Again, we'll talk more about what this means when we get to May next year. The first one is customer collaboration. The supply chains of the future will depend on much more collaboration between, let's say, retailers, the FMCG producers, the 3PLs, and people like us. I just want to talk about Zero Waste World. This is a collaboration, an initiative we've launched. It's a major initiative where we're partnering with our customers to tackle waste in the supply chain and the inefficiencies that cause the waste.
There are three areas that we're looking at. One is eliminating waste, the first box. How can we help our customers eliminate one-way packaging? We migrate to reusable solutions. A good example is a large FMCG is a customer of ours. We're using corrugate packages to transfer raw materials to one of their factories. Clearly, the corrugate was used once and then thrown away and not recycled. We suggested that maybe we have some containers, which we actually have as part of our first-mile solution product offering anyway, to substitute for the corrugate. Saved them a lot of money, also saved them a lot of carbon miles as well. There's incredible value to that. Helped us because we obviously got a new product, new business with that customer.
Reducing food waste, a huge challenge for society, and one where we feel we can contribute. If we look at the next one, eradicating empty transport miles. We've talked already about what we started doing a couple of years ago around collaborating with customers. If you just think about one small fact. In Europe, 30% of every truck, if you think about all the truck miles and all the truck journeys in Europe, 30% of them are empty. Huge waste of carbon and massively inefficient. What we are doing, and we started doing this more manually with spreadsheets, you start looking at because we have the visibility across the supply chain, looking at customers that are going one way empty and another customer might be going in the same direction full, how can we link the two together so that we optimize the transport efficiency?
We started doing that manually. Took a long time, produced good results. We've now actually managed to get our BXB Digital business to get involved. We're now using algorithms to do these same calculations and these same matches much more quickly and be able to expand the scope. It helps with reducing empty miles, it helps with reducing transport inflation, and of course, reducing the environmental impact. The final one is cutting out inefficiency in the supply chain. We can work with our customer about reducing bottlenecks in the supply chain, and improving forecasting, and therefore reducing waste. We are doing all of this not as a thought leader, but more as a facilitator and collaborating. If you want to think about it another way, it is not about us saying we know everything, because we don't.
This is about us saying, here is a problem that society has to solve. We think we can help in conjunction with other people. From a more business case perspective, it means that we are effectively taking a small percentage of a much, much larger pie. Of course, we're becoming much more embedded in our customers' businesses. This is not just a philanthropic thing, it is also a business thing. So far, we've been doing it for four or five months. Amazing response from big customers, amazing traction, both with those customers and internally within Brambles. I'm very confident this is going to be a really great initiative. You can see already the fiscal 2019 savings, both in terms of waste and carbon emissions. That's, I think, probably just the tip of the iceberg. Brambles led the industry in developing pooling models.
What we want to do is we want to lead the industry in shaping future pooling models, and that's going to require us to think about innovation both in products and services. I'd just like to give a few examples of what we're doing at the moment. The first one is the new European quarter pallet. That's part of our last mile solutions product offering. Going into convenience stores, for example, or going into a retailer where they want to offer more SKUs to consumers and change things out more quickly than they can do on a full pallet. It also very much supports promotions. If you look at some of the bullet points on the right there, I won't go through all of them, but I think some key ones are 100% recyclable and certified as carbon neutral, pretty important.
Also it's digital-ready for proximity marketing. What does that mean? If you have an FMCG in conjunction with a retailer who wants to, as you walk past, say, "You bought this before," or, "You bought something similar, how about buying this?" We will have the technology on the pallet to work with the promotional marketing that goes on that pallet to attract the consumer in. This is, again, something we've been trialing for a while, but this is now our first larger scale product that's ready to go to market. Next one, too, if you look at some materials. We're continually looking for materials to deliver better performance. Historically, the challenge of plastic has been its high cost and there's a lack of repairability.
If you have something that get damaged on a plastic pallet in the past, you kind of have to grind the whole thing down and start again. It's quite hard to repair a piece of it. What we're trying to do is to overcome that by a combination of using tracking technology, having a more modular repairable design, and of course, pricing to a premium. It will help people return the pallets to us because obviously there's a value in it, and two, it makes the math work better from a financial perspective. What have we been doing so far? We talked a little bit about the trials we've done with Costco in the U.S. with a full-sized plastic pallet. Those have gone very well. We're now at the point of working with Costco to do a much larger scale trial.
We're not quite ready to go full conversion, but we've made really good progress on that. We are continually working to try and get the weight down and the cost down. One of the things that at the moment is more work in progress rather than something we've got to show the market is a hybrid pallet. The benefit of the hybrid pallet is it will give you the same structural performance as an all-plastic pallet, but it will be made of a mixture of materials. Maybe some very high grade wood, which will be much stronger than regular wood, but also plastic and maybe some metal as well. The benefit of that is you'll get the same structural performance as plastic, but it should be much lower cost. That's something we're working on.
Nothing to show yet, but I would hope that within the next 12 months, we'll be able to talk a bit more about that. Finally, we look at collaborative transport solutions. Again, this is something we've been working on for some time, and this is really just to say that we've taken it a step further now by using digital technology to make these estimates and these decisions much quicker and much more efficiently. Moving on to digital. Again, it's a key part of where we need to go in the future. We've made significant progress in FY 2019. We now have BRiCS, which I think we talked about before. It stands for Brambles Information Exchange. It's effectively the black box that takes all the data inputs from having been tracked on pallets and other information flows, uses algorithms to make predictions, and that's what it's doing.
