Good morning, everyone, and thank you for joining us today for our twenty nineteen Half Year Results Announcement. I would like to start with a few key messages about the results. We delivered strong sales revenue growth of 7%, in line with our objective for mid single digit growth. This performance reflected strong volume growth and improved price realization in both developed and emerging markets. Our underlying profit was up 1%, which is in line with the guidance we provided as part of our first quarter trading update.
Underpinning this performance was the strong growth in sales revenue driven by strong volume and price realization, which offset a combination of global input cost inflationary pressures and continued cost challenges in the Czech Americas segment. At our twenty eighteen Investor Day, we outlined a number of initiatives to restore margins in our U. S. Pallets business. These initiatives included the accelerated automation program, the lumber procurement program and a number of pricing initiatives.
I'm pleased to report that these initiatives remain on track to deliver progressive margin benefits over the medium term. Our return on capital invested of 18% remains strong and is well above our cost of capital. As signaled at the full year results announcement, free cash flow after dividends was below the prior period, reflecting a $30,000,000 reversal of FY 'eighteen working capital timing benefits and a $31,000,000 investment in supply chain efficiency programs, such as The U. S. Accelerated automation program.
In line with our progressive dividend policy, we have maintained our interim dividend at zero one four five. Francing for this dividend has risen to 65%, reflecting the timing of Australian tax payments. Going forward, it is expected that franking will revert to 30% consistent with prior periods. Turning to Slide four. In the first half of this financial year, we continued to build upon the progress we have made towards achieving our key strategic objectives.
In our U. S. Pallets business, we successfully implemented new pricing initiatives to align our pricing and contractual terms with the cost per serve whilst also partially offsetting inflationary cost pressures. Importantly, this did not affect our ability to grow as we also achieved 5% sales revenue growth, which is at the higher end of the historical range for our U. S.
Business. Similarly, we are making good progress in our U. S. Accelerated automation program, where we are spending 150,000,000 to $160,000,000 through the '1 to automate over 50 plants in The U. S.
This program remains on schedule, and we have already completed 10 plant installations and have assessed and approved installations in another 17 sites. This project is a great example of how we are utilizing the group's global best practice and expertise to benefit an individual business. Now turning our focus to our Europe, Middle East and Africa business. It is again pleasing to report that the strong momentum in sales revenue growth continued into the first half of the 2019 financial year. Looking forward, we are seeing a slowdown in the underlying economies of Western Europe and remain wary of the impact that Brexit may have on U.
K. Growth. I will discuss our preparations for Brexit in more detail on the following slide. In our Asia Pacific businesses, we continue to deliver consistent sales revenue growth, and we are expecting this to continue into the second half of the year. Now turning our attention to Brexit.
While still a very fluid situation, I wanted to update you on our preparations. In 2018, we created a Brexit task force responsible for preparing the business for a number of potential scenarios, including a no deal Brexit. With approximately 10% of European volumes relating to cross border flows between Europe and The UK, the task force has identified a number of key potential risks for our business and our customers' operations. These risks include access to pallet and timber supply, changes in customer demand patterns, labor shortages and increased or altered trade and custom regulations. For all of these risks, we have put in place mitigating strategies, including the preparation of plants for potential heat treatment capabilities and reducing pallet relocations to Europe.
We are already experiencing some disruption as customers prepare for Brexit by building inventory. In response to the resulting increases in customer inventory levels and extended cycle times, we have spent $11,000,000 of CapEx on additional pallets during the first half of fiscal 'nineteen. It is, of course, important to understand that these risks are not unique to Brambles. We do, however, believe that due to our superior scale and depth of expertise, we are uniquely positioned to support customers through any period of transition. I would now like to provide you with an update on the separation of IFSCO from Brambles.
In our efforts to ensure that the optimal shareholder outcome is achieved, we are continuing along a dual track demerger and sale process. This process, while sunset schedule, is not sufficiently advanced to determine the method of separation. As previously announced, as part of the separation, we are also undertaking an evaluation of Bramble's capital structure to ensure it is optimal for supporting future growth and shareholder returns while still maintaining a strong balance sheet and credit profile. Finally, from a group wide perspective, as we look beyond the ISCO separation, we're increasingly looking for opportunities to optimize, modernize and simplify the way we do business and interact with our customers. We will give you more details about this and the outcome of our capital structure evaluation in August as part of our full year results announcement.
I'll now hand over to Nessa, who will provide a more detailed overview of the financial results.
Thank you, Graham, and good morning, everyone. I'll start by reviewing our P and L in more detail. Sales revenue growth of 7% represented strong top line growth across all of our regions. Underlying profit increased 1%, reflecting the strong sales contribution to profit and inflation related pricing actions. These were offset by inflationary cost pressures and ongoing cost challenges in Czech Americas.
Significant item expense of 5,500,000.0 is made up of the costs associated with the IFCo dual track separation process. Net finance costs decreased despite the loss of $7,500,000 of interest income from the HFG shareholder loan that was repaid in the 2018 financial year. The lower interest expense in the half reflects the lower coupon rate on the €500,000,000 EMTN issued in the first half of twenty eighteen, which refinanced an EMTN with a higher coupon rate, which matured in the second half of twenty eighteen. The reduction in interest costs also reflects the lower net debt balance following the receipt of proceeds in the second half of last year from the exit of the HFG joint venture and from the sale of the recycled business. Tax expense increased due to the cycling of the 103,200,000 noncash tax benefit associated with The U.
S. Tax reform that was recognized in the 2018 financial year. The effective tax rate has increased to 29% in the first half as a result of The U. S. Tax reform relating to foreign payments, which was effective from the July 1.
The decline in profit after tax is largely driven by the cycling of the €103,200,000 tax benefit booked in the first half of last year, as discussed earlier. And the underlying EPS decline is driven by the increase in the effective tax rate. Looking now at sales growth in more detail on Slide nine. We delivered revenue growth across all of our business operating segments driven by strong volume growth in the Czech Pallets businesses and Ithco RPCs in Europe, along with improved price realization. Turning to the individual components of growth outlined in the chart on the left hand side.
CHEP realized pricemix benefits driving two points of growth, primarily reflecting price increases in The U. S. In response to increased cost to serve. Price realization also improved across the remaining Americas region and EMEA pallets businesses. The growth in CHEP revenue also includes volume growth of 5%, driven by expansion with new and existing customers in both developed and emerging markets.
