Brambles Limited (BXB) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Brambles Limited 2020 Half Year Results Conference Call. I would now like to hand the conference over to Mr. Graham Chipchase, CEO. Please go ahead.

Good morning, everyone, and thank you for joining us today for our 2020 half year results announcement. I would like to start with a few key messages about the first half performance. We delivered strong sales revenue growth of 7%, in line with our objective for mid-single-digit growth. This performance reflected volume growth with new and existing customers across all CHEP pallet businesses, improved price realization in our U.S. business and illustrated the resilience of our European business despite significant geopolitical, economic and cost headwinds. Our underlying profit was up 5%, including the impact of AASB 16, which is in line with the guidance we provided at our full year 2019 announcement. Underpinning this performance was the strong growth in sales revenue, improved supply chain efficiencies and a moderation in transport and lumber inflation, which were partially offset by higher operating costs and increased asset charges across the group. Previously, we outlined a number of initiatives to restore margins in our U.S. pallets business. These initiatives included the accelerated automation program, the lumber procurement program and a number of productivity and pricing initiatives. I am pleased to report that these initiatives delivered a 1% margin improvement in the period, which is in line with our commitment to lift U.S. business margins by 2 to 3 percentage points by fiscal '22. In December, our Asia Pacific business won a 10-year RPC contract with a major Australian retailer commencing in July of 2020. The contract win reaffirms our commitment to the RPC business in Australia. During the half, we recorded a significant improvement in cash flow, driven by increased earnings, lower capital expenditure and improved cash collections across the group. Our return on capital invested of 18% remains strong and well above our cost of capital. Now turning to our dividends and capital management program. In line with our new dividend payout ratio policy, we have declared an interim dividend of USD 0.09, which will be converted and paid as AUD 0.1338. This represents a payout ratio of 50%. This ratio is consistent with prior year and within our targeted payout ratio range of 45% to 60%. During the period, we also conducted significant capital actions. In June 2019, we commenced our USD 1.65 billion on-market share buyback. To date, we have repurchased 51.4 million shares at a cost of USD 415 million. We expect to complete the buyback in late fiscal '21. In October, we returned USD 312 million to shareholders, comprising $183 million of special dividends and a pro rata capital return of USD 129 million. I'd like to take this opportunity to remind everyone of our global leadership position in sustainability. Firstly though, it's worth noting that when we first set the targets in 2015, the goals were considered very ambitious, and in many cases, we did not have fully defined pathways to achieve the objectives. As such, it is extremely pleasing to report that we are on track to achieve many of our key targets by the 30th of June 2020 deadline. Without mentioning all the achievements, I would like to highlight some. We expect, by June 2020, we will be able to report that 100% of our wood comes from certifiable, sustainable sources. We will have reduced our carbon dioxide emissions by 25% since 2015. We helped remove 1.3 million tonnes of waste from customers' supply chains. And we've eliminated 70 million kilometers of trucking haulage through transport collaboration with our customers. As a group, we remain committed to our sustainability leadership position. It is our intention to launch our 2025 sustainability goals at our May 2020 Investment Day in Orlando. They will again be ambitious and designed to maintain Brambles as one of the world's most sustainable companies. I would now like to take a moment to address what Brambles is doing to support bushfire-affected communities in Australia. All of us at Brambles have been shocked and upset by the devastating bushfires we've seen across Australia in recent months. These fires have significantly affected whole regions and communities, and many of our own employees have been impacted. Our Australian team has provided emergency relief, including significant in-kind support for our charitable partner Foodbank, which continues to provide food to affected communities. We've also allowed for paid leave for up to 4 weeks for rural fire service and emergency services volunteers. Additionally, we have donated AUD 500,000 to be shared equally between Foodbank Australia, the Australian Red Cross Disaster Relief and Recovery, Landcare Australia and the Australian Rural Fire Services. Brambles is also matching any donations made by our employees globally. Providing the support both financial and in-kind recognizes that sustainability is in our DNA as a business, and this includes contributing positively to the communities in which we operate. We know from previous discussions that many of you are interested in our ongoing trials with a U.S. retailer to test the operational functionality, asset management and economics of plastic pallets, in line with the retailer's stated strategy to convert all their inbound platform flows to plastic. While commercial and customer sensitivity prevents me from going into greater detail, I will make the following points. Total flows from this retailer represent less than 3.5% of Brambles' global pallet flows. All our major U.S. competitors are participating in these trials. The trials involve extensive testing of new plastic pallet designs and asset management technology, and the trials will extend into the second half of 2020. In addition, I would add that Brambles already maintains the world's largest pool of plastic pallets and operates substantive wood and plastic parallel pallet pools in Europe. Now looking forward to our expected operating landscape and our full year 2020 outlook. Volatile global trading conditions and political instability, including Brexit, have led to a slowdown in organic growth in core European markets such as the U.K., France and Germany. These conditions are expected to continue in the second half of fiscal '20. Similarly, the coronavirus may lead to a slowdown in Asia, though our businesses there remain small and not material from an earnings perspective. Transport and lumber inflation in the U.S. business is moderating, though other sources of inflation such as labor and property lease inflation continue to rise. While sales revenue growth in the Americas segment is expected to remain strong, benefits from timing of customer contracts of 1% to 2% are not expected to repeat in the second half of fiscal '20. Within this context, at constant FX and including the impact of AASB 16, Brambles' outlook for full year 2020 is for mid-single-digit sales revenue growth and underlying profit growth to be in line with sales revenue growth. I'll now hand over to Nessa.