We're using that for both internal and external use. We've had some large-scale tracking projects, so full-size pallets in the U.S. We've talked about that with both MPD lanes and with a large retailer. We're looking at asset efficiency pilots in Europe and also doing some customer pilots in Australia and New Zealand. Going back to the European half pallets, about promotional tracking, we've actually done a trial with Ferrero in Canada about showing them when promotional products come into the retailer. Again, this is absolutely key in terms of FMCG and marketing. You tend to target a one-week period when your product is promoted at the end of an aisle at a retailer. To do that, you also plan all the TV and media promotional and marketing material to coincide.
If you get that right, you can sell three or four times more of that product than you do normally. It's very valuable to do it, but it only works if the product is on the shelves during that one-week period when you're launching all the other marketing. It's really critical to check whether products are actually coming into the retailer at the right time. When you look at the data, it often isn't. This gives a very useful insight for the FMCG producer to go back to the retailer and talk about how to make the promotion more effective. In fiscal 2020, what are we going to do? We're already looking at larger scale assets tracking programs. For example, what we're doing with Costco will be an example, but we're looking at internal ones as well.
How can we get much better bang for our buck and start really moving the dial on the asset efficiency objectives we've got? We're looking, for example, to see how we can use better tracking on our Kegstar kegs. Again, it's a good project to use because there aren't that many of them, but they're very, very high value. You can see where it's worth having a much better tracking solution there. We're also looking at how can we use AI and ML, so artificial intelligence and machine learning, to simplify things like customer declarations. I'll talk about that very briefly. Our model, our business model is based on cost to serve. Pricing is effectively based on averaging hundreds and hundreds of thousands of transactions. We probably don't get it 100% right. It could be 80% right, for sake of argument.
To do that, we actually require ourselves and our customers to start declaring when assets have arrived at their factory, to our premises, and when they've left. It's a huge manual/semi-manual process. We have estimated, and I won't talk about it now, how much that costs us and our customers. We're still working off our averages. If we could use technology to effectively do away with the need to fill out all those bits of paper and yet still come up with, let's say, as accurate an estimate, so let's say we still work to the 80% accuracy limit, then the value we would create by eliminating all that cost but still coming up with as efficient a business is pretty big. We need to work on how can we eliminate declarations using technology, and that's something we'll talk about more in May.
Similarly, we're looking at AI and ML. If you think about the sales and operational planning process, it is a lot of people using Excel spreadsheets, using data flows, and making estimates. That's all we're doing, making predictions. AI is misinterpreted by lots of people to mean lots of different things. In essence, AI, all it does is it makes predictions faster than a human brain. That's what it does. If we're in the business of trying to make predictions and then using humans to do it, well, why not use AI and do it quicker and to the same level, if not better accuracy? That will help us run our business better.
If you think about what our business is, it's about working out when we need to send pallets to a certain location to go to a customer, when we should try picking them up. That's what it is, and that's what AI can help us do much better. Again, trialing that, and we'll do more in fiscal 2020 on that. Finally, the fourth area I want to talk about was around operations. We're using technology to enhance what we're doing in our service centers.
On automation, we've spoken quite a lot about the program to automate pallet inspection and robotic repair and removal of certain broken elements. We're now accelerating that to look how we can do robotic repairs using augmented reality so we actually can take the operators straight to the right place to repair the pallets and make the whole process much more efficient, as well as taking some of the steps and doing them much more automatically. If you look at plant management. At the moment we're just rolling out a program where we're trying to make the whole process of trucks coming in and out of our plants more automated. Using number plate recognition, the truck will come in, all the data of what's on the truck and where it needs to go to next is fed in automatically into our service center system.
They can therefore get in and out much quicker, much less admin to fill out, much more efficiently. That's being rolled out. Finally, we're looking again, just in terms of a work in progress and experimenting, how does AI and ML, how can we use to improve that whole operational planning process? Just finally, we've made strong progress against the five core strategic priorities. We're well positioned for sustainable growth, both in the short, medium, and long term. We're setting an ambitious direction to capitalize on what's happened post-IFCO, and now that we're much more a streamlined, focused global business. We're partnering with customers to remove waste and inefficiencies from the supply chain and trying to solve problems that the world needs solving.
We're also, I think, doing a great job around bringing the company together and leveraging our capabilities across the world, which is something we've not always done so well in the past. We'll do a lot more in terms of sharing the details of what we plan to do in the future when we get to the Investor Day in May next year. With that, I think we're ready for Q&A. If you'll those of you, we'll take questions from the room first. If you wouldn't mind just saying who you are and where you're from because of the recording, and then we'll move on to questions from outside.
Good morning. It's Niraj Shah from Morgan Stanley. I just had a question on pricing in the U.S. Obviously, it contributed 3% to the top line in fiscal 2019. Inflation seems to be moderating, but on the other hand, you said competition remains rational, and best I can tell, Whitewood pricing growth remains robust. I guess how should we think about the profile of pricing over the next couple of years as the remaining two-thirds say of the book rolls?
