Brambles Limited (BXB) Earnings Call Transcript & Summary

Thank you for joining us today, and welcome to the Brambles briefing to discuss our decision on Costco plastic pallets. We appreciate the time there such notice and we know for many of you this briefing is taking place after market close. So thank you for being so accommodating. I'll start this briefing by providing you with a short overview of the strategic rationale and financial implications of our decision to stay after which there will be time for Q&A with myself and Nessa O'Sullivan, our CFO. As you will have seen from the announcement lodged on the ASX, Brambles has made the decision not to participate in the potential transition to plastic pallets in Costco's U.S. supply chain. Our decision today should reassure shareholders that we are disciplined in the allocation of capital and will only pursue investments, which we believe to be in the best interest of shareholders and long-term sustainability of the company. In the 3 years since Costco announced its intention to migrate to plastic pallets, global supply chains have faced unprecedented disruptions with broad-based shortages and high levels of cost inflation across crystal inputs. In the case of our plastic pallet trials with Costco, the cost to serve has been impacted by cost increases. A Costco spec plastic pallet is now 4x the cost of a wooden pallet, 50% higher than in September 2021 when we presented the economics at our Investor Day. As the largest pallet pooler in the North American market and the global leader in plastic pallets, we have a unique perspective and strong capabilities which we've leveraged to conduct an extensive trial to assess the viability of investments in a plastic pallet pool for Costco. The key focus of our trial was to identify and test a more efficient business model, including a fully serialized pool to drive operating efficiencies in a plastic pallet pool for Costco's U.S. supply chain. This would allow us to reduce the level of price premium required to make the plastic pallet economics work for us, our customers and Costco. The model leverages Costco's network to sort and issue pallets directly to manufacturers, which enables further operating and transport efficiencies across the supply chain. As part of the trial, we developed a high-quality plastic pallet that is fully compliant with Costco and U.S. regulations, including critical U.S. fire regulation. The unique pallet design, both identifiable using RFID technology to support asset control and has a modular design that allows faster and easier repairs, which reduces the overall cost of running the pool. Despite the material efficiencies identified and developed with Costco and our customers, the price premium and contractual terms required to deliver on our return objectives were at a level our customers and Costco were unwilling to accept. We've been transparent in our dialogue with Costco that shouldn't investment in classic pallets not make economic sense, we would not perceive. It is our understanding that Costco is continuing to assess alternatives to transition the supply chain plastic pallets. But the likelihood, timing and magnitude of any such transition is currently unknown. Costco remains a highly valued retail partner in North America. We will continue to work closely with them and our customers. We are committed to supporting them through any transition should it occur. Our business is prepared for this scenario. While there will be some revenue and profit implications associated with the transition, the strong underlying demand for our pallets from both existing and new customers and the investments we are making in automation and other efficiencies are expected to enable us to effectively manage these changes in network dynamics. While the specifics of any transition to plastic pallets and Costco supply chain remain uncertain, we can reasonably make the following assumptions; firstly, any conversion to plastic pallets is likely to be phased over multiple years. It would also be reasonable to think that no pooler has enough plastic pallets that fully comply with Costco's needs and U.S. fire regulations to deploy into the Costco lanes at scale immediately or in the short term. Secondly, we would expect any reduction in our current volumes at Costco would be replaced by new business wins, of which the current pipeline is very strong. Over the long term, with approximately 50% of the U.S. market currently addressable, there are material opportunities for growth in the U.S. Any pallets released from the Costco system would be redeployed to support growth with existing and new customers. And this is against a backdrop of material levels of pent-up demand given pallet availability constraints in the U.S. market over the past 12 months. Finally, we will seek to mitigate any short-term transition costs such as pallet relocation costs and inefficiencies in the wooden pallet pool due to the loss of Costco volume through network efficiency and optimization initiatives. I'd like to close today by saying that while we have not proceeded with the rollout of plastic pallets across Costco supply chain, our U.S. business is well-positioned for the future, and we continue to have a strong relationship with Costco. At a macro level, the current operating conditions are leading to high demand for wooden pallets, while supply is limited. These dynamics are not expected to change in the near term, and therefore, we do not anticipate a shortage of demand for our pallets in the United States. Over the medium to long term, we are also confident in delivering on our shaping our future ambitions. The program, as outlined to investors in September, is progressing well and we believe it will transform the business to increase our competitive advantage, improve customer service and deliver strong shareholder returns. We continue to expect the improvement in underlying profit between FY '21 and FY '25 to be weighted to the CHEP Americas Segment. Thank you. And I'll now hand over to the operator for Q&A. And just to remind you that we are in a blackout period, so I can only answer questions relating to this specific decision.

[Operator Instructions] Your first question comes from Matt Ryan from Barrenjoey.

Graham, just hoping if you could share any findings from the trial and how that came in relative to your expectations? Obviously, the pricing has come in below in terms of the acceptance of that pricing, but what did the loss rates, the damage rates and all the other sort of key metrics, how did they perform?

So I think what we found, Matt, was the efficient operating model that we were expecting has been developed. I think we've proved it out. And if we go back to sort of the key driver really is the unit cost of the pallet and ensuring that there is commercial terms that we needed to get to the sort of return expectations would be accepted by the -- our customers and Costco. So everything else, so we were seeing efficiencies within the network from things like transport savings because of the way we have the movements between the TPM in Costco system and avoiding the need to go to our service centers, lower damage rates and lower loss rates because of the technology enablement. That all seems to be working pretty well. So again, it wasn't a huge amount of data, and that's why I think we have to be reasonably careful about our sort of assumptions and be sort of cautious. But the basic operating model is working really well.

And you made a few references just to the new business wins that might be available. Just hoping if you could talk a little bit about that. I'm not sure whether you know about the quantum of what might be out there. But maybe if you could just talk to that? And also just, I guess, how much of this pent-up demand for your products is related to the really high whitewood prices at the moment or perhaps just the shortage of pallets more generally?

Yes. I think we'd refer back to the Mac retrace because to say it's going to be X or Y in the short term is difficult because you don't know the pace of any change of any potential change of converting our pool into plastic from Costco's perspective. But if you look back, as we've always had, sort of 0 to 2% or 3% per annum conversion from whitewood into pooled. And we haven't seen that for the last 12 months, a bit longer than 18 months because of the shortage of pallets. So we've been focusing on keeping our existing customers supplied as best as we can rather than going after new business wins. But we do believe that within that SME community, there is a demand to switch. Now whether it's driven by very high whitewood prices or not, it is always a debatable point. I think you know my views, which are it's more driven by the need for the SMEs to sell their products across a broader geographic spread, and therefore, they need to go into them on the supply chain and have a pallet which will survive the rigors of lots of forklift truck handling and storage and high bay warehouses. But at the same time, they don't want to have to go and collect it from one side of the U.S. to the other because that's not their job, and that's why they go to pull. But yes, I mean, with ultra-high whitewood pricing, if the people were sitting on the fence, and I'm sure they would be more inclined to come in and support solution. But at the moment, the issue is there aren't any pallets. So we are doing our best to service existing demand. But we do think that that is there once those supply and demand issues ease off.

Your next question comes from Niraj Shah from Goldman Sachs.

Graham, Nessa, I hope you can hear me okay?

Yes.

Just I guess, a couple for me. One, just to be clear, and apologies if I missed it. So have you now ceased all plastic pallet trials with Costco?

So what we've done is we said we're not going to proceed with the rollout, but we have got assets, obviously, which have been deployed through the trial. And rather than sort of right and trying to find another use, then we are going to continue to let them flow through the system with those customers where we're getting premium pricing. And the reason for doing that is; a, we're keeping customers satisfied and particularly in a period of shortage of wooden pallets generally, but it will help us build our capabilities around operating a fully digitized pool, which we are -- that capability is something we need to build up for building up a more serialized wooden pool eventually. So that's -- it's worth doing it. And as I said, we're going to get good returns from that particular pool, anyway. Anything you want to add to it Nessa?

Yes. And the only thing is just putting in context as we've been sort of investing in this over 3 years. In total, we've invested under AUD 20 million. So what we're talking about here is a relatively small investment that can help us with a wider wooden pool as well.

Sure. That makes sense. And secondly, you kind of touched on this, but -- just want to be clear, is there any change in sort of messaging from Costco to you on sort of their determination to transition their pool over time?

No, it's been very, very constant in terms of their desire to do it. But again, no definite time frame and our view is it's going to take a while. So -- but there's been no change in the messages.

Sure. Okay. And sorry, just last one for me. And I'm not sure how much detail you want to go into on this. But I just came to understand I guess, how close the decision was because you guys have clearly extracted some of a lot of efficiencies in this operating model, but obviously, the plastic pallet cost has gone against you in quite a dramatic way. So I seem to understand, I guess, the sensitivities around those variables.

No, you can -- the outcomes from the trial were very conclusive. As we discussed at Investor Day, if we've been able to get within a reasonable range, I'm sure we would have continued to try and work with all the participating -- participants across the supply chain to be able to reach our target objectives. But look, we highlighted in this environment, particularly, inflation is high and a key input is the cost of the pallet. And when you see the costs now being -- used to be historically running at 3x the cost of wooden pallets now and it's in and around 4x the cost of a wooden pallet, the commercial terms that our customers would have to take on, including the premium pricing. We're just at a level that it wasn't acceptable and it wasn't within a close enough range that we would have said we believe we should continue with the trials. So it was pretty conclusive.

I'll leave it there.

Your next question comes from Anthony Moulder from Jefferies.

If I could start with the capital cost of the place billing, obviously, up 50% since September. Was there any discussions with Costco about the land. This is a decision until such times maybe pricing came back into a range.

Well, look, for us, Anthony, it wasn't just about.

Hello?

This is the operator. We seem to have lost audio from the speaker line. Please hold while we get them reconnected.

Hi, Anthony, it really wasn't because it was you -- there drop calls.

I haven't touched anything.

Sorry about that. So Anthony, do you want to repeat your question so that everybody on the line can understand and what your question was, and we'll get right back to answering it.

Sure, sure. So I guess given the increased cost of the plastic pallets seemed to be a proportion of this decision not to proceed. I expect pricing was another component of that. But was there ever a discussion with Costco to say not at this price point, but if Russia pulls out of Ukraine, if the U.S. goes into a recession, then the price point of the plastic pallets coming down? And if it came back to within this kind of a range or back where it was in September '21, and we're more likely to proceed? Was there a decision or a conversation about delaying this decision further?

So Anthony, our decision was more around what are all the factors that we needed to get in place to make this viable economic, which for us was about reaching our target objectives in terms of the returns that we had set as our target. That -- it just involves the input cost of the pallet, although that is a material input. It was also about the commercial terms we needed to get acceptance of which was from our own customers as well as from Costco, largely relating to asset accountability but also some other terms related to volatility in input costs and other costs to serve over time. So there were a range of factors. And as you can imagine, we tried very hard to sit within a range, could this make sense. And for the foreseeable future, we have to say, as we look at, we can't see that the costs would change materially or that we would get acceptance of the commercial terms that we needed for the viable future. But I guess in the very, very distant future, if everything was to change materially, we are a leading pooled plastic pallets globally. We do it successfully in other markets and it's all about getting the right pricing and right commercial terms in place to make it viable, and we just weren't able to do it, and we weren't close enough to have warranted ongoing discussions and negotiations about the pricing terms.

Right. Okay. And obviously, the counter factor on this is that you proceed with growth in the U.S. market. I guess that 50% of unpalletized non-pooled pallet movements in the U.S. for fast-moving consumer goods has always been there is an opportunity. Why now? What gives you the confidence that you can now pursue growth option into that other 50% of the market that's remained that size for a decade.

So Anthony, if you look back historically over the results that we've published and we always show the U.S. making up at least for the last sort of 6 years or so that Graham and I have been around, we always show that chart which shows exactly where our volume comes from, what's organic and what's new business wins. And the new wins -- the net new wins have historically been at that 0% to 2% range that Graham referenced, and that has come from that space. So as the overall market has grown, while we look at overall share, us and the competitors have continued to get growth from there. But it's fair to say because there are no pallets available, that there is demand that you would have on an annual basis that comes from that, that has historically always been part of our growth profile that we haven't been able to service and we made the decision not to service it and with the lack of and scarcity of pallets, our priority has to be to service our existing customers.

Great. So that mean that is not white collar customers, but it's also take out customers that you would see that growth option from?

No. We think that there's enough opportunity still in the unpooled part of the market. And in fact, disruptions to supply chains like this only seek to highlight to a whole range of people who are in the unpooled market the advantages of having a proven pallet and dealing with all the complexities of supply. And as also a sustainability becomes more and more important to end consumers as well. The fact that we have those credentials operating a circular business model makes our model more and more attractive over time. So I think they are all key factors that really you should think about in terms of growth.

Sure. But I guess if I look at the whole of the market, the Costco channel, supply chain incredibly quick, very high velocity, and you're now converting down to a part of the market that hasn't seen the benefits of pooled pallets considerably that is they are turning at a rate lower than your average outside of Costco. So is it a margin and a return impact and moving down into that part of the market. Would you agree with that?

So there's a couple of comments that I'd make about that I think are really important to note. First of all, as we look at -- different customers have different speeds of cycle time. And so if you're a customer who has slowed, they're part of their flows that are particularly fast, generally, within their portfolio, they also have flows within that goes to higher-risk lines or to lower velocity. That will all factor into their pricing. And we can't imagine if you look at what might happen in the shorter term, first of all, this isn't something that we see happening overnight. There is no other pooler out there right now who is a pallet that meets the Costco stack at any type of scale who could do this. So in terms of appetite, Costco currently not mandating it, and that's been very clear, and we have an ongoing very, very strong relationship with Costco. So I think you have to sort of take those 2 factors into account. No rapid change and that basically, if we end up with a faster flow on the mix changes to something that a slower flow, then you should expect that we would have a higher revenue from per issue as a result of that switch over.

I'll leave it there.

Your next question comes from Jakob Cakarnis from Jarden Australia.

Graham. Nessa. Through the process of trialing plastic pallets with Costco, was there ever any discussion about co-funding the investment in the plastic pallet pool and whether that's between your sales in Costco or your sales in customers? Or was the CapEx always continuing on Brambles stumping up the initial investment?

So there wasn't because our view is that we've got a strong enough balance sheet to fund this. And particularly when you think about the conversion, it is going to take time -- would take time if we were going to do it. So it wasn't something that we didn't think we couldn't manage the cash outflows throughout our existing funding structure. So that was never a point of conversation.

To maybe go down the same angle though, is it -- could it be likely that Costco look to co-fund their desire to get a plastic pallet pool up with someone other than yourselves? And does decision this evening preclude you from participating in any change to the structure of the plastic pallet pool moving forward?

I mean, you'd have to ask Costco what their plans going on. It's not us. And our relationship with Costco, I think, is sufficiently strong. But I think as Nessa said, some time at points in the future, should the conditions change in either structure or pricing or cost then we don't feel that we would be excluded from participating in the future. But for right now -- right now, we not -- we don't see that position changing in the next couple of years. And I think it's -- even in future, the thing change should expect us to be disciplined about capital allocation and still want to make those sorts of returns in the future.

Okay. And one final one for me. I appreciate we're not moving forward with it now. What year was marked for the start if Brambles were to pursue this investment with Costco? What you were plastic pallets ear-marked to start the conversion of the current pool to the plastic pool place?

Well, that would have been driven partly by what we could do. So again, Costco has not set a firm deadline when they want to start or continue to transition. And our view is it was going to take some time anyway, and we certainly didn't expect much to happen over the next 10 to 12 months. So that's obvious we start in '23 but we weren't going to be able to ramp up significantly for a couple of years.

Your next question comes from Andre Fromyhr from UBS.

Just wondering, I mean it's following up on the previous question. But in terms of timing, do you know how advanced Costco are in their discussions with alternative providers or exploring alternative business models here? Or is the conclusion of these trials sort of back to square one for them?

I'm sure it's not. They've always been very clear that they would always have more than one pooler involved in the process with them. So again, I can't speak for Costco and what the timing is that we know that we certainly win them in the only person in the presence.

Okay. On the sort of commercial terms that you were exploring with them, did you ever talk about them -- Costco or all the customers themselves assuming any of the asset risks from the capital investment? For example, an increased amount of compensation in the event of losses?

Absolutely. So as Graham mentioned in his introduction, we explored a whole range of alternative options and explored what ways could -- what would need to change, what variables would need to change? What would we need to derisk in the model to be able to get to an adequate return and obviously doing that in conjunction with discussions with Costco and our customers because they were all key people who would have had to sign up and accept the terms. But obviously, we didn't reach a sufficiently high premium in the price and the related commercial terms that we needed to get us to the right returns. So being disciplined about where we're allocating capital. Our conclusion has to be from quite extensive trials, putting all those levers, exploring all those options that we're not in a position to be able to recommend that we proceed with this.

Okay. And from the trials and things you learn from it, what -- maybe just remind us of the what are the aspects of the Costco supply chains that are unique to the situation that helped with the plastic economics? And I guess what I'm also asking is did you learn anything from the trials that might give you ideas of who else either in the U.S. or globally could suit the plastic model?

So we are leaders in plastic pallets globally. So we do have a good insight as to what are the key variables that work well. And one of the things that we've always talked about is Costco having faster cycle times sets them up well. Also in terms of actually collaboration, Costco has been very collaborative with us and very supportive of the digital asset model and having the right infrastructure to be able to support that. So all those things were kind of key variables that set us up to think this could work really well. Also Costco were very supportive of us working through a model that would be using that sort of TPM, which is essentially a site, which means allows you to effectively source and reissue pallets much faster, so they don't have to go back to a service center. That was another factor that put Costco in that sort of -- had the right conditions for us to say, this could well be a scenario where we could get a much better outcome relative to even other plastics in the markets where we are in a really good return on it. So all those factors were key factors for us. But having that collaboration with Costco was also a key factor that they were very open to work with us through the trial. But they are quite unique circumstances, which is why if you were dealing with say going to another retailer that had higher loss rates, longer side time, given that the asset cost historically has been 3x wouldn't the fact that it's closer to 4x sort of irrelevant. Even at 3x the cost of wooden, the economics just make that quite prohibitive.

Okay. And just one more for me, which is in the event that Costco proceeds and you sort of go through with the transition, you've made comments about short-term transition costs. Can you give us some clues on how to think about sizing those transition costs and how they compare with the estimated CapEx savings that you might have on the wood pallets that get freed up?

So look, for us, what we've said is we would seek to offset those. So in terms of how you're looking at modeling us, we believe it will be progressive so that we can plan for it in early transition and that we would look to take on new business, but also there's a range of investments that we've already talked to market about in automation and other things that we're doing that we think should enable us to offset that. So we don't expect to see that being a material issue for us in terms of having incremental costs as we transition.

And are the wood CapEx savings still in line with guidance that you're going to give -- I mean, I guess the alternative on the price at the time.

Yes. And it also depends on what's the ratio of transition. And also, if there is any transition, would it be part of the 2? Would it be all of the 2, but you should assume that if pallets are released, we have a home for them within our existing network because across our network, we buy new pallets every year to support growth toward end-of-life assets, et cetera. So -- and we haven't been able to go after new business. So if pallets are released back, we would be able to redeploy them. And the value to us of the CapEx, to your point, would really be -- it would mean we wouldn't have to go out and buy a wooden pallet. If a wooden pallet was released from a Costco network, so whatever the value of the market price was at the time would really be what the economic value to us would be.

Your next question comes from Justin Barratt from CLSA.

I just wanted to ask, the trials that you did with Costco, is there anything that you learned from those trials that could potentially be rolled out into other aspects of your network, whether it's plastic or wood?

Yes. I mean, I think the benefit of having a fully digitized tool to allow you to minimize losses and start thinking about, can you end up with a more dynamic pricing model based on specific dwell time, cycle time, specific lanes or specific manufacturers. I think that's all a learning that we knew was there, but it was actually to get some real-world experience in a very large network like Costco. So that absolutely is something we can carry forward and learn from. And I think the R&D effort that went in to developing a new type of plastic pallet that can be replaced much more easily and more sustainably because you're not having to replace the whole pallet of the modular design that again, we can use elsewhere around the world because we are the leading provider of plastic pallets globally. So the next time we want to upgrade a pooling in another country, we can use that technology. So those are some, I would say, the main learnings.

Great. And then at your Investor Day last year, you outlined, I guess, some expectations or targets for revenue growth and EBIT growth longer term at which you complete that sort of investment program. If Costco were to go down the plastic path and you didn't end up actually supporting them in any way, shape or form? Are they material enough to impact that sort of guidance or long-term target?

So I think we said that we still anticipate that if you look back at the shape and the quantum of the numbers we put out in the Investor Day, the weighted towards the America segment being weighted to that segment and the consequent shape of that. We're not changing our view about that at all. So it doesn't really make any material impact on the numbers one way or the other.

And look, I think it's a key point that given the scale of this and how you would have to get the pallets manufactured at the spec that Costco wants the pallets at, this would take time to implement. So it'd be progressive. And we feel we're well set up to continue to get growth in other parts in terms of if you're looking at what would be the impact in terms of overall growth. We believe this will be done in a more orderly transition rather than an overnight. And I think we have had to step away from going after new business but it's within our DNA to get new business and get new business growth, plus it's within the setup and the structure of the market that every year, historically, you get that 0% to 2% growth from that unproved part of the market. And then if you consider the [Technical Difficulty] 12, 18 months that we haven't been able to go there. So we would look to manage that in a way that we wouldn't see any material change to what we'd expect in terms of our growth overall.

Your next question comes from Cameron McDonald from E&P.

Just a couple of questions from me, please. Just in terms of the ROCE target that didn't lead, presumably, you're not going to tell us exactly what it would have achieved? But under your previous homework you said that you would do it above 15%. You sort of talk about between 12% and 15%. Is it fair to say that it didn't reach the 12% either. And even under the previous framework, you would have rejected it?

No, it's not fair to say that. And you're very -- just going to say, we're not going to tell you what it did get to. But I mean we were very -- I think the last communication was we were setting a hurdle of 18% and had to get to at least 18% or above before we do it. So I think you can assume that it didn't get to 18% or higher, and that's all you should read out of that.

Yes. But one of the other comments we made, too, was that, look, if we've got -- if we were really, really close to there, we thought that there was an opportunity to continue to work with our customers and with Costco in the short term that would tip us over into our -- to reach our target, we would have continued to do that. But the trials were pretty conclusive and hence, the conclusion reached.

Okay. But then you also said that even at 3x the CapEx, it still wouldn't have met the number. So it's got to be at least 25% away from the 18%.

I think you need to be careful. I don't think you're necessarily drawing the right conclusion. I think you need to go back and focus on it's not just the input cost of the pallet, it is also heavily dependent on getting the right commercial terms in place with our customers and with Costco. So all of those variables are material variables that you need to get yourself to the right place for us to be able to say this is a good place for us to invest.

Okay. The other question I've got is that you've said that you're going to leave the $20 million worth of investment in plastic pallets out in the broader pool to continue to learn from. How are you going to stop those -- that $20 million worth of plastic pallets ending up downstream in Walmart?

So look, we're continuing to manage the plastic pool the same way we have through the trial, and they haven't ended up in Walmart. And where we will keep them flowing is where we're getting good premium pricing. And we're continuing to learn from the digitization, which is part of the overall transformation strategy anyway. So -- the issue is we've invested in this pool, and now we're saying how do we leverage that further so that we get learnings both -- would improve and also in terms of digital insights, not just for how we run our business, but also potentially that will flow into the initiatives we have in place to servicing our customers better.

So they -- in short, that means that they're not going to be part of an open pool?

Correct.

Correct.

But isn't the point of -- isn't according to digitalization to actually have them in an open pool we work out where things are going?

Well, I think digitization, there are learning to get, whether it's closed pool or open pool. Yes, we're doing a whole range of different trials that are more open pool and different. But while you have the opportunity to learn from an investment we've already done, and we already are getting premium pricing on slowing. It would make sense to continue to do that to build our knowledge. So it is all about how do you track the pallets, how do you work at the velocity of loads? Where are the insights and how do you eliminate the supply chain further? All those things are valid, whether it's a relatively close pool because what we might say it's the close pool, there is no flow really disclosed on this is directly in and out and back in a very, very simple flow. It's fair to say Costco flows are not all of that nature. There will be some element of open, but it's not open broad adding they'll end up in Sam's Club or they'll end up in Walmart.

Presumably you have been down the path of investing in Costco with the Costco plastic pool of pallets that would have been more open?

Well, the fact...

Because you've said that it's 10% of flows, right? How are you going to have a close for 10% flow?

That's exactly my point. I'm saying it's not as open flow, as you might say, in a higher loss lane, but Costco velocity and lower losses overall meant that it was a better candidate and it was one of the unique characteristics of Costco that made them a good potential partner to work with. But you're right, the flows, that was the point I was making, that the flows are not the Costco flows, 10% of the flows, they are not all sitting with full closed loop. And that's why if you look forward, Costco may decide over time that they're going to transition part of it or all of the flows. They may decide some flows are better on plastic and other flows may not make sense given some parts of it may have a higher loss factor or a longer cycle time, and it may not make as much sense. But that's a matter for Costco. But you're right, our trial was based on real life Costco flows, which you'd say, well, they are high velocity, lower loss or not, in fact, fully closed loop. You're absolutely right.

Your next question comes from Owen Birrell from RBC.

Just a few questions from me. Just the first one, I guess, a point of clarification. It's really -- you said that the -- you couldn't achieve the right terms on effectively loss compensation, and you mentioned input cost volatility, and I assume that means you couldn't put resin price pass-throughs into the contracts. So just to confirm that that, in and of itself, effectively increases the risk profile of the investment, if you couldn't capture both of those dynamics? And is it fair to say that that was really what knocked over the decision and the fact that whilst you could get a return, you couldn't appropriately accommodate the risk profile?

It was a combination of all of the factors. So any investment that you would expect us to do being disciplined with allocation of capital that we look at not only the quantum of capital but you look at the factor in the risk factor. And as you would expect us to do the same way we have in contracts for different customers. There are different terms sometimes. And for us, when you're dealing with another is historically 3x, but now 4x the cost, some of those commercial terms relating to loss are more important. If you think that there's going to be a lot of volatility the same way say for transport, we do in our contracts, we've got a -- there's a cap index or the surcharge mechanisms, you expect us to have appropriate mechanisms so that we take some of that risk off the table so that we can price appropriately for it. So it's not any one factor. It's a range of factors that we needed to get agreement on for us to be able to say, this makes sense now, and this is -- can deliver a sustainably good return and sets us in a position where we can appropriately support Costco with all of their customers and with a high-quality pool. All those factors factored into the decision. So you shouldn't read into it that it's one factor in isolation. All of that comes together.

Sure. So effectively, the risk-adjusted return was just nowhere near what was acceptable for the Brambles despite your scale and the potential efficiencies that you could have derived across this pool. I guess my next question is, do you think that level of return -- risk-adjusted return is anywhere near appropriate for any of the other potential poolers to come to meet that task?

We, again, I think you'd have to debate that with them directly because we don't know what their risk appetite is, and we don't know what their cost of capital is. So they may well have a different view. However, one of the things we have learned are because you need a high level of fire retardant to meet the fire regulations, which are Costco's requirement and legally, our requirements and the U.S. as well. That's a big cost contributor, and they would have that same issue, the same as us. And the cost of resin is the same for everybody pretty much. So again, they're going to have the same cost issues as us. And one would expect, given that we think our technology is pretty good on the pallets and they will need to invest in capability of understanding the data. They're going to have that issue to come to manage as well as the design of out pallet, I think is quite interesting in terms of its modularity to manage the cost of repairing any damage. These are all things that they're going to have as well. So on that basis, the sort of the cost to serve are going to be pretty similar for everybody. And then if it's a question of what sort of appetite have they got, a risk stroke -- a return. And that will be answer then as -- all we can say is we were going to be disciplined about our capital allocation, and that's what we've started doing..

Does Costco provided any indications to you what their plan B would be if no providers come to the table?

No, not. We've not talked about that. They've been very clear that they want to transition all of their flows to plastic over time. That's all they've said, and they haven't changed that messaging at all.

Okay. And then just one final one for me. It seems like the transport efficiencies was a big part of the possible benefits from this model. Are there any learnings from that that you can deploy into the timber pool? Or is timber just too different to get those sorts of efficiencies from?

So yes, really good question. So part of why we want to develop across our wooden platform, digital solutions. It's because with digital solutions, this enables you to explore these other ways of managing your pool that can potentially mean that you can take out extra transport legs and detailed setup of using TPM is something that we have used in the wooden business. But if you add digital on top, it just makes it all a lot more feasible and viable to do it. And you have that -- you get the added benefit of velocity of the pallet pool as well as reduced transport costs.

Your next question comes from Sam Seow from Citi.

Just a couple of quick ones. Look, I just -- is there anything at all that you can tell us that was particularly bad about the results of the trial? I guess we're just trying to figure out and we're trying to understand what someone else would need to do to take this on?

No. I mean I think the one thing that I think was not helpful was the significant increasing the cost of the pallet to manufacture it. I mean that was something that has made us a big difference. I think we always knew there was a debate around the level of price premium that the market would bear and the contractual commitments around things like loss and we think that was going to be something we have to get into debate with customers. So that wasn't a surprise. I mean I think the big issue was the cost increase and we knew that we were going to have a -- it's going to be a test to see what the market would bear. And it's driven by the view from Costco that the rest of the supply chain should be covering any increase of cost driven by the capital cost of the plastic pallet versus wood offset by the efficiencies. And our view is the efficiencies are material. They're just not enough to offset 4x capital cost. And I think that was -- that's the one sort of big thing that's come out at us. All the others were very positive.

Okay. Sure. So was there a price customers would have been happy to pay or premium? And how far was that of the money or out of the money?

So again, I don't think we want to get into specifics on prices with individual customers, I think that's commercially sensitive. But the view, I think from a macro level is that we knew that it would be very, very difficult for manufacturers to pass on any cost increase to Costco, but I think that's become increasingly difficult in the current environment where all the retailers are really thinking very hard about inflation and how they pass on anything to their customers and the consumers. And I think it becomes an even more difficult to close under the current environment.

Okay. And then maybe one more. Were the returns easier to calculate? Or I mean, how volatile were the returns? I mean, just trying to understand the risk, I guess, someone would need to take on.

For us, as you can imagine, we ran the numbers, we ran sensitivity. We pressure tested what commercial terms might change the outcomes for us. All of those were factored in. So look, for anybody else, as Graham said, they're going to face similar challenges in terms of the overall economics. We would like to think, given our experience globally with plastic pallets, we had a good starting point. We would like to believe from our capability and existing knowledge of our customers and the flows that we were really well-placed to be able to do a good test. We did this across a wide range of sectors in terms of the customer groups that were tested. And we went into this with a very open mind and willingness to explore options both with our customers and Costco. And I think anybody coming into it is going to have to have an open mind and work through the variables because they're challenging. Plastic pallets and the economics have always been challenging. But as technology changes and other things change over time with the tracking of pallets or if you can get other people to sign up to take either cost to our customers, we're prepared to take a higher loss demand. We're prepared to take some of the volatility off the table. All those things, I think, that I think anybody coming in will have to explore. But we can't comment on their specific views or their specific costs in relation to the components. But I think we are confident that we gave it a very rigorous trial in terms of the factors we covered and exploring all the potential commercial leverage to get us to a return that would have been acceptable to us, our Board and the shareholders.

Great. That's fantastic. And just maybe some housekeeping. On the costs for the trial, is there anything that we need to think about that will stop. And it sounds like it will take transition costs above the line?

Yes. So look, at this point, while we're not talking about all the components we don't expect to be material for us then to be anything below the line, it would need to be material. We don't see anything as material. This was always a small -- relatively small in terms of -- if you think about Costco flows, this was done on a subset of Costco flows. And we've got over 100 million pallet pool in the region. Costco pallets pool size 6 million. It was a very small subset of that we did. So no, don't expect anything material in terms of either outcomes from results or expect to see us having a material cost that goes below the line.

Appreciate the color.

There are no further questions at this time. I'll now hand back to Mr. Chipchase for closing remarks.

So thanks, everyone, for coming on the call at short notice, as I said. And we're looking forward to seeing you in August in person, which would be really nice and discuss the FY '22 results. So thanks a lot.

Thanks.