Profits for CHEP Americas were down for the first half of the current fiscal year. It suffered the largest drop in profitability compared to other units of parent company Brambles.
However, CHEP Americas is projected to post improved financial results beyond the current fiscal year, according to Morningstar, a leading provider of independent investment research.
Despite higher prices, underlying operating profit fell 11% compared to the first half of the previous fiscal year; profit margin declined from 17.3% to 14.7%.
The reason for the decline: inflation of costs for transportation and lumber.
Brambles CEO Graham Chipchase noted that changes by retailers have driven cost increases, notably in transportation. Some retailers are now requiring CHEP to retrieve its pallets, and some want to charge for sorting CHEP pallets — shifting costs back to CHEP.
Morningstar now projects margins to fall to 14% in fiscal 2019, down from its earlier forecast of 16%.
There are some bright spots, though. The unit increased volume 2% for the period. In addition, Morningstar predicted better cost pass-throughs on new contracts, investments in automation in the U.S., and customer-led investments in Canada to a different platform. The improvements are expected to drive better profitability beyond the current fiscal year, and Morningstar predicted a margin of 20% by fiscal year 2022.
CHEP’s revenue from U.S. pallet operations was up 5% for the first half of the current fiscal year. It’s not being fueled by more business, though. It got a boost because of surcharges to customers for transportation and lumber costs.
“In response to sustained levels of elevated cost inflation in most major markets,” said Chipchase, “our businesses implemented surcharges and exercised contractual indexation clauses to offset three-quarters of the inflationary cost increases experienced during the period. Our teams continue to focus on aligning contractual terms and pricing with the prevailing cost-to-serve in each region.”
To help offset those inflationary pressures, Brambles has focused on identifying areas to trim operational costs and improve efficiency. In the U.S., CHEP has completed automation projects at 10 pallet repair depots. It is also exploring a variety of automation technologies, such as robotics and advanced pallet scanning systems; CHEP plans to invest $150-160 million through fiscal year 2021 to automate over 50 plants in the U.S.
New business growth was only 1% for the period, and it was 2% and 1% in fiscal years 2018 and 2017, respectively. That’s compared to new business growth of 3% in FY 2015 and 4% in FY 2016.