I think what we're saying in the U.S., I think we think the profile should stay pretty much as it's been in fiscal 2019 because we still got some more contracts to convert. We're still applying pressure to get price increases as, of course, we create more capacity in the market. That's because there are three things. It's the competitor behavior, which seems to be rational still. It's the lack of capacity, which is beginning to open up a little bit, as well as our ability to go in and against the high inflation, get price increases. Two of those are going to begin to soften, our intent is still to go out after price increases in the U.S. I think we'd anticipate the profile being similar at least for the next 12 months.
Hi. Scott Ryall from Rimor Equity Research. I was hoping that you could give a little bit more detail on the issues in LATAM, particularly if you've got specific countries that are underperforming. Are any below your hurdle rates for return on capital close?
Nessa?
The weighting of the business has always been more weighted towards Mexico. I won't break it down across the specific business units, Mexico is the biggest part of the region. In terms of overall returns, it's still a high returning market. The challenge for us is that the normal structure should be we'd expect to get efficiency. We weren't getting it. It was telling us that the way we were growing the business was going to land us in trouble because we didn't have the right controls to manage the pool appropriately. A change in management was needed to get somebody that both come from the European business, who had good experience both in operations there, but also supply chain, and specifically asset management.
As a group, we also put a lot of the group resources into working with the team across Latin America to develop a detailed plan. They've had access to the best thinking globally from all the markets to help them to develop the plan. We've had our group supply chain lead, Carmelo, has been working with them as well as the team in finance and commercial. Look, from a plan that was developed, we took it to the Board because it required additional investment and overhead to do it. It required quite a radical change in approach with retailers. Look, it's been implemented in the second half of FY 2019, and to already have such strong outcomes from it is pleasing, particularly because we see there's lots of growth opportunities still in Latin America.
We were at a point where we were saying we actually have to get to a point where we can have a trajectory that says this is going to look like other markets when we get to maturity. When you put more capital in to get the growth level that you're getting better returns. I'd say we're going through a bit of a reset. The pricing only came in in quarter four. We left it as amber on the chart until we'd collected the pricing from everybody because it involved discussions around if you want to be in these lanes, you have to take a lot higher pricing in these areas. By the way, we're just recognizing the cost to actually service this business is higher than we had previously recognized, and this is the commensurate pricing. I'd say going into FY 2020, the momentum is good.
It's early days, but seeing CapEx to sales come down and have record recollections, we think we're on the right path.
Okay. Mexico is the largest business. Is that also the largest problem in terms of where you've identified that you're growing? I don't want to put this the wrong way, you've not got the controls around your growth profile. Is that the biggest problem in that area?
Well, when you think about the region, just Mexico is about half the region, you should think proportionately. When you think about stage of the development, if it's half, that's the one that should be developing. That's reaching that point to give you the indications that you haven't got the right systems in place. The learnings and the changes are across the business, but more focused on addressing immediate challenges with Mexico, given that's the biggest piece of the portfolio. It's a regional management team that's gone in, and it's a regional approach.
Okay. Great. Thanks. The second question is on your plastic trials with Costco. I assume, Graham, this is yours. Could you just give a sense of why Costco specifically is looking at plastic? What are the attitudes of some of the suppliers into Costco, please?
Yeah. I think Costco are thinking about it because they're looking at it from, particularly if you think about their customers are also, it's much more of a, craft is not the right word, but it's more of a, it's not someone walking in off the street. You have to become a member of Costco to go and shop at Costco. They are very concerned around safety. They're looking at wood pallets versus plastic pallets on an aisle and what's both the hygienic appearance as well as safety. They are, I think, looking at it from also a supply perspective and saying a lot of their products are bulk and heavy and they have a feeling that plastic is stronger. Now, that's not necessarily the case, and obviously in the way you've built the plastic pallet.
I think that's one of the challenges, getting the level of performance in high and low temperature, because plastic in high temperature bends a lot more than wood, and in low temperature shatters, which wood doesn't. This is not a straightforward operational switch. They're looking at that as well. For us, Costco was a good retailer to go and do a trial with because in terms of cycle time, we knew that their attitude to asset ownership and looking after assets is significantly better than several of the other people we deal with in the U.S. We knew that if we were going to put some high-value trial assets into their chain, we would get them back, and they wouldn't go missing. That's why we were happy to start with Costco. As it turns out, it seems to them as being a very strategic move.
It will happen with them. The reason we're not saying it's going to happen is we're not the only player in town. We have to go in there and prove that we are giving them an asset that delivers on their performance objectives. There will be a point when we have to look at the cost compared to other people who might want to play in that space. Their suppliers at the moment, because that's where we're moving now from the smaller scale trial. The smaller scale trial is with one or two suppliers. They want to move to a larger scale trial where it's multiple regions within the U.S. and multiple types of suppliers. It's not just in one category segment.
It's moving across several category segments, both to test out their model, but also for us to see are the economics going to work with more than just one type of industry segment? That's why it's now going to a larger scale trial than going straight from small trial to roll out. I think Costco recognized it's not straightforward either, and that's where we are there.
Okay. Thank you.
Hey, it's Paul Butler from Credit Suisse. I've got a couple of questions. Firstly, on slide 17, where you've given the margin improvement targets for the U.S. business. I don't think you report the U.S. margin. I'm just wondering, just to make some sense of that, whether you can give us some sense of the margin progression that you've seen in the U.S. in 2019 versus 2018.
Sure. If you go to the previous slide, if you flip back to the previous slide, which is on CHEP Americas, which is slide 14, shows that essentially a point of margin decline from the Americas region was due to the U.S. business. You'll see that we expect the outlook, the progression to be the one point over the next three years. That's because the major driver of the margin improvement is always going to be through the automation projects and the outcomes from that are largely weighted towards 2021 and 2022.
