Brambles Limited (OTCPK: BMBLF) Fourth Quarter 2022 Earnings Conference Call August 17, 2022 p. m. Eastern Time
Participating companies
Graham Chipchase-CEO
Nessa O’Sullivan – Chief Financial Officer
Conference Call Participants
Andre Fromyhr – UBS
Anthony Longo – J. P. Morgan
Justin Barratt – CLSA
Anthony Moulder – Jefferies
Niraj Shah – Goldman Sachs
Paul Butler – Credit Suisse
Matt Ryan – Barrenjoey
Cameron McDonald
Owen Birrell – RBC
Jakob Cakarnis – Garden Australia
Scott Ryall – Rimor Equity Analysis
Sam Seow – Citi
Operator
Thank you for being here and welcome to the conference call on Brambles Limited’s 2022 annual results. All participants are in listen-only mode. There will be a presentation followed by a question and answer session. [Operator Instructions]
I would now like to speak to Mr. Graham Chipchase, Director General. Continue.
Graham Chipchasse
Hello everyone and good morning from Sydney. Thank you for joining us for our 2022 annual earnings announcements. Today, I will begin by offering a summary of our functionality for the year and offering an update on progress as opposed to our transformation schedule and the Fiscal 23 Outlook Statement before Nessa presents you with the detailed monetary statements.
Let’s move on to slide 3 and our annual functionality key messages. We delivered better-than-expected effects with better-than-expected functionality in Q4, giving us a smart boost as we head into FY23. At constant exchange rates, earnings expansion was solid by a 9%, underlying earnings increased 10%, highlighting the operating leverage we’ve generated this year through value realization and supply chain efficiencies. sourcing, offsetting short-term transformation charges and service charge increases across the group. Free cash flow benefited from higher earnings and higher asset offsets, although this was more than offset through additional capex to help longer cycle times across stores and Array brands, as well as a $470 impact million for the inflation of the wood, which raised the values of the pallets. year after year. This translated into free cash flow after dividends that represented a net outflow of $218. 6 million.
Our return on investment of 17. 7% is in line with the previous constant period, which is an impressive achievement given the constant tailwinds of inflation and inflation facing the company and underlines our disciplined technique for capital allocation. %, reflecting earnings and profits consistent with the percentage-consistent buyback program, which ended beyond this year. We increased the declared annual dividend to 11%, representing a payout rate of five 3% and also increased the postage consistent with the percentage through five issues to 3cinco%. Expressed in Australian dollars, dividends declared for the year above 18%.
Let’s move on to some of the highlights of the company. The Shaping Our Future transformation calendar is gaining momentum and we are seeing the first signs of monetary benefits that have been offset by significant headwinds to load inflation. The importance of Shaping Our Future has never been clearer and this will underpin price creation in the medium and long term. To counter significant charge inflation and broader challenging market conditions, we have accelerated asset and business productivity projects and made great strides towards our ambitious 2025 sustainability goals, a key differentiator for Brambles and a source of price.
Let’s go to the next slide. The operating environment is once again more challenging with unprecedented disruption to global supply chains, the continuing effects of the COVID-19 pandemic, and rising geopolitical tensions. The global wood supply, transport capacity and availability of hard labor have been affected by shortages of sources or capacity limitations. And we expect the value of those critical inputs to be mostly volatile again in FY23. source and value of new pallets in all regions. High inflation, chain of origin constraints and pallet shortages across the industry have meant that consumers and stores have stockpiled to lessen chain of origin risks. We have also seen an increase in unauthorized reuse of our pallets in reaction to pallet shortages and the higher cost of pallet market position. In reaction to this, we have taken several steps for our consumers and keep supply chains moving. Specifically, we purchased another 8 million pallets in FY22. However, due to persistently low yields and refresh cycle times, those purchases were not enough to fill our inventory. of factories at optimum levels, with the allocation protocol still in force in the main market positions in the United States, Europe and Australia.
While situations remain challenging, we expect the point of maintained inventories to be partially absorbed in the current part of FY23. We implemented new processes to restore 1. 5 million additional pallets that would otherwise have been discarded and d asset control capabilities, adding increased use of knowledge analytics and virtual data to the scale and power of our pallet collection engine.
Let’s move on to slide five. Given the challenging market situations and the development of macroeconomic uncertainty, I wanted to take a moment to reiterate Brambles’ defensive characteristics, which position us well to generate prices at all stages of the business cycle. Looking at the composition of our FY22 revenue, you can see that over 80% of sales are generated through the customer’s commodity sector, underpinning our company’s resilience in periods of economic downturn. Our functionality, the global currency crisis in fiscal years 2009 and 2010 is a perfect example of this. Overall, sales expansion has been broadly solid over the two years and capital expenditures have fallen approximately $180 million each year, which in turn has been a driving force for the company to generate a strong loose cash flow despite a relief in underlying earnings.
In addition, we know that there are still significant expansion opportunities in key regions with a strong business portfolio that we can continue where pallet inventory has now returned to optimal levels. Whatever the economic conditions, our conservative and flexible balance sheet with enough room to maneuver provides coverage against the ups and downs of market cycles. While our business is strong and inherently resilient, we also perceive the importance of further optimizing our company’s functionality and making an investment to build the Brambles of the future. In fact, the challenge of the operating environment we are facing lately has only reinforced the importance of our transformation agenda.
Let’s move on to the next slide, which outlines some of the highlights of the Shaping Our Future transformation program. We are pleased with the tangible progress made during the year. The company has laid the right foundation for the transformation program and continues to build momentum to achieve the multi-year program. When it comes to business capabilities, our migration to the cloud is now complete, bringing benefits in knowledge security and procedural efficiency. We’ve also made progress in assignment control and the company’s virtual capabilities. The existing operating environment has led to a greater focus on accelerating business allocations to recoup service charge increases, as well as asset efficiency, which we will discuss in more detail later in the presentation.
Across our network, we have delivered power benefits through service center automation, adding the provision of built-in end-to-end preparation processes in seven of our largest service centers. In addition, we have tested partially automated repair functions in small and medium-sized service centers, which will allow us to further automate our network and increase power. Grid optimization projects increase power and reduce transportation and garage costs over the course of the year. Rates in the United States, Europe, and Australia, resulting in a hundred basis point relief in damage rates. That’s 25 basis points ahead of our annual target.
By going virtual for our clients, the foundation has been laid to digitize our pool and put our wise asset strategy in place. We will expand on the progress to date later in the presentation. Let’s move on to slide seven and our detailed dashboard, which tracks our progress against the top initiatives. Primary measures are progressing well and on track, with some targets already met or completed in FY22. Progress to date is a good indicator of initial program success. However, some metrics are below target, largely due to market headwinds. Pallet availability issues, coupled with declining return rates and broader supply chain dynamics, have had a negative impact on some initiatives. Pallet availability was the primary explanation for why the promoter’s net scores were below target, as well as why it did not meet volume expansion goals with existing customers. Several of our asset power metrics were also below target for the year and there were delays in implementing end-to-end automated repair processes due to semiconductor and component shortages. Although we are somewhat on target for women in leadership roles, our FY22 target of 34% was met in July 2022. We remain confident of meeting our FY25 target of at least 40% of control positions held by women.
In the next few slides, we will define the comprehensive plans in place to mitigate existing obstacles and provide the operational and monetary effects of the transformation program and innovations as opposed to the metrics we are tracking under target. Moving on to the next slide, we notice that the market position is looking for more granularity to see the pullback of the investments that we are making. So let me talk about some of the maximum vital measurements in more detail. From relief on uncompensated pallet losses, we are slightly lagging due to market position conditions, which have led to a buildup of unauthorized reuse and uncompensated pallet losses. If 30% relief on uncompensated losses is achieved, the annual price tag is estimated to be approximately $150 million through pallet repositioning fee savings and construction of upgraded reimbursement coverage. We are making progress on our goal to reduce scrapped pallets by 15% through the end of FY25, including the benefits of processes brought to the US to refurbish pallets that would otherwise be scrapped. We expect to exceed FY2025 scorecard goals. Finally, as we implement the end-to-end remediation process, we have mitigated some of the revenue shortfall through other automation initiatives. We now expect implementation to be complete by the end of FY25.
Going back to slide 9, the existing operating environment has increased the importance of accelerating our asset power projects. We are proud of the effects achieved the year with approximately four million pallets recovered or recovered in an environment where the source of pallets per year was limited. While I don’t propose to review one and both elements on this page, there are key calls from both categories where additional context might be helpful. Our advanced storage capacity allowed us to collect 2. 5 million pallets per year. These projects have been supported through the knowledge of knowledge research and the exploitation of our new technological capabilities. We have a larger fleet of small trucks in North America and Europe, with increased frequency of collection, reducing the time our pallets spend in a store or recycler and thus reducing the likelihood of loss. We estimate that another 900,000 pallets were collected during the year. We continued to focus on interaction with non-participating suppliers in the United States, resulting in the recovery of 400,000 pallets per year.
The price and demand for our pallets has changed dramatically, forcing us to motivate our recyclers differently. While this did result in construction upgrade charges, given the existing replacement price of the pallet, the additional charge was hilarious and led to the recovery of 500,000 pallets. Excitingly, we’ve also expanded our relationships with five recyclers to build our network’s success in two areas where we can’t succeed, and in combination, we’ve built a greater capacity to purchase, inspect and purchase pallets and recover an additional 500,000 pallets. year. . In an effort to improve pallet life and reusability and in line with our zero waste commitment, we have now installed pallet remanufacturing facilities at 20 service centers in the United States. In an environment where pallet costs remain high, the ability to repack pallets at the end is helping to reduce our service costs. This year we remanufactured 1. 5 million pallets, 500,000 times more than expected. Finally, we increased rates on high-risk routes during the year, which translates into higher asset compensation in the US and Europe. In the United States, we are doubling our canopy rate part per year to now cover 40% of NPD flows.
