Brambles Limited (ASX: BXB) shares are up 3.2% to $11.05 following an announcement that will reportedly save the company $1 billion.
In an ASX release after the close of trading on Thursday, Brambles announced its decision to say 'no' to a request from Costco Wholesale Corporation (NASDAQ: COST) in the US to provide plastic instead of wooden pallets to its supply chain network.
According to reporting in the Australian Financial Review (AFR), saying 'yes' would have meant a $1 billion-plus capital investment.
For those unfamiliar with Brambles, it provides returnable pallets, crates, and containers to companies who use them to transport their goods. If you've ever noticed a blue crate with the word 'CHEP' on it in a supermarket carpark, that's Brambles.
They own approximately 345 million pallets, crates, and containers and operate in 60 countries.
The power of saying 'no'
In 2019, Costco announced it wanted to transition away from wooden to plastic pallets in the US.
Since then, Brambles has developed and trialled "an industry-leading plastic pallet" that complied with US fire regulations. Together with Costco, they also worked out ways to save on system costs through new efficiencies.
But those savings didn't cover the additional capital cost of plastic pallets, which is four times higher than wooden pallets. So, Brambles had to up the price to provide Costco and its suppliers with the new plastic pallets. In turn, they decided they didn't want to absorb this higher cost.
What did Brambles management say?
Brambles CEO, Graham Chipchase explained the decision:
Our decision not to proceed demonstrates our disciplined approach to capital allocation.
As the market leader, we have leveraged our scale and expertise to exhaust every operational and commercial lever to find a viable solution for Costco's supply chain in the current environment.
The trial results confirmed the unique efficiencies in Costco's supply chain and sound operational foundations of a digitally enabled plastic pallet pool.
However, in the current economic and market conditions, a conversion to plastic pallets was deemed commercially prohibitive by Costco's suppliers and, without adequate cost recovery, dilutive to Brambles' ROCI (return on capital invested).
We believe today's decision is the best course of action for our business as we concentrate on helping our customers through the current challenges across global supply chains.
In its statement, Brambles said it continues to have a "strong relationship with Costco and its suppliers". It also said it "is committed to supporting them through any potential transition".
However, Brambles also reassured shareholders that any transition by Costco to plastic pallets would take years. Brambles is also confident it can offset any loss of business from Costco and its suppliers.
"… Brambles would seek to offset any associated financial and operational impacts through new business wins and transformation initiatives. Any wooden pallets released from the Costco system during a transition would be redeployed to new and existing customers, resulting in lower capital expenditure."
Brambles said approximately 50% of the US market was addressable and provided "material opportunities for longer term growth".
Guidance for FY22 earnings
In its FY22 third-quarter update released on 21 April, Brambles upgraded its FY22 guidance.
It's now expecting sales revenue growth of 8-9% (previous guidance of 6-8%); and underlying profit growth of 6-7% (previous guidance of 3-5%). And that's including US$50 million in one-off costs.
Brambles will report its FY22 full-year results during the upcoming earnings season on 17 August.
Brambles share price snapshot
Over the past 12 months, the Brambles share price has decreased by 2.2%.
Year to date, the shares have gained 2.8% in value and outperformed the broader market.
The benchmark S&P/ASX 200 Index (ASX: XJO) has declined by 13.5% year to date.