Thank you, Graham, and good morning, everyone. I'll start with an overview of the first half fiscal '20 result. We delivered sales and earnings growth across each of our regions in the first half. Sales revenue growth of 7% was at the top end of the group objective to deliver growth in the mid-single digits. Underlying profit growth was 5%, including a 3 point increase from the implementation of AASB 16. We have had no significant items in this period or in the prior year first half, and hence, the underlying profit growth of 5% is in line with operating profit growth. Earnings growth was driven by sales, efficiency gains and lower lumber and transport inflation, which more than offset higher operating costs and asset charges across the group. The first half increase in asset costs partly reflects the weighting of annual asset charges in Latin America to the second half of FY '19, which are now phased across the full year. Profit after tax, which includes discontinued operations, decreased 9% due to the prior year period, including earnings of $51.4 million from the IFCO business, which was sold in the second half of FY '19. Underlying EPS of USD 0.178 increased USD 0.01 per share, reflecting higher earnings and $0.003 benefit from share buybacks. The new leasing standard, AASB 16, came into effect for Brambles on the 1st of July 2019. The key points to note are as follows. AASB 16 contributed 3 percentage points to the group underlying profit growth. Whilst the standard has a net 0 impact on the total statutory consolidated cash flow, there is a $56 million net increase in reported free cash flow with $56 million of lease payments now classified as debt repayments and recognized in the payment of principal component of lease liabilities line in the consolidated cash flow statement within the statutory accounts. And in terms of the impact on the group ROCI, AASB 16 resulted in a 1.8 percentage point reduction in the group reported return on capital invested. For those seeking more information, Appendix 3A and 3B provide more details, including a breakdown by segment. Turning to the group sales revenue on Slide 12. Group sales growth of 7% was driven by a good balance of volume growth and price realization across our businesses. Price growth of 3% includes price realization across all markets with a notable increase in the Americas region, reflecting inflationary trends and cost-to-serve increases. Group like-for-like volume growth was 1%, driven by growth in the Americas and Asia Pacific regions. Like-for-like volumes in the EMEA region were in line with the prior year. It should be noted, however, that all regions contributed to the 3% growth in net new business wins in the half, including the EMEA business, which delivered net new business growth of 3% despite economic challenges in the region. In terms of the second half, our expectation is to see group revenue growth moderate by 1 to 2 points, reflecting ongoing economic challenges, the roll-off of a contract loss from the second half of FY '19 and the cycling of prior year customer wins. Turning to Slide 13 and the group profit analysis. Sales revenue made a strong contribution to the profit of $94 million, which was partially offset by direct and indirect cost increases across the group. Depreciation expense increased $14 million, reflecting growth in the asset pool to support increased issue volumes, net of improved asset efficiencies. The increase in depreciation also reflects the ongoing investment in the U.S. supply chain automation and lumber projects with $115 million spent to date, which has been funded by $250 million of proceeds from FY '18 asset actions exiting underperforming assets. Net transport costs increased $7 million, largely driven by higher collections in Latin America, following the launch of the enhanced asset management program in the second half of FY '19. This cost increase also drove increased pricing in the region, which is recognized in the price/volume mix bucket on the slide. In the transport cost bucket, this increase was partly offset by a $2 million decrease in U.S. transport costs, reflecting lower third-party freight rates in the period. Plant cost increases of $25 million related to 3 key factors: firstly, labor and property inflation with particularly notable increases in North America; in Europe, we incurred additional handling and inspection costs, largely due to an increased focus on asset efficiency across our service center network; and finally, we experienced some anticipated inefficiencies in the U.S. pallets business during the rollout of the automation program in the region. IPEP expense increased $25 million in the half, reflecting higher asset charges, partly due to an increase in pallet written-down values across the group, and $5 million of the increase related to the rephasing of higher asset charges in the first half of FY '20 in Latin America, which followed the recognition of a higher cost to serve in the second half of the prior year. Other costs increased $13 million, largely due to investment in additional overheads across the group to support supply chain efficiency and asset management programs, particularly in the Americas region to support the delivery of improved commercial outcomes across those regions. And finally, AASB 16 contributed $12 million benefit to the underlying profit growth in the period. Now looking at our segment performance and starting with CHEP Americas on Slide 14. Sales revenue growth in the Americas was very strong at 9%. This included improved price realization across the U.S. and