Back to slide 10. We continue to expand and refine our wise asset strategy. The knowledge gathered and analyzed through our savvy asset deployments supports the decisions we make to build the Brambles of the future. And it will be a key driving force in unlocking more prices in our business and for our customers. We would like to think of each and every stream as being interconnected and scaling any smart asset deployment that follows a sequential trend starting with specific diagnostics that lay the groundwork for rolling out diagnostics before moving to serialization further into a region. determined. There are early price signs and, more importantly, we are building the right foundation for smart assets to succeed. In specific diagnostics, we achieved our goal of rolling out to more than 20 markets in FY22 and plan to expand to 30 markets in FY23. The program injects rapid asset pools with a small sample of comprehensive tracking and suggestion devices, Since those implementations target known issues, whether they are suspected leaking resources or higher lifetimes, the price offered by those diagnostics is typically high relative to the capital investment. For example, in the United States this year, an imaginable $50 million in profits were made through specific diagnostic insights, enabling the team to improve high-risk road pricing as well as take steps to improve control. of the assets expressly. Channels While we do not recommend that pricing scale be extrapolated to all smart asset deployments, the vital point here is that we are building the required infrastructure and capabilities, adding collection points, analyzing knowledge, and creating benchmarks. encouraged to implement additional monitoring. initiatives.
Next Continuous Diagnostics brings the ability to track and suggest to a small proportion of the typical 0. 1% to 1%, which expands the visibility of our assets through visitor origin chains. We have now achieved our goal of deploying 200,000 smart assets by the end of the year in our two pilot markets, the UK and Canada. Although it is still early and takes time to collect, analyze and use knowledge, we are seeing the first symptoms of benefits, which deserve to be gradually expanded in the coming years. Taking the UK market, for example, with the knowledge of those wise assets, we have known and announced 35,000 pallet flows, for which in the past we were not paid. We have also learned of 650 new pallet collection issues in our network and established relationships with 15 new recyclers, which will increase the number of pallets recovered from the origin chain. The increased visibility of our pallets and the first glimpses of the price we are sure to generate in the long term also led to the resolution to expand the ongoing diagnostic program to North America.
Finally, we will review serialization plus in Chile, which combines continuous diagnostics with a unique economic identifier. Depending on the good fortune of the test, there may be a way to further boost serialization in the United States. It is vital to keep in mind that we continue to review our speculation in a variety of technologies and markets before making investment decisions and virtual functions in FY24 and beyond.
Let’s move on to our visitor cost slides. We are aware of the value increases that our consumers have agreed to in all regions to recover costs to face inflation. In this context, we perceive that while those are genuine increases in input costs, we also want to create more costs for our consumers, which boils down to delighting the visitor, the quality and availability of our pallets were less difficult. to manage. We have a whole list of projects to accomplish this. We continue to seek tactics to delight visitors by simplifying the onboarding process, making self-service less difficult and faster, and offering greater visibility into pallet deliveries. We are running our proactive ordering pilots and now have design, proof of concept for new visitor solutions, leveraging our unique supply chain visibility and looking ahead to share more key points as we go. as it advances. I already detailed the many projects around the quality and availability of palettes in the previous slide. Finally, we localize tactics to make it less difficult to do business with us. From transforming research data into action, as well as migrating key systems to the cloud, enabling seamless upgrades and reducing downtime. These are all vital projects to the delight of our consumers when they interact with us.
Let’s turn the page on our sustainability program. We continue to consolidate our leadership position thanks to our world-renowned references. In FY22, we announced our commitment to drive forward our 10-year decarbonisation strategy, achieving net zero greenhouse fuel emissions. throughout our supply chain until 2040. This is central to our purpose of maintaining our leadership in sustainability. We have up to 25% of consumers and are on track to meet our 2025 target of 500 consumer collaborations. we ended the year with 33% of leadership positions held by women. Finally, we signed a new $350 million revolving sustainability credit facility in August 2022. The price of this line is related to sustainability objectives, adding decarbonization and highlights the importance of sustainability development in capital markets.
Finally, let’s move on to our outlook for FY23. We expect the challenging macroeconomic and operational situations experienced in FY22 to continue in FY23. This comes with continued supply chain disruptions, inflationary pressures, and geopolitical unrest, leading to increased market uncertainty and volatility in our key regions. Against this backdrop, our monetary stance for FY23 is: earnings expansion of between 7% and 10% in consistent currency; expansion of underlying earnings of between 8% and 11% in constant currency, implying approximately $25 million of short-term transformation costs; money lost after dividends improves compared to FY22, but remains net. In addition to this underlying improvement, the money lost after dividends will come with the benefits of earning the income of $41. 5 million won in August 2022 from the repayment of the loan to obtain immediate reserves. Finally, according to our dividend policy, the pay-out ratio deserves to be between 45% and 60%.
I would now like to speak with Nessa to provide the monetary review for FY22.
Nessa O’Sullivan
Thank you, Graham, and good morning, everyone. Based on our effects for fiscal 22, the Group recorded strong currency cash expansion consisting of 9% with operating leverage to generate an underlying and operating cash expansion of 10%. surcharge recovery mechanisms and efficiency of the source chain. The earnings expansion includes a net profit of 1 point due to savings in business charges related to the decrease in pallet returns, partially offset through related operational inefficiencies.
In fiscal year 22, the company also gained a unique advantage expansion and gained 1-point advantages in the last year similar to site payment in the APAC region. The Group’s after-tax advantage increased by up to 18% at constant exchange rates and included hyperinflation spending of $22 million similar to Turkey. This was offset through a revaluation gain of $21. 6 million on First Reserve’s receivable. Since the end of the year, this revaluation has been completely completed and a loan contract budget of $41. 5 million has been deposited. Brambles’ core EPS expansion was 23%, reflecting an 18% expansion in after-tax advantage and a 5-point advantage from the year-ended percentage buyback program.
Turning to the slide 16. La group’s earnings expansion increased by as much as 9%, driven through higher values with earnings expansion across all segments. The 9% value expansion reflects the resumption of input cost inflation and other service charge increases related to challenging operating situations. the year. The group’s emission volumes were in line with last year, as pallet availability was affected by several factors, adding timber shortages, pallet production restrictions, and decreased pallet return rates due to longer cycle times and higher stock grades in the global supply chain. Volumes with existing consumers decreased by 1%, offset by the accumulation of 1 point in the volume of new consumers, basically in Europe, as well as the contribution of the renewal volume of a primary RPC contract in Australia, which began in the middle of last year.
Let’s take a look at the drivers of the group’s earnings functionality on slide 17. Sales expansion combined with incremental revenue growth in North America contributed to earnings expansion of $574 million a year and offset significant increases in operating prices in the whole group. The $175 million buildup in mill prices was due to $183 million of charge inflation, primarily lumber and labor, and also set prices related to pallet refurbishment that would otherwise have been discarded. These increases were partially offset by trade rate savings from reduced pallet return rates and increased damage rates from pallet sustainability initiatives. Increases in transportation charges of $154 million included fuel and freight inflation of $207 million and more asset recovery prices in the U. S. operations. These accruals were partially offset through network optimization efficiencies and lower activity prices due to the decrease in pallet return rates in the period.
IPEP expenses increased to $38 million, adding $23 million due to overhead prices of unit pallets, with the balance of $15 million due to a combination of additional loss fees in the Americas segment. Overall, the Group’s losses as a percentage of the group remained in line with last year. Transformation prices increased to $53 million and included short-term prices of $48 million. The rest of the accumulation is similar to the higher prices of continuous transformation, mainly relevant with virtual transformation initiatives. $18 million as investments in resources to aid long-term expansion and accelerated business effects across the organization were partially offset through higher asset offsets during the period. Circular of $11 million of one-time compensation in the Asia-Pacific region, basically similar to the mandatory relocation of a service center.
Slide 18 shows the charge recovery functionality throughout the year. Our ability to set charges and adapt our business style and business situations to recover the backlog of service charges is a key component of the effects and demonstrates the company’s resilience. As you can see from the first two bars on the left side of the chart, we generated a net profit of $150 million in profit and loss, which only partially offsets the group’s capital expenditure accumulation during the year, which was driven through an accumulation of $520 million in wood inflation and $155 million in purchases of additional pallets to help build upgrade cycle times and upgrade pallets. Lost. of capital and generate an adequate return on this investment for several years.
Let’s take a closer look at wood inflation on slide 19. This slide highlights ordinary wood price inflation and timber market volatility in the U. S. In the US and Europe, with the price of wood well above the old averages. Historically, we have noticed cyclical increases in timber prices in a range of around 30% to 505%, which is well below the inflation levels of over 200% that we have noticed in softwood lumber indices. they continue to replace with a variety of factors, adding demand from China, the possible recession, housing starts in the United States, as well as the Russian-Ukrainian conflict, adding new uncertainties to the cost of curtain inputs for our company. Demand for pallets and timber is also affected by stockpiling and losses in the supply chain, which has led to an increase in the number of pallets needed to meet the same demand. call point for.
