Article from:  The Australian

BRAMBLES boss Mike Ihlein is days away from unveiling the long-awaited strategic review of its key Chep pallet operations in the US, with expectations of a big overhaul, including management changes, a structural split of its pallet business into a high-quality pool and low-quality pool, and a renewed focus on customers.

The review comes as speculation erupts among institutional investors and transport analysts that there will be even bigger changes at head office, with Ihlein and perhaps one other senior executive expected to leave within the next six months.

Brambles investor relations manager Michael Roberts declined to comment on the speculation. But the company is well aware of it, having fielded a number of calls from the investment community in the past few days. Whatever the case, the clock will be ticking for the company to end the speculation and make a statement to the market about Ihlein's future.

Ihlein has been chief executive at Brambles for more than two years, after being appointed chief financial officer in 2004 to help clean up the mess after a series of profit downgrades and millions of blue Chep pallets having gone missing. His role included a $4.2 billion garage sale of assets and the unification of Brambles' British and Australian shares.

He did a great job and was given the ultimate reward: the top job. But like many chief financial officers that go on to run a company and are criticised for being too detail-focused, Ihlein has copped a lot of flak. The criticism has ranged from a lack of clear communication of strategy, failing to act quickly enough in the US when the Wal-Mart saga erupted in April last year, failing to properly understand changing markets, and losing key staff.

This all took place against the backdrop of the global financial crisis, which hit demand for pallets, and therefore earnings, and as new competitors emerged.

The loss of staff didn't help matters as many left without a proper explanation and took with them corporate memory and credibility.

These include the well-regarded Dave Mezzanotte, formerly head of Chep globally, who left after missing out on the chief executive's job, Miguel d'Cotta, president of Chep Europe who "decided to leave", Howard Wigham, president Chep Asia-Pacific, who also "decided to leave", and Michael Lamb, president Chep America, who was appointed by Ihlein after Mezzanotte's departure, and suddenly departed around the time that troubles started to emerge with Wal-Mart. Ihlein declined to offer the market an explanation for the sudden departure, which knocked the confidence of the market and resulted in a vacuum of information about what was really going on in the US.

As one fund manager said recently: "One of the challenges the company has is the lack of trust the market has in the management after a number of problems they've had in communicating."

Brambles is no small fry. It has a market cap of almost $11bn and it is the biggest supplier of pallets in the world, with a presence in more than 45 countries. The bulk of its revenue comes from its global Chep business, which contributes more than 80 per cent to group revenue, and the rest comes from its document and management group Recall.

This means that when problems emerge in its Chep pallets business, and senior executives leave without an adequate explanation, and their replacements are relatively inexperienced, investors rightly get worried.

In the case of Chep in the US, problems started to arise in early 2008 when it announced Wal-Mart was modifying the management of pallet flows through its US network, including Total Pallet Management arrangements with Chep and other pallet-pooling companies. The news sent shivers through the market, with $2.5bn immediately wiped off its market capitalisation. Investors complained that the initial statement to the market was confusing and tried to play down the potential impact, but the market didn't believe it.

As demand for pallets in the US started to fall through the course of the year, the company announced the scrapping of 7 million excess pallets, an increased investment in the Chep two-year pallet quality program by $US60 million and took a number of one-off charges.

Instead of launching a review back then, it took the company until the following February to review its key US business. To make matters worse, it said it would take eight months to release the findings of the review to the market. Put simply, since the Wal-Mart saga erupted, it has taken the company 18 months to come up with a new strategy.

In the meantime, it allowed a new competitor, Intelligent Global Pooling Systems (iGPS), to enter the market, steal some key clients and cause some trouble.

Investors and clients took iGPS seriously because it is headed by former senior Chep executive Bob Moore and ex-Brambles chief executive John Fletcher, who is on its board. Its seriousness grew when it snared the Quaker, Tropicana and Gatorade (QTG) units of PepsiCo from Brambles and Kraft and General Mills were expected to move a portion of their pallet needs from Brambles, to the likes of iGPS, which supplies plastic pallets rather than Brambles' wooden models.

The review of Chep USA will be unveiled to the market in the next few days. It is designed to position the business for the medium to long term. In the words of the company, the objective of the review is to determine the optimal range of service offerings, pallet platforms, pallet quality, service centre network requirements and cost and pricing structures to best meet future customer needs.

The US review is likely to include a restructure of Chep's customer services, a segmented customer approach, higher ongoing repair costs to tart up existing pallets, and an offsetting cost reduction program. Some analysts expect this will cost a little under $US100m ($116m).

In a recent report, UBS says it believes customer defections to competitor iGPS are more due to dissatisfaction with Chep's service rather than an issue with its timber product versus plastic. It believes some of this has occurred because of the businesses' focus on new customer acquisition versus customer retention and the centralisation of customer service resources in the Orlando head office rather than in the field.

"We think the review is likely to include a restructure of the customer service team and culture," UBS says.

The review is also expected to lift the amount of money Brambles allocates to repairing pallets, after running the quality down in recent years resulted in an unsustainably low level of pallet quality, which management is attempting to correct with its $US160m investment in quality over two years (2008 and 2009).

The company is also expected to adopt a segmented product offering that will include higher-quality pallet issues for automated applications and special needs customers and lower-quality pallets for other customers. To do this would require a restructure of Chep's US business.

Brambles has gone through some turbulent times in the past couple of years, some outside of the company's control, and others not. The share price has similarly suffered. Falling from a high of $14 in 2007, to a low of $4.29 in March this year. Like the rest of the market, Brambles has made a strong comeback since the dark days of March, almost doubling its share price to $7.80 at the close of trade on Friday.

But the market wants more. Many analysts have recently upgraded their earnings forecasts, recommendations and price target on Brambles on the basis that as the global economy rebounds, so will demand for pallets. Once it gets the US review out of the way and quells the intense speculation about management, the company can get on with growing the business.