Latin America to recover input cost inflation and cost-to-serve increases. Despite these pricing initiatives, volume growth was robust and reflected contributions from the current and prior year contract wins in Canada, Latin America and the U.S. AASB 16 contributed 0.6 points to CHEP Americas margin, which improved by 0.2 points in the half. Excluding the benefit of AASB 16, the Americas region margin declined 0.4 points, notwithstanding a 1 point increase in U.S. margins, in line with our stated objective. The decline in segment margins was driven by anticipated first half margin pressure in Canada and Latin America, which includes the impact of half 1/half 2 phasing of costs in Latin America related to assets and the asset management program, which were recognized in the second half of the prior year. Slide 15 details the components of the CHEP Americas margin increase in the first half and provides commentary on our expectations for the full year with improvement expected in the second half. Starting with the U.S. The 1 point margin improvement in the first half translated to a 0.6 point benefit to the overall Americas segment margins. This 1 point of U.S. margin improvement reflected improved cost recovery through price, a moderation in lumber and transport inflation and efficiency benefits from our lumber procurement initiatives. These benefits offset labor and property inflation as well as anticipated inefficiencies during the rollout of the U.S. automation program. As we look to FY '20, we expect U.S. margins to increase by 1 point on FY '19 levels. As anticipated, Canada margins declined in the first half, decreasing the overall Americas margin by 0.5 points. This decrease was driven by higher asset repair costs associated with the stringer-to-block pallet transition and increased IPEP due to higher unit pallet costs. As a result of these additional costs, we expect the year-on-year trend in half 2 and full year Canada margins to be consistent with the trend noted in the first half. Latin America margins declined in the first half, reflecting higher asset charges recognized in the current period with the prior year charges weighted to the second half of FY '19. First half FY '20 overhead costs also reflected investment in the additional head count associated with initiatives and actions implemented in the second half of FY '19 to deliver higher asset collections and improve cost recovery through pricing in the region. The pricing and asset management initiatives in Latin America have already started to deliver results with improved price realization and $24 million of additional cash flow from asset efficiency benefits in the region. We expect margin improvement in both the second half and for the full year, reflecting improved cost recovery through price and the benefit of the year-on-year phasing of half 2 asset charges. In summary, excluding the benefit of AASB 16, America's FY '20 region margins are expected to increase on FY '19 levels, largely driven by the anticipated margin improvements in the U.S. and Latin America businesses. Turning to Slide 16 and U.S. sales revenue, which reflected improved price and volume growth in the first half. Pricing initiatives to recover costs contributed 4 points to revenue growth, although effective price, which includes surcharges, was 1 point lower at 3%, reflecting a reduction in surcharge contributions in line with the moderation in lumber and transport inflation over the past 6 months. Like-for-like volume growth of 1% was in line with historic levels. Net new business wins increased to 3% and included the rollover contribution from a major contract win in the prior period. Looking to the second half of the year, we expect volume growth to moderate by 1 to 2 points, driven by a roll-off of a prior year contract loss and the cycling of prior year's second half wins. In addition, surcharge contributions are expected to decrease in line with current trends in third-party freight rates. Turning to Slide 17. We have made good progress with our U.S. margin improvement initiatives during the first half. As you can see from the shaded circles in the chart, our pricing and procurement initiatives have largely been implemented, and we expect full year contributions from both initiatives in FY '21. Our automation program is on track with the 25 sites automated to date delivering in line with our initial investment case expectations. Collectively, we continue to expect that these initiatives will deliver 2 to 3 points of margin improvement on the first half '18 levels and for the phasing of this improvement to reflect an annual increase in margins of around 1 point per annum across FY '20, FY '21 and FY '22. Turning to the CHEP EMEA segment where the margins and returns remain strong despite challenging economic conditions and cost headwinds. Revenue growth of 4% was driven by solid volume growth and price realization in most parts of the business. Excluding the impact of AASB 16, underlying profit was flat on the prior year as the sales contribution to profit was offset by direct and indirect cost increases. Direct cost increases reflected higher transport costs in the automotive business and additional inspection and handling costs in Europe pallets business as the business sought to optimize pallet balances across the network. Indirect cost increases were driven by higher pallet unit costs in the IPEP calculation and investment in overhead to support new business growth and improved commercial outcomes across the region. The 1.7 point reduction in region ROCI reflected lower