• Competitive pressures and cost inflation leading to margin erosion, particularly in the North American market.
• Operations are very capital intensive.
• Any further loss of large contracts significantly reducing revenue and earnings.
• Weak economic conditions will lead to less consumption of FMCG, and hence less use of pallets.
• Volatile whitewood prices.
• Exposed to a wide range of currency and political risks.

Figure 1: Revenue by segment

Source: Company

• Key FY18 headline numbers. 1. Group revenue of US$5,596.6m was up +6% in constant currency terms on prior year, driven by organic volume growth and strong net new business wins in Pallets combined with expansion in IFCO; 2. Underlying profit of US$996.7m was flat in constant currency terms, sales contributions were offset by profit headwinds, including developed markets inflationary pressures, CHEP Americas cost pressures driven by network capacity constraints and conversion costs, along with the previously announced loss of a large RPC contract in CHEP Australia; 3. ROCI remained high at 16.1%, but deteriorated -90bps from FY17 due to the aforementioned contract loss; 4. Strong FCF generation of $554.4m (up +$330.2m on pcp) through combination of EBITDA growth and working capital management fully funded the final dividend payment.
• Cost pressures continue to cycle through the peak. As always, input cost inflation in transport, lumber and labour costs, was a key focus through the presentation, with management noting that current levels of cost inflation are unprecedented. Market inflation for transport was +10% in the USA and +12% in Europe, while lumber costs increased +13% in the USA and +6% in Europe. However, BXB’s pricing and surcharge initiatives to recoup these costs have been relatively successful, especially considering the inherent time lag, with pricing actions recovering US$33m of the US$52m in cost inflation.
• IFCO separation plans. The key talking point from the presentation was management’s intention to separate IFCO from BXB prior to the end of CY19, with plans for a demerger, but a sale has not been ruled out. The rationale being the two businesses are operationally and commercially independent with no meaningful synergies, and through separation, the individual investment needs of each business can be better met.
• FY19 outlook. The CEO noted that input-cost inflation will trouble FY19 underlying profit, and to expect BXB’s strategic initiatives to “progressively deliver efficiencies and earnings benefits over the medium term.” Over the medium term, BXB expects “constant-currency sales revenue growth in the mid-single digits”, driven by expansion and further conversions to pooled solutions, and for underlying profit growth to exceed sales revenue through the cycle.