While lumber inflation has an effect on fixed rates, lumber inflation’s biggest influence is on CapEx investment, with lumber accounting for more than 80% of the fee for a new pallet. In FY22, lumber inflation was the main driving force behind the 40% build-up in weighted average pallet value across the group, adding $520 million to the capex pool on a regular basis. While we did see some moderation in lumber values in the fourth quarter of FY22, we expect the FY23 pallet weighted unit rate to accrue beginning in FY22 as inflation affects the value of lumber. new pallets to varying degrees in other regions. When considering the implications of the cash and capex effects, it should be noted that a $1 build-up or reduction in the Group’s weighted unit pallet load equates to approximately $50 million of annualized cash and flow impact and CapEx.
In terms of monetary implications, there is also a two- to three-month delay in money relative to CapEx commitments. So, it’s worth noting that while we get information about moneyArray, the value is consistent with the palette and stock securities you hold. in supply chains remain vital prospective tipping points for CapEx capital expenditures and monetary effects in FY23.
With regard to the power function of the Group’s assets on slide 20. The measure of the power of the group’s assets, the CapEx pooling index to sales, increased through nine issues to 30% in FY22, due to platform value inflation year over year. have a higher pallet purchases effect on the CapEx/sales ratio of $1. 555 billion to aid a longer cycle time and replacement of the last pallets was offset by innovations in asset power, adding superior asset withdrawals and remanufacturing of pallets that have otherwise been discarded. We expect FY23 capital expenditures to decline by 3 to 4 percentage points, reflecting higher pallet return rates due to a combination of asset power and liquidation projects as we see global supply chains normalize. the group’s weighted unit pallet prices remain above fiscal levels 22.
Now let’s move on to the segment result. The Americas segment recorded a 12% earnings expansion at constant exchange rates, largely reflecting prices to recoup service charge increases. the p
Now let’s move on to slide 22, which looks at pallet revenue in the U. S. UU. La revenue expansion of 11% over the year reflects an expansion in value to higher service costs. volumes remained strong compared to last year as the company prioritises serving existing consumers rather than targeting new contracts.
Let’s move on to EMEA on slide 23. CHEP EMEA reported sales expansion of 7% at constant exchange rates, reflecting a 4% value expansion in reaction to higher service charges, as well as a net new business expansion of 3%. up to 5% thanks to the contribution of revenues, asset offsets and operating savings resulting from the decrease in pallet returns, partially offset by an acceleration of inflationary tariff pressures. Despite the power of the supply chain and the accumulation of value to recover the service rate, the overall margins decreased by 0. 3 emissions due to the accumulation of inflationary pressures during the year. The ROCI also fell 0. 7 emissions, but held firm at more than 23%.
With respect to the sales expansion on slide 24, in EMEA, overall, the 7% region sales expansion included a 4% value expansion, reflecting further indexation of contract value and other price movements to recoup the top service charge in the region. Net new Business volumes increased by 3%, basically due to contracts won in central, eastern and southern Europe. effect of shortages of semiconductors and other parts on the automotive industry.
Let’s go to slide 25, hunting in CHEP, Asia-Pacific. The company experienced 5% sales growth at constant currency, reflecting an increase in value to recover construction services prices and also reflecting improved pallet group productivity and refurbishment of volume contributions from the Australian RPC contract which started in the middle of last year. Pallet availability issues in the Australian business continued with volume expansion. Underlying advantage is increased by 20% and includes existing and prior year one-time hits, which more than offset each other. The FY21 benefit includes $11 million of one-time earning benefits, primarily similar to the one-time payout for a site in Australia, and FY22 includes $10 million of net time earning benefits due to decreased returns of platforms These $10 million time gain benefits for FY22 are expected to end in FY23 as pallet returns normalize. Excluding those items, earnings expansion reflects increased pallet pool productivity, sales contribution to earnings and slow build-up in the Australian RPC business, partially offset by inflation and general price build-up. .
Equity return investors advanced through 2. 3 percent issuances at constant exchange rates, as margin expansion in the era was partially offset by increases in AITs to help the Australian pallet and CPP businesses and reflecting higher pallet group productivity and timber source shortages restricting new pallet purchases. .
Let’s move on to slide 26 and the business segment. Total transformation prices of $108. 6 million increased to $53 million and have an impact of $48. 4 million on short-term transformation prices. These short-term prices were in line with the providers’ estimate of $50 million on Investor Day September 2021. The charge of the existing $60 million program came with approximately $40 million in virtual transformation pricing. Also in line with the address provided during Investor Day 2021. The expense balance was similar to IT investments and projects to improve the visitor experience. Higher headquarters prices through $7 million at constant exchange rates and come with $5 million similar to Brambles’ percentage of MicroStar’s after-tax losses. In addition to increases in overall costs similar to hard work and insurance.
Now turning to cash flow on slide 27. Despite emerging inflation during the period, the Group generated positive free cash flow before the split was finalized. While the company posted strong earnings growth and asset offset creation, operating cash flow of $372. 6 million was down $528. 5 million from the prior year, due to a buildup of capital expenditures currency and an accumulation of current capital. The year-over-year decline also reflects the cycle of taking advantage of relief in plant stocks over the past year. Cash and capital expenditures increased to $597. 3 million and included $470 million of lumber inflation and reflected the impact of construction cycle time and higher loss matrix that were partially offset by the benefits of the asset power and scrap production initiatives. The year-over-year build-up in working capital of $42. 8 million reflects a build-up in industry accounts receivable at the end of the year, consistent with a strong earnings expansion in the fourth quarter and the impact on inflation. of wood which also raises the price. operating balances of capital stock. Financing fees and tax bills increased to $13 million and included prior year tax timing reversal for $35 million benefit. Free cash flow after the split was a net outflow of $218. 6 million after split bills for the year of $304. 8 million, an accumulation of $24 million from last year. ‘last year.
Let’s move on to slide 28, in our balance sheet. The balance sheet remains strong and puts us in the right position to continue to invest in long-term expansion and praise shareholders with dividends, while maintaining our strong premium credit ratings. For the full year, we have $900 million in unused committed services and $158 million cash balances and a conservative net debt to EBITDA ratio of 1. 47 times. We continue to have an adult profile of long-term debt without bond adults prior to Fiscal Year 24. And fortunately, in August of this year, we leveraged our sustainability credentials to signal a new five-year, $1. 35 billion sustainability revolving credit facility, which replaces $1 billion of existing banking services and adds an additional $350 million in committed margin.
Let’s move on to slide 29 and considerations for FY23. We need to conclude by covering some considerations about the outlook for FY23 to add more context to our directions, which Graham described above. and the operational situations encountered in FY22 will continue into FY23, we also expect pricing and surcharge mechanisms to continue to work well to allow inflationary pressures in the P to resume.
The expansion of underlying earnings is expected to be affected by higher fixed and handling prices as supply chains normalize and asset productivity projects lead to higher pallet return rates. In the APAC region, this is expected to lead to FY’23 ULP margins under FY’22. Se the margin rate in the Americas segment is expected to moderate, given the strong effects of fiscal 22. Loose cash flow after FY23 dividends will be weighted at the part of the time of year that has the highest profits, asset power projects and supply chain normalization are expected to clash in the timing part. on this slide.
Year-over-year, year 23 ROCI is expected to decline by about 0. 5 points to 1 point, reflecting the full year’s impact on year-round pallet purchases at peak prices and the slow delivery of asset returns with a 10-year shelf life. It is vital to note that the ROCI for FY23 remains well above the capital charge.
I will now turn to Graeme for her closing remarks before moving on to the Q&A.
Graham Chipchasse
Thank you Nessa. In short, we are proud of our many operational and monetary achievements during the year in difficult operating conditions. As a company, we continue to achieve our purpose of connecting other people to the essentials of everyday life, playing a role in global supply chains by supporting our consumers while making an investment for the future. We have demonstrated that we are focused on achieving our monetary targets with our 22nd result prior to revised guidance, thanks to strong functionality in the fourth quarter.
Towards the end of FY22, we finalized our capital control program, which began in 2019. In total, we returned $2. 8 billion to shareholders, demonstrating our disciplined technique for capital control. We have made tangible progress with our transformation program, building momentum for long-term success. It is vital to note that the long-term price of the transformation program is based on our sustainable business style with reuse, resilience and regeneration at its core. We continue in our position as a leader in sustainability with significant progress opposed to our 2025 Sustainability Goals.
Finally, our outlook for FY23 remains for the business to generate strong earnings expansion with accelerated money generation despite continued challenging macroeconomic and operating conditions.
Q&A session
Operator
Thank you. [Operator Instruction] The first comes from Jakob Cakarnis from Jarden Australia. Go ahead. Forgive me Jake, your line is now online. The next one comes from André Fromyhr of UBS. Please continue.
Andre Fromyhr
Maybe it just starts with the prospect of loose money. This surprises me: to be higher than expected for fiscal year 22, which will result in double-digit earnings expansion next year. As a result of the [indistinguishable] decline in timber prices in the U. S. He also pointed out and advanced the capital : the CapEx relationship to sales, why we still expect a negative amount of money lost only after this year.
Nessa O’Sullivan
So thanks for the question. So, some things to keep in mind, look, we still point out that we expect the loading of wood to pass year after year, because that’s the trend that we’re still seeing right now in pallet prices. So hence the explanation why we call, look, if we got it wrong about it, and if we really see the weighted average charge of our pallets shrinking, a $1 drop is worth an additional $50 million and $2 money flow, obviously, you can do the math, but because there’s a diversity of uncertainties that affect us, we have taken into account what we see and what we expect to happen at this stage. And the year, we will be able to give more data on what we actually see. carry out the placement.
