Wooden
Pallets V's Plastic Pallets
Simplified
Brambles hopes pallets stack up as vultures circle
VISION 2010
Robert Gottliebsen
If the sluggish group fails again, it will be taken over by an
investment bank
March 25, 2006
AS Toll chief
executive Paul Little moves to acquire a strong Australian base
so that Toll can be a meaningful regional transport player, he
can learn much from Brambles, which has taken many decades to
finally convert its strong Australian pallet base into a global
success.
Now that Brambles is making a pallet pool work globally –
what next?
The adrenalin level of chief executive David Turner rises when
the long-term future of his reorganised Brambles is compared to
a power utility.
Excited, he
pulls out a pad and quickly draws a diagram to show that once
he has competed the current $US100 million ($139 million), three
to five year cost-reduction program, he can enter a whole range
of potential new markets to drive Brambles' growth for the next
10 to 15 years.
It's an ambitious
plan.
Turner, the
UK finance executive chosen by chairman Don Argus to spearhead
the reorganisation over the past two-and-a-half years, says: "I
think Chep pallets is a remarkable business. I have never seen
anything like it.
"It's
down to us to execute the strategy and deliver premium growth.
I think that's what we will do."
Left unsaid
is that Brambles has well and truly used up its chances. If its
executives fail again, Brambles will be taken over by an investment
bank and shipped to the "knackery", that is, turned
into a utility.
The new Brambles
performance clock starts running next week when the information
memorandum goes out for the sale of its industrial services operation,
the final parts of Cleanaway and its automotive business.
From July 1,
2006, Brambles will be an easy-to-understand company – a
global Chep pallet business that is increasing sales by 7-9 per
cent a year plus a much smaller document and data storage business
that is growing by 6-8 per cent a year.
These two businesses
increased profits at an average rate of 12 per cent over the past
three years and Turner clearly expects them to at least match
that performance (and hopefully do much better) over the next
five years.
He is staking
his reputation to institutions around the world that Brambles
will be a "premium" global growth business in the absence
of major global economic downturns.
His predecessors
have said similar things and Australian institutions believed
them, but international institutions thought Brambles was overrated
by Australians – one reason why the London listing did not
work.
In the past
three years Brambles has totally reorganised its US and European
pallet business, correcting organisational mistakes born out of
Australian overconfidence.
Brambles was
simply not able to operate three complex global businesses from
Australia, plus a local industrial services operation.
Could Brambles
disappoint again? I think there is a very good chance that this
time it will work.
Clearly its
business is tied to growth in the US and European economies. and
in Australian dollars it will reflect movements in the local currency
because most of its earnings are overseas.
The biggest
risk is that it will repeat old management mistakes, but the $2.8
billion asset sale simplifies the company's task.
After its planned
capital return, Brambles should emerge as a cash powerhouse able
to fund growth opportunities to provide better long-term returns
for shareholders. If the "opportunities" don't stack
up, more cash will go back to shareholders.
Brambles' future
growth momentum is also subject to a most unusual premise. The
pallet business of Brambles has its origins in the federal government's
pallet pool of the 1940s.
The business
of 2006 still uses the same basic wooden pallet, albeit made more
efficiently and the pool better organised. There is probably no
other global business where the basic product has not changed
in 60 years, yet its customers, the major food makers and retail
suppliers, have revolutionised their supply chains. The wood pallet
has seen off challenges from plastic pallets in all but specialised
applications.
And although
radio chip monitoring of product/and or pallet movements will
improve, Turner cannot see any change in basic wooden pallet usage
on the horizon.
He expects
that if ever there is a rival product to wooden pallets, Brambles
will quickly embrace the technology. (That is easier said than
done. Incumbents often defend old technology.)
The Brambles
pallet business is really four separate regional operations –
the US, Europe, Australia, and developing areas, including Latin
America.
In the US Brambles
has dramatically improved the efficiency of its 92 million pallet
pool and is now investing large sums in new pallets.
Brambles' US
pallet pool competes with the so-called white pallets, which are
usually unpainted and individually owned. They represent a huge
swap market. But there is no direct competitive pool to Brambles.
In contrast,
Brambles' European operation faces competing pools in key markets.
To match the
competition, Brambles originally also developed separate pools
in different countries. But now it operates a 124 million pan-European
pallet pool.
Although it
has more pallets, Europe earns less than the US pallet pool, so
there is scope to use existing pallets more efficiently.
Brambles' European
operation has a clear drawback – Germany has a substantial
pool of "white" pallets funded by German Rail. Brambles
has not been able to find a way to penetrate Germany in a substantial
way.
Meanwhile,
Australian margins are high at around 30 per cent (the US is 22
per cent and Europe 19 per cent), partly because the pool of Australian
pallets is old and has been depreciated.
Latin America
is growing at around 30 per cent a year.
Turner is engaged
in a massive program of cost comparison within the myriad component
parts of the global pallet operation.
He calculates
that there is $US100 million to be taken from costs by creating
an operation using only best practice. This re-engineering of
each business unit will help propel Brambles' profit growth during
the next five years.
But in the
process it will substantially lower the costs of pallets.
In about five
years Turner expects to be in a position to have a cost structure
that will enable a Brambles pallet pool to operate successfully
in new industries such as packaging and office equipment.
If Brambles
invests in pallet pools for new industries, it will require a
substantial investment in new pallets.
In theory,
Turner should have sold the document and data storage business
Recall and allowed Brambles to remain a pure pallet play.
But three-quarters
of the world's document and data storage business is conducted
by companies themselves. Recall has only 4 per cent of the global
market and has giant competitors like Iron Mountain.
With the asset
sale distractions out of the way, Turner believes he can make
Recall perform better and be a major beneficiary from a switch
to the outsourcing of global document storage.
When Brambles
made its past mistakes it was a clear takeover target. But the
complexity of Brambles and the high share price frightened potential
bidders.
Having created
shareholder optimism, if Brambles' performance again lags expectations
and the stock is hammered, there will be a string of private equity
companies ready to convert Brambles into a highly leveraged infrastructure-style
company.
To prevent
that happening, Turner has to keep delivering on his premium growth
forecasts well into the future.
Including the
businesses to be sold, in the latest half year Brambles earned
at an annual rate of US31c per share.
But the assets
it is selling did not yield anything like the profit margins of
Chep and Recall.
In pricing
the shares at around 24 times existing earnings, the market is
looking to Brambles to rapidly improve long-term earnings per
share on substantially reduced capital.
Once long-term
performance is established, the market will be confident that
Brambles can use the 60-year-old technology to attack new markets.
