Fine-Tuning Brambles

Brambles chief executive David Turner is continuing the drive to pare the company back to two operations '” pallets and document storage '” and says it is on course to unwind the dual listing by the end of November.

In today's video interview, he tells Robert Gottliebsen* he expects the Cleanaway businesses in Britain and Australia, and the Brambles Industrial Services to be sold by the end of the financial year. Then the company will concentrate on extracting further efficiencies from Chep and Recall to enhance profit growth.

Robert Gottliebsen: How will the global retailers and manufacturers change their supply chain over the next four years?

David Turner: They’ll probably do much as they’ve been doing over the last four: focus on supply chain costs; try to improve efficiencies and at all times take costs and take inefficiency out of the system, from manufacturer right through to when the goods end up on the retail shelf.

What do Brambles need to do to adapt to this?

Continue to pool pallets and to encourage more manufacturers around the world '” food and beverage manufacturers '” to used pooled pallets, which will create efficiencies through the supply chain for the manufacturers and for the retailers. So it will be continue to do what we’re doing now and to do more of it and gain more penetration in the markets in which we operate.

Is there a rival to pallets on the horizon?

Can’t see it yet. It’s a remarkable business, isn’t it. I mean how many businesses provide a service around an asset, if you like '” you can call a pallet an asset, it hasn’t changed since the early 1950s or even earlier than that. It is quite remarkable and although there have been technological changes to how it is made there have not been any fundamental changes to the fact that a pallet is the same standard unit load device as it was then. That doesn’t belie the fact that we spend a lot of money every year and we have a lot of people looking at it, looking at improvements that we can make both for the wooden pallet, the configuration of the pallet, what sort of wood goes into it or whether indeed there could be some other product out of which the pallet could be manufactured.

So you don’t see a basic change ahead?

No we can’t. We can’t see a basic change in the use of the pallet as the device that carries goods and into which, on which it’s stored in racking systems. Because that seems to be the most efficient way of doing it.

David what changes do you need to make to make the Brambles Chep operation more efficient?

We need to make sure that our customer service remains top quality but where it’s not top quality we ensure it is top quality and that applies in every market in which we operate. We need to have customer satisfaction at high levels and every small detail of customer service, whether it’s consistency of who answers the phone, talks to the customer, right through to whether the pallets arrive wet or dry and in the right number in the right place at the right time. Every single detail has to be right. If we get every single detail right customer satisfaction continues to move up. We have content customers, then the basic economic model of pooling pallets as against using the alternative, the white wood alternative, should drive further growth of the business because that is the best answer for the retailer and for the food manufacturer, as you asked earlier.

What sort of growth are we talking about here?

Well in the Chep business it’s probably 7–9% growth in the medium term.

Who are your rivals in the US and Europe?

It’s always the white pallet pool. Wherever we do business it’s the white pallet group. By white pallet, it’s the regular wooden pallet I’m talking about, it’s not something that’s painted white, and it’s always the cost of the wooden pallet alternative '” the white wooden pallet alternative against which we measure ourselves. If we’re better than the wooden pallet alternative in terms of cost, efficiency and all the ingredients that go into cost then manufacturers, food manufacturers or other forms of food or beverage manufacturers will then use our pooled pallets as against continually going and buying white pallets and having to replace them and repair them and go through all of the aggravation and cost of that. So it will be the economic model that we have that will drive growth; economic model built on customer satisfaction. And on top of that it will be down to us to improve the efficiencies in which we operate the pool.

You’re a bit like a power station.

I’d not thought about that, I have to say. The business has never been likened to a power station. Chep’s never been likened to a power station and I wouldn’t want to start now. If you took tens and tens and tens of years, and every pallet in the world magically was a pooled pallet, then at some point of time it becomes more like that with huge cash flows and every market developed, but it would be way beyond mine and probably my children’s lifetimes before that situation was ever reached.

Why did you keep the document and data storage business Recall given it’s only got, say, 4% of the market?

Well it’s got 4% but it has underlying growth, we believe, of 6–8%. Rather like Chep. Chep’s 7–9%, Recall is 6–8%. It’s a market in which the basic service is largely unvended. Banks, hospitals, professional bodies, tend generally speaking to keep documents themselves whereas it’s a service they can outsource and as these businesses continue to look for efficiencies then we can take advantage of it by doing it effectively, just as Chep books pallets effectively and we believe we can generate good value for the shareholders. So we’ve got two premium growth businesses. Execution is the key in both.

Recall has a major rival doesn’t it?

We do. We do have a competitor that’s a good deal bigger, particularly in the US. It’s not a problem, provided that we segregate and this is exactly what we do, our market offering on to a regional or a segment basis where the customer, the customer’s needs and our cost and service base are ideally matched. If, for example, we had a customer in Cincinnati and we have a service team in Cincinnati that could service that customer, it would be a perfect match. It wouldn’t matter if we were 10 times the size all around the US, it would work brilliantly for that customer. That’s a slightly extreme example, but that is why it will work perfectly well for Recall.

Are your asset sales on track to realise $2.8 billion?

We never said they were going to raise $2.8 billion. We said that we would somehow get $2.8 billion back to our shareholders. Insofar as the asset sales are concerned yes they are on track. We’re selling businesses all the time. We keep announcing that we sell regional '¦ one of our regional businesses late last week and we would expect to have sold the three bigger businesses, Cleanaway in the UK, Cleanaway here in Australia, and Brambles Industrial Services in Australia by June 30 of this year and we should be on track to unify the dual listed company by November 30.

Looking forward four years, can you maintain the 12% profit growth that we’ve seen in the past three years in the retained businesses?

Yes, there’s another of those questions. I never said we'd generate 12% profit growth rate. Suffice it to say that if we’ve got 6–9% revenue growth '” barring economic or major accidents '” if we’ve got a 7–9% growth rate for Chep, and 6–8% growth rate for Recall on the top line and we can drive operational improvement (like, for example, in Chep we have this 'perfect-plant project' to take operational costs out of the business) '¦ if we can do the same sort of thing across the Recall business and have more progress in Chep then we should see profitability growing at a faster rate of sales. That would be the goal.

* Robert Gottliebsen is a business commentator for The Australian.