Okay. Just further on the price increases that you're getting in the U.S. We've had a number of conversations with some of your larger customers, and there seems to be a very concerted effort there for them to try and reduce their usage of pallets to offset price increases. I'm just wondering what you're seeing there and whether you see that as a risk. I imagine that there's quite a range of price increases that you're putting through to get to the 9% average.
I don't think we've seen that because when you look at the growth profile, the like-to-like growth is still there in the U.S. I don't think it's not gone in the wrong direction. Obviously, we're still able to convert because the net new business wins are still reasonable. We have been, I think, doing the right thing in terms of price increases where, because we are still capacity constrained and will be for some time, where we had businesses which, in our view, were sub-acceptable returns, we've gone for quite large price increases. What's interesting is when we were expecting to lose some of that business, we have not lost as much as we expected. Therefore, people are still having to use the pallets, I think is the short answer.
That is not to say for one moment we are taking the view that maybe was taken in the past, that an arrogant view of people have got no choice. That's not where we're coming from at all. I think we recognize that we still have to improve on quality in the U.S., and we still have to improve on our own operational effectiveness, making sure the customers get the pallets when they need them, where they need them. I have not heard from any customers that are saying, "We're going to use less pallets because your pricing is too high." Don't get me wrong, they don't accept the price increases willingly and happily, but that's just life, and there have not been price increases in the U.S. market for quite some time.
When we started doing it last year, that was the first time for many years.
Sure. Just further, in the last year or so that you've made progress with Walmart, your biggest retail partner, on reducing flow of pallets out of the country. I just wonder whether you can comment on whether you've made any further progress in trying to facilitate a more timely return of pallets from them?
The short answer is we've made some progress. One of the things we did with BXB Digital in the last 12 months is one of the trials we did was putting some digitized pallets into the Walmart flow. Again, we wanted to prove out or not the view that all the problem was due to the continued reuse of pallets from distribution center to stores and back again within the Walmart chain. We found that a large percentage of it is that, but there is also a percentage which is not that at all. The two things that we found were that, in some instances, the store managers were, because the last thing they want from their own operational efficiency is to have empty pallets on the back dock of the store. They were selling the pallets to recyclers, which they're not technically allowed to do.
The other thing we found was some of the FMCG producers were, in some instances, doing direct shipments for products to the store rather than through DC, which is fine, but they had been instructing either tacitly or not, the drivers, if they were empty on the way back, to pick up a load of pallets and take them back to the FMCG producer. In the U.S. model, that's not good news for us because we only get to issue a fee or to charge people when we issue a new pallet. If we don't even know these pallets are being brought back into the FMCG, we can't charge for it. Finding those two things out is really important. We've now been able to go back to Walmart.
Walmart, the issue is really that it's not an integrated organization, the logistics people aren't necessarily the same people who run the stores. We're beginning to have a dialogue now saying, can we now talk to the store organization about what they're doing with recyclers? We're now able to talk to some of our customers and say, "Actually, technically, you're not allowed to do this." We are making progress. We're also getting progress from Walmart in terms of understanding the need to sweep their stores more regularly and get the pallets back to us. Yes, but we're not seeing it in numbers yet because it's a huge organization. From a direction of travel, I think we're going in the right place.
Okay. Just another one. In Canada, you're highlighting that you got extra costs because of the dual pallet pool and also because of the higher damage rate to the block pallets. I just want to draw that across to how we think about what happens if plastic becomes a bigger part of the pool. Obviously, plastic pallets are more expensive, so you need more pricing to cover that. You also end up with a dual pool. Are you confident that you're going to get the pricing to match the level of returns you've got elsewhere in the business?
This is not just a pricing issue, it's also what's your assumption around damage rate and loss percentage? It's a number of different factors which then can lead you to making sure you've got the right returns. That's why this next larger scale pilot is quite important because that'll be when we can start testing our pricing assumptions with the suppliers into the Costco supply chain. Looking at it on piece of paper and what we think we can do in terms of recognizing that there's got to be a premium for plastic pallets, it looks like it's still okay. Will it be necessarily as high a return as wooden pallets? Possibly not. The alternative is to do nothing and let somebody else do it, which I'm not sure is a good answer. Costco find a completely different solution, which is not a good answer.
As long as it's above cost of capital, I think that would be the right thing for our business and our shareholders. Clearly, we want to optimize that, and that's where I think the trials are important around pricing, but also checking our assumptions on loss and damage. We've only done it with effectively one supplier, one lane into Costco, and we need to check out the assumptions. It's a key thing. I think the other, as I think we've said before, as that, let's assume that gets scale, and it's not maybe not just Costco, it might go elsewhere in the U.S. business. We've then got to manage maybe different types of service centers, different repair processes, different wash processes, and manage the transition.
If we've got the growth in wooden pallets given and also understanding the life cycle, I think it's manageable unless there's a big switch. I don't think there will be a big switch in a short period of time. I think it's manageable, but it's something we have got to think about, sure.
Okay. Thanks.
Are there any more questions on the floor? No. If there's not, we'll go to questions from the phone.
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're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Matt Ryan with UBS. Please go ahead.
Hi, Graham. Just sticking with plastic, can you talk a little bit about the tracking technology that might be applied to these plastic pallets?