The other critical detail we noticed is that we had to invest a lot more CapEx to help with longer cycle times, because in supply chains, other people have more inventory. Online in fact in the current part of the year, the timing of this will also have an effect on pallet purchases. So, there are two key points, those are significant amounts and at this point we are something like – we point out that we will be waiting for an improvement, however, there are a number of vital points that still need to be played.
Andre Fromyhr
Maybe you can just transfer to the prices. Obviously, this is a solid feature or a major driving force of sales expansion right now and some of that will continue into FY23, do you have any idea what the market is like?Its competence and the broader type of white wood environment are evolving. About costs and what’s the point of attention with consumers right now, it’s appropriate when you provide the knowledge and threat research that you talked about, does it make consumers leave on that basis?Or are you getting the behavioral responses you should?expectations in terms of asset control.
Graham Chipchasse
So I think there is quite a bit to this question. So first, let’s talk about the competition. As I think I’ve said pretty consistently, when it comes to the value environment, you want three things, you want some inflation, which I think we have a smart bite of at the moment and we want strict sourcing and demand popsicles, which again, in fact we have that at the moment and we want rational competition. And I think what we’re seeing is that the competition is rational and all the other preconditions are there. So there is no reason to think that the environment to be able to continue downloading worthwhile builds is there. Now, I might like your comments on the market reaction. At the moment, I think consumers want popsicles, because there are enough popsicles. So as long as they walk away, no one walks away because they all desperately want popsicles. I think the bottom line is that while we continue to revel in the charge, the higher service charge and we are, because no longer, as Nessa said, we still expect to see higher pallet values due to lumber inflation. But on the most sensitive of that, we’re also seeing service rate growth, because we have more inventory and longer cycle times, which increases our service rate, so we would have to increase the values to get that back. So we’re still seeing that and we’re still expecting consumers to pay for that, however at some point, at some point it’s going to be harder and at some point we’re going to see consumers say, look, there’s no shortage of popsicles, we’re not satisfied with the values that qualifies us and that is why it is very, very important that we show our consumers what we do for them beyond just getting the right lollipops, in the right place, in the right place. time under the right conditions. We want to show you that we’re creating more cargo with our most productive networks, what we’re doing around virtual to give you information, so that you can profit and pull some cargo from your own source chains. So I think it’s kind of. I’m not saying it’s going to be a challenge in the next 12 months, but it’s definitely going to become something we’re going to have to do at some point. So I’d say that’s fine for now, but if we get a lot of Christmas cards from consumers thanking us for our valuable build, of course not. I mean, nobody likes that. But at the same time, of course, they’re seeing huge increases in the inflation rates of all their other raw drapery inputs. I don’t think we’re the only ones saying this, which I think makes it a little less controversial.
Andre Fromyhr
Can you foresee a situation where the base price stays where it is or continues to go, but the visitor delights?I guess I’m thinking about the Americas here, where consumers really get a reduction in value, because surcharges are falling.
Graham Chipchasse
Well, I think the surcharges will go down at some point, because we decide them through the index that is the element of the charge. So either loads of fuel or wood. So it will surely happen. The query is if we stay with the base price, the normal price that we put there, because the service charge has increased and if we have things that they replace in the markets that bring the service charge, then we’re going to probably need to take a look at that on a client-to-client basis. That’s the whole point of having a dynamic pricing style, which is based on greater knowledge so that consumers who return our popsicles to us faster see a merit over consumers who don’t, because in the end we literally need to get back the paddles. faster. And I think to the extent that our pricing style is driving habit replacement, that’s a smart thing for us to do. So yes, I mean we have to wait and see what happens when situations are replaced. We don’t see situations changing, so it’s hard to respond accurately.
Andre Fromyhr
Super. Thank you.
Operator
The next one comes from Anthony Longo of JP Morgan. Continue.
Antonio Longo
Hello everyone. I only have a quick query about CapEx grouping for sales and improvements. I was wondering if maybe I could explain a little more why I don’t expect it to improve more by 30% to 26%. Does this potentially reflect longer cycle times and granules in the manufacturer and retail consumers and also potentially higher damage rates.
Nessa O’Sullivan
Less in the damage rates, more in the cycle time and the actual unit cost of the pallets, because the relief is motivated by a greater power in the group that we will be waiting for year after year. We will still be waiting year after year increasing in pallet prices, again, this is a significant turning factor. So if we place ourselves in a much larger scenario with pellet prices, it would allow us to get a CapEx decrease for sales faster. But we take into account the fact that we, despite an increase in the unit load of pallets, have noticed smart effects on the power of assets this year, and we expect this to happen more next year. And that’s despite our being Keep negotiations in mind: at present, we manage our pallet pool with lower-than-ideal stock levels, which limits our ability to pursue new contracts. We also plan to rebuild this pallet fleet through fiscal year 23 and this is reflected in the outlook.
Antonio Longo
It’s great. Thank you Nessa. So, just ask about the costs. I appreciate that we have already talked a little bit about this, however, in the context provided about some of the subprime loans that I had, some of them, that I had pointed out and in the context of inflation that we have seen, as well as perceiving that dynamic overload as well. I mean to what extent costs are still expected to increase in the next moment, because it turns out that this figure at the time of part of the year has been particularly high, especially in the Americas.
Graham Chipchasse
Yes. Well, as you know, we can’t process all the contracts at the same time. So there are still contracts that we haven’t seen in terms of conversion of the MPD surcharge or additional fees. So that will continue through FY23. And the contracts continue to renew and we continue to renew them at higher values to reflect the higher service charge. Therefore, we do not expect any significant replacement in this type of directional security position. I mean, I think for us, it’s a dynamic scenario and we have to look at it very carefully. What we’ve noticed though is that the increased NPD load in the US hasn’t really replaced the habit as much as we’ve even thought of it and that’s obviously because there’s such a shortage of pallets other people are very wary about some – transfer it to white wood, because there is not enough white wood either. I think we’re also going to be a little bit careful because we recognize that our consumers don’t necessarily send all of their products to an MPD, some of them will start to become attractive suppliers and we run that risk, if we push too hard. hard for the NPD indictment, they will start saying that in fact we are only going to remove the NPD and the fired PD and it will backfire. Therefore, we are reviewing the scenario on a case-by-case basis, if we believe it is suitable, we will continue with the search. But in other cases, we will say no if we think enough is enough. Once again, it’s a bit of a dynamic scenario.
Antonio Longo
It is ok! Great. Thank you. Graham. Listen, just one last one for me. I will not go beyond the reception. But in addition to the rules of Exercise 23, there is a slide in which he highlighted things: his purposes for the type of uncompensated pallets, discarded pallets, etc. For your FY23 guidance, do this: – Does that mean you have to make those resolutions to get in that direction?Or is it largely an ambitious purpose you’ve set for yourself?
Nessa O’Sullivan
Therefore, we come in FY’23, we come with objectives that advise us on this path to improvement. So, you expect us to show incremental improvement in the coming years on this, but that comes with an improvement in FY23. Yes.
Antonio Longo
Good, excellent. Well, congratulations on the effects and thank you for the time.
Graham Chipchasse
Thank you.
Nessa O’Sullivan
Thank you.
Operator
The next one comes from Justin Barratt of CLSA. Continue.
Justin Barratt
Hi, guys. Thank you very much for your time today. Maybe just a few for Nessa. Nessa, the mid-22 result, highlighted the tension you see on the call side and on the source side in terms of wood values. I was wondering if I could get an update on how you see this right now. And I guess I was just asking in the context where he commented on the value of the unit of pallets that deserve to be higher by 23 than by 22. I just wanted to ask you if I understand why that’s the case given the record value, I guess, of softwood we’ve seen in ’22.
Nessa O’Sullivan
Yes,so, some things to keep in mind. First of all, if you look at the way timber inflation is accumulating, we’ve noticed that it actually increased in the United States. If you look at last year, we had a much bigger impact. This year, we have noticed those effects. spreading to Europe, where we have noticed this acceleration. And then if you look at Europe, you look at Russia, Ukraine. And although we don’t have access to much timber from Russia, Ukrainian markets, as a percentage of our overall global source, which is a very small number. The challenge is that it cuts off the source of other people buying wood, which means that there are now more people looking to buy the same wood as us, even though there is a possible underlying drop in demand and issues with affordability and the type of customer demand that other people think there may be a recession. It still has this underlying piece which is a challenge in wood and especially in Europe.
And then if you really look at what we’re seeing in the Americas and the United States, when we’ve seen some moderation, if you look at the group-weighted overall charge, what we’re doing across all regions, when we’ve seen some moderation, we still don’t We have seen a steady decline. Therefore, a component is also affected. The value of pallets in the United States, for example, is also influenced by the amount of imports we get from Latin America. So there are also source issues that have an effect on the net charge, and that has been a plus for us. So since we seem a bit more limited in his supplies, his weighted loadout is also affected. So we take a look to describe the number of factors. We’re not going to catch them all for sure. But things like US housing demand may not be as strong as we thought 12 months ago when we saw some changes in visitor dynamics. But we still believe that the flows from Latin America are going to be. they’re still going to be a little bit challenged from a source aspect perspective, and we expect them to have an effect on Europe from the flow of Russia, Ukraine going the opposite way in terms of value.