IFCo also made a solid contribution to revenue with strong volume growth in Europe, Latin America and Asia. The growth was partly offset by a mix change in revenue in Europe with a higher mix of lower revenue, lower cost to serve volumes included in new contract wins. Price growth in North America was offset by lower volumes as we exited a number of unprofitable contracts and experienced some crate availability constraints during peak periods. Turning to the group underlying profit bridge. The strong sales contribution to profit of €89,000,000 was offset by a number of cost increases during the period.
Depreciation increased €14,000,000 largely due to ongoing investments across all segments supporting strong revenue growth. Despite the delivery of supply chain efficiencies across the group, both plant and transport costs increased during the first half. Net plant costs increased EUR 21,000,000, reflecting both lumber and wage inflation in most major markets as well as additional pallet handling and repair costs and quality investment in CHEP Americas, which offset operational efficiencies. Czech Americas' higher plant costs also reflected increased costs associated with the ongoing transition from stringer to block pallets in Canada, which we would expect to be largely completed during this financial year. The EUR 32,000,000 increase in net transport costs reflected high inflation in third party transport, particularly in North America and Europe.
The impact in The U. S. Market reflects both the longer haul distances as well as additional transport miles due to changes in customer behavior and transport moves associated with capacity constraints across the service center network. Other costs increased €17,000,000 largely driven by higher cost to serve, which includes increased Latin America costs as highlighted at the full year results. In addition, we've also increased our investment in resources to support the delivery of growth, innovation, network efficiencies and commercial outcomes across the group.
Slide 11 outlines our lumber and transport inflation experienced during the first half. As you can see from the chart on the left hand side, we have progressively increased the level of lumber and transport inflation recovered through indexation and surcharge mechanisms in The U. S. And Europe from 50% in the first half of twenty eighteen financial year to 75% in this half. It's important to note that price coverage of inflation is more complete in Europe, where most contracts have annual lumber and transport price indexation.
In The U. S, where the average length of contracts is three years, many contracts did not have cost recovery mechanisms in place twelve months ago when inflation accelerated in The U. S. To address this, we are progressively putting surcharges into contracts as they are renewed. In addition, it should be noted that transport inflation is primarily an operating cost driver, while lumber inflation mostly impacts capital costs.
As noted at the bottom of the slide, lumber inflation resulted in an €11,000,000 increase in CapEx pellet costs in the half. Looking forward, transport inflation is expected to continue to increase in The U. S. And Europe, albeit at a more moderate rate compared to our experience over the last three halves. In terms of lumber, we expect modest decreases in U.
S. Inflation. However, European lumber prices are expected to continue to increase. Now looking at each segment in more detail, starting with CHEP Americas on Slide 12. Sales revenue growth of 6% was driven by strong price realization and volume growth in U.
S. Pallets as well as ongoing expansion and price growth in Latin America. In The U. S, the effective price, which includes contributions from fuel and transport surcharges that are recognized as an offset to direct costs, increased 5% in the first half. Volume growth of 2% reflected ongoing expansion with new and existing customers across the grocery, beverage and SME sectors.
Over the next few slides, I will outline the key drivers of the Czech Americas margin and ROCE decline as well as the actions we're taking to progressively deliver margin improvements over the medium term. Slide 13 outlines the components and key drivers of the 2.6 percentage point margin decline in CHEP Americas as well as the actions we're taking to improve margins over the medium term. I will start with Czech USA, which accounted for 1.7 points of the 2.6 margin decline in the region. In addition to the elevated levels of input cost inflation, which impacted all three businesses in the Czech Americas, The U. S.
Business continues to face a number of structural and cyclical cost pressures, which we've previously outlined. These include capacity constraints in our U. S. Service center network and changes in retailer behavior, which have driven cost increases, particularly in transport. In addition to this, and as highlighted at the full year results, we increased our investment in pallet repairs to ensure our customers receive high quality platforms.
CHEP Canada contributed 0.5 points to the region's margin decline, largely due to additional transport and handling costs as well as higher service center costs as we transition from stringer to block pallets. Finally, 0.4 points of the margin decline related to Latin America, where we have seen an increased cost to serve driven by a combination of high growth and the underdeveloped nature of the local network and supply chain, which results in longer cycle time and increases the likelihood of loss and consequently drives the need for higher IPET provisioning and capital expenditure to support growth. In response to these elevated cost levels in the segment, we're implementing a number of initiatives to offset cost pressures and improve operational performance and network efficiency. We are also taking pricing actions to better reflect the cost to serve in each business. We are also taking pricing actions to better reflect the cost to serve in each business.
I have already outlined the progress we've made with pricing initiatives in The U. S. Over the last eighteen months and noted that given a three year average contract term, we expect to continue renegotiating terms on contracts, which are due for renewal over the next two financial years. In addition to pricing, we're also looking at our own operations for cost saving opportunities. We're investing in supply chain and other cost out initiatives such as The U.
S. Service Center Automation Program, which will improve both operational efficiency and platform quality. We're also investing resources to improve the efficiency of our networks and to deliver improved commercial outcomes and leverage our global scale and expertise around key spend pools such as lumber. Now turning to Slide 14 for an update on U. S.
Pallet's margin improvement initiatives. As outlined at our twenty eighteen Investor Day, we set an objective to improve U. S. Pallet margins by two to three points from the first half twenty eighteen levels. It's pleasing to note that despite ongoing inflationary pressures, the initiatives we are implementing in The U.
S. Business remain on track to deliver margin improvement over the medium term. During the half, we continued to optimize our network and transports to drive further efficiencies. In terms of pricing, as detailed earlier in the presentation, effective price realization during the first half, which includes surcharges, was strong at 5%. As noted by the green circles in the chart, we expect increasing benefits from pricing initiatives over the next three financial years as we renegotiate the remainder of our contracts in our portfolio, which come up for renewal from now until FY 2021.
In terms of procurement initiatives, our lumber strategy to reduce pallet unit costs and repair costs remains on track to deliver full benefits by FY 2021. Importantly, The U. S. Automation program, while in the early stages of implementation, is progressing well. 10 site implementations have been completed and the program outcomes are delivering in line with the original business case.
Turning to Slide 15 and the CHEP AMEA segment, which continued to deliver strong margins in ROCE despite cost inflation and ongoing investment for growth. Revenue growth was strong at 9%. The European business maintained good revenue momentum with 5% volume growth, primarily driven by expansion with new customers in the grocery and beverage sectors in Central, Eastern And Southern Europe. Like for like volume growth was modest at 1% and is largely reflective of the macroeconomic conditions in the region. The Containers businesses delivered particularly strong revenue growth of 24%, driven by a large contract win in the European automotive business and the ongoing expansion of the Kegstar business.