profit margins and higher ACI, which included the impact of prior year automotive asset purchases and CapEx to support Brexit-related increased retailer stocking. On Slide 19, looking at the EMEA sales revenue in more detail. Despite challenging macroeconomic conditions, which impacted like-for-like volumes, which were flat on the prior year, CHEP EMEA delivered growth of 4%, which included a 1 percentage point contribution from price realization in line with cost inflation in the region. The net new business wins of 3% was below the prior year FY '19 level. However, FY '19 included a 2-point contribution from a large automotive contract win. Looking to the second half of FY '20, we expect like-for-like volumes in the European pallet and automotive businesses to continue to be impacted by broader economic uncertainty. Turning to CHEP Asia Pacific, which delivered margin uplift and strong returns in the first half. Solid revenue growth in the pallets business and cost control and efficiencies across the region more than offset the impact of a large RPC contract loss in the prior year. We won a large RPC contract with a major Australian retailer in the first half. The contract, which is a term of 10 years, will commence in July 2020. Revenue contributions from this contract will commence in FY '21, and we expect earnings benefits to flow through from FY '22 onwards. In terms of capital and return considerations, upfront capital investment will be made in FY '21 with returns expected to be well in excess of the cost of capital over the 10-year life of the contract. Looking at our cash flow performance in the first half of '20 on Slide 21. Excluding the impact of the $183.2 million special dividend, which was funded by IFCO sale proceeds, free cash flow increased $108.1 million on the prior year first half. This outcome was driven by a significant increase in operating cash flow, which reflected higher earnings; a $33 million reduction in cash capital spend despite volume growth; and increased cash collections, which drove working capital improvements in the period. Reported free cash flow also included a $56 million increase due to the implementation of AASB 16, which together with stronger operating cash flow, more than -- was more than offset by the $119 million adverse year-on-year impact relating to the divestment of IFCO. The $119 million year-on-year IFCO-related reduction in cash flow is made up of the $97 million IFCO cash contribution to the prior year comparative period recognized in discontinued operations as well as $22 million of current year ordinary dividend outflows, which related to prior year IFCO earnings. Importantly, ordinary dividends were fully funded by underlying free cash flow after adjusting for IFCO-related dividends and the investments in automation, which are funded through proceeds from FY '18 asset actions. Moving to Slide 22. On an accrual basis, total capital expenditure decreased $26 million at constant currency in the first half, reflecting asset efficiency benefits and timing of nonpooling CapEx. Our key asset efficiency metric, the pooling CapEx-to-sales ratio, improved materially in the first half with a 1.8 percentage point reduction to 19.6%. This improvement was delivered despite ongoing investment to support volume growth and reflects asset efficiency across the group with a notable contribution from our Latin American pallet business. Prior year pooling CapEx included 2 items, which did not repeat in the current year: firstly, $11 million of additional pallets to support Brexit-related retailer stocking, which is yet to unwind; and secondly, $12 million of CapEx invested in automotive assets relating to a large contract win in the prior year. Nonpooling CapEx decreased $15 million over the prior year, largely due to the timing of investment in the U.S. automation program with commissioning of sites weighted to the second half of FY '20. Turning to the balance sheet on Slide 23. Net debt increased $1.4 billion on FY '19 levels, reflecting $718 million of lease liabilities brought on balance sheet under AASB 16 and $674 million of capital management transactions, which included share buybacks as well as a capital return and a special dividend payment in the first half. We have significant headroom on our balance sheet with $2.4 billion of cash and undrawn credit facilities, which is more than sufficient to fund the balance of our share buyback program. As we look to the full year and considering the impact of AASB 16, we expect FY '20 net interest expense to be between $85 million and $90 million for FY '20. During the half, we revised our financial policy to include the impact of AASB 16 with the revised policy targeting net debt-to-EBITDA below 2x, which is aligned with our commitment of maintaining our investment-grade, BBB+ credit rating. In addition, we have also revised our EBITDA definition to recognize IPEP as a depreciation line expense, which is in line with the methodology applied by the credit rating agencies. In summary, revenue growth in the first half was resilient in the face of macroeconomic uncertainty. The initiatives we've implemented in the Americas region are on track to deliver both operational and financial improvements over the medium term. We delivered a material improvement in underlying cash flow, reflecting asset efficiency across the group and disciplined working capital management. And finally, we have a conservative and flexible balance sheet, which continues to be underpinned by an investment-grade credit rating. Thank you. We will now go to Q&A.