I think what's most likely is it's going to be an RFID type of solution. To that end, Costco are already looking at the investment they would have to make within their own network in terms of installing scanners. Because it's all very well us sticking an RFID tag on a pallet, but you can only read it when it comes into contact with a scanner. That requires, therefore, scanners within our service centers, but also within the DCs and stores at Costco. They are prepared to make that investment because they can see the benefits of doing it. I think that's where we'll end up, but we haven't finalized it yet. That'd be my gut feel, is it'll be an RFID type of technology.
I guess looking at the trials that you've conducted so far, if we were to assume that some sort of passive RFID was applied to those, are you expecting that loss rates under this broader, larger pilot will be pretty similar to what you got in the trial?
Well, if it wasn't, I think we'd have a different view on pricing, as I said, because the things are linked. Costco and the people who are helping them on this project have been incredibly proactive and supportive in trying to close off all the areas of potential leakage. We've sat down, not only from the results of the small trial, but looking at the system as a whole and identifying where we think there are areas of potential leakage. They've gone in and said, "Okay, but if we do this, and this, actually close it down." This is definitely a joint effort because they understand that for us to make this work for us, they've got to help us manage the loss rates and the damage rates as well. They've been very, very constructive and collaborative in this process.
Okay, thank you. Just flipping to price in the Americas, I think the effective price increase in the U.S. was about 4% over the year, which implies about 3% in the second half. Can you just talk through, I guess what happened with the surcharges? It doesn't look like you got much of a benefit from surcharges in the second half.
If you go back to actually look at the recovery levels and the margin impact year-on-year on the margin, first half, second half, you can see we did get good recoveries. Obviously, if you start to see a lower rate of inflation, you get a lower recovery. Year-on-year, the net impact, despite an increase in inflation, we had a full year impact this year of $10 million across the group, which is down from $18 million in the prior year. You can see we were getting a benefit, which is partly driven, that net lumber is reflecting the surcharges. We have certainly increased over the year progressively the surcharge clauses in contracts in the U.S.
Sure. I guess I was just looking at the first half numbers where I think you said you had effective price growth of 5%, of which 3% was price, 2% was surcharges. I think you said in the second half, or sorry, for the full year, you also had price increase of 3%, but your effective price went up four. That sort of assumes that all of the growth in the effective price in the second half was actually just price change rather than surcharges.
Well, it depends on obviously your mix of business that you have in the first half versus the second half. In the second half, we actually had quite a bit of beverage volume, which is again, a lower price that gets included in your total pricing of what we would have reflected. It depends on the contracts you're renewing. The bigger contracts in general, having more market power would have a lower average price increase compared to say, the smaller contracts. There is a big mix impact. I would say in the second half also, we had a bit of a lower mix of agricultural flows. That was because as we went, we won a very big contract that required a lot of pallets.
That was in the last quarter of the year, but we hadn't quite exited some other contracts that were on the lower OPI, but we didn't pick up some of the agricultural flows that we would normally pick up seasonally because we had our pallets tied up. I wouldn't read too much into the first half, second half that we haven't continued to get pricing.
Okay, thanks. Just last question on transport inflation. I think the guidance is for ongoing inflation in all markets, which includes the U.S. Can you just talk about how you're taking account of, I guess, improving rates that we're seeing in the spot and contract indices that we can see publicly?
Yeah, definitely. You'd be a brave person to call where the inflation's going to end for the year based on what we've seen to date. Yeah, we have seen a moderation. If we continue to see those low rates continuing during the year, we will get some benefits from them. Absolutely, we'll be tracking that very closely. Part of our portfolio is on spot. We generally, even for fixed contracts, tend to be pretty sophisticated on how we buy. Yeah, we're keenly focused on that. The view currently going into this is that we'd expect to still see some inflation. Let's see where we go in the first half.
Okay, that's helpful. Thanks, Nessa.
Your next question comes from Owen Birrell with Goldman Sachs. Please go ahead.
Hi, guys. Just a few questions from me. I'll just start with the U.S. pallet margins. Great slides, I guess again, just showing where you think you can recover margin in the U.S. market off those first half 2018 levels. Given you don't split out what the U.S. margins are in the first place, I'm just wondering how are we supposed to measure that?
Everything that we put into our ASX slides is QA. We have, I can tell you, amount of people who double-check all the facts and all the analysis and our auditors review the comments that we make as well. We do have a very detailed review, and we keep an audit trail of all of this to confirm that what we're communicating to you is exactly in line with how we did the calculation in the first place. It is a very rigorous internal process, but we're not going to start reporting U.S. as a separate business. We're reporting in the regions as we have done and will continue to do.
I guess we've gone above and beyond the way we break up the segments because we are trying to guide people and help you to get there, and we've added additional notes as well in the accounts, even for the changes in IFCO. We do have a rigorous process, and you should have comfort around that.
Okay.
Owen, I think your reference back to that sort of Investor Day comment. It does hang together because I think what we said was if you take the margins at the end of the first half of 2018, we said, well, we think they're going to go up two-ish percentage points, maybe two to three. We've since gone down one, which is therefore still consistent with us saying we think we're going to go up about two to three between now and the end of 2022. I think it's consistent. We're obviously talking about is it two, is it three, is it somewhere in between, but I think it still hangs together given we've gone down one since the, in fiscal 2019.
If you have a look at the margin slide, we've also footnoted so that you know you're comparing like with like to clarify those points.