So it’s a combination, and that’s why we’re pointing, listen, we’re waiting for a building. It’s not at the point we saw in FY22. That’s a particularly low point of accumulation, but we’re saying there’s no decrease. But it remains to be played. And so we’re very open to saying that we will continue to update the market based on what we see. And don’t forget that the wood we buy isn’t exactly what you see in wood indices. And so, the indices of wood, if you look at this point of accumulation that has increased by 200%, our weighted average load of pallets has increased by 40%. And it’s a little bit because of the staggering softwood lumber inflation that has occurred in other markets. It’s a bit of a mix, but we also buy more than at the market, buying wood and supplying wood. And let’s not forget that this is a sustainable wood supply, so we have a selection of where we buy. We have outperformed the market in the way we buy wood.
These are all points to think about. So when wood indices go down, they don’t necessarily translate directly to us in terms of costs, but you can rest assured that we will remain very competitive when it comes to how we buy wood and make sure we get the most productive value imaginable in terms of the pallets we buy, but making sure we stick to smart quality wood that meets our sustainability requirements.
Justin Barratt
Great, thanks for this detail. Second, only in terms of net plant and transportation costs as a percentage of revenue. I just noticed that in EMEA they are a bit higher than the old levels. ? And then, only in Australia, it was much lower than in the past. Is it just due to the decrease in pallet returns that you announced?go back to where you have been in the past?
Nessa O’Sullivan.
Look, I think he did a smart job in his research there because if you look at the total, you take the net charge from the plant to sales that we explained in Schedule Five and the net shipping charge to sales, it’s still around. five and five% on a combined basis compared to sales. But you’re right, we’re seeing some movement and decline in activity in Asia Pacific that we hope to moderate. And if you see an increase in EMEA, especially in regions like the UK, where there have been specific disruptions with shipping shortages, we’ve noticed that shipping capacity disruptions increase the load. So, those are the things to think about. And in terms of plant load in EMEA, we also had the effect of the post-Brexit pallet heat solution being added to that.
Justin Barratt
Fantastique. Et then one last one for me. I was surprised by the relief in their IPEP spending in the current part of 22, given that, I suppose, the source strings or the restriction on the source strings are important again. Can you describe what were the main drivers of this relief in the current part of 22?the year?
Nessa O’Sullivan
Oui. Eh, well, you’ll want to take a look at it on an annual basis from year to year, because the timing of expenses also depends on when we finish audits and some of them are similar to site access. So I wouldn’t read demasiado. de what you see in the middle and half. I would take a look at the basis of the whole year. And for a full year, see that the loss rate in the group was around 8. 3% overall, so it’s a bit similar year over year. And the overall buildup that we’re seeing is, of the $38 million it’s largely because of the FIFO load of the pallets, which is $23 million, and the balance of $15 million is that, it’s a little bit the accumulation of overall losses. So that’s what — looking at this, it’s more productive to take a look at on a full-year basis because depending on when we do the primary audits, that’s where we count, it has an effect on the time of what we’re counting.
Justin Barratt
Fantastic. Thank you so much.
Operator
Thank you. The next one is from Anthony Moulder of Jefferies. Continue.
Antonio Moulder
Hello everyone. If I can move back to the values, please, the very large values increase during the period. I guess the query is how many of your consumers are now paying a value that reflects that higher service cost. I guess I’m looking to find out how many more periods those value increases want to continue or just keep rolling.
Graham Chipchasse
So, I mean, part of your answer is that there are even more contracts to deal with because again if you think about sight, the average duration is 3 years, so we’re moving on to doing a third part every year. So, and again, in terms of expanding the service charge, they continue to increase. So on that basis, even if they stopped last year, we still have a third or two-thirds to pass. But this is not In the case, we always see a higher service burden. So I think the environment is still there for us to remain physically strong enough in terms of value increases. And that’s, I think, our perspective for 23 kinds of reflects that.
Antonio Moulder
And I see it in the very low income of the surcharge, which tells me that the design of the surcharge was not implemented very well when it was implemented in the United States. He does not like the European programme. So, can those value increases only be implemented for the restart of the contract?Or is there a discussion that can take place in the 3 years in which you can get a maximum position to serve in the meantime?
Graham Chipchasse
So the additional tax mechanism, you can see, I think it was an accumulation of $76 million in 22. So I think that. . . and that was in the United States, I mean, I think it’s Array, quite important. And I think that this is the result of all the painting that has been done in recent years so that the contracts come with surcharge clauses to cover things like wood and fuel. But the other thing, which I think is what we’re really looking for here, is the actual accrual of charges in the contracts similar to any of the service charges, but really if you make sure that the contracts are successful and create value, which again, for a long era of time, was probably not happening in the United States. Which we have addressed, again, every time a contract is renewed, and continually seek to raise the bar through network paints. So every time a contract is renewed, we look at, well, is it below average now? Does it really reflect the service charge? And if this is not the case, we have interaction with strong value constructs. And I think that’s precisely what we deserve to be doing. And there is, and I think there is no target to move away from that, as long as the underlying 3 points are still there around tight supply, inflation and rational competition. And those are the prerequisites for this kind of physically powerful pricing environment.
Nessa O’Sullivan
And it’s worth noting that, if you need it, component of this surcharge mechanism, if you need it, if you need to translate it to Europe, it occurs with indexing. Yes, there is a time lag if you do it on July 1st, but in recent years we have also racked up update charges in the European market which has been out of cycle for this indexing. It’s not in every contract, but there is, we have where there has been a building in charge. The pace of Brexit has been one area where we have pushed back and increased costs, for example for heat treatment of pallets and where we have had a partial acceleration in shipping cost inflation, going back to fiscal year 22. We also got additional prizes in the beginning of the middle of the moment. So there is a lag in indexing in Europe, which makes it less ideal in many. . . when inflation is high. But we acted where we needed to, to deal with it. But in the United States, let’s say, in North America, we think those additional tax rates work pretty well for us.
Antonio Moulder
Bien. Merci. Et I guess this leads to higher pallet prices that are processed through those value increases. Can they continue, given that the prices for your business will pass at least through the P
Nessa O’Sullivan
Yes. Very smart, a really smart question, Anthony. So what we do as contracts come in, we take a look at the whole cycle and think about the asset load on those contracts. So if we have several years where asset charges are still higher, that will have an effect on the charges we set. We expect there to be some moderation in wood charges over time, so this is included in our pricing thinking. We have the ability to rethink contracts on average every 3 years, but some of them are shorter than that. And we keep looking at what the total charge is to serve during the term of the contract. What is our perspective? And so it is taken into account globally. But for us, and I know there have been requests for us, why can’t they get it all back in a year?It wouldn’t hurt for our clients to review a 10-year asset to consider each and every one of them.
So, if you wish, we take a look at the actual cash over the cash, what is the cost of the service to the visitor, what we earn with the visitor, and that is the entrance to the price. But he is right, then when we spend more on a pallet, eventually there will be, for example, higher depreciation prices and the penalty for wasting a pallet is greater because we have to upgrade it to a higher charge and notoriously take a hit on the P.
Antonio Moulder
I guess that’s a point that. . . I guess the question is whether he recovered enough or not in the past period, because that position will remain in the Fr.
Nessa O’Sullivan
Well, I think you have to take a look at the [multiple speakers], I’m sorry, I just think you have to take a look at what the economic charge of the assets is. So, depreciation is an element, and you can see that we handle it with more than top ies. But we also seek to offload an adequate return on the additional capital invested in the company. And that’s why we’ve been looking to show those graphs with how much we surpassed the position in the P.
anthony moulder
As the last consultation of BVA. La I will ask for more at 10:30, but then I sought to ask about the CapEx of the virtual transformation that seemed to decrease by the 23rd. Is there a hold on any of those systems on the 24th?Please?
Graham Chipchasse
Part of the explanation is that we don’t install as many Ultra devices, which are the maximum, obviously, high-expression devices because, as everyone knows, there is a shortage of semiconductors. Therefore, we could not get as many as we needed. But we also take our time to make sure that the projects we need to invest in deliver what we need. So, a smart example is anything we were going to do to make the visitor delight in the virtual transformation component. We have just made the decision to wait a few more months, as we are talking to an express consumer about it. And we think we can launch it until the end of fiscal year 22. This will take place in the next two months.
So I think that kind of thing has given a slight delay. But if you look at it on the way, we say it’s on the right track between – between 22 and 23. But the result of what we do in 23 will say CapEx spending on 24 and 25 because, as we said on investor day, we block investments, and we have not yet noticed the conclusion of the judgments, which will be if we move forward with some of the things in ’24 and ’25.
Antonio Moulder
It is ok. Thank you.
Operator
The next one comes from Niraj Shah of Goldman Sachs. Continue.
Niraj Shah
Hello. Hello, Graham and Nessa, Just a follow-up to this last question. I appreciate the discussion and sensitivities you have provided regarding the price of pallets for the CapEx grouping. Can you provide some guidance on what this aspect looks like for exercise 23 or at least the main moving parts between 22 and 23?
Nessa O’Sullivan
Compared to CapEx not shared?
Niraj Shah
Yes, it is.
Nessa O’Sullivan
Well, I think we explained on Investor Day what our investments would be across supply chain, digital, etc. , and CapEx, and we’re broadly in line with those indicators. So if you use this as a rough guide, some phase changes, some mixing changes, but overall, this is a pretty decent guide.
