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Brambles Industries (BI.)

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Monday 25 November, 2002

Brambles Industries

AGM Statement

Brambles Industries PLC
25 November 2002



                          BRAMBLES INDUSTRIES LIMITED

                            BRAMBLES INDUSTRIES PLC



        TEXT OF ADDRESSES TO SHAREHOLDERS AT THE ANNUAL GENERAL MEETINGS
                                25 NOVEMBER 2002



DON ARGUS, AO, CHAIRMAN 
 

 
We of course cannot control the divide between what we report in terms of financial  
performance and how the market treats our share price. 
 
The slide on screen shows the relative price to earnings ratio of Brambles Industries Limited 
against other high growth stocks in the Australian market. What this demonstrates very clearly 
in the middle line is that high growth stocks reached a price to earnings peak in late  
2000 / 2001, but have fallen sharply since then across the board. The top line shows Brambles' 
price to earnings ratio, which you can see has closely tracked the overall movement of other 
high growth stocks. 
 
But that is only part of the story. We have attempted an analysis of the various contributors 
to the share price decline in both Brambles Industries Limited and Brambles Industries plc. 
 
On the screen now is an analysis of the share price movement of Brambles Industries plc  
since the merger. 
 
No one likes to see the share price fall but our analysis suggest the following: 
 
First, there has been a significant general decline in equity prices around the world since the  
merger. 
 
You can see the impact of this on our share price in the second column of the graph where,  
since August 2001, the UK market overall has come down 13%. 
 
Secondly, the UK Support Services Index, of which we are part, has come down even further,  
down a further 21% on top of the overall market fall. 
 
And finally, you will see that our own operational issues and market sentiment have contributed 
a further 29% to our share price decline.  
 
In Australia, as you can see from the next slide, the market has also fallen, but not to the  
same extent as the UK. In fact, the Australian market has outperformed virtually every other  
market in the world. 
 
However, there is an important difference. High rated growth stocks like Brambles are down 
a further 36%. 
 
What this shows is that, in addition to our own issues, a significant portion of the drop in our 
share price is related to the fall in equity markets in general, and more particularly to the 
fall in high P/E growth stocks around the world.  
 
However, to measure value simply by reference to the price of a Company's shares ignores of  
course the reality that value can be created through strategic positioning, diversification of  
cashflows, the spreading of risk, growth in scale and hence the ability to use that base for  
further consolidation and the ability to be included in the world's major indices. 
 
Having the resilience both in earnings and cashflow to grow organically and replenish the  
source from which the Group derives its profits also preserves and adds value. The share price 
is the outcome. 
 
As I explained before, the most important step we could take to restore shareholder  
value is to take the hard decisions to address the issues, particularly in CHEP.  
 
We have done that. 
 
There have also been issues on how we communicate to investors. We are working on that too. 
 
While the benefits will not come through overnight, I do believe we are on the right  
path and the measures announced last Thursday are a major step towards Brambles  
entering our next growth phase. 
 
Of course, as I have already said, what we cannot control is the divide between what we 
report in terms of financial performance, and how the share market treats our share price. 
 
Before handing over to CK to give you his report, let me give you a general view of the economic  
outlook as we see it at this point in time. 
 
The economies of the US and Europe continue their uphill battles in the face of a weakening 
global growth outlook. Higher oil prices and lack of jobs growth threaten consumer spending  
which has been the global economy's main source of growth. We are seeing global growth 
forecasts being revised downward as risks to US domestic demand and European  
industrial production are weighted to the downside.  
 
However, that growth is still positive and we believe that monetary stimulus now in place  
will be sufficient to avoid a dip into recession. Recent comments by Alan Greenspan in the  
US seem to confirm this view. 
 
While the threat of weaker consumer spending in the US and Europe is real, its impact is  
likely to be at least partially mitigated by the markets our customers operate in. In times of  
downturn, spending tends to drop off in discretionary and luxury goods markets. 
 
It remains fairly constant in markets for more basic consumption goods, such as groceries  
and other retail food products. 
 
Our customers, the majority of whom are involved in these more constant, stable markets,  
are less likely to be affected by the consumer downturn than other sectors. 
 
We are confident that, given our leading market positions, strong brands, proven strategy  
and long term customer partnerships, Brambles will weather the downturn in the global economy 
and will return to strong growth over the coming three years. 
 
Let me now ask CK to brief you on Brambles business performance. 
 
 
SIR CK CHOW, CHIEF EXECUTIVE OFFICER 
 
The first 15 months after the merger have been extremely challenging. We are very much aware 
of the share price movement and its impact on our shareholders. The operational issues we face 
today in CHEP are not created by the merger, they are revealed by this more transparent structure. 
We are facing up to these issues. We have put improvement plans in place and we are  
committed to rectifying these legacy issues and bringing CHEP back to profitable growth. 
 
Despite these operational issues, Brambles remains a very strong company. In the next  
20 minutes, I shall go through the strategy of Brambles and the performance of each of its main businesses. 
 
As part of this presentation, I shall ask Victor Mendes, who is the Chief Executive of CHEP, to 
talk to you about his view of the business and the actions he and his team have put in  
place to improve its performance. 
 
Let me start by saying a few words about our strategy.  
 
Brambles has high quality businesses. They are all market leaders in their field, with strong 
competitive advantages. 
 
From the helicopter view, our strategy is: 
 
To maximize the growth of CHEP mainly through organic investments. We shall pursue 
profitable growth of this unique franchise on a global basis. 
 
We shall grow Cleanaway and Recall by organic investments, as well as by selective  
acquisitions that can add value. 
 