Underlying profit growth of 5% was impressive, particularly given the high levels of transport and lumber inflation experienced in the half and additional costs associated with the growth in the business, which included higher depreciation charges. In addition, the business also increased investment in additional resources to support growth and strategic objectives in the region. ROCE of 26.2% continues to be a highlight and was delivered despite increased investment for growth. This reflects the additional €29,000,000 of CapEx to support the large contract win in our European automotive business and €11,000,000 of Brexit related increased pallet purchases to support higher U. K.
Stocking levels. Our Czech Asia Pacific business delivered sales growth of 3% and strong underlying profit growth of 5%. The results reflected a solid sales contribution, primarily driven by like for like volume growth and modest pricing gains in Australian Pallets. Underlying profit increased 5%, reflecting pricing, the receipt of one off government infrastructure grant in the Asia region and the benefit of asset recovery outcomes, which more than offset transport and wage inflation. BISCO businesses continued to expand strongly in the first half of twenty nineteen.
Sales revenue increased five percent driven by strong volume growth in Europe, Latin America and Asia and strong pricing growth in North America. In Europe, volume growth was partly offset by a mix change with contract wins with lower revenue and lower cost to serve customers in The UK. These customers are generally lower cost to serve as they pay for their own transport outside of the contract. The mix change was a positive contributor to the margin improvement in the period. Price realization continued to be strong in North America, offsetting volume declines as a result of the exit of a number of unprofitable contracts during the half and some crate availability constraints during peak demand.
Underlying profit increased 9% and margin increased by 0.5 points, driven by a strong sales contribution to profit and transport efficiency gains in Europe. ROCE improved 0.7 percentage points, largely reflecting capital efficiencies and margin improvements in Europe. Turning to Slide 18 on our Corporate segment. Overall, Corporate segment costs decreased €2,000,000 with the decrease due to the exit of the HFG joint venture in the second half of last year. The resulting reduced segment cost was partially offset by increased corporate spend and a higher level of BXP digital costs recognized in the P and L.
Corporate costs increased €3,600,000 reflecting innovation investments and higher compliance costs and advisory fees, which included fees associated with U. S. Tax reform and other costs. The year on year BXP digital spend was largely unchanged. However, the expense increased by EUR 2,400,000.0 due to the lower level of capitalization of spend, which reflects increased resources allocated to field trials in the first half of this year.
The higher level of capitalized costs in the prior half, largely relating to the development of our software logistics system, Bricks. Looking at our cash flow performance for the year on Slide 19. Cash flow from operations declined by €73,800,000 during the period and includes the cash investment of €31,000,000 in The U. S. Supply chain efficiency programs, which are funded by portfolio actions completed in FY 2018 with approximately €250,000,000 of proceeds banked in the second half of twenty eighteen.
Excluding the investment in U. S. Supply chain efficiency programs, cash flow from operations declined 42,800,000 largely due to the reversal of a €30,000,000 working capital timing benefit and lower asset compensations in Czech Asia Pacific, both of which were disclosed to the market in the FY twenty eighteen results. Capital expenditure increased €46,700,000 reflecting investments to support growth and supply chain efficiencies as well as additional CapEx to support Brexit related increased stocking levels. I'll cover capital expenditure in more detail on the next slide.
Free cash flow after dividends decreased €63,900,000 as the decline in cash flow from operations was partly offset by a lower cash dividend payment due to a weaker Australian dollar. Slide 20 provides more detail on our capital expenditure in the first half. Overall, total capital expenditure increased EUR 73,000,000, driven by increased investment in growth, including EUR 29,000,000 investment in the European automotive business, EUR 31,000,000 in supply chain programs, EUR 11,000,000 on Brexit related pallet purchases and a further €11,000,000 increase in investment driven by lumber inflation. The increased investment required was partly offset by €35,000,000 of capital efficiencies, primarily in U. S.
Pallets and IFSCO Europe. Of this EUR 35,000,000, 11,000,000 was due to the mix benefit of lower cost crates with a balance of EUR 24,000,000 due to efficiency gains across the group. Looking specifically at Pooling CapEx. Pooling CapEx increased 51,000,000 or 9%, reflecting new platform purchases to support volume growth in existing businesses as well as EUR 29,000,000 of new market development capital, primarily to support the contract win in the European automotive business. As mentioned earlier, 22,000,000 of the pooling CapEx increase was driven by a combination of lumber inflation and Brexit related spend.
Our balance sheet remains strong. Net debt to EBITDA decreased from 1.69x to 1.51x at the December 31, and it is well below our policy of under 1.75x. The decrease is largely due to a reduction in net debt resulting from the repayment of the HFG shareholder loan and proceeds from the sale of Czech recycled in the second half of FY twenty eighteen. Net interest cover increased from 15.2 times to 17.9 times due to the decrease in net finance costs despite lower interest income associated with the second half repayment of the HFG shareholder loan. Net debt at the 12/31/2018 was EUR 2,400,000,000.0, an increase of €99,000,000 reflecting the free cash flow after dividends performance.
Before closing, I'll provide you with an update on the implications of the new revenue and leasing standards. Starting with the new revenue standard, AASB 15, which was introduced at the beginning of FY 2019. Issue fees are now recognized over the estimated cycle time between the asset being issued and returned to Bramble. As noted in the table on the slide, we recognized a year on year net benefit of €10,000,000 in the 2019 due to the seasonally high fourth quarter sales in FY 2017 and 2018 being deferred into the first half of FY 'eighteen and 'nineteen. This benefit is expected to reverse in the second half, leaving a net neutral impact for the full FY 'nineteen year.
All adjustments are noncash. Turning to the new lease recognition standard, AASP 16, we are making good progress to developing systems, capabilities and processes to implement the new standard on the July 1. Due to the capitalization of leases, we currently estimate a one point reduction in ROCE in FY 2020, but we will be providing a full update at our FY 2019 results announcement in August. In summary, we have delivered strong sales performances across all of our segments, driven by volume growth and improved price realization. In terms of the Ithco separation process, we are on schedule to complete this in calendar year 2019 and will provide an update on Bramble's capital structure at our full year FY 2019 results announcement.
As noted earlier, we are declaring an interim dividend of $0.01 $4.05 with a one off increase in franking to 65%. In terms of future outlook, our Global Automation productivity and supply chain cost out programs remain on track to deliver margin benefits and improve business outcomes over the medium term. We are expecting cash generation to improve in the second half, notwithstanding ongoing investment in supply chain programs. And on a full year basis, for FY 2019, we expect constant currency underlying profit growth to show modest improvement over the prior year with increased costs to be offset by price realization and the delivery of efficiency gains. Thank you.
