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Brambles Industries (BI.)

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Wednesday 26 February, 2003

Brambles Industries

Interim Results Part 3

Brambles Industries PLC
26 February 2003

PART 3

OVERVIEW



TRADING PERFORMANCE



In the six months to 31 December 2002 revenue from continuing businesses at
£1.45billion was 3% above the same period in the previous year or 6% higher on a
constant currency basis.



Comparable operating profit (profit before interest, taxation, goodwill
amortisation and exceptional items) from continuing businesses was £182million
compared with £170million last year, an increase of 7%.  The prior year included
a one-off charge of £31million within the harmonisation of accounting policies
at CHEP.  Comparable operating profit on this basis was 7% lower than last year
excluding the one-off charge and at constant currency.



The half year has been dominated by the continuing successful execution of the
performance improvement programme in CHEP USA and the commencement of a similar
programme in CHEP Europe.



In CHEP USA the five key initiatives to reduce costs and improve efficiencies
all continue to yield good results.  Profits from the Americas as a whole
increased by 33% with CHEP USA up by 44% compared to the same period last year.



In CHEP Europe the reorganisation plan has been further developed. The
pan-European management structure in CHEP Europe is now in place, the
organisation is being streamlined and there is total focus on improving service
quality, increasing profitability and driving up the return on capital invested.
The total cost of the restructuring plan is confirmed at the previously
estimated figure of £85million and will be spread over some 30 months. Within
this a charge of £2million has been incurred in the first six months and treated
as an operating exceptional item.  Trading in CHEP Europe continued as expected
with revenue up by approximately 4% and comparable operating profit down by 32%
or 25% excluding the impact of the service centre fires.



Cleanaway performed steadily in a challenging market, and Recall is growing both
revenue and profits.



Industrial Services improved, driven by a strong performance in Australia, but
profits from Regional Businesses were lower with a weaker performance from
Interlake due to adverse market conditions.



The dividend is being held at the rate of A$0.10/3.757 pence per share,
consistent with the Board's stated policy of at least maintaining this level of
dividend per share. The interim dividend will be paid on 10 April 2003 to those
shareholders registered on 21 March 2003.

                                       8



BUSINESS DISPOSALS AND EXCEPTIONAL ITEMS



The principal business divestments during the six months were Brambles Shipping
in Australia and Heavy Contracting in Europe.  Of the total proceeds of
£55million, £39million was received before 31 December 2002 and the balance in
early 2003.  The net exceptional profit under UK GAAP arising from the disposals
was £13million (£10million after tax).



FINANCIAL POSITION



Cash inflow from operations after capital expenditure improved by £42million to
£38million compared with a cash outflow of £4million last year.



Interest expense was £42million compared with £52million in the same period last
year, due both to lower average debt levels and lower interest rates.



Working capital increased by £68million principally due to a reduction in trade
creditors about half of which was in CHEP and was associated with lower capital
expenditure.



Debtors decreased by £23million.  In CHEP, overall debtors are falling as a
proportion of sales and debtors should reduce further in the second half.



Working capital requirements across the Group are expected to fall in the second
half of the year.



Net debt at 31 December 2002 was £1.68billion with the EBITDA interest cover at
eight times and net debt/EBITDA at 2.5 times, leaving ample headroom in our
credit facilities.



CAPITAL EXPENDITURE



Capital expenditure for the half year was £242million, £62million lower than
last year, as all divisions with the exception of Recall reduced spending.



In CHEP, capital expenditure at £183million was £37million below last year. The
principal driver of the reduction was in CHEP Europe where expenditure at
£77million was £21million lower than last year.  A decrease of £17million in the
USA was partly offset by increased capital expenditure in Latin America to
satisfy strong growth.



Capital expenditure at both Cleanaway and Industrial Services was £10million
below last year at £33million and £9million respectively. At Recall, a £7million
increase resulted from the ongoing mega centre construction programme across its
territories.



                                       9



TAXATION



The group tax rate for the half year was 32% on profit before tax and goodwill
amortisation, up from 26% in the same period last year (28% for the full year).
The increase in the tax rate for the period was due principally to the absence
of the one-off benefit of tax losses which benefited Cleanaway Germany last
year.