We shall manage our other businesses for performance, that is to ensure that they  
are market leaders, they generate cash and they are BVA positive. BVA being Brambles  
Value Added which is simply profit less the cost of capital used to deliver that profit. 
 
When the merger took place in August of 2001, we said we would fulfil the primary  
objective of the merger by integrating the CHEP and Cleanaway operations on a global basis.  
This we have achieved successfully. The integration process was seamless.  
 
We said that we would integrate all of Brambles operations under one unified management team.  
This we have also done.  
 
We said we would thoroughly review our operations and make the necessary changes.  
We have completed this review, and improvement programmes are now all in place.  
I shall go into more detail on this point later. 
 
We committed to divest low growth business which do not fit the profile of the group.  
We have successfully completed ten divestments, bringing the total proceeds of the  
divestment programme to A$1.37 billion. 
 
We have focused the organization to create shareholder value, by adopting Brambles  
Value Added which not only measures revenue and profit growth, but also the creation  
of value taking into account the cost of capital. BVA is in fact, much more than a measurement 
tool, it is a mindset for all Brambles employees to work together to create value for our shareholders. 
 
In the past financial year, despite slower economic growth around the world, revenue  
growth from our three key businesses continued to be strong. In aggregate, they achieved  
double digit growth. 
 
Although CHEP remains very profitable, its profit performance was lower than the previous  
year. As the result of a thorough review after the merger, we have identified a number of legacy 
issues in CHEP USA and Europe. It became obvious that CHEP's management needed  
to be strengthened. I appointed Victor Mendes to be the Chief Executive of CHEP in March.  
Victor had managed Recall successfully in the previous three years. 
 
Improvement programmes have also been put in place to rebuild the profit platform of this  
valuable business. 
 
Victor Mendes will take you through more details in the course of his presentation. 
 
In 2002, profit grew both in Cleanaway and Recall. 
 
Brambles Industrial Services were successfully restructured and refocused. It is now a  
healthy business positioned for further progress. 
 
Capital discipline has led to cash flow improvement for the group. After the proceeds from  
divestments, Brambles generated positive cash flow of £282 million or A$856 million last year,  
strengthening our balance sheet considerably.  
 
Now let me ask Victor Mendes to talk to you about CHEP. He is the person who is driving 
all the programmes to improve this business. 
 
 
VICTOR MENDES, CHIEF EXECUTIVE OFFICER, CHEP 
 
CHEP is the biggest business of Brambles. As you know, it was founded in Australia more 
than 50 years ago, and has since then expanded very successfully into a business that  
operates in 38 countries around the world.  
 
Today 49% of CHEP's revenues come from the Americas, 41% from Europe including the  
UK and 10% from the rest of the world - mainly from Australia and South Africa. 
 
Last March I was honoured with the opportunity to lead such an exciting business. CHEP is  
an exciting business first and foremost because of its unique pooling concept which  
delivers synergy and scale benefits at the industry level. 
 
CHEP is a strong market leader in every one of its major markets. 
 
It has exciting growth prospects with further market penetration, new products and services,  
and new territories. 
 
It would be extremely difficult for a competitor to replicate the robust competitive  
advantage we have developed through our global infrastructure, our established asset  
base and our long-term customer partnerships. 
 
However, as we progressed on our review of the business, it became apparent that an 
overemphasis on sales growth in the past several years has led to very large capital  
investments and to a rapid expansion of small distribution points which are costly to serve.  
All this has led to declining asset productivity, increasing capital expenditure and declining profit margins. 
 
These are significant issues and it is critical that we take vigorous action to protect CHEP's 
long term value and to build a strong foundation for its future growth.  
 
In the United States, CHEP invested heavily for growth for several years, but these investments  
had not yet produced the required returns. 
 
Earlier this year, we introduced five major initiatives, nicknamed the Magnificent Five, to improve  
the performance of CHEP in the US.  
 
These include: 
 
• the renegotiation of a new contract with Wal*Mart, 
 
• the introduction of a new programme for non-participating distributors, including a significant  
surcharge for those distributors; and 
 
• the reconfiguration of our network of service centres to place them in optimal locations to  
reduce transportation costs. 
 
The implementation of the Magnificent Five has been very successful. Profit and margin  
improvement started again in the fourth quarter. Capital expenditure came down by 32%.  
 
This improvement in performance has continued into the first four months of the current  
financial year. Profit in the Americas was up by 22%, and we expect a significant improvement for  
the current year as a whole. 
 
In Europe, we could see some of the same symptoms from the push for revenue growth 
over the past few years. In June, I appointed Mark Luby to the role of President of  
CHEP Europe. Mark had successfully run CHEP Asia-Pacific for the previous 5 years, based  
in Sydney. I gave Mark the assignment to take a fresh look at our business in Europe as one 
business - not as a confederation of country-based businesses. 
 
Mark moved to London in July and quickly launched a comprehensive review of the European  
business.  
 
It became evident that our country-centric organization had led to inefficiency as the  
European market gradually evolved into a single market. 
 
We also identified through our review that pallet collection and repairs had not kept up  
with the volume of pallet issues. This had led to higher pallet purchase requirements and an 
increasing use of cash to fund these purchases. It had also led to an excessive number of 
pallets in the pool, which is a sub-optimal condition to operate a pooling business. 
 
The lack of common business processes across Europe had led to a higher cost structure. 
 
Other legacy issues in Europe include an inadequate pricing model and the need to improve  
service quality and customer satisfaction. 
 
The bottom line was that CHEP was buying more and more pallets, rather than collecting and 
reissuing them. Asset utilization was declining, profit margins decreasing and we were using 
more capital than we needed to. This led to a disappointing profit performance last year and in 
this current year. 
 
In view of this situation, we are putting in place a comprehensive programme to improve 
the