Well, let me just drill this another way. North America as a group, first half 2018, 16.2% was the margin then. Are you sort of implying that you can add sort of what, 2 to 300 basis points on that to get you back up to sort of 19%? Given the issues in Canada and LATAM, can you get to that level?
We're talking about the commitment here is to the U.S. pallets, and that's why we break it out to the U.S. pallets.
That's my point.
We talked about Latin America, and we're taking new pricing that's just come in quarter four. I would expect that the level of the IPEP charge should be able to come down over time in Latin America because we'll be going into lower risk flows, which means you have to expense lower charge relating to those flows. We have to see both those impacts flow in, and that's going to be a three-year program. In relation to Canada, we recognize when we go to block pallets there will be a higher damage rate that will be ongoing. You're getting a softer wood with 4-way forklift entry, which means that they get more damaged because usually the corners, they get damaged. The stringer is a lot more robust.
We just want to signal that we've come from a position that our Canada business was particularly a very high return business. The competitors also have block pallets, so we don't have a lot of room to say we're going to charge more because the block pallets gets higher damage. We're limited in terms of commercially what we can do. We're saying expect there'll be some moderation in margins in Canada on an ongoing basis relative to where we've been historically. Latin America from where we are now, we'd expect some improvement. The U.S. we expect improvement by these quantums.
Okay. All right. This is another question, just looking at plant costs. They rose through the period as well. You called out increased inefficiencies. We also note that the U.S. automation program's at 50% now with 20 out of 50 sites. Just wondering, did automation actually have any positive impacts during the period, or is it still going through commissioning and you're facing those sort of difficulties?
No, not really. It's not really. That's why we've always said it's going to be weighted to 2021 and 2022. As you go through, you take plants, you take. We started off, but we didn't have enough capacity. When you get to a point where you're capacity constrained and then you're taking capacity out, that means you end up with a lot of rehandling, reworking. You've plants that aren't working efficiently because you're stretching them to use every last piece of capacity. You're running overtime in them. It's not an efficient way to run a network. You overlay that we've had a lot of inflation on transport. You get sort of doubly hit because the transport costs ping you for the additional moves. You start with not having enough capacity, and then you take capacity out.
As you progressively, so you think we've done 20, we're doing another 17 this year. That inefficiency doesn't really start to fall out until you get to the 2021, 2022. That's how you should think about it.
Okay. Can I just ask on the capacity constraints, I mean, Graham, you called it out a couple of times during the presentation. Is that affecting the service quality standards to the customers in terms of being able to deliver the customers the pallets when and where they want?
It's not affecting the quality because we're making sure that we keep on investing in the quality of the pool, even though we're obviously struggling with margins in the U.S. at the moment. We've not relented on the investment in quality. I think it does make it harder for us to deliver the right pallets at the right time to the customers. We're effectively eating that up as we just talked about in terms of network inefficiency. If you look at the customer surveys we do and the Net Promoter Score, they've actually been improving in the U.S., so that implies that we're doing it better than we were before, even if it's not necessarily at the levels that we or the customers would want it to be.
Yeah. One of the other factors we're seeing too is in the U.S., a lot with the big box e-commerce guys are the access to labor. Labor churn is an added cost that we've got that's an increased inefficiency or increased costs we're also bearing.
I'm just wondering, are you seeing any increased rates of churn as a result to competitors?
Sorry, can you say that again?
Are you seeing any increased rate in churn of contracts to your competitors as a result of that capacity constraint?
Because we're managing it by effectively putting in more cost. We're eating extra overhead, we're eating the extra transport cost. Ideally, in fact, as we've gone through the portfolio, we had a number of customers where we won a big customer, and we were losing a couple of other customers, and actually the ramp down of those customers was slower than ideally we would've liked for pallet efficiency. That's why in the second half we bought more pallets in the U.S. than would be ideal for that network. No, we're not seeing that.
Okay. That's great. Thanks, guys.
Thanks.
Your next question comes from Jakob Cakarnis with Citi. Please go ahead.
Hi, Nessa. Just to pick up on the efficiency point, I think you mentioned there that you're purchasing more pallets to service customers in the U.S. I noted that there was a change to asset efficiency metrics for the managers. Can you just talk to the runway of how we get improved terms from here, just noting the delays that you're seeing on the automation rollout?
Look, first of all, I think you can look at cycle times, but there's always a question about what impacts cycle time. We've actually said the fairest measure is using CapEx to sales, because in a higher cost inflation, your pallets are going to cost you more, but you should be charging more for them. A better mix, a better ratio to judge people by. We've seen some improvement. If you ex the Brexit adjustment, the pooling CapEx to sales is about 20%. We would say that the progress we've made has been smaller than we would've liked on the CapEx to sales. You'll see on the CapEx slide, we split it out so you can see how much efficiency we're actually getting.
We analyze the root cause of what drives all the components, including how much is due to Brexit, how much is due to CapEx, and to lumber inflation, for instance. We're using that. That measure change of using it as a % to sales, we feel is a more appropriate fit. We've also split out automotive so you can see the level of investment that relates to that, and you get a sense of the improvement. We see this as an area where we would say over the last few years, we see this as an opportunity, and we have made some improvement. We haven't really got to the full place that we can get to. We see that there are further improvements that we're already seeing, say, in Latin America from the collection processes and other things.