OPERATIONAL REVIEW



CHEP
                                        6 months to                 6 months to           % Change -

                                         31 Dec 02                    31 Dec 01             Constant

                                           As    Constant                                   Currency

£m                                   Reported    Currency

Revenue                                  620         646                   591                    9
Comparable operating
profit                                   103         107                    84                   27
Add Back
One-Off loss provision                                                      31
Comparable operating
profit                                   103         107                   115                   (7)



Revenue from CHEP increased by 9% in constant currency, while comparable
operating profit was £103million compared with £84million last year. The prior
year profit included a one-off loss provision of £31million.  Excluding this
loss provision, CHEP's comparable operating profit for the half year was 7%
lower than last year.



CHEP Americas



In the Americas, revenue increased by 13% to £294million.



In the USA, revenue growth was 11%.  Revenue growth included a higher
contribution from Wal*Mart's suppliers and a first time contribution from
suppliers to Sysco, the largest food service company in the USA.



Revenue growth in Canada included a new contract with Quaker.  CHEP's Latin
American markets were strong, with new contract awards in all locations.



Comparable operating profit in the Americas increased to £43million, up by 33%
in constant currency, with significant growth being achieved in all CHEP
markets.  Comparable operating profit margin rose by two percentage points from
13% to 15%.



                                       10







In the USA, the continuing successful implementation of the five key performance
improvement initiatives was an important driver of the profit improvement.



  • Service centre network optimisation is proceeding well and will be
    completed in March when all 75 new service centres will be operative.  The
    60 already in operation currently process some 84% of pallet returns.



  • Transport optimisation savings are being achieved through the new service
    centre network.



  • The new pallet return policy whereby major retailers return pallets to
    CHEP, by taking advantage of the new service centre network, is being
    successfully implemented, with attendant cost savings.



  • Total pallet management (TPM) contracts are continuing to develop
    profitably.



  • The non-participating distributors (NPD) channel management initiative is
    also yielding results with pallet transfers from our customers reduced from
    5.6% of total issues last year to 4.3% this year.  Pallet returns are
    running at approximately 70% of issues, up from around 58% a year ago. In
    the first half, a total of 257 NPDs were converted, the largest being US
    Foodservice Alliance with over sixty locations.



Elsewhere in the Americas, strong profit progress was achieved in Canada,
Mexico, Argentina and Brazil.



CHEP Europe



The results of CHEP Europe for the half year were consistent with indications
given in the November trading statement.



Revenue was up by 4% with progress in all markets except for a slight fall in
the UK, which was due principally to the insourcing of the RPC contract at ASDA
in March 2002.  Pallet revenue in the UK was up by 4% with a slight improvement
in pricing.  Key new contracts in pallet pooling included San Pellegrino and
Nestle Purina in Italy, Friskies in France and Henkel in Germany, Italy and
France.



Comparable operating profit was £44million, after a cost of £4million in respect
of a number of service centre fires last autumn and compares with £63million
last year. Excluding the impact of the fires and on a constant currency basis,
comparable profits were down by 25%.





                                       11







IT costs, principally SAP, rose by £4million and other overhead costs increased
by £9million of which the largest elements were lower compensation receipts in
the period and an increase in recurrent loss provisioning.



The balance of the profit shortfall compared with last year comprised the
increased costs relating to improving asset management, and the further
repatriation of pallets from the UK to continental Europe offset in part by the
profit contribution from increased volumes.



In November we announced a major European restructuring plan to reduce costs and
improve both profitability and service quality. The plan will also increase both
the effectiveness of the pallet pool and the returns achieved on capital
invested.



