Brambles (BXB) has blamed high levels of competition with a US rival pallet company called PECO for the downgrade in its annual earnings forecast yesterday which saw the shares slump 11% at one stage.
In first revealing the downgrade in a January 23 statement (which also saw the shares sold off), Brambles blamed the lower forecast on destocking by US retailers that impacted volumes and resulted in increased costs associated with higher-than-expected pallet returns.
But yesterday Tom Gorman, Brambles’ about to retire chief executive, said on an analysts call that strong competition was a bigger reason for the cut.
As a result Brambles yesterday withdrew its guidance for return on capital investment to reach 20% by June 30, 2019 from 15.9% at December 31 2016 (which isn’t bad at all).
Analysts said yesterday the weak result and downgraded return target means more pressure on new CEO, Graham Chipchase, who takes over from Gorman as CEO today (a week earlier than expected – a sign of the concern at board level at the problems).
His task will be to improve the performance of the US division, which accounts for most of Brambles’ revenue but has lower profit margins than its European business. That means a lot of hacking and slashing of costs, including jobs, and bad publicity.
Brambles shares fell to an intraday low of $9.33 yesterday – the weakest since 2014. They ended down 9.9% at $9.47.
Perhaps the shares were punished because Brambles wasn’t entirely straight with the information it released at its June 23 briefing and tried to cloud the real reason for the weak US performance.
But once again the dividend says it all for Brambles outlook – unchanged from a year ago at 14.5 cents US a share. In other words, life is not going to be easy over the next six months or so, or even longer in the US business.
Brambles yesterday forecast a flat full-year underlying profit for the year to June (instead of a solid increase) after posting a 3% rise in first-half underlying profit.
The company said underlying profit was $468.9 million for the six months ended December 31. On a statutory basis, profit after tax fell 44% to $162.3 million.
The guidance for a flat full-year underlying profit in the 12 months ended June 30 was well below the range of 9% to 11% offered before last month’s downgrade.
“While performance in the first half was below our expectations, our team delivered revenue growth in every operating segment and underlying profit growth across the group, with the exception of our North American pallets business,” Mr Gorman said yesterday.
Seeing the importance of the US business to the group’s overall performance, the growth in profit and “underlying profit” elsewhere didn’t matter a pinch of you know what to investors yesterday.