We're trying to use pricing levers in other markets where we're trying to better align prices with cycle time and use of assets to incentivize people to have the pallets for less time, give them back quicker. We still see that opportunity with more work to do as well in terms of using digitization and some of the bigger trials hopefully this year should help us to do that.
Okay. Just pivoting now to slide 17, where I think everyone's been focusing on this U.S. pallets margin outlook. At the investor day, there was a view on this 200-300 basis point margin improvement that also included, I guess, some downside from cost inflation. I'm just wondering whether or not the views remain consistent given the pullback in cost inflation that you guys are pointing out happened in the second half of 2019.
Look, the comments that I made earlier, I'd stick by that comment to say, look, our current view is that inflation will continue to be a challenge for us. We've always said that when inflation is continuing to rise, there will be a lag to catch up. If inflation moderates and if we do see deflation, yes, you should expect us to get some benefits. There'll be some timing benefits that you get, the same way we've had some adverse timing impacts as the inflation has increased. Our current view is it's going to continue to increase. If that changes and the actual outcome is that it's not increasing, yes, we may be looking at a different profile over time.
Just on slide 17 there, where you are saying that the phasing of the improvements will be about 100 basis points from 2020 to 2022, is that solely from the self-help initiatives and kind of ex inflation, or is that including a view on inflation at the moment?
If you look at where we're saying we think we get a point of improvement for each year for FY 2021 and FY 2020, it's a combination of all of these items together.
Okay, thank you.
If inflation comes down, we don't get the full win because the surcharge comes off as well. You've just got to be conscious that when we were going up, we had the raw cost coming in where we didn't have the surcharge. We've been catching up with surcharges. As you come down, you'll have a bit of a timing benefit from when it comes off and your surcharge is still on. Net, over time, you will get the surcharge comes off as well as inflation coming down. It's a net lumber that you're looking at probably on the benefit side as opposed to on the way up where we have a raw increase in cost. The other inflation that we talked about as you look going forward is we are seeing property inflation. We're seeing warehousing costs, particularly service center costs go up.
Again, big box retailers have been a big impact on that. If you look, I guess, to the U.K. and other parts, you're seeing the Brexit-related warehousing costs go up. We have seen that impact now starting to come through too on labor. I agree with you. We're seeing lumber moderate, which is CapEx. We're starting to see some early signs of transport, but we still would have some property and potentially labor challenges.
Your next question comes from Cameron McDonald with Evans and Partners. Please go ahead.
Good afternoon. Just some clarification questions, if I can. Graham, you mentioned that you thought the CHEP USA margins had declined by 1% since the first half 2018. Did I hear that correctly?
In 2019, in fiscal 2019, they've gone down one point.
One point in terms of Americas region impact.
Right. That's not actually the benchmark.
2005/2014. You'll see that the annual impact from the USA on the region is just over a point, with Canada and Latin America making up the balance. You'll see the relative improvement in the USA half one to half two. Part of it's due to improved recovery of costs, which is through surcharging, and part of it is also due to more favorable comps. If you remember in the first half of 2018, we didn't have the high inflation, therefore you'd expect as the U.S. cycled out with higher inflation, it would have a bigger impact on the year-on-year margins.
Yeah. Just to be clear, though, you are highlighting that the benchmark is now based pre the accounting changes at 16.2% and the Americans, so the U.S. contribution to that 16.2% is the benchmark.
We're going back to the absolute margins of the first half 2018, and we'll continue to measure it on a like for like basis, adjusting so that the accounting changes do not impact it. It'll be the real margin outcome that we're measuring.
Yeah. Okay, great. Thank you. Can you give us an update on where you are with the Coles RPC contract in Australia, please?
Not really, because we've actually signed some confidentiality terms with that negotiation. There's nothing I can say on that.
Is there any timing related to that decision?
There is nothing I can say on that.
Okay. Then, sort of with the plastic trials in with Costco, is there a decision point about the go, no go and what the potential capital requirements could be?
Well, there will be, but that will be down to Costco, and I think they will have to look at the results of the trial from an operational perspective. If it's in line with what they are hoping for, then I think they will look for various suppliers to put in an RFP and we'll go through a normal process. Then our decision will be, do we think we want to take on all the business? Will we be allowed to take on all the business? If I were Costco, and I suspect where they're coming from they'll have more than one supplier, because that just makes business sense. Then it'll be a question about to what extent can we say we think our product is better suited to certain lanes or certain regions.
It's very hard to call on what the CapEx will be until we actually get into a more detailed negotiation post this large trial. We won't be in that phase for at least the next nine months, 12 months, I would have thought.
Are you the only supplier in the larger trial or are there other suppliers that they are bringing into that trial that you potentially would have to share?
Costco today have 3 pallet suppliers, and I'm sure all 3 will be involved in the trial. It's not something we're made aware of, but I would be extremely surprised if all 3 were not involved in the larger trial.
How are you protecting your IP under that trial then, if you've got other suppliers involved?
Well, our pallets have got IP, and that's IP. I mean, it's our pallets, it's our IP. Similarly, the other suppliers will probably have their own pallets and their own IPs. Therefore, one of the challenges, but there might still be good commercial reasons for doing it, is that you'd be running, if you're Costco, a pool or the poolers will be running the pool, but you'd have different pallets within the pool. That's sort of not that different to where they are today in terms of having to sort different At the moment, if you look at the Costco pallets that are used in their business, they've got a mixture of wood and plastic, three different suppliers. It's the same sort of operational challenge that they've got today.