The plan is in two parts, the first a reorganisation to improve operational
efficiency with an estimated cost of £40million and the second, an Asset
Productivity Improvement Programme with an approximate cost of £45million.  The
reorganisation has the following costs and benefits:




Reorganisation Plan                                          Cost                Anticipated Benefit,
                                                                       Comparable operating profit


£m                                                          Total                FY04               FY05
Indirect Workforce Reduction                                  19                   6                 10
Service Centre Configuration                                   8                   3                  4
Service/Product Offering/Price                                 9                   3                  7
IT Write Down                                                  4                   1                  1
Total                                                         40                  13                 22



Operational Efficiency

This element of the restructuring plan has an estimated cost of £40million
(£34million cash) spread over 2 years and is being treated as an operating
exceptional item in the accounts as the costs are incurred.  The acceleration of
cross-border trading, the related increase in pan-European pallet movements and
requirements of European customers have all outgrown the previous country based
management structure.  As a consequence, the organisation was changed in October
last year with the creation of a pan-European management structure reporting
directly to the President of CHEP Europe. The asset management function has also
been greatly strengthened to ensure more effective control over CHEP's pallet
pool.



Streamlining operations in line with the change in management structure will
result in a net reduction of between 300 and 400 positions from the European
indirect workforce, at an estimated cost of £19million. Discussions with the
relevant Works Councils and employee representatives are currently underway.



                                       12







Approximately 50% of this cost is expected to be incurred in the current
financial year with the balance in the next year.  Annualised savings of
£10million are anticipated once this programme is completed.



As successfully undertaken in the USA, a study is underway to assess the optimal
service centre network configuration for the pan-European business. We expect
this study to be completed by September, at which stage implementation will
commence. An estimate of £8million has been included for this element of the
reorganisation with the majority of the cost to fall into the next financial
year. It is estimated that savings of £4million per annum will be achieved
within two years.



A review of product and service offerings, in order to simplify customer
administration and billings, improve service quality and to align prices more
closely with activity and cost, has also commenced. This, combined with the
write off of some £4million of capitalised IT costs related to country specific
applications, comprises the balance of the £40million expenditure.



Asset Productivity Improvement Programme

The second part of the restructuring plan is a programme to improve asset
productivity in Europe.  Since 1999, the size of the European pallet pool grew
disproportionately to the growth in revenue and this has resulted in an
estimated excess of up to 14 million pallets in the pool.  It is worth
emphasising that this is an issue relating to the under utilisation of our
assets.



While it is inevitable that during the execution of the productivity improvement
programme, there may be some pallet shortfalls identified during audits, the
estimated costs of the plan at £45million should be sufficient to cover such
eventualities.



The excess has been caused by a number of factors; surplus pallets in our own
plants, inadequate collection and repair activity, as well as business decisions
to grow CHEP into new territories such as Italy and through other smaller
distribution channels.



In order to improve the pallet pool efficiency a number of initiatives are being
put in place.  These include an intensified programme to audit, collect and
repair pallets at manufacturers' plants, retailers' distribution centres and the
small distributor channels, as well as a one-off relocation of excessive pallets
within CHEP's own service centres to meet customer demand.



This part of the restructuring plan is estimated to cost £45 million which will
also be shown as an operating exceptional item in the accounts and will be
charged over the next 30 months as incurred.



                                       13





The cash benefit of the project will be a combination of savings in capital
expenditure and increased revenue from pallets that are presently non revenue
earning offset by the cost of the programme.



CHEP - Rest of the World

In the Rest of the World, CHEP continues to perform satisfactorily. In Asia
Pacific, revenue was up by 14%, reflecting a good performance in Australia and
strong growth in the new but smaller Asian markets.  Profitability in Asia
Pacific was slightly ahead of our internal forecasts though comparatives in the
first half of last year were distorted by a high level of compensation receipts.
As is the case elsewhere in CHEP, the Asia Pacific region is now bearing its
share of global IT development costs although the implementation of SAP is not
scheduled until the next financial year.



CHEP - Africa also performed well with both revenue and profit improvement over
the same period last year.



CHEP - Other Products

New products continue to offer exciting opportunities for future growth.
Reusable Plastic Container (RPC) revenue at £35million was slightly higher than
last year, notwithstanding the insourcing decision by ASDA in the UK.  In the
USA, growth is being driven by continuing implementation with Wal*Mart and a new
RPC contract with HEB, the largest grocery retailer in Texas that was won in
July 2002. CHEP Europe has seen success with a number of RPC contract wins, the
two most significant being with Carrefour and Casino.