Niraj Shah
Compr. Merci. Did you discuss the assignment protocols?Can you comment on how your DIFOT or any other delivery metrics compare to the competition in key regions?And what are consumers doing in reaction to the loss of those pallets?
Graham Chipchasse
So I think one of the vital things to keep in mind is that even though consumers are stationed in some of our regions, that doesn’t necessarily mean they can’t run their production lines. This means their protection stock is incredibly low, which clearly creates a lot of frustration and worry for them. And what that means is that we had to run the business on a day-to-day basis instead of being able to do it on a monthly basis because of what might have happened when protective stocks were higher. So I think it’s vital to recognize that yes. And so we spend a lot of time and effort trying to convey to our consumers site by site, week by week, what their needs are, making sure we give them exactly the minimum and nothing more because there are enough pallets to run their operations. . Now there will be occasional factory outages, but they are quite a lot, we keep them to a minimum. So that’s the reaction. How our competitor’s DIFOTs work, well, I still have no idea, and wouldn’t expect to know. However, what we are seeing is that our competition is also struggling to get enough pallets. We’ve had inquiries in some markets, and I might not say which ones, where our — where our consumers, who get full supply through some of our competition or double supply through us, and a competitor has asked if they can just move. to a higher source percentage from us because the other competitor is definitely in trouble and we seem to be handling the situation, admittedly not perfectly, but a little better. So I guess or hope we’re having a pretty good time. But it will be because we have the widest networks, the most internal networks and we invested a lot in our groups before the existing situation.
So, while we were talking about the presentation, we tried to be at the forefront of things like restoration and recovery of pallets that we weren’t before. So I think we’re doing very well, but I don’t need to say we’re doing it. much older than compared to A, so I don’t know, and I think B is a bit out of place in a scenario where everyone is struggling.
Niraj Shah
Excellent. Thanks for the colors guys.
Operator
The following is by Paul Butler of Credit Suisse. Continue.
paul butler
Hello. Thank you for the presentation and congratulations on the result.
Graham Chipchasse
Thank you Pablo
paul butler
I just wanted to ask you about your comments, Graham, where you said you expected a partial outcome of the actions in the middle of the moment. I’m kind of like, and also your comment that, I mean, what I mean, I mean, I think I said several times before that consumers have higher levels of pallets or at least try to maintain higher levels of pallets as protective stock. So what is the risk, in your opinion, that we will move out of this environment?from pallet shortages to a threat of oversupply if we see a slowdown in market demand as well as the protective stocks that your consumers also have?
Graham Chipchasse
I mean, again, this is an attractive question and hard to answer because no one knows. But when we communicate with stores, in particular, because I think they are, that’s where a lot of the reserve stock is accumulating, it’s more in stores than in manufacturers. It turns out that they think that after Christmas they will begin to reevaluate stock levels and maybe move more just in time than just in case. shortly before because if you think about interest rates, no one will need to have many shares. I don’t know if you’ve noticed the effects of Walmart posted overnight, where they also communicate about looking to particularly reduce stock levels. So, this is all kind of consistent with the fact that other people definitely think about when they’re going to start moving.
Now, the threat to us or the opportunity to us, depending on how you want to see things, I think is greater if that happens gradually safe. I think all doing it at the same time in the same shot would be very useless. . But I think compared to the past, where we had a challenge with a big pallet return around the extra garage costs, the extra repair costs, we are. . . it can be said that it is older because it has not been older for the last two, about 18 months. We are in a better position as we desperately want to fill factory stock levels. So in fact, if we get a little more than expected a little faster than expected, we can use them to rejuvenate and rebuild the network.
So I think we’re in a pretty smart shape, however, it’s something that we’re looking at very closely transparently, again, other exogenous points that go into this, the recession, what markets, when, if any, at what depth, how long These are all things that will have an effect on this return of pallets, obviously, combined with our own movements to recover them faster after all. So that’s something we’re looking for very closely. We communicate to stores and our consumers quite normally. But for now, I would say that no one has a really transparent concept of what to expect. But our current speculation is that after Christmas, other people will start making those decisions.
paul butler
It is ok. And just a little bit more on that. For example, what percentage of the reserve can it simply absorb so that plant stocks return to the optimal level?much more agile in terms of managing the supply of visitors, given the scarcity of pallets available. Isn’t there some kind of opportunity to generalize this activity and be able to run the business with a much smaller stock of factories?given your investment in virtual and things like that to keep up with things.
Graham Chipchasse
Yes. Therefore, first check the answer to the first of the queries. I think we’re saying that five to six million popsicles will bring us. This is what we want to absorb in order to get back to the right place. But in the most sensible of that, I think I don’t forget that we haven’t gone out or achieved any new business in the last 18 months. So, there’s another opportunity there, which, again, somewhere like in the United States. , still accounted for 1-2% of prospective new net earnings. We, the pipe is there. We have goals in this pipeline so that we can go out and, again, do some of that. So that’s another piece.
And I surely agree with you that all the self-help we’re doing in terms of all the other actions, whether virtual or non-virtual, will also allow us to replace the model. So, we deserve to be able to run the business at the right time much more well and successfully with a decrease in garage stock throughout the network. But we’re not, I don’t think it’s for the short term. This is for the medium term. But I think we can do a lot, either by increasing plant stocks or looking for more growth, which we haven’t fully taken into account because we don’t know when the next 12 months will be.
paul butler
It is ok. And just one more, if I can say so. Let’s go back to the prices. Sorry, we had some questions about this. But in the current part of the year, in the U. S. In the U. S. , I think they achieved a 17% improvement in value and combination. To what extent is it similar to overall value increases in comparison?to solve the service charge challenge with express customers?
Graham Chipchasse
I think one can assume that a significant amount of the charge to serve the kind of increases. So I think that’s what I’d like, I’d avoid it. We’re not going to break it down much more than that, however, a significant part of that total.
paul butler
Super. Thank you so much.
Operator
The next one comes from Matt Ryan of Barrenjoey. Continue.
matt ryan
Merci. Je just wanted to explain the comments related to weighted prices consistent with the pallet unit in 2023 compared to 2022. I just want to know what this is based on in terms of guessing to know where it might happen over the course of the year?And just in relation to that, what’s your kind of visibility when you do those kinds of assessments?
Nessa O’Sullivan
IT IS OK. So when we do the reviews, remember, we’re probably buying them with a three-month delay. So, in terms of visibility and clarity, it’s low. So why do we explain that we assume a construction based on what we understand, and it is also about our combination of pallets?So when we look at that, we know what types of wood we’re buying, where we’re going to get it from, and what that combination looks like. And I mean the fact that we’re taking on a slightly weaker mix of Latin America that has traditionally lowered our average costs in the United States, and we’re looking for higher inflation in Europe. And we also take a look at our express flows from our sustainably connected express suppliers. Therefore, it can replace materially, which is why we discussed it several times during the presentation. But that’s our most productive vision right now than we see in the course of the year. But we are fully aware that market dynamics are likely to continue to be replaced.
And I think he also wants to go back to that benchmark. If you just look at the indices, it went up by 200%. Our pallet costs have increased by up to 40%. And we call you, so that you can perceive or attach the points. While indexes are useful, they are not entirely informative about things like our composition, our acquisition arrangements, and so on.
matt ryan
Merci. Et So, I mean, do you feel like you have pretty smart visibility with wood and nails and other things that may have been affected by sanctions or other things?
Nessa O’Sullivan
Yes. We believe we have an intelligent vision. The challenge is that if I only take softwood, we buy less than 1% of our global wood from Russia, from Ukraine, it may have been only 1% each or between 1% and 2%. The challenge for us is to know why we have visibility about it. We don’t have as much visibility into how many other people will need to buy the same masses of wood we need to buy, and what happens when that source becomes more difficult. So we have component of the equation, however, we can’t fully see what’s going on with demand. So if there’s more recession, if we see recession impacts, then there will probably be less festival for that softwood. We expect, for example, that housing starts in the U. S. will be used in the U. S. The U. S. will now be lower than we thought in the past.
So it’s not a factor. There is a total mix of factors. And as you can imagine, we engage our supply chain team. We involve our wood experts. We look outward. But we are well aware that whatever we choose, we will be wrong. But it’s based on the most productive data we have lately, but knowing that, we don’t look that far in terms of blockage in our chain of origin and prices.
matt ryan
However, I only need to explain one thing with this European situation. I notice that he doesn’t get many of the positions he mentioned. But the broader market is largely provided through those markets. an effect of that?
Nessa O’Sullivan
That is why we have noticed more inflation in Europe. So that’s what we’re seeing. But it’s about what happens if there’s more of a sense of falling customer spending, which that will also mean for other people’s demand. We are fundamental assets for customers and we know that we are quite resilient in those environments. But this will potentially affect other solicitudes. de other places But we are seeing this impact.
matt ryan
It is ok. Thank you for that.
Nessa O’Sullivan
Thank you.
matt ryan
Thank you.
Operator
Thank you. His next comes from Cameron McDonald of E
Cameron McDonald
Hello. Hello Graham. Hello Nessa. Just a few questions from me, if I can. He discussed some kind of very strong expansion in the fourth quarter, which was more powerful than expected and contributed to the full-year result. Can you tell us a little bit where you saw this expansion and where you saw this fortress and what you contributed?to that, please?