[Operator Instructions] Your first question today comes from Anthony Moulder with Jefferies.

If I can start with the guidance level you've talked to, 1% to 2% -- call it 1 to 2 percentage points revenue impact in the second half. Is it -- I would take that that's evenly split across the Americas and EMEA?

No, it's in the U.S., basically. There'll be a little bit in EMEA, but the majority of it is in the Americas.

So -- and that's the volume impact from the contracts rolling?

Yes.

So economic uncertainty in EMEA, no real impact?

So I think what we're highlighting there is very similar to what we said in August or our thoughts are similar to August and probably the year before that as well, which is Europe -- this is not just a Brexit impact, it's we're seeing economies slowing down in places like France and Germany as well. But do we see the impact being worse in the second half than we had already seen in the first half? And I would say probably not, which is we've seen flat underlying like-for-like growth in Europe. So we think it's going to be like that and rather than going negative, but you've just got keep a close eye on it because, again, what could the impact be of something global trade wars getting worse or coronavirus spreading outside of Asia, we don't know at this point. But our view at the moment is the second half is, in Europe, it will be similar to the trends we've seen in the first half.

You're no longer providing the geographic regions of Europe. Can you talk to whether or not one of those is being more impacted by that slowdown?

Well, yes, I mean I think what we're saying is it's the -- I'll call them established rather than developed markets in Europe. So you're talking mainland Europe. We're still seeing good growth on the fringes and in some of the sort of Middle East, India-type of parts of that reporting segment. So again, that sort of does lead a little bit to why we're calling out, in terms of the margin growth, that whilst we're seeing growth in some of these other markets, we are -- they're not necessarily going to be as high profitability as the -- sort of the France, Germanys, U.K.s part of Europe. And so that's -- I think that's the picture we should be thinking about.

More Western and Northern?

Yes.

You commented on the automation programs running to expectations. Given customers, I guess, over the last 12 months have agreed to the pricing increases from higher inflation in the system, are you expecting customers to ask to share the benefits of the automation program when they start to step up?

No. That's not our assumption. And I don't think we've had any indication from the negotiations we've had so far that, that will be the case. So we're very confident that those margin -- that margin guidance we've given over the next 3 years is something we can deliver.

And I think, Anthony, it's also worth noting, as we talk about effective pricing, we've highlighted that effective pricing is lower than the actual price realized on the top line, and that reflects that we're getting lower surcharges. So the mechanisms largely, as they -- as the lumber costs come down and transport come down, so too do our surcharges. But particularly in the U.S. region and the Americas region, that is not reflected on the top line revenue. It's an offset to the cost line. So that's where the flip comes in as costs come down, our surcharges come down also.