The Automotive container business is also moving ahead, with revenue of
£22million being some 7% ahead of last year. The smaller Intermediate Bulk
Container (IBC), and Catalyst and Chemical Container (CCC) businesses, while
embryonic, are also making progress.



CHEP - Global Initiatives

The SAP initiative which commenced in 2000 has created a global IT platform to
measure and control the operations of CHEP in both Europe and the Americas with
global implementation to follow in 2003.  The system will also facilitate the
standardisation of processes and service offerings on a global basis.



The core commercial and operational systems have now been fully implemented in
Europe, USA, Canada and Mexico. The cost of the IT implementation to date has
been approximately £60million, most of which has been capitalised.  Increasingly
sophisticated data and key performance indicators will be incorporated into the
SAP system and will facilitate the benchmarking and measurement of business
efficiencies, asset usage and customer profitability. Simplified and
standardised service offerings will result in more streamlined invoicing, thus
improving customer service and cash collection.



                                       14





Other global IT initiatives include the ongoing development of Portfolio, the
web based customer order interface system and the initiative to develop a
commercially viable radio frequency identification (RFID) tracking system for
pallets and containers.



Outlook

The outlook for CHEP in the second half of the financial year is much as
indicated in the November 2002 trading statement, with good growth in the
Americas and the Rest of the World, and lower comparable operating profit from
Europe.



Cleanaway


                                         6 months to                      6 months to          % Change -

                                          31 Dec 02                         31 Dec 01            Constant

                                            As    Constant                                       Currency
£m
                                      Reported    Currency


Revenue                                   505         501                        478                   5
Comparable operating
profit                                     50          49                         51                  (4)



Cleanaway continued to perform steadily, despite difficult conditions in some of
its European market segments. Revenue at £505million was 5% above the same
period last year in constant currency, though comparable operating profit was
slightly lower than last year, at £50million.



In the UK, revenue was 3% higher at £246million, while comparable operating
profit was below last year's level.  Within the UK business, revenue and
comparable operating profit from Dry Waste were both similar to last year with
good growth in commercial, industrial and municipal dry waste offsetting the
short term negative effect of the new landfill directive restricting wastes that
can be sent to landfill sites.  Cleanaway continues its strategic focus on
recycling and total waste management, leveraging off its expertise in Germany
and offering integrated waste management solutions to both commercial and
municipal customers.  Recent successes in winning integrated waste management
contracts, such as the new £32million five year contract with Thurrock Council,
evidence this trend.



The performance of facilities management was weak in part due to the start up
phase of a new contract, as well as a softness in the building repair and
maintenance division.  This latter division, with revenue of some £27million in
this first half, is being divested as it does not have a strategic fit with the
rest of Cleanaway's waste business.





                                       15







In UK Technical Waste, revenue was flat and comparable operating profit was
lower than the previous year.  This was due to lower volume from the chemical
industry and unfavourable price/product mix.



In Germany, actual revenue of £172million increased by 4% in constant currency
as higher average paper trading prices in the first quarter more than offset
reductions in paper and trade waste volumes, caused by weaker economic activity.



Comparable operating profit in Germany was slightly below last year due to lower
contributions from commercial and industrial (C&I) partly offset by improvements
from the Municipal sector and from DSD (the German Packaging Recycling Scheme).



In Australia, Cleanaway revenue of £77million increased by 4%, notwithstanding
the termination of the loss making municipal contract in Brisbane. Profits
continued to advance with a strong performance from the Enviroguard landfill and
a number of contract wins including those in Blacktown, Canberra and Alice
Springs.



Outlook

In the UK, Dry Waste outlook is firm with a strong outstanding order pipeline.
The Facilities Management business will be divested. The Technical Waste
business is expected to remain under pressure.



Our German business is faced with a higher degree of uncertainty than normal for
a number of different reasons.  These include the introduction on 1 January 2003
of a compulsory deposit scheme on one way drinks containers, the impact of the
DSD re-tender on Cleanaway's £80million annual revenues in this area, and the
generally weak German economy. Cleanaway has a strong base from which to meet
these challenges and to benefit from the opportunities that are expected to
arise following this period of considerable change.



