Management team now has asset efficiency KPIs as part of their rem structure, with 20% of the short-term incentives could be lost if asset efficiency targets are not met. Given’s BXB’s heavily reliance on asset efficiencies, Mr. Sullivan noted “what we want to show the market is that our business is very disciplined and its driving a better cash outcome and all that comes from asset efficiency.”

BXB has been experiencing cost pressures, not only because of inflationary pressures but also because retailers have seen increased competitive pressure (i.e. discounts) who have in turn put pressure on manufacturers (core customers of BXB). In such an environment, BXB clearly was operating in an environment where pushing price increases to its customers (manufacturers) wasn’t realistic given manufacturers were under pressure from their respective customers. However, Mr. Sullivan noted (in the words to the effect of), “…what’s changed quite dramatically though in the last 6 months is behaviour of our competitors (become rational) so we are forced to take price irrespective of the inflationary pressures…” This indicates that despite increasing prices, the lack of cheaper alternative options, BXB is retaining business (and in fact winning new customers in SME space) whereas before, there was the risk of losing customers. Last year, BXB achieved underlying growth of 3% in APAC (with flat margins) and 8% in Europe (flat margins) and management expects it to be same for FY19.

BXB’s revenue model has a relatively attractive payback period, where pallets go from BXB’s service centre to the manufacturer (core customer), who pay an issue price to BXB upfront depending on the number of pallets they have ordered. BXB collects the pallets from the manufacturer’s different sites and repairs them for re-use (cost of collection and repair is borne by BXB). Each pallet does around 3 to 3.5 such cycles a year. A pallet costs BXB $20 and it earns $5 each cycle. BXB is in the process of digitalising the process to keep track of the pallets in areas of high loss rate, which should lower capex and opex.

Sullivan noted in the words to the effect of, “currently 80% of our European service centres are 70% automated and 25% of the U.S. ones are at that level of automation; the program will increase the 25% in the U.S. to 85%…the game changer here is AI and machine learning because automation in the old concept doesn’t help us because automation in normal factories is based on everything being standardised and the problem for us is everything that comes in [speaking of pallets] is damaged differently, so the machines have to be able to learn to identify the different damages and repair them…in 5 years you might see us having fully automated factories, with just a computer guy controlling everything.”

Sullivan noted that whilst China is on a trend to resolving logistics issues, there was still some way to go. He mentioned that trucks in developed nations are standardised/optimised and in the right design for moving goods around, whereas in China, the trucks are of different shapes and sizes and as such, a manufacturer would have a forklift driver move a pallet close to a truck, then ~20 employees to load the goods manually (by hand). By contrast, in the developed world, the forklift driver would load the pallet of goods onto the truck (which is designed to accommodate) straight away and the goods are delivered. Separately, on India, the infrastructure as well as the design of the trucks are not accommodative of moving goods.

From our discussion with Mr. Sullivan, we think it does not really matter what new trends are in supply chain or logistics, given the basis of moving products is still on pallets and e-commerce is not going to have an adverse impact on BXB’s revenue model, rather BXB is a beneficiary to e-commerce players as they help to move the products quicker.