Ladies and gentlemen, we will now begin the question and answer session. And Your first question today comes from the line of Anthony Mulder from CLSA.
Maybe if I can just start on The U. S. Market. Can you see, obviously, very strong pricing benefits in the half, but lower volumes, organic and net new wins. Can you talk to how you see pricing impacting volumes?
No. I think when you say lower volumes, I think the organic growth is actually very much what we think the run rate should be. So I think as I said at the full year, when we've been tracking 2% like for like, that was unusually high. So 1%, I think, is fine. The net new business wins, again, we give a range of 1% to 3% as our expectations.
So yes, sure, it's at the bottom end of the range, but it's still in the range. We haven't seen a significant impact on volume due to our pricing actions. I think that's partly a recognition that is driven by costs increasing and therefore, the customers understand it. And I think it's also partly due to the fact that the market is being very disciplined and showing the right sort of discipline around volume versus price. So yes, don't think there's anything to worry about there.
I don't think there's anything that we're seeing unusual. I think you just always have to keep an eye out for your macro statement from the U. S. Administration as to what might happen with like for like volumes. But at 1%, we're sort of in our normal range.
Right. Okay. So that kind of level you'd expect to continue around that sort of one on one?
Well, I would say, notwithstanding a statement from the White House, which might impact the GDP of The U. S. Yes, that's what we would normally expect.
Okay. You mentioned cost to serve pricing initiatives in The U. S. Can you talk to more detail as to how and where you're putting those through?
Yes. Sure, Anthony. It's Nessa here. Look, what we've been doing as contracts have come up for renewal is that we're putting a lot more rigor to understand the cost to serve, I. E, the exact cost that, that particular those particular flows attract.
And as a result of that, we are changing pricing. So we're doing a lot more tailored pricing actions. And we're also, at the same time, when we're looking at how costs arrive from customers, working with customers to see how we can actually take out costs at the same time. But it's fair to say we're having a more detailed and thorough review of the actual costs associated with each individual customer as we're establishing the right pricing.
So I'd take from that that it's more customer by customer, not channel by channel? Or is it channel by channel? And is it also completely related? Make sure
it's Anthony, completely it's both because as we look at customer flows, we look at where the products end up because there's a variety. Some of them will end up in participating distributors, others will end up in non participating. So it's a bit of a combination of the both, of of both things recognizing that depending on which channel they end up with, that they have different costs associated with service, both in terms of getting the pallets there, but also the returns, the loss rates and the damage rates associated with that.
Understood. And last question on The U. S, obviously, 10 sites now converted to an automated repair process. When do you expect to see some, I guess, lowering of that capacity impact that you've had over the last one years point now?
Well, I think what we're anticipating is partly why we're saying what we're saying about the full year outlook is where we'd expect to see some of it coming into play second half of this year. But obviously, you look at Messrs, the slides you're talking about with the green dots on, you see it progressively coming through in 2021, 'twenty two. But we are beginning to see improvements on the 10 sites we've already implemented.
Because arguably, they're probably the worst for the capacity impacts.
Yes. So well, I mean, it's a combination of the ones which were the least efficient and therefore, obviously, you a bigger bang for your buck, but not just that because some of them, we've converted where we had the tightest capacity constraints. So yes, mean, for sure, we should be seeing a good improvement through this year as we convert more and more sites. But the full benefit won't be for a few more years, as we mentioned, right, back in the Investor Day.
Sure. Understood. And if cash, obviously, we're probably hoping for an update on indicative bids, I think, by the March, I think, was the previous guidance. Has that changed? Are you still confident of getting or is that the timing for indicative bids for us to go?
We didn't give a timetable on indicative bids. I think all we said was that we would complete the separation by the end of calendar year 2019, which I know is not terribly helpful, but that's what we said. So where we are now, and you may have noticed we put out a release to the ASX this morning just because there's been quite a lot of media speculation. All we're saying is that the separation process is on track. We do expect to complete within 2019, but we are still going through both processes.
So whilst the assessment of the sale in process is an advanced stage, both processes are incomplete. We're continuing work streams on both. And as soon as we have any developments, we will inform the market. So at the moment, it's the situation as it was before.
And last question around Brexit. Obviously, you've qualified an impact from that longer cycle times for the pellets business. Appreciate that if that doesn't have that kind of constraint, but or impact, but are you expecting any impact from Brexit depending on
how that plays out through the if co business?
And there might be a little bit in terms of retailers stockpiling, but we haven't seen it. And we've put words we have seen it on the pallet side. So I wouldn't expect any material impact in this guy.
Your
next question comes from the line of Matt Ryan from UBS.
Graham, hi, Nessa. First question on U. S. Margins. So as you sort of highlighted, cost inflation appears to be moderating at the moment.
And I appreciate that you've got contracts in place. So the benefits that you guys might get might be a little bit more delayed than the spot markets that we can see. But I guess with what you can see at the moment, how confident are you that 2019 will be the low point of margin?
Look, for us, it really depends on what happens with inflation. And for as we went through the first half, we saw effectively really transport has been the biggest single impact, and it's weighted towards The U. S, where we have longer haulage miles. And also, we have the added issue of increased ring handling because of the inefficiencies in the network. So look, as we get into second half, obviously, the comps were obviously cycling a higher inflationary period.
So the sort of period on period in the second half shouldn't be as severe. That's the key component. And then the chart that we set out on Chart 14, which shows the margin initiatives that come into place, They are progressively delivering, but really the biggest impact is really FY 2021 and 2022. So we're confident that those building blocks are in place, but we are a little bit held around some of what happens with inflation.
Okay. And then the, I guess, the 2% to 3% margin improvement, which I think you've reiterated today. I think previously, there was a year of 2021 when you'd achieved that. Has that changed?
We're showing, we're showing that we get to f y twenty two when all of the benefits come through within that range, but we would expect as we get to f y twenty one to be able to show material progress against that.
So would would that year be within the two to 3% improvement that you've been speaking about?
Remains to be to be seen in terms of total commitment because we're not giving guidance by year. But you would expect if we needed to get within that range of two percent to 3%, that FY 'twenty one should show material progress, which should get you pretty close to the bottom end but without giving any guidance.
Okay. And then I guess just with the outlook commentary today, can you give us any color on what you mean by modest? I guess maybe just to frame it in the context of your medium term guidance for profit above revenue growth. It fair to say maybe that we're not going
to see that this year?