The firm outlook for the Australian business is underpinned by a strong
municipal contract order book and a growing National Accounts and Recycling
business.



                                       16






Recall


                                         6 months to                      6 months to         % Change -

                                          31 Dec 02                         31 Dec 01            Constant

                                            As    Constant                                       Currency
£m
                                      Reported    Currency


Revenue                                   118         125                        107                  17
Comparable operating
profit                                     19          21                         18                  17



Recall continued to deliver strong revenue growth, some 17% above the same
period last year, with acquisitions contributing 8%. Excluding the Dassler
business transferred from Cleanaway and a one-off Brazilian contract in the
prior year, the underlying growth rate was 7%.



North America remains the most important market for Recall, and accounted for
52% of the total revenues. Of the total of 11 acquisitions made since June 2002,
nine were in the USA and represented a continued expansion into the Secure
Destruction Services (SDS) market together with further geographical coverage in
the Document Management Services (DMS) business.  The Recall DMS business now
services directly the key markets of Washington DC and Minneapolis, Minnesota.



Europe continues to grow, with revenue up 21% (adjusted for the Dassler
transfer) in total, or 8% in terms of underlying growth. New operations were set
up in Sweden and Finland, bringing to 23 the number of countries worldwide in
which Recall operates.



In Australia, modest revenue growth was seen in both DMS and Data Protection
Services (DPS).  Asia and Latin America both showed strong internal revenue
growth at 10% and 23% respectively, albeit from a relatively small base.



Recall's comparable operating profit at £19million was 17% ahead of last year.
Operating margins at 17% were in line with the prior year, with efficiency
improvements in part offset by higher insurance premiums and one-off carton
movement costs resulting from the development of more efficient DMS storage.



Looking forward, Recall should continue to grow revenues and profits both
organically and by acquisition.





                                       17






Industrial Services


                                         6 months to                      6 months to         % Change -

                                          31 Dec 02                         31 Dec 01            Constant

                                            As    Constant                                       Currency

£m
                                      Reported    Currency


Revenue                                   137         137                        134                   2
Comparable operating
profit                                     13          13                         12                   8



Revenue in Industrial Services was slightly above the same period last year with
comparable profits 8% higher.



In Australia, which comprises more than half the division, revenue and
comparable profits rose strongly. In all territories performance of the BIS
contract outsourcing business was satisfactory with a particularly good half
year from the PCI fuel injection plant managed for BHP Steel.



In the Northern Hemisphere, results were lower than last year. In the UK, the
write-off of assets held at the site of a bankrupt customer coupled with lower
volumes from Corus at Port Talbot combined to hold back both revenue and
profitability.



The Industrial Services division continues to deliver strong operating cash
flows.



Looking forward, second half profits will not benefit from last year's one-off
receipt of £2million in respect of the Llanwern closure.



Regional Businesses


                                         6 months to                   6 months to            % Change -

                                          31 Dec 02                      31 Dec 01              Constant

                                            As    Constant                                      Currency

£m
                                      Reported    Currency


Revenue                                    73          78                      97                   (20)
Comparable operating
profit                                      6           6                       9                   (33)



Both revenue and profits of the Brambles Regional Businesses were lower than
last year.



Almost all of the profit setback was due to Interlake where the softness of the
US economy continued to have a negative impact on business performance.  For
Interlake this has been exacerbated by the collapse of the E-business bubble
which has seen the closure of related warehousing facilities and resulted in the
market for warehouse racking being flooded with second hand equipment.



                                       18





Plans are in hand to further rationalise Interlake's production capacity.  This
action will be completed in the second half and will benefit results in 2003/
2004.



Brambles' other Regional Businesses performed steadily.



Outlook



Assuming continued global political and economic stability, the outlook for the
Group for the financial year is unchanged since our AGM and trading statements
in November 2002, with good growth in CHEP Americas and the Rest of the World,
and lower comparable operating profits from CHEP Europe.  Cleanaway continues to
face a challenging market in Europe.  Recall should continue to grow.  There
will be a continued focus on improving the cash performance of the Group.







                                       19


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