Brambles’ Divisive March Quarter

Australia | Apr 24 2024

A negative reaction to Brambles’ March quarter update suggests more was expected, but brokers, while split, are largely positive.

-Brambles sees slowing sales growth
-Destocking both a drag and a benefit
-Free cash flow improvement expected
-Diverse views among brokers

By Greg Peel

Brambles’ ((BXB)) March quarter group sales grew by 2% in constant-currency terms on slowing-but-positive price growth of 3% and continued negative volumes, down -1%.

Management reiterated guidance for FY24 sales growth of 6-8% in constant currency, and 13-15% of earnings growth, but Macquarie’s expectation is that FY24 will be towards the bottom half of guidance. Price was a major driver in first half, and this has virtually disappeared in the US, up only 1% and down to 4% in Europe, Middle East & Africa (EMEA).

In the first half, price increases offset the impact of the destocking and the effect of contract loss, Macquarie notes. March quarter revenue in America was down -1%, EMEA up 2%, with only Australia improving materially, up 6%.

The destocking cycle, which was well flagged to investors, released around three million pallets. This is dampening growth, the broker suggests, not just with existing customers, but is also slowing conversions to CHEP, as the white wood secondary market is also over-supplied (with lower pricing).

For CHEP this destocking cycle should run its course in FY24, albeit it is hard to see the signs of growth rebounding, Macquarie warns.

All in the Price

Brambles has continued to navigate a challenging operating environment well, Morgan Stanley suggests, with price realisation the key driver of revenue growth. This broker notes, however, slowing price momentum from 11% growth in the first half to 8% in the March quarter.

As was the case in the first half, new price initiatives contributed 3%. Morgan Stanley is also seeing a slowdown in the trajectory of sales growth within group revenue. September quarter sales growth was 22% year on year, the December quarter saw 4% and the March quarter faded to 3%.

Net new business growth has still not accelerated. Brambles thinks this is a reflection of a "slower than expected ramp up" in new customer volumes but also a result of some volume loss due to a shift to dual sourcing (customers using two pallet suppliers instead of just the one). Morgan Stanley thinks the lower net new wins demonstrates that competitive activity remains.

However, it is encouraging that at this stage, price discounting is not evident. The broker continues to view this as the biggest risk.

UBS notes sales guidance now requires 3-11% growth in the June quarter, implying an improvement from the March growth rate. This broker believes it's reasonable for June growth to step up from March based on the easier comparable period a year ago, particularly due to volumes. June quarter FY23 volume was unusually weak (-7%), likely due to destocking at the time.

Brambles expects FY24 overall volumes to be flat year on year, implying to UBS roughly 3% growth in the June quarter.