I think that's a very flat statement. Mean, what we go back to the comment around the operating profit leverage, we did say through the cycle, and that meant that if you had periods of high cost inflation, you wouldn't be able to get the leverage. I think we can all agree we're in a period of high cost inflation, so there'll be no leverage this year. I think when we say modest, I mean, we all have different views. You can see what we did in the first half, and we expect it to be slightly better in the second half.
Therefore, to get to the full year, it'd be slightly better overall. And I think that's all we can say. And you'll have your own view about what modest means.
Your
next question comes from the line of Owen Birrell from Goldman
I'm just going to lay to the point on The U. S. Just a little bit first. You mentioned on Slide 10 changing customer behaviors in The U. S.
I wonder if could just provide a little bit more color around what you mean by that.
Yes. Mean it's the thing that I think we've talked about fairly consistently over the last few reporting periods around things like, in certain instances, us having to pick up pallets, whereas in the past, the customers sort of taking it back to our service centers for us. The move which started, I mean, over a year ago now of certain retailers wanting to charge for sorting pallets, that's the sort of thing we're talking about. It has been growing, but I don't think it's something that we can't deal with. It's just one of those things where we have to, through a mixture of pricing and being more efficient ourselves, offset it over time.
And that's something that's what we're in the progress that the prices are doing.
So it's not to do with customers using less pellets or better inventory management, things like that. It's just the, I guess, collection and the supply chain side of it?
Yes. Okay. And can I
just ask, we're seeing pellet pricing in The U? S. Falling quite dramatically. Last time we saw this happen had a major impact on white wood conversions in the subsequent period. Any expectation of that happening around this time?
Well, again, it's one of the things we haven't seen much happening, but and, yeah, and, you know, I think I've said this before. My view is there isn't a direct correlation between the two because people go to pooling for reasons other than price. But, I mean, when you get it appears at the extreme of very, very high whitewood pricing or very, very low whitewood pricing, then it can make a bit of difference. So if whitewood prices come down a lot, then I think our view is that that means that you might only get down to the bottom end of our range on net new business wins rather than the higher higher end. And sure enough, we are at the bottom end at the moment.
So there may be some correlation there. We haven't seen anything noticeable yet.
Understood. Capacity constraints. You mentioned increasing costs in The U. S. Is this as a result of automation?
Or has it got more to do with this increased need to collect pallets and your supply chain issues there?
It's really going back to us when we identified that The U. S. Capacity was not where it needs to be to operate efficiently. And so as we're investing, it means that in certain cases, we're taking capacity out of the market as we automate plants and upgrade plants. We're trying to do that in a way not to cause issues for our customers' service levels, but that does mean increased rehandling costs to put them through other plants to run over time and rehandling.
And, you know, until we actually get more through the automation program where we need to see another twelve months going forward, we are still going to have those increasing levels of inefficiency because we're growing at the same time as we're taking out capacity.
Understood. Are you going to put a dollar value around that overhead cost that you're having to bear and essentially will come out at the other side?
Look, when we look at the overall U. S. Margin decline, we would say of the efficiencies, we would have there'd be a point of inefficiency there.
Okay. And I guess just finally on The U. S, the cost coverage in your U. S. Contract, you mentioned that the group, it's about 75%.
Just wondering if you can give us an update for The U. S. Market specifically.
Yes. Look, we feel we have made really good progress in terms of recovery because it's about also about what so as we get into The U. S. Contracts, we started from having very low coverage, but there was some in there. So we had we started off, like, twelve months ago with sort of, 50 plus coverage, and we're sort of we've been progressively moving that up.
So we've been sort of high sixties, low seventies. And that's why we have price indexation in Europe, while we have good coverage, it doesn't cover every component of it. Plus also, you have to realize that with Europe, the indexation happens generally on the July 1. So therefore, it captures what's moved in the year. But as you have increases beyond that, you also get impacted.
So when we look at overall coverage, we're looking at both those components, I. E, a catch up with the contracts in The U. S. Not having it, but also that the indexation largely in Europe happens on the July 1. So when we talk about that, when we take all the costs together, all the recoveries that we get from this to get to that number, and that's why we're going to continue to track to see that we're progressively making improvements in that.
Okay. Excellent. And just one last one, if I may, on IFCo. The prices effectively went backwards during the period. I'm just wondering if you can give us a bit more color around what happened there.
And if there was
a one off, what could
the underlying price movement do? Because understand previously you were talking about price levers as being a big driver of the sales line there.
Yes. Well, look, generally, in Europe, the team has done a really nice job of investing in price to get volumes, and we continue to see that. But the results in IFSCO Europe, where we did have a net net price decline, we're also impacted that we did take on a number of contracts that were high volume that are lower revenue per issue, but they're also lower cost to serve where customers take on their own transport. So that's reflected in there as well. We continue to get strong pricing in The U.
S, but really Europe, it was more business as usual and then but overlaid with this step change in mix where we had some big customer wins that fundamentally, the shape of the revenue and the cost is different, but it was a positive contributor, that mix change, to margin in the period.
All right. That's great. Thank you, guys.
Your next question comes from the line of Jacob Kakanis from Citi. Please go ahead.
Two quick ones from me. Firstly, can you just comment on the state of competition in The U. S. Marketplace and how that might look if we do see these inflationary headwinds recede in the second half of 'nineteen?
Yes. So I mean, I think as I said earlier, the competition has been very disciplined. And it's been good that when we've been announcing the fact that we have been we're going to increase prices to cover the inflationary cost increases, as far as we can tell, the composition are falling as well, that's great. I think if the inflationary cost pressures come down, you would expect there'd be the same discipline because there is still capacity constraints, and we're being very careful. But if we're managing our volumes to an extent, if we lose if we think of the business we're going to lose, well, then, you know, we'd hope that that would be the business that the competition would find would fit their their network better than ours, and that's why we'll be prepared to lose it.
I think as long as that discipline is still held in the market through through both the, you know, increasing inflationary pressures versus the decreasing, there should be no change in the statement of the markets behaving in a disciplined way. That's what I would expect to say.
Okay. And now just moving to the CapEx. I know that there's been an increase in the pooling CapEx. I'm just wondering if there's any discussions with customers regarding pallet quality when you're talking about pricing changes or at the
recontracting stage, please? I mean there's always a conversation about pallet quality. But I think one of the things that we've seen just around that promoter surveys and scores is that when I think particularly in places like The U. S, there were comments a few years ago comparing us to the competition. Those have died down significantly for a combination of the competitors pool getting older, but also us investing in quality, which we have been doing over the last year or two.