Nessa O’Sullivan
So, in terms of where we thought we would be, our source of income was greater than we expected. And we took a look at the whole group, and we had a pretty strong fourth quarter across the group, but we had a higher value mix than we expected. Therefore, it had a greater transfer effect in terms of the overall result. The other thing we saw in the fourth quarter that gave us a bigger-than-expected result was that we saw some moderation in U. S. transportation inflation. In the US, it had been following a rebound. And when you look at that, there’s a lot, or a slowdown in demand from China, which accounts for about 20% of the activity, transportation activity in the United States, that we’ve seen. We also saw an accumulation in asset offsets in our business. And again, we had an increase in our profits because of pricing, transportation, and compensation, but we really had more money because the bias of the component that supported the most productive bottom line was money. -directed.
Cameron McDonald
Yes, that was going to be my next query, obviously, you got negative loose money after dividends in 2018 compared to your previous forecast of $300 million to $350 million, which you reiterated in the past in the year. Is this really the total return of this higher asset return?
Nessa O’Sullivan
Therefore, it is not just an asset. If I had to take what I would say approximately, more or less the improvement in the money of the P
Cameron McDonald
Yes well. And he talked about the prospect or expectation that maybe in the current part of the 23rd he will start to see a stock liquidation. Some of its major clients and counterparties, not clients, but counterparties, have begun to appeal. to the elasticity of demand in the United States given inflationary prices. What do you think of that? And maybe he’s just thinking about. . . because the last time we had some kind of economic effect in the United States, what did you really see and how did it have an effect on your business?
Graham Chipchasse
So, if we go back, as we said in the main component of the presentation, when we go back to 2008, 2009, type of crisis and the effect in 2010, in the total group, the effect on profit did not make sense or did not make sense, and that is that 80% of what is happening on the pallets is fundamental consumption. So, and I think it would be a very moderate reading of what we’re seeing right now. And if you take a look at what some of the big stores in the United States are saying right now in terms of where they plan to liquidate stock, it’s not about commodities for customers. It’s in some of the other things like garden furniture and clothes and that kind of thing. So I think it’s a moderate reading. And then what we also saw was that the ULP was obviously affected, but not dramatically. I think in 2008, then I think it was in 2008 or 2009. 2009, the first year, it was a top singles digit that had an effect on the ULP.
But the most important thing in terms of price is that we’ve generated a lot more coins because, as you can imagine, we’re starting to see a popsicle pullback, less activity. We don’t have to do so much CapEx. Je I think we do: we would expect this to happen if there was a recession in the future. We have some effects on revenue, not much, some have an effect on the ULP, but we would get much more. coins to return. The conversations with stores and customers, as I think I said in a previous question, were. . . it’s that no one knows. We get other feedback from other people. I think a smart guideline is to assume that they’ll start looking for it after Christmas.
But yes, last night we saw Walmart say they were going to take on what they would call overstocking or, in fact, very cautious stock levels. They’re starting to deal with it now because they had a lot of feedback on their last earnings call 3 or 4 weeks ago, it wasn’t that good and now they’re going to fix it. It will probably have effects on us as well in due course, I think. But a lot of what they’re addressing in the short term is things that aren’t basic elements of the customer. So I think other people worry as Christmas approaches because they don’t have enough products to meet their needs, and they’ll think about that in the new year. But if we see a very temporary recession in some markets, which can happen, although I think the symptoms combine in that, then it can happen before Christmas. But my intuition is just that, so we say in our perspective that we expect things to get a little better in the current part of our fiscal year after Christmas.
Cameron McDonald
Merci. Et just one last question. On Investor Day, it guided a low-digit 23-digit ULP type of guidance, expanding by 24 and 25 to reach single-digit growth. implications for the long-term goals of the company, please?
Graham Chipchasse
I think we would say that unchanged, I think, would be our opinion on the long-term things we said on Investor Day. Because I think you have to recognize that in recent history and maybe in the recent short-term future. , a lot of this is due to inflation, higher levels of inflation and what we want to do to recover prices to serve. But eventually, that will be less problematic. And then we can go back, I think, to what we said for the outdoor years on September 21, I think they’re still valid.
Cameron McDonald
So, to be clear, are you talking about achieving the absolute point in FY25?Or would you still expect to surpass single-digit ULP expansion in 2024 and 2025?
Graham Chipchasse
Let’s communicate the percentage expansion rates, because I’m not going to repeat the forecast of 25 or 24 at this point. I mean those numbers were a component of what the shape of finance shows. So we still believe that the percentage increases in the income of the ULP and the return to the positive money flow are valid. That’s what we’re looking to do.
Cameron McDonald
It is ok. Thank you.
Operator
The next one comes from Owen Birrell of RBC. Please continue.
Owen Birrel
Can I go ahead with the above comment about safety stocks and the fact that you would prefer additional $5 million pallets to $6 million to fill that buffer stock?May I ask if I had those $5 to $6 million pallets?Today, what kind of savings do you envision for the next 12 months?
Nessa O’Sullivan
Well, I think you have to look at it in other ways. So, the first thing is that we would have more net expansion in new businesses. So, this is the first one. Potentially, a little more biological expansion as well, but we would have net expansion into new businesses. We talked, we gave him the net inefficiency that we had, and we essentially said, look, we had a net profit of about $8 million this year because if you take our net inefficiencies because of out of stock and then you save them from not doing the maintenance because dealing with them because we didn’t get the pallets back, we found that, as we did, it is not an accurate science, however, our estimates would lead us to. . . we have about 1 merit in points. And that’s the bike.
Please note that last year we earned 1 point from Asia-Pacific single site compensation. And it is not uniform in all regions. I would say that one of the ICCAs is probably the one that has benefited from the maximum network, if you will get, from deferred repairs, which is the $10 million type we advertised. So, you can see that there’s some sort of combination of inefficiencies rather than gaining advantages, but ACPA gained net advantages that we call an investment in FY23.
Owen Birrel
So, approximately, $10 million in terms of net profits on the actual prices of the plant. What about the savings on shipping costs?Because there were a significant number of additional trips to pick up the pallets.
Nessa O’Sullivan
So that’s what we included all of this together, but what was done is separate what we think are the inefficiencies due to the lack of pallets, and that’s where we got to the net amount, but we’re telling APAC just Think, $10 million in total. Yes, yes. And if you look at the whole thing, you look at transport prices, and the accumulation in transport prices is under the point of inflation because there was optimization and other projects that helped us with general transport prices.
Owen Birrel
I’m just looking to get a concept that if we see the pallets coming back in the current part of the year, but we fall into a recessionary environment, what are the charge savings that will result from the rebalancing of the pallet pool?
Nessa O’Sullivan
Net-net, we would say that just thinking about the $10 million is the biggest impact. The others seem to wash themselves with inefficiencies, and we would expect that as we get additional fixed costs, we get additional plant efficiencies. , that’s the simplistic way I would think.
Owen Birrel
It is ok. Sounds good. I only sought to draw attention to the improvement in CHEP Americas ROCE that we saw in the current part of the year, 260 basic problems in a seasonally weaker period. I just sought to perceive proportionally how much of that came from Canada as opposed to the US. Unlike LatAm, especially for the moment part.
Nessa O’Sullivan
[indistinguishable] like that. But I’d like to keep in mind that when you think about where we’ll run out of plant inventory, that would be one of the key areas. So if you think about a $6 million deficit, some of that again, obviously, in Australia, we’re in short, some of that is also in the United States. So even though they had to manage the plant, with minimal inventory of factories, there is also a merit to ACI that, as we reinvent, comes to fruition. But no, we’re not going to split that across the company.
Owen Birrel
It is ok. And then, just in terms of improving the ROCE. Is it fair to say that much of this improvement has been supported through the transformation timeline in terms of employing automation or deploying virtual assets in this region?
Nessa O’Sullivan
Look, it has to be a combination. Separately, listen, as you know, we introduced a large investment program in the United States, automation and co-investment in sawmills. Was. . . it was a wonderful merit to us in adding capacity and agility. What helped us a lot in the transformation is that we’re getting a lot more out of using data, and that’s helping us assets. This contributes to profitability. It’s also helping us know the charges and get a more wonderful view of the actual service charge. And we hope to be able to continue to get more wonderful data over time.
So, I think it’s hard to separate precisely what, how much I would have done without all the support, and yet access to knowledge and transformation initiatives, which now lead us to greater efficiency, and we’ve talked about some of those transport initiatives, they all make a contribution to that.
Owen Birrel
He discussed: only about the implementation of virtual assets. He discussed the implementation of those resources in Latin America and Canada. Have you deployed virtual assets in the U. S. market?out of [indistinguishable]
Graham Chipchasse
Yes. So, I mean, really the first position where we implemented the virtual asset was in the United States. Some of the early testing was there, and we’ve put some of it into Walmart over the last couple of years. So they have been one of the adopters of the generation rather than one of the laggards. And one of the things that we’ve made the decision to do based on the readings and some of the benefits that we’ve seen from rolling out Ultras in the UK and Canada is to speed up what we call ongoing diagnostics for the United States. So that means putting a lot of Ultras in the formula because just letting them run around the formula instead of necessarily putting them in lets us know there’s a big problem. We think there’s enough upside to doing this to help support asset power innovations and some of the pricing data, leading to help for higher costs in the US. Yes, this is happening for the fiscal year 23 as we speak. So, however, the bottom line is that if the effects of the Chile test on serialization plus go well, then we would be looking, by the 24th, to start building serialization plus style in the US if we think the benefits are there. .
Owen Birrel
Can I ask more questions about implementing continuous diagnostics?They discussed: they announced the addition of 300,000 pallets or additional devices to the North American market. Can I ask only on the particular UK market?market? And if not, how much more is left?
