25/08/05 Brambles Second-Half Net Income Rises on CHEP Unit

Brambles Industries Ltd., the world's biggest supplier of pallets used to move and store goods, posted a 74 percent gain in second-half profit as it raised prices in Europe and increased volumes in the U.S.

Net income rose to A$294 million ($222 million) in the six months ended June 30 from A$168.6 million a year earlier, making it the company's fourth consecutive half of earnings growth since the cost of reorganizing its CHEP pallet business in Europe caused earnings to slump.

Chief Executive David Turner has made CHEP the company's most- profitable unit since taking charge two years ago, a turnaround for the business which took a one-time charge in 2003 to retrieve millions of lost pallets in Europe. In the U.S., Brambles cut costs by using cheaper lumber and transport. Profit may rise again this year, Turner said today.

``CHEP overall continues to be encouraging,'' said Misha Collins, who holds the stock for the equivalent of $5.7 billion he helps manage at BT Financial Group in Sydney. ``Pricing is clearly starting to improve and come through on the bottom line.''

Brambles stock rose 1.4 percent to A$8.89 at the 4 p.m. market close in Sydney, the highest price in three years, taking this year's gain to 28 percent. The shares surged 32 percent last year and 12 percent in 2003 after tumbling 55 percent the previous year.

Second-half profit, a record for a six-month period, was calculated by subtracting the first-half result from Sydney-based Brambles's A$528 million full-year net income.

Profit Outlook

``We expect CHEP to deliver good growth in all of our regions in 2006,'' Turner, 60, said on a conference call from Sydney. ``It will be driven firstly by continued sales growth and secondly by benefits from operational improvements that we already have in place.''

Turner changed the way Brambles deals with customers in Europe to ``ensure that customers paid for the cost of service.'' Brambles introduced standard fees and additional charges that it imposed depending on the frequency and type of pallet usage.

He is trying to increase volume growth in the region by meeting delivery deadlines. CHEP's U.S. business boosted volumes of pallets and cut costs by changing its transport network so trucks hauling pallets moved shorter distances.

Turner also improved profitability by ditching smaller customers who use fewer pallets and cost the company more for the same service it provides to larger clients.

`Positive' Outlook

``The outlook was particularly positive, especially with regards to cash generation from CHEP,'' said Atul Lele, who helps manage the equivalent of $378 million at White Funds in Sydney and may buy more shares after today's announcement. ``We're really seeing the benefits flow through to the bottom line.''

CHEP's second-half sales rose 5.3 percent to A$1.8 billion bolstered by earnings in the U.S. and pricing gains in Europe. All regions improved their profitability, Brambles said.

CHEP is ``clearly back on track,'' said Jason Smith, an analyst at Citigroup Inc. in Sydney said in a note to clients today. ``Pallet returns are up and its cost base continues to fall. The market will find it hard to fault the CHEP numbers at any level.'' Smith has a ``buy'' rating on the stock.

CHEP's pallets are wooden platforms used to move goods on forklifts. Customers include General Motors Corp. and Procter & Gamble Co.

``We're getting more products from existing customers, we're signing up new customers because retailers are advocating the use of our products and we're gaining more volume,'' Turner said in an interview.

Cleanaway, its waste management unit, increased sales by 3.6 percent on improved performance in the U.K. Recall, a document storage business, had a 5.6 percent increase in sales helped by Europe's document management unit.

BlueScope Contract

Brambles' industrial services had the biggest increase in sales, 6.2 percent, after winning contracts with companies including BlueScope Steel Ltd., Australia's largest steelmaker. It had orders valued at A$2.2 billion at the end of the half.

Brambles was expected to report second-half net income of A$303.2 million according to the average estimate of eight analysts surveyed by Thomson Financial.

The company will pay a second-half dividend of 11.5 cents a share, up from 10 cents a year earlier.

Nine of the 11 analysts tracked by Bloomberg rate Brambles ``buy.'' The company's stock also trades on the London Stock Exchange as Brambles Industries Plc.