So it's not something that comes up particularly at the moment. And I think that's an indicator of the fact that we are investing in the right things and talking to our customers about their needs and the standards that they need to make sure that what we're providing them to fit the purpose.
Sure. One final one for me. Just you've spoken to the CapEx implications from Brexit in The U. K. Can you talk through any OpEx or revenue impacts that you experienced in
the first half of 'nineteen, please? Yes. There haven't been any real OpEx impacts. I mean there might be going forward. It depends a little on the risks we outlined on Brexit, in particular, the heat treatment of pallets.
If that has to happen, which we still don't know whether it will or it won't, then not only will there be a bit of a CapEx implication for us, but clearly, will flow through in OpEx. But we would aim, I think, to pass that on to customers because it's an increased cost of being outside of the EU. Apart from that, again, the risk that we've seen, we've highlighted around things like kind of availability of labor and delays with increased tariffs. It's too soon to know what will happen, and therefore, we haven't seen any impact through the P and L yet.
Your next question comes from the line of Cameron MacDonald from Evans and Partners.
Just a couple of follow-up questions. One on the Brexit CapEx. Presumably, that's a one off? Or are you calling that out as something that Brexit is going to continue to drive up that CapEx requirement?
Well, it should be a one off because what we're seeing is it's it's related to our, customers, obviously, stockpiling and, therefore, having to inject more pallets into the system. So one would expect that once Brexit, whatever Brexit ends up being, returns to some sort of level of normality, those extra powers you put in will kind of, you know, we won't need to put quite so many in in in future periods. The only thing we don't know is just how long this period of uncertainty. And if there is gonna be a bottleneck at the ports, you know, whether that's gonna continue for any length of time. If it does continue for twelve months, then we might have to put some more CapEx in.
But at the moment, where we would be calling it out as a one off.
Okay. And you've called out an infrastructure grant in Asia Pacific. It's contribute it's positively contributing. Can you quantify how much that was, please?
You look a relatively small amount. You should think less than a million in terms of your total earnings, but it was due to due to us investing in innovation where we were able to under some programs in Asia to actually reclaim some of those costs on some government grants.
Okay. And then two relating to The U. S, You've called out the efficiency and the capacity constraints in The U. S. Is that are you seeing customers then adjusting their return behavior and and in effect, you know, holding pallets to to provide some level of their own insurance against your capacity constraints?
No. Nothing out of all.
No. I can't really look.
Our customers wouldn't have the space to be able to stockpile pallets either.
Okay. And last question, just in terms of the detail and the
number of pallets. You had
a 140,000,000 pallets at the '18 and in in Czech Americas. And and you're saying now that you've got a 141, and yet you've purchased 11,000,000 during the period. So can you just explain where the 10,000,000 has disappeared to?
Yeah. Sure. So look. If you have look. If you if you just look at the pallets line there, so we have 139,000,000 pallets in the at the beginning of the year.
We had purchases of $11,000,000 And then we have an IPEP of $5,000,000 So the provision against that would be $5,000,000 pallets, which includes, remember, we highlighted in Americas to expect as we go through that we will have higher provisioning, particularly in Latin America. So you've got to factor that into your Americas region. We also then would have about the normal course of business, 2,000,000 worth of pallets and a half would be written off. And then we get a further we have had a further 2,000,000 odd where we get compensation for, I. E, where people pay for those pallets because they're responsible for the losses associated with them.
So essentially, if you have a look at that, that takes you from the 139,000,000 to the closing 141,000,000 And as I said, for €2,000,000 of those, we would have compensations across against that, which you'd see on the cash flow line under the proceeds from sale of property, plant and equipment.
Your
next question comes from the line of Paul Butler from Credit Suisse.
I just had a question on the price increases that you're getting through in The U. S. So you said, I think, effective 5% price increase. So given given that you've got three year contracts, and I presume that relates to just a thirty year contracts, the effective increase sort of per contract is something like 15%. Is that is that reasonable?
No. How you should look at it is that, you know, we get more pricing on the top line, but the surcharge pricing that we get for those so for everybody who's got it in, if the cost of of something the surcharge applies to goes up, then that pricing that we get from that goes up as well. So it's not just over the smaller amount that you're looking at the increase in surcharge income. It's the income that's increased across the whole of the pool.
So so so does that mean more like 10% increases for the contracts for further contracts?
It really varies. It we very, very widely as we're doing the reviews and we look at the real cost to serve. It's a combination where we can take costs out of flows with customers, which would reduce the amount of the increase they've got that we have to pass on. Or it can be in some contracts, some have some bring a lot of benefits to our network where their increase would be lower than others that don't bring as much benefit and they cost us more to serve. So if you have a much higher mix, say, in the nonparticipating distributors or if you have a higher loss rate or longer cycle times overall, then generally, your price increases will be higher than others who have less flows into those NPD and have shorter cycle times, for example.
Your next question comes from the line of Scott Ryall from Bramall Equity Research.
Bramall, you made some comments about your about pallet quality in The U. S. Having improved and not being really a discussion point. But in the increases in costs, you've called out increased investment in U. S.
Pallet quality. Is that am I missing something? Or are you saying because you're spending, you're not having the conversations with customers anymore?
No. All I was saying was that because we have been investing in quality, which not a big increase year on year, but it's something that hadn't been going on some years ago when I think that we were getting more annoyed about pallet quality in The U. And I think that was a combination of us not investing so much in the pool, but also competitors' pool is being much younger. So what I'm saying is that the noise has definitely reduced because of both those factors moving, I. E, the competitive pallet pool is getting older, but also we are investing more than we have been in the past on quality.
But it's not a significant amount, but it's more than we were doing before.
Okay.
And could you just in terms of the Canadian shift from stringers to block pallets, how far along the transition are we, please?
Scott, we expect that we would be reach a balance point by the end of this financial year. So last year, we said expect an additional EUR 9,000,000 in costs year on year. So we had about EUR 9,000,000 last year, expect an incremental EUR 9,000,000. So from where we're seeing the progress in the costs, it is playing out the way we expected. But we would expect then as we get into next year, next fiscal year, that we shouldn't be seeing more incremental costs come through in relation to that transition.
Okay. Great. And could you talk in the East Coast business, you mentioned in The U. S, you've exited unprofitable contracts. Clearly, the price makes them unprofitable.
But could you just explain to me when you presumably tried to renegotiate with the customers of those unprofitable contracts? Why you weren't able to come to an agreement on price, please?
