Brambles Chairman & CEO Overviews
September 17, 2012
Brambles Chairman Graham Kraehe AO and CEO Tom Gorman
During the 2012 financial year, Brambles remained committed to generating value for all stakeholders. We delivered further sales and Underlying profit growth and increased momentum with the implementation of its long-term growth strategy. We reported a strong increase in sales revenue for the period amid a challenging economic backdrop. We drove growth by adding new customers and by entering new segments and regions. We strengthened our established operations in the Pallets segment and expanded our less established operations in the high-growth Reusable Plastic Crates (RPCs) and Containers segments, as well as in emerging markets. We delivered this sales growth at a stable Underlying profit margin for the Group while continuing to increase investment in business development and improvement programs to strengthen our business for the future.
Today, we are approaching strategy under four key themes: diversification; cost leadership; Go To Market; and people and leadership.
Our growth strategy involves diversifying our global Pooling Solutions business, operating primarily under the CHEP and IFCO brands, by expanding into more customer segments, broadening our range of products and services, and growing geographically, including in emerging markets. In Recall, we continue to diversify and develop the way we deliver services to customers, including the delivery of digital document management services.
To support diversification in Pooling Solutions, we made strong progress in the Year with our program to invest US$550 million over two years to expand our RPCs business, grow the Pallets business in emerging markets and develop our operations in the Containers business. In all, we invested US$240 million under this program in 2012, in line with our target for the first year of the program.
As we diversify, our three Pooling Solutions segments are achieving their sales growth targets. In the largest and most developed – the Pallets segment – we continue to deliver constant currency sales growth in our major markets such as the USA, Canada, Western Europe and Australia & New Zealand. This reflects our ability to win business by converting new customers to our solutions, despite poor economic conditions leading to a subdued environment for like-for-like “organic” volume and pricing growth. In the emerging markets of Middle East & Africa, Latin America, Central & Eastern Europe and Asia, which now represent 15% of our CHEP sales revenue in the Pallets segment, we delivered constant currency sales revenue growth of 20% in the 2012 financial year, in line with the target we set 12 months ago for each of 2012 and 2013.
In RPCs, we are on track to deliver our target of 15% constant currency sales revenue growth, when normalised for the impact of acquisitions, in the 2013 financial year, having achieved that goal in 2012. The acquisition in March 2011 of IFCO Systems – operator of the world’s largest RPC pooling business – gave a significant boost to Brambles in this area. Today, our RPCs segment is growing strongly as retailers continue to drive their suppliers of fresh produce to adopt reusable pooled solutions, which are more sustainable and efficient than disposable alternatives. We are expanding strongly by penetrating further into new regions, in particular in the USA.
We are also progressing our growth strategy in the smallest of our three Pooling Solutions segments, Containers, through which we provide specialist solutions in the automotive, manufacturing, chemicals and aerospace sectors. Over the past
24 months, we have made a number of small acquisitions to support our expansion and continued to win new business. We formally launched the CHEP Aerospace Solutions brand during the 2012 financial year, and have strong momentum with customer growth in that sector. We are also making progress with our strategy of expanding our automotive and intermediate bulk container operations in the USA.
Our Pallets, RPCs and Containers segments share certain characteristics that align with Brambles’ core pooling expertise: a common platform is used by multiple parties; assets (i.e. pallets, crates and containers) flow freely; the ownership of those assets is not a competitive differentiator to the user (i.e. our customer); pooling those assets can create a “network advantage” through increased efficiency; and expert management of that network can generate superior economic profit for the pooler. These common characteristics enable us to apply the unique intellectual property we have from our well-established operations into these newer operations. Each of our new initiatives offers a compelling market opportunity and, at scale, long-term return on capital invested in excess of 20%, pre-tax, in line with our pre-existing Pooling Solutions operations.
We have positive momentum with our growth strategy, but the journey has not been without challenges, not least in the context of the severe economic headwinds we face in many of our major countries of operation. While these economic conditions are beyond our control, they place in sharper focus the importance of maximising efficiency. Therefore, we continue to strengthen our efforts in our second area of strategic focus: cost leadership, by which we mean delivering a low-cost business model that leverages our global scale to create sustainable competitive advantage.
In 2012, we demonstrated positive momentum in cost leadership. In Recall, we delivered substantial cost reduction and efficiency improvements, helping to drive a significant increase in Underlying profit margin.
In the Pallets segment, there were continued improvements in the efficiency of delivery of the Better Everyday business improvement program in CHEP USA. Also in the Americas, we delivered the first tranches of savings from the integration of the IFCO acquisition, and best-practice standardisation in operations and logistics.
Across the Group, we expect to deliver total IFCO integration synergies of
US$40 million by the end of the 2014 financial year and total Pallets operations and logistics efficiencies of US$60 million by the end of 2015.
Cost leadership is also about maximising capital efficiency. Our focus on asset utilisation continues to increase, in particular in Pallets. The three main drivers of asset cost in equipment pooling are loss, cycle time and damage – that is, what proportion of the pool leaves our network control, how quickly we can retrieve our assets, and the extent of wear and tear that those assets endure while they are under hire.
During the Year, we continued to invest in projects aimed at addressing these three key issues so we can improve control of our assets over the long term. For example, in CHEP USA, we have worked with some customers in the grocery manufacturing sector to reduce the number of pallets sent into distribution and retail channels that do not participate fully in the CHEP pooling network. This means fewer of our pallets get lost, we are able to retrieve and return them more quickly and – because they spend less time in the field – damage rates should reduce. We are pleased to report a modest reduction in the size of the Irrecoverable Pooling Equipment Provision – which provides for non-compensated pallets that have leaked from our system – in the Americas region of the Pallets segment as a result of these initiatives.
We are investing in enhancing and developing the way we Go To Market by strengthening our brand position and continuing to enhance the customer experience through improved quality of our products and services.
We have streamlined and accelerated our product development efforts by linking them more closely to our customer engagement programs and innovation processes. We have implemented a standardised Go-To-Market approach for our commercial teams to drive an improved quality and efficiency in our interaction with customers. We have set up a dedicated global accounts team for our largest customers, resulting in a significant improvement in customer satisfaction and the conversion of major growth opportunities.
The other of our four key themes is people and leadership: attracting, developing and retaining the right individuals and teams that can enhance our culture and bring the required capability for sustainable success.
A key aspect of this is the Board itself, which we strengthened with three international appointments in the 2012 financial year: Tahira Hassan, who has had a distinguished 26-year career with leading nutrition, health and wellness company Nestlé; David Gosnell, President of Global Supply & Procurement with leading premium drinks business Diageo, who previously served on the Brambles Board from 2006 to 2010; and Doug Duncan, who had a 30-year career in the transport and logistics sector, culminating in the position of President & CEO, FedEx Freight.
In addition to strengthening the Board, we made three appointments to the Executive Leadership Team (ELT) during the Year: Jean Holley, as Chief Information Officer; Jason Rabbino, as Group President, Containers; and Zlatko Todorcevski, as Chief Financial Officer. The new appointments we have made at the Board and ELT level have advanced the objectives set out in the Diversity Policy that the Board adopted in the 2011 financial year.
Brambles entered the 2013 financial year in robust and resilient shape, despite the ongoing challenges created by the uncertain and volatile economic conditions in many of our major markets. Against this backdrop, we are committed to delivering on our growth strategy, to driving ongoing improvements in our underlying business, and to continuing to innovate and enhance service for our customers while providing a safe and stimulating workplace for our employees.