And remind us as to how long that takes to normalize down, please?

Around 2 to 3 months, depending on the exact wording in each of the contracts. But roughly, roughly, it's around that sort of time lag.

Yes. Not a 6-month impact, I guess, is the benefit. And lastly on -- whilst I'm still in the U.S., has there been any change to retailers' behavior in that market, positively or negatively?

I would say no material change either way.

Your next question comes from Matt Ryan with UBS Investment Bank.

Just a question on EMEA margins. I think you've called out a number of direct and indirect cost pressures on Slide 18. Just curious on which of these costs do you think are temporary or one-off. And I guess looking out maybe to FY '21, your thoughts on this increased cost pressure.

Look, a couple of comments, Matt. One would be if you look at the makeup of the growth, given that we do have high growth in, you'd say, more emerging or developing markets where we don't have the same level of scale, we're getting great returns and strong margins from them, but they're not at the same level of the total region. So I think, pleasingly, what this is showing that although we're seeing a slowdown in Europe that the business has been able to get good momentum and a pipeline for growth in new areas of development, and we should sort of expect that kind of shape as we go into the second half. If economic conditions change materially, then we can probably expect to get more organic growth, which may give us a little bit of a benefit through on margins. But overall, for the region, we're still at very, very strong margins and strong returns, and I wouldn't be building into any of the models a tick back up in margins. We'd rather continue to see good, strong growth at high returns for the business be added in.

Okay. That's clear. And then on Slide 13, there's an other line, which looks like you've incurred about $13 million of extra overheads.

Yes.

Can you just describe what that is exactly. And should we just double that for a full year benefit -- sorry, a full year impact?

So the answer is yes in terms of a full year impact, but the nature of the cost, first of all, it includes the Latin America piece. If you remember, so for the second half of last year, we started implementing the new asset management program. So we added more resources, commercial resources and market resources, asset recollection, et cetera, into that market. We also, across the group, have added more resources to improve our commercial pricing of contracts. And also, as we're looking to use more and more digital capabilities across the group, including we've rolled out a new sales tool for our sales force. So they're the key contributors to that added cost.

I guess I mean like a $25 million, that's close to 3% of EBIT. Is that a bit higher than what you were thinking that number might be?

No, that was in line. As you can see that the results we've delivered have been in line with what we had indicated. Really, the biggest flip in terms of first half, second half is really the timing of asset charges first half versus second half rather than this as an overhead cost. And look, a key piece -- and that's why we called out, look, a key piece of as we got price realization was recognizing higher cost to serve, particularly in that Latin America business.

Okay. And then the U.S. transport and lumber cost, can you tell us whether you are a net beneficiary at that cost line after taking into account the surcharge reversals?

Yes. So look, we still have -- we're now -- we're still a net-net beneficiary. So we called out that we had a $2 million benefit net in the U.S. from transport. We generally saw the lumber really net-net, net adds with the surcharges. The challenge for us, though, in the U.S., which we've seen come on is increased labor inflation and also increased property costs, which are the 2, I guess, new components that we have in our total cost base.

Your next question comes from Owen Birrell with Goldman Sachs.

Just a few questions from me. Just firstly, on the guidance, I noticed you've changed your guidance from the lower end of mid-singles up to the middle of mid-single digits growth. But it sounds like you're sort of talking down the growth profile across all the markets. I'm just trying to reconcile that into what's actually changed since August to give you a little bit more confidence in the growth outlook.