Well, depends. Mean, there'll be lots of different reasons. There might be alternatives, and some of some of them may have flipped back to corrugate because they decided that, you know, the the price increase was too great. It could just be that they decided that the price increase was too great, and they they, you know, they didn't like it. It could just it could be something that was going to happen anyway, and it wasn't just about the price.
And there's a whole range of things. But from our perspective, it was very important that we start, taking a bit of a stricter view on those contracts, which were not profitable. The good news is that the ones that are left are profitable and doing quite well, and you can sort of see that through the numbers. But it's been one of those things that I think is a culmination of the last few years of price increases. It was definitely going to affect volume at some point.
Okay. So do you think you're through that period now? Is it taking out those sort of contracts?
Think it's hard to call, I think, is the answer to that one. I think we probably got through a lot of it in the last six months, nine months. So hopefully, it will get better, but I don't really want to call that one just yet.
That's fine. Okay. And then could you talk about the some of your technology trials, particularly around tracking and what the progress of that has been, please?
Yes. So I think we've started to get some really, really good insights, particularly in The U. S, around what's happening in the NPD channels. And I think that sort of links back to some of Nestle's comments around pricing, which I think with that data, it allows us to go back to some of the customers and saying, if more of your product is going through the NPD channel, we now have a better idea of cost to serve. And therefore, that informs our pricing decision.
So we're definitely getting some of that out of the BXP digital trials. We're also working on some of the other sort of historically difficult channels in The U. S, which everyone knows who they are, but we won't talk about them right now. But also in Europe, we're doing some more work in Spain. I think, again, we're seeing a bit more getting more insights.
So what we've said, I think we said it in August, is we would expect by the end of the fiscal year, this year, to come back to you and say, here's what the value has been of the trials. And I don't think there's anything from our perspective that says we won't be able to do that. It's clearly, this is a longer term play, but we are beginning to see some value now.
Mhmm. Sure. And what about I mean, a lot of that is related to your cost base. What about value add to customers in terms of temperature tracking and other conditions and those sorts of things, Steve?
Yes. So I mean, we are doing some of that as well. And we've got a couple of projects which are progressing well. I just think in terms of you'll not see it in the numbers. It's so small in terms of the value.
It's going to change the dial. And from our perspective, the the value of focusing people's efforts and attention on the asset efficiency, the cost of service is so much greater than, anything else we can do. We just got to be a bit careful about not spreading ourselves too thinly. But we're trying to keep the customer value piece alive, but it's not the top priority at the moment.
Okay. Thanks. That's all I had.
Thanks.
Your next question comes from the line of Michael Morrison from Deutsche Bank.
Is Graham. You talked previously about the rationale for the difficult sale or the merger, and you talked about synergies, customers being different decision makers and then funding. And you've talked about short term CapEx for the automation coming from some of the asset sales that we cycled. And then back at last year's Investor Day, you did talk about, Tom, it could take up to ten years to develop a new pallet market. Could you give us some color around either capital management or how you might deploy the proceeds from a Nifco sale?
Well, I mean, think it's premature to talk about proceeds from NIFCO sale, but it may demerger. So I I don't think I'm going give too much color on that. But I think just think theoretically, what we've said is that if we haven't got any material projects, which are value accretive and where we which we can't fund from ongoing cash flows, and yet we clearly would use some proceeds for those sorts of projects because why wouldn't we? Because they're they're value accretive. But if there aren't any, in the short term, and I think we're talking twelve months, eighteen months, then we would return the proceeds if there are any proceeds to shareholders.
And how we do that, clearly, we'll have to address at the time. So I think that's probably as much as I can say on it at the moment.
Yes. Obviously, we do as well.
Yes. Okay. And you've talked about, speaking to customers about the value add as well as catching up on the cost inflation. Could you give us a bit more color around that? You talked about sort of the quality of the pellets, but some more color around just when you sit down with the customers, what are the other things you talk about?
Well, I mean, the clear thing that we do talk about, apart from the quality, is the value of our network advantage because if you're a customer purely looking for the lowest price, you can undoubtedly cherry pick lanes. But then the whole benefit of having a pooled system is that you actually use the network advantage and they'll be the lanes which we also serve to less a higher cost to serve. And that if you take if you start bifurcating those two types of channels, actually, there's an increased net cost for the customer. So that's one thing we'll always talk about. In places like Europe, in particular, we do a lot of conversation around transport collaboration.
There are many customers now where we're saving them significant amounts of money on transport to the extent that, that becomes a big factor in whether they even retender the business because actually, we can prove to them how much we're saving. So I think that's a clear indicator around value. And then you start having some conversations, as I said to the earlier question, around what we can do with our insights using the data, but I think that's still at a fairly early stage.
Okay. And then the last question. Just as you suggested, the newswires are busy talking about potential sales, and they mentioned one particular PE firm. But when it comes down to making a decision about demerger or sales, it really all about the price? Or is there other things you're considering?
Well, it's about the value, for sure. And it's about the value to shareholders. And I sort of use that word quite carefully because clearly, you would look at tax implications for shareholders as well as just the price as well. And then you start thinking about the cost goods from cultural perspective, were looking at buyers. And also, you'd have to start looking at the capabilities and making sure we've got the right capabilities in the team should it be demerged and be a stand alone entity.
So it's not just about the price.
Your
next question comes from the line of Paul Butler from Credit Suisse.
Hi. I I seem to have got caught up before.
You thought you were just being rude.
Well, I didn't think my question was that contentious. So look. Just just back on to that. So there's the 3% increase you've reported, 5% effective. Is there any specific reasons why over the next two years where you're continuing you're expecting continued price increases, it
would be a different sort
of magnitude to what you've talked about today?
Well, the increases will be dependent on that come from surcharges will be dependent on where inflation is. But we would expect as we go forward to FY 2021, regardless of where inflation is, that we will have contracts that are much better positioned for us to face these kind of headwinds again. The challenge for us now is that we're in catch up mode, and it will take us through a three year cycle to get to all of the contracts. That's not an ideal position to be in, but I think we've made good progress with seventy five percent recovery. I'd say we kind of we won't have it in every single contract, the surcharges.
Some of them will be just will be through pricing. We might get overall to sort of 80% plus. But I think this leaves us just the key objective being that we continue to make progress to recover the costs and that we have contracts in the future that are best placed to manage changes better placed to manage changes in the market.
Okay. And in Canada, there's a previous question, and I think you said that there won't be any additional cost or margin impact in FY 'twenty. I'm just wondering, at what point does these additional costs reverse out and we actually get a margin benefit related to Canada?
