Wooden pallets shortage continues as repair costs surge: Brambles

The shortage of pallets, dubbed ‘pallet-gate’, lingers as Brambles warns of ‘extraordinary’ lumber inflation, but shares rally on earnings upgrade.

The global shortage of wooden shipping pallets continues with Brambles warning of ‘extraordinary’ lumber inflation.

Brambles shares soar more than 8 per cent after the pallets giant upgraded its annual revenue and earnings guidance, which helped soften the blow of continued pallet shortages and inflationary pressures running through the global supply chain operator’s business.

Investors were buoyed by Brambles’ better than expected forecast for the 2022 financial year as the group managed to lift revenues across all its regions despite operational issues and cost rises.

Brambles rose to an intraday high of $10.89 before closing up 80c, or 7.98 per cent, at $10.82 to make it the second best performer within the benchmark S&P/ASX 200 for the day.

It came as the global shortage of wooden shipping pallets has failed to improve with Brambles warning of “extraordinary” lumber inflation, worsening repair turnarounds for broken pallets and shipping disruptions caused by the war in Ukraine.

Brambles – which owns hundreds of millions of pallets that circle the world and are used by a range of businesses to ship goods – said it had continued to witness pallet scarcity and rampant inflation – especially for lumber used to make its wooden pallets – while supply chain bottlenecks were exacerbated by the conflict in Europe.

The Covid-19 pandemic triggered the pallet shortage crisis last year and saw companies scramble for pallets to ship their goods from warehouses to customers, with key Australian retailers such as Woolworths and Coles calling out the pallets scarcity problem as they struggled with supply chain disruptions.

Brambles has confirmed that this shortage is still an issue, from a lack of available pallets to slower times to fixing broken ones, and that it was also seeing rising prices for lumber used to make the pallets which would further feed into inflationary pressures.

However, despite these shocks to its core pallets business Brambles has managed to up its revenue and earnings guidance for fiscal 2022 as it booked higher sales across its key operating regions of America, Europe and the Asia Pacific.

Releasing its March quarter update on Thursday, Brambles said it now expected sales revenue growth of 8-9 per cent (previous guidance of 6-8 per cent) and underlying profit growth of 6-7 per cent (previous guidance of 3-5 per cent) including around $US50m ($67.3m) of short term transformation costs.

Excluding short-term transformation costs, underlying profit growth is now expected to be between 11-12 per cent against previous guidance 8-10 per cent.

Brambles chief executive Graham Chipchase said strong sales revenue momentum continued in the third quarter resulting in year-to-date growth of 8 per cent to $US4.067bn.

The revenue gains were led by an 11 per cent lift in revenues in North America to $US2.12bn while in Europe, Middle East and Africa revenue was up 6 per cent and in Asia Pacific up 5 per cent.

Mr Chipchase described the rise in prices for lumber over the quarter as “extraordinary”.

“The sales performance in the third quarter was driven by pricing actions in response to operating cost inflation, pallet scarcity and increased pallet costs driven by extraordinary lumber inflation,” Mr Chipchase said.

“The supply chain dynamics and inflationary pressures we noted in the first half of the year were further exacerbated in the third quarter by the conflict in Ukraine and Russia. Ongoing disruptions in global freight and lumber markets continue to impact the flow of goods across supply chains resulting in higher costs across our business.”

Mr Chipchase said Brambles continues to face pallet availability challenges with ongoing constraints on new pallet supply and lower than normal pallet returns in all regions as well as slower repair times.

“As a result, we are continuing to see lower pallet repair activity across our network which we expect to normalise in 2023. Our teams are working around the clock to improve asset efficiency and secure new pallets to service our customers and create capacity for new business growth.”

Brambles is trialling a plastic pallets program with US retail giant Costco.

“Any investment in plastic pallets will only be made if returns are not dilutive to group return on capital invested after an initial ramp up period and will be subject to ongoing review as part of the Group’s disciplined capital allocation process.”

Coles CEO Steven Cain in October dubbed the shortage pallet crisis “pallet-gate” as supermarket giants rely heavily on pallets to receive and move stock around its vast store network with Woolworths boss Brad Banducci also raising the issue.

The Australian Food and Grocery Council, the peak body for the $133bn food manufacturing industry, recently warned that the lack of pallets had forced some businesses to temporarily halt production as they had nothing to ship their goods to customers on.