Brambles shares fell more than 2.5% yesterday in the wake of the much leaked decision to appoint a new CEO and revamp its troubled CHEP pallet business in America.
The shares ended down 20 cents at $7.45 after the two announcements were made in the early afternoon. The shares had been suspended in the morning pending the release of the two statements.
The review revealed initiatives that will cost the best part of $260 million over the next three years as Brambles revamps its CHEP business in the US and tries to turn it into a premium business, a big ask given the US economy is sluggish and many of the company’s customers are doing it tough.
The company revealed the new CEO in one statement and the results of the review in another.
The new CEO is Tom Gorman, the boss of its European pallet business (and former head of Ford Australia). He will succeed current chief executive, Mike Ihlein, next month.
The mooted shake-up of the US pallet business will cost Brambles an additional $110 million over the next three years, with an additional $50 million a year on top of that as Brambles moves towards the introduction of premium pallet specification over the next three years. It will also upgrade Brambles’ pallet pool in the US to a ”minimum standard”.
Mr Ihlein remains at Brambles until next March. He will receive a cash payment of $1.18 million and shares when he steps down.
He said the conclusion of the CHEP review, which was revealed last February, after the company lost business to rivals, was a logical point for him to retire.
Brambles’ chairman, Graham Kraehe, said in the statement yesterday that Mr Gorman was the logical successor because of his strong operational background. Mr Gorman was the unanimous choice of the board following an extensive executive search, Mr Kraehe said.
Mr Gorman, whose base salary and other benefits will total $1.8 million, said his first priority was to execute the CHEP review. He joined Brambles in March last year and was considered the most likely internal candidate to replace Mr Ihlein.
Brambles said in the statement that "Mr Ihlein’s decision to retire follows nearly six years with Brambles during which time he was Chief Financial Officer, before becoming CEO in 2007. Under Mr Ihlein’s leadership, Brambles has had a strong period of sales growth, profits, EPS and cash generation."
Brambles’ underperforming US business has been its weak point and seems to have led to the pressure on the board and Mr Ihlein, to sort out the mess.
Mr Ihlein had been CEO since July 2007, so he has not had a long period in the role.
He took the reins just before the global credit crunch erupted and Brambles business, like so many, gradually got rolled up as the US and European economies slowed and then fell sharply into deep recession late last year.
As customers saw sales evaporate they started returning pallets to CHEP because they no longer had any need for them, and wanted to cut costs.
Brambles is now part way through scrapping seven million CHEP pallets in the US – or almost one in 10 – after manufacturers and retailers returned them. Some 600 of the 700 job losses forecast back in February have happened.
Early this year the US division lost a major contract to Florida-based rival, iGPS. Several subsidiaries of the Pepsico soft drink giant, opted for iGPS’s plastic pallets instead of Brambles’ wooden pallets.
The company also had to scramble to maintain its contract with the huge Wal-Mart retailing group in the US.
The company also said it would not push through general price increases in the US over the next year while it carries out the program. That will add to the pressure on earnings for the next year or more.
Pallets account for about 89% of Brambles’ sales revenue. And America is by far the most important market.
So that’s why the most important announcement yesterday was the results of the review.
"The new customer service and quality (“Better Everyday”) program is the culmination of an indepth review of the CHEP USA business, which commenced in February 2009, and reflects extensive consultation and successful trials with major customers. The implementation of initiatives flowing from the CHEP USA review will further strengthen the business to capture a greater share of the US$10 billion pallet market," Brambles said yesterday.
"A central feature of the program is the introduction of a new “US Premium” pallet specification, to be fast-tracked over three years, to meet next generation supply chain trends.
"There will also be an immediate upgrading of the CHEP USA pallet pool to a new minimum standard level (“US Plus”). The two new pallet specifications are the result of rigorous analysis of market dynamics and will allow CHEP USA to segment its customer base according to customers’ evolving quality needs.
"Other features of the Better Everyday program include: an increase in field-based sales resources; expansion of account management systems; and streamlining of administrative processes to improve the speed and quality with which CHEP USA responds to customer needs.
"The program will involve an ongoing net cost of approximately US$50 million per annum.
"The fast-tracking of this program will allow CHEP USA to maximise growth opportunities and meet identifi