Yes. Well, we have look, on an ongoing basis, the challenge is the block pallets are not as robust as stringer pallets. The challenge with that is that when you shift the pool over from stringer, we've enjoyed a market where we've had much lower damage rates and much lower repair costs because we were running a Stringer pool. It's going to be there is a majority of the costs that we've now got will continue on because we will have a pool that reflects a higher damage rate. There is a portion of that cost, a smaller portion of it, that relates to just losses as you transition over.
However, there will be you shouldn't be expecting there's going be a big margin uptick. This is more we had good margins, the margins come down. There's still going to be it's still going to be a good returning market, albeit at lower margins than it was sitting on a string of rules.
Right. So I mean, the customers and the supply chain in general gets a logistics efficiency benefit from the block pallets versus the stringers. Do you get a pricing benefit to sharing that?
So the challenge for us is so first of all, customers, the reason why we're shifting the pool is because customers prefer the pallets with the four way entry, which makes it more efficient for them in terms of warehouse management and their own logistics. So yes, there is a reason why customers want it. In terms of the pricing, there are other competitors in the market who are also pricing the market, which determines the price of those block pallets in market. So we don't have the opportunity to increase the issue prices proportionately with the higher cost for the damage rates, etcetera, associated with that pool.
Okay. And I just had a question on the AA SB 15 adjustment. I think for the prior year, there was about a 15,000,000 adjustment related to the Americas business, which was proportionally larger than for the other businesses. I'm just wondering why that is.
Look, the adjustment is purely due to the shape of the revenue earned in each of the markets. So where you have a business that has higher quarter four sales relative to in the first half, then you're going to have a higher deferral at the end of the year because you'll have more income that has to be spread over the cycle time. So if you're issuing more sales in the fourth quarter, then comes to year end cutoff, you're going to have a bigger quantum of deferral because if you take it that you turn a pallet three times a year, there's still going to be income from that fourth quarter that gets spread across the next half. So it's to do with the shape of the earnings. And traditionally, from a group perspective as well, we do have a higher quarter four relative to the second quarter.
So hence, why you will have the shape of it. So in the first half, if you look at it year on year because we restated the prior year numbers under the old standard, and now we're running under the new standard. Net net, the impact on first half is that we have a €10,000,000 increase in underlying profit in the first half, and we would expect that to fully reverse in the second half purely due to the shape of the sales revenue.
Okay. And Graham, a question for you. I mean given your visibility over the supply chain, I'm just wondering if you can comment on how well you think the supply chain is preparing for the various Brexit scenarios that we might see.
I think the answer is that people are preparing for it pretty well. And I think I'll give you a couple of examples, I suppose. I know through some of other sort of living in The U. K, you hear a bit more about this. A lot of the retailers, for example, were being contacted by the government about what their plans were for stocking.
And, it was back in January, and they said, well, we've already made our plans. It's too late to tell us to do something different. So they had already assumed a no deal Brexit as far back as, you know, as Christmas and and had planned accordingly. So I I think people have actually gone ahead and and taken a pretty, you know, gloomy scenario around no deal Brexit and have planned appropriately as other companies, obviously, I know a bit better, have done exactly that as well. So I would say people are are are appropriately.
I I I know I'll say this is slightly controversial. I do I do think that we're focusing a lot on Brexit, but actually, also we have to be looking at what's going on in the rest of Europe, and it's not just about Brexit. You know, if you look at the economies in Germany and France and Italy in particular, those are all sort of under some under some pressure. So I think we should be thinking more about just what's happening with GDP in Europe generally rather than just focusing on Brexit. But I know that's a hot topic for people at the moment.
Your next question comes from the line of Owen Birrell from Goldman Sachs.
Just a couple of follow-up questions from me. Just firstly, on U. S. Margins. You're talking to previous guidance of 2% to 3% increase on first half 'eighteen.
So it's sort of implying at the midpoint around about 18.7% margin in The U. S. That's effectively a 30% increase on your profitability out of US or circa $50,000,000 of cost savings or cost recovery. That's a pretty big number. How confident are you that you can actually achieve that?
Look, we if you look to Slide 14, when you look at the automation project, just take that as one chunk of it. So we talked about that we were going to spend $160,000,000 and we expect to get returns of 20% on that. So that starts to get you into a big chunk of where it comes from. Then we have lumber saving and pricing on top of that. Look, obviously, we look at the margins, they'll get restated for changes in accounting policy, etcetera, but we're holding ourselves to account in terms of we said we had initiatives in that we deliver incremental benefits that we expected to flow through to the bottom line, and we believe we're on track, albeit that the benefits are skewed towards 'twenty one, 'twenty two.
Okay. And then just a second question for me on you've mentioned this capital structure review post an Ifco transaction. It seems to me that sort of Ifco needs a fair degree of capital, and Bramble is obviously continuing to invest. I'm just wondering, as part of that capital structure review, we get a demerger scenario, whether there's a possibility of a capital rising at that point as well.
That's not our intention.
No. Okay. Okay. Excellent. That's that's great.
Thanks.
We can answer the question. There's one here on the screen that we can answer. I think we've probably covered it, but Piers Bolger asked, do we think we're at the peak of the cycle as it relates to inflationary pressures from lumber and transport? And the Part B of that question, do we envisage that we'll pass through more than 75% of that? And I think I'd reference you to the Slide 11, we're saying, look, inflation has been higher than we would have expected coming into the year.
Our outlook is that we expect transport to continue to go up, albeit we see the CAF index and some of the other outlooks are indicating they would expect to see a moderation in that. We'd yet to see that come through to the extent that some of those indices would say. And lumber, we are still seeing some increases. Certainly, in the half, we saw increases year on year. But we do think we have seen steep inflation.
We wouldn't expect it to continue at the same rate. And in terms of us moving through recovery, maybe we'll get to a target sort of 80% to 85% might be sort of where you end up across all your contracts. A bit of that remains to be seen because it will depend on what we get on top line pricing and where we see the cost to serve. Some of it may just involve changing of the clauses, for instance, where we don't take so many transport legs ourselves. So there's a number of other ways that we can address that, too.
There was also a third question on European growth, and I think Graham just covered that, saying that we are seeing some weakness in the macroeconomic outlook as well across Europe.
There are no further further questions at this time. I would like to hand the conference back to today's presenters. Please continue.
Great. I would just say thank you very much for your time and the questions, and I'm sure we'll be seeing many of you in the next day or two. So thanks very much.
Thank you.