So I think let's just talk about guidance language, generally. I think we're -- and this is not -- this is -- we'll take the blame for this. We are talking on a pinhead here between going from mid-single digits to sort of slightly above, and we're talking about the ULP being in line with or slightly above to in line with. Just to take -- to step back from the words, we are still sticking by our view on ULP for the year. What we're just trying to reflect a little bit in terms of the language is we did better on the top line in the first half than I think we expected, but that was partly -- we held on to business, as Nessa talked about, in terms of U.S. business that's coming off, we held on to it for a bit longer than we thought. And we've done a little bit better in other regions in terms of sales growth than we did in Europe, and there's obviously a margin mix impact there just from -- because Europe is such a profitable market. So in reality, I don't think we're saying much has changed at all. We're just reflecting that what's actually happened in the first half on the top line, our views on the bottom line stay pretty much the same. In terms of the sort of the market outlook, the only area where I think we continue to be cautious is around Europe just because we are seeing a slowdown in the underlying economies. But again, the business did pretty well in the first half, notwithstanding the macroeconomic implications. And then the only other thing I think I would -- yes, I have to say is we don't know what the impact of coronavirus will be on our business in Asia and China. It's very small, our business, therefore, from an earnings perspective for the group, it's not material. But we are -- it's hard to call right now what will happen if there's a pandemic, which is global. I certainly don't know. I don't think many other people know at this stage. So that's -- I think we're just trying to stay balanced about outlook in terms of the macroeconomics. But I think the important things to come back to are, yes, we've had a lot of economic uncertainty in the first half but our business is very resilient, and it's still able to produce really good top line growth and bottom line growth numbers even in those conditions. And more importantly, I think for Brambles, sort of the key things, which we are trying to deliver in the first half, were really good cash flow, which we've done and convince everybody and show everybody that our plans for U.S. margin improvement were going to happen. And we've been -- nailed that on the head in the first half as well. So I think if you put all that together, us being slightly -- still remaining cautious about global outlook growth, is a minor point compared to the positives on the other ones.

All right. Understood. And just on that U.S. pallets revenue, you talked to a 1 to 2 percentage point roll-off in the second half. Just to confirm, so what you're saying is the U.S. market, 8% growth in the first half. It should be around about 6% to 7% growth in the second half year-on-year, and the deviation is essentially in that net new business wins.

I would sort of, me being me, I would go sort of 5%, 6% or 7% possibly rather than any higher than that. But it's -- so you could take the 8% minus 2%, for sure. And then you've got to take a view a little bit on some of the pricing rollover and all the rest of it. But yes, that -- I think your analysis is good enough.

Okay. And just in Australian market, you talked about the new contract, the RPC contract that you've won. I mean we can all guess who that is. I'm just wanting to get a sense of what the nature of that contract is. Is it actually a pool management contract? Or is it just a pool servicing contract as per what it used to be?

No, so we are effectively taking on the management of the pool and washing of the crates from their own in-house operations that -- we're taking on the full facility -- full operations of it.

Okay. And can you give us a sense of what level of investment is actually required into that? Because we understand that the old facilities they had were quite old as per your facilities. Can you give us a sense of the scale of the magnitude of investment that's likely to go in, in -- was it FY '20, I think it was?

We can't, because it's sensitive, but it's not sort of life-changing. It's an amount of capital, but I think the most important thing is that the return on that capital investment is above the cost of capital across the period of the contract. I think more importantly for me is that strategically, we're back in business in RPCs in Australia, whereas if we had not won that contract, I think we'd have had to significantly rethink what we were doing. But as a -- from an economic perspective, it is a good project to have won. It's just there's a bit of timing, as you've already sort of kind of alluded to, between the investment going in, in next year and us getting the ULP flowing out in the year after, but it's a good program.

In terms of the return profile there, I mean the WACC, I would imagine, for the project over that period is quite low. I know your internal hurdles are quite high. Can you confirm whether you're actually going to be exceeding your internal hurdles on that project?

Yes. Yes, because our internal hurdles are our internal hurdles and that's how we judge projects. So whether they're the right internal hurdles or not -- or whether they're too high, reflecting the lower cost of capital across the globe, we can have a debate about that. But we've kept them up as high as they were before, and we will beat those hurdles with this project.

Okay. And just final question for me. On BXB Digital, nothing mentioned in this result on BXB Digital. What's happening there? Is there any updates or any new projects or initiatives that have come out of there?

So they're still very much focused on supporting the business in terms of understanding better where the leak is occurring and how we can run our business more effectively. And I think we'll talk a little bit more about what's going on when we get to May for the Investor Day. But I think you can see the sort of impact of BXB deal or the insights we're getting from that flowing through in the better asset productivity and the CapEx-to-sales numbers, because that's all linked to are we understanding where the assets are going missing and can we -- can change contractual terms to get better pricing to reflect the higher cost of serve. So it's supporting all of that activity, but there's no new major initiatives, which we need to talk about until we get to May.

Your next question comes from Anthony Longo with CLSA.