Margins stacking up

RESULTS

Need To Know

• FY23 operating profit at top end of guidance range (+19%), despite sales at the low end of guidance (14%) implying solid operating leverage
• Guidance for FY24 implies further operating leverage, with sales up 6-8% and operating profit up 9-12%, slightly ahead of consensus
• Strong growth guidance this early in the year shows management’s confidence, despite a still uncertain macroeconomic backdrop

FY23 results overview vs consensus

Revenue $6,077m vs $6,121m

EBIT $1,067m vs $1,056m

EPS 50.7cps vs 48.0cps

Final Dividend 14.0cps vs 13.5cps

Investment Implications

BXB delivered a high-quality result, with operating profit and free cash flow coming in at the top end of guidance and above expectations. Sales growth was driven predominantly by price increases and business mix (+16%) with net new wins (+1%) contributing, before being offset by a small reduction in like for like volumes (-3%). The renegotiations of contracts over the last few years has been significant in transforming BXB’s business, with data analytics being key to unlocking insights into pricing contracts for higher cycle times and better compensation for riskier channels. The investments in digital capabilities are clearly paying off in this result and further efficiencies are expected in FY24.

Free cash flow which was guided to be ‘positive after dividends’ ended up coming in at $180m, well ahead of expectations, including a slight dividend boost. ~10m pallets were recovered during the year from asset productivity initiatives, and an additional ~5m were returned as manufacturers and retailers continue to optimise inventory levels. Pallet availability continues to improve, and is now at the stage where BXB is starting to convert on its pipeline of opportunities to grow its market share, although this is expected to be weighted to 2H24. The pooling capex to sales ratio of ~23% was above previous targets given increased lumber prices. As lumber prices fall and BXB gain more asset efficiencies, it expects to drop this by 5-7% in FY24.

FY24 guidance was incredibly strong given such a volatile macro backdrop, indicating managements confidence in the business. Sales are expected to increase 6-8% (all in constant currency) and underlying operating profit (EBIT) is expected to rise 9-12%, indicating some strong operating leverage. This is relatively in-line with consensus at ~10%. Free cash flow before dividends is expected to be between $450-550m, which is slightly disappointing, although includes many working capital timing adjustments from FY23. The continued downtrend in lumber prices could see this number increase fairly materially.

Investment View

We had expected the price increases seen during the first 9months of FY23 to begin to slowly unwind as surcharges for holding onto excess inventory were reversed. BXB has utilised its investments in data analytics to better renegotiate contracts with its customers to better reflect the underlying nature of each individual customers cycle times and potential loss rates. This has allowed BXB to more than capture its cost to serve, protecting margins.

BXB has also been able to find improved operating leverage despite significant macroeconomic headwinds and inflationary pressures. The FY24 guidance this early in the year is strong, where the market was likely expecting a more conservative outlook. The further likelihood of improving margins in the business and the more robust nature of customer contracts could be the catalyst to see the stock re-rate higher. Free cash flow generation remains the key focus for investors, with this result beginning to show evidence that it can be generated sustainably going forward.