Okay. Thank you.
Your next question comes from Ky Van Tang with Colonial First State. Please go ahead.
Hi. Good afternoon. All my questions relate to Brexit. Can you expand in greater detail what these Brexit-related inefficiencies are? Are they just impacting your U.K. business or are you also seeing them impact your mainland European business?
The inefficiencies we're seeing at the moment are related to customers wanting to stockpile ahead of what they think is going to be a hard Brexit. We saw that leading up to March, which is when the first deadline was going to be. That's where we end up putting more CapEx in because clearly customers want to stockpile product, but pallets then aren't moving through the system. We're having to inject more CapEx. That in theory is a temporary issue, not a long-term issue, because when they stop stockpiling, then the pallets are released back into the system, which is what's happened since March. We have the next deadline coming up. Could be, and someone's smiling in the audience here.
It could be the end of October, it could be any other time I guess as well, where, again, we expect customers to want to stockpile. The slightly different element now is that if it is the end of October, that's also the time when customers need to be preparing for the Christmas surge. It's probably going to be an exacerbated issue in terms of having to put more CapEx into the business. That's one element. The other element, though, is around the heat treatment of pallets, which if the U.K. leaves the E.U., at the moment, pallets going backwards and forwards within the E.U. are treated as being okay from a bug perspective. If the U.K. comes out of the E.U., all of a sudden our bugs are clearly very dangerous bugs to the E.U., and we have to prove that we've heat treated everything.
That means we need to invest in heat treatment in our U.K. plants, which we are doing. There's a bit of CapEx there as well. I think just to put it into perspective, though, that only 10% of our European business flows are U.K. cross-channel. Yeah, it's a major irritation, but it's not a dramatic thing. The bigger issue, and I don't think it's necessarily, there's no evidence to support it's affecting our non-U.K. business today. You could argue that the slowdown we're seeing in France in particular is probably impacted by some Brexit uncertainties around the ports and flow of goods. I mean, you could. I don't think there's hard evidence to support that.
The bigger issues are going to be, I think, the slowdown of GDP in Europe. That is driven as much by the fact that Germany's economy is an export economy and therefore it's affected by China and the U.S. France's economy is also slowing down. Italy's is slowing down. I think these are far bigger issues in the context of Europe. I think the bigger issue from the U.K. perspective is the political change that may or may not happen as a result of Brexit being effected with or without a deal. People far more intelligent and better paid than I are still not able to answer that question. I just have no idea what the outcome of that is. For me, that's actually the bigger issue. I don't think we can plan for that. We have to do what we can control.
What we are doing is effectively talking to our customers. We've spent a lot of time talking to over 100 customers about understanding what their plans are around Brexit so we can either support them or at least understand what the requirements might be. Thinking about doing heat treatment, but also lobbying the government around making sure that if we have a hard exit, that there's going to be some grace period around having to effect some of these changes, and they've been very supportive of that. Those are the sort of things we can do. The other items I think are becoming less of an issue. I think we were worried at one point about flow of labor across the border. I think that might be okay. I think we're doing everything we can.
It's an incredibly difficult thing to forecast, but we're taking the view that there's going to be a hard exit, and that's what we're planning for because that's obviously the most impactful scenario to plan for.
I think all of Graham's stuff are sort of definitely the bigger picture and the bigger potential impact. In this year, we also had a lot more pallet relocations. We also relocated pallets back to mainland Europe for exports back to the U.K. on U.K. pallets. We also, because there was a big demand for that U.K.-type pallet, we also accelerated repairs on any of those pallets because there was particular high demand for that U.K.-type pallet. There was some impact as well on this year when we talk about Brexit operating inefficiencies. Obviously Graham's covered the bigger strategic issues and potentially bigger financial impacts.
Great. You're saying you're prepared for it. Have you done any sort of scenarios as to what a no-deal Brexit would mean for you in terms of cost? Is that too hard to get into at this point?
Well, we're planning for no-deal hard Brexit. In reality, what is the impact going to be around potential tariffs on pallets coming into the U.K. to manufacture, obviously, if you're purchasing from outside the U.K.? That's probably one of the bigger ones. The solution is not easy, but there is solutions. We go and buy more pallets from inside the U.K., and it's not like the U.K. doesn't have any wood. It's that we've been buying them from outside the U.K. for a while. That's something we can look at. In terms of is it going to be a big cost impact? We don't think so. There are some things we're going to have to do differently. I think the impact is more likely to be on our customers if there's lots of tariffs on goods.
I think something like 30% of the U.K.'s food is brought in from outside of the U.K. That is going to have a bigger knock-on for consumers and for our customers. We don't see it as a huge financial issue for us. It's something we just have to think around.
Finally, are there any break clauses in your existing contracts with customers that are directly related to Brexit such that if there is no-deal Brexit, they have the opportunity to renegotiate the terms of those clauses or break it off completely?
Short answer is no. I guess you'd have a debate around whether it was force majeure, and I think most commentators think that this is not force majeure. I think no, that's not something we're particularly worrying about at the moment.
Great. Thank you. That's all from me.
There are no further questions at this time. I'll now hand back to Mr. Chipchase for closing remarks.
Right. Well, I think we've gone on quite a long time. Thanks for the questions. I'm sure we'll be seeing some of you in the next few days. Thank you very much.
Thank you.