Graham Chipchasse
So there was some mixed stuff there in terms of. . . so in the UK we put. . . so if you look at the 250,000 smart devices that we rolled out, 50,000 were in various specific diagnostics around the world, however, 200,000 were placed between the United Kingdom and Canada. Therefore, we do not allocate them between the markets. That is the total. That. . . they run and run now. So we are not going to put more at the moment because we are focusing on serializing more in Chile. We think in a market where you need access to serialization more we’re going to have to be somewhere in the middle, that’s not a very useful diversity for you, 0. 1% to just over 1% of the group is probably Ultra. So that’s the number. The rest is worth very low cost, and it will be something like RFID or probably more likely a QR code or even a serialization stamp, very low cost IDs because the camera tech will see them when they come in and out. several places compared to the Ultra, which gives you a 24/7 read of the source string. This is where we are. So there is no question of doing more in the UK. It’s about accelerating what we’ve learned to move to Chile and then seeing if we make bigger steps in the United States with technology.
Owen Birrel
It is ok. It’s fantastic. Excellent result. Thanks guys.
Graham Chipchasse
Thank you.
Nessa O’Sullivan
Thank you.
Operator
Thank you. The next one comes from James Wilson of Jarden.
Jakob Cakarnis
It’s Jakob Cakarnis [indistinguishable] at the beginning of Q
Nessa O’Sullivan
As for what we expect, we expect the final results or return to the standardization of the origin chains to start in the current part of the year, not in the first part of the year. But overall, we’ve also made transparent that we expect to see, that’s where we expect to see an improvement in weighted money in the current part of the year.
Jakob Cakarnis
It is ok. But will this be reduced with plant-led construction and potentially shipping costs?Will this reduce the growth rate of underlying earnings?
Nessa O’Sullivan
So, obviously, it is based on the review for the disposal of stocks. So if you bring them back to a domain that has been, that you’ve been, for example, if you pick up a total load of pallets in APAC, then you’m passing by to see that the pricing ones go pretty quickly right away. If you see more than one sequence, then you will see a slow replacement. And it depends on the style in the world. If it’s a small reflux, we would possibly not see an effect in terms of replacing curtains on the dynamics. And that’s why our recommendation is by organization. We verified and have given you some considerations across the region. But because we don’t know for sure, we have put: this is what we estimate will happen according to the organization, but it is very complicated to say what the style will be and therefore it will have an effect on prices because it is different through the market.
Jakob Cakarnis
It is ok. Thanks for that Nessa. Quickly, Graham, on the progress of uncompensated losses. I appreciate that there is a big pie to play here. What prevents the collection or implementation of those uncompensated losses?Is there a problem with implementing this in contracts?Are those disruptions similar to the transmission of knowledge to customers, now you appreciate that you have rolled back some of the uncompensated losses now in FY24?
Graham Chipchasse
I don’t think so. I mean there’s nothing from an app perspective. We invest resources. We have the. . . we know the type of movements we must perform. It’s more about the behavior of the workshops that keep the pallets for longer and our inability to manage it, because until we know that they have been lost permanently, it is quite difficult, or not to return. for longer, we can’t do anything about it. So, yes, I think we have. . . I think we’re confident in ourselves now that, this downhill trajectory we’ve shown where we have the right team in position to execute this. So, and as I think Nessa said earlier, we’ve incorporated those assumptions into our FY23 outlook on this downward trajectory.
Jakob Cakarnis
Thanks guys.
Operator
Thank you The following comes from Scott Ryall of Rimor Equity Research. Continue.
scott ryal
Hello everyone. Thank you so much. I’ll ask two questions about the payment report, if you don’t mind. In terms of non-public purposes, Graham, I think he achieved 67% of the purpose and Nessa about 85% compared to the president, North America 90% and President, Europe 100%. Could. . . I have the matrix in front of me in terms of what are the purposes for that?Could you tell me where you and Nessa have failed compared to the effects in North America and Europe?been stronger, please?
Graham Chipchasse
So, the short answer is no, because we no. no give effects relative to individual metrics. I think what I would say is, and the result of, in the first short-term goals is quite mechanical. It’s unreasonable, it’s incredibly mechanical. So there’s no subjectivity in that. And what has distorted the effects a bit this year is that some have done very well and others have not. So, for example, if someone has something about the customer, Net Promoter Score, as you saw on our dashboard, on the transformation board, we didn’t do it right at all. And the other people who will have visitor statistics will be the ones who handle some of the divisions. I would have it in mine, but Nessa would. not having it in yours, for example, because yours will be much more focused on things like asset productivity and transformation goals, which have disappeared; the transformation has gone incredibly well.
So there’s this kind of — there’s a little bit of pass or fail on some metrics, which is rare because normally you would expect a bell-shaped distribution curve, where there would be more encounters and the rest would be — some would not meet and some would be fine. Then the other thing is that even within some of the goals, they don’t all have the same weight. So it has another compounding effect to think about where other people might have had a lot of one and less of the other. And that, and whether that particular one was maxed or missed, will obviously have a huge impact on the final results. So I think the most important thing to say, and I would say this, is very little, since I have lower numbers, it has nothing to do with our opinion of other people’s private performance. It has more to do with the final results of those very express measures. I think that’s all. Q – Scott Ryall No, I get it. I was looking to get to what I think you answered, which is visitor satisfaction metrics with [indistinguishable] Is that correct? [Multi-stakeholder]
Graham Chipchasse
Yes. No, absolutely.
scott ryal
And the transformation of people’s productivity, which is the other, is where – closest to the goal. Would that be fair? That is what I must achieve.
Graham Chipchasse
Yes, absolutely. Yes.
scott ryal
IT IS OK. IT IS OK. And then, the moment I have is about money operational metrics. So if I look at the operating moneyArray, it’s down 50% year-over-year in the Americas and EMEA. And I know you have $180 million of CapEx recovery, $180 million CapEx recovery that was transferred from ’21. If I put that only in America and EMEA, which, I think, given the length of their business, that explains some of that. But then I have a pretty big gap between the President’s Awards, Europe was 52% and less. Sorry, the metric was 52% and less. While president of North America, he was above the high with 172% above target. So I’m just looking to find out why the operating monetary result in North America was good, and that in Europe was perceived as bad, where they look pretty similar to me in direct measures, please.
Graham Chipchasse
I mean, I think you need to realize that the damaged payment passes across the region are based on the budgets we had at the beginning of the year. And things happened during the year. A clever example would be that things were many, many. they were much more complicated in Europe due to unforeseen inflation of pallets. We didn’t have this budget because we didn’t think it would be a big challenge in Europe in 22, when it turned out to be towards the end of the year. Although we knew, because of what happened on the 21st, that the U. S. The U. S. was going through a very complicated time with things like wood inflation. That is why its budget would have been set at a lower point than Europe’s. Here’s how it works. But obviously we’re not moving on, we’ve never done it and we’re not going to move on to the main points of the budgets set for individual companies at the beginning of the year, but this is what determines the outcome.
Nessa O’Sullivan
Get a little more data about money. In the appendices, we show the CapEx of sales and give feedback from year to year. And you can see some of those differences in terms of the year-over-year effects of wood inflation that may be useful just to say that.
scott ryal
It is ok. But he basically did: he expected incredibly low money from CHEP North America’s operations. I understand the budgetary procedure and all that. But it is: I was predicting a really poor outcome in North America and the result was greater than this really poor outcome compared to some of the unexpected effects that have occurred in Europe, as you say, from Russia, Ukraine and scarcity. there. And this is, I suppose, the main driving force of money in Europe which is not so good.
Graham Chipchasse
Directionally, I still wouldn’t use it – the very poor adjective is yours, mine. But yes, address, I agree.
scott ryal
That’s great. And then, just in terms of that $180 million capital expenditure to catch up, just for you to perceive the separation between North America and Europe, what is it?
Nessa O’Sullivan
So I don’t think we’ve separated it. But as I said, pallet shortages are most commonly weighted in the United States. So if you do the math, assume that the percentage of the lion belongs to the United States.
scott ryal
It is ok. Okay. It’s just helping in terms of comments on [indistinguishable]. That’s all I had. Thank you.
Operator
The next one comes from Sam Seow of Citi. Continue.
sam seow
Hello. Hello everyone. I appreciate the time. So just a little interview query for me. The automation appreciated has probably been slow given the limitations of the source. But maybe you can give us an update on when you think you can spend that $400 million on machines?And then when we start to see some of that margin of merit. Fructify?
Nessa O’Sullivan
So listen, we’re planning. As you can see, we only pushed it back a year in terms of the ability to finish due to delays. If you look directionally at the spending that was planned over the next two years in terms of automation, that sounds pretty good. I would probably put a little more on a ’25 guy and a little on the ’26 to get back to the general one we guided on Investor Day, that’s probably the most productive way. And look, in the meantime, obviously, we went out of our way just to see if we could get through faster. But that’s our most productive estimate of what the plan is, and yet we’re still very, very attached to it. And I think the best thing is that controlled to incorporate more power from the small-cap source chain into our numbers for this year.
sam seow
So the same way, a year on the right.
Operator
Merci. No there are more questions at the moment. I will now return for the final comments.
Graham Chipchasse
Super. Eh well, thank you all for calling and asking questions. They’ve been good. I think we’re expecting to see them at their best over the next week. I’m sure we’ll continue with some of our conversations later, but thank you very much.
Nessa O’Sullivan
Thank you.