Shares in Brambles hit a new all time low yesterday in the wake of the group’s earnings slump report and job cutting.
They closed at $5.65, down 11.7% on the day as investors sold off the shares after the world’s biggest pallet hire group said earnings fell 28% in the first half.
With no sign of any improvement on the outlook, the company took out the cutting axe and revealed plans to slash 750 jobs from the business worldwide as it also restructured the operations in the US and wrote down the cost of pallets in America.
Like Boral and James Hardie, Brambles is finding out how tough it can be in the US market in the middle of bitter recession.
Retail volumes are down across the board and while fuel costs are lower, the company is cutting costs and quickening the pace of scrapping unwanted pallets and recycling the wood.
That’s a sure sign of the slowdown in activity and a prudent move.
Brambles posted profit for the six months to December 31 of $US212.8 million ($A325.78 million), down from $US293.7 million ($A449.63 million) in the prior corresponding period.
The company declared an interim dividend of 17.5 USc, up from 17 c, on sales revenue of $US2.07 billion ($A3.17 million), down 2% from $US2.1 billion ($A3.23 billion) in the first half of 2008. The interim dividend is in line with the 2008 final. A dividend reinvestment plan is being re-introduced with a discount of 2.5%.
“Brambles is, of course, not immune to the dramatic slowdown in key markets and our results reflect this,” Chief Executive Officer Mike Ihlein said in the statement to the ASX.
“Consequently, it is important we take decisive actions now to underpin our future performance.”
He said “Brambles has performed well, delivering good sales revenue growth despite the tough economic conditions and has maintained Underlying profit in line with prior year.
“The performance demonstrates the strength of the CHEP and Recall business models. It is particularly encouraging that we continue to win new business across all parts of the world.
“Our customer wins and strong new business pipeline provide a solid foundation for the long term health of our business, and will position us well as key customers and economies move out of recession and return to growth.
“In the meantime we are generating solid operating cash flow and continuing to take active steps to control discretionary costs and capital expenditure to maintain a prudent financial position.
"The company is writing off $131.7 million before tax for the period, including costs accumulated while scrapping 7 million excess pallets in the US.
"This initiative results in a charge in 1H09 of US$99.0 million (before tax) (US$37.4 million non-cash) and will enable CHEP USA to avoid significantly higher operating costs over the next few years.
"Rationalisation of a number of facilities and operations across the globe to ensure an optimal structure to support the business, expected to result in a reduction of approximately 750 people across Brambles over the next 12 months at an estimated total cost of US$60– 70 million (before tax) over FY09 and FY10.
"Annualised savings of US$40–50 million (before tax) are expected once fully implemented.
"Increasing the investment in the two year pallet quality program in CHEP USA by a further US$60 million to a total of US$160 million following positive customer responses.
"By the time this program concludes in December 2009, Brambles will have undertaken a major review to determine the optimal range of service offerings, pallet platforms, pallet quality, service centre network and cost and pricing structures for CHEP USA for the medium to long term."
On a constant currency basis, however, Brambles said its sales revenue actually was 4% higher. (It was lower by normal measures that do not attempt to ‘smooth’ out fluctuations in currencies.)
Brambles said it also has introduced ‘Underlying profit’ as a simplified non-statutory profit measure to replace the use of ‘Comparable operating profit’, commencing with this interim report.
"Underlying profit is profit from continuing operations before finance costs, tax and Significant items.
"Underlying profit after finance costs and tax was US$270.5 million, while Statutory profit from continuing operations was US$195.3 million (with the difference being Significant items after tax, those write-downs, mainly in the US)."
Basic earnings per share was 15.4 USc, down 26%, from 20.7 USc the year before. And that’s the problem for Brambles and other companies trying to spin the results by using terms like "constant currency" and "underlying profit".
They are handy to get a better view of the way the company went during a given period, but you can’t earn a profit from "constant" currencies when they are very volatile, as they have been since 2007, nor will you be able to pay dividends out of underlying profit if the one-off items have to be offset against profit from operations.
Brambles said that since guidance at the AGM in November, "there has been a further sharp deterioration in trading conditions around the globe impacting our businesses, especially in the USA and Europe.
"The current challenging and volatile trading environment is expected to continue for some time and this makes it difficult to provide outlook guidance with confidence," the company said.
"However, Brambles has strong underlying business models in both CHEP and Recall.
“Continuing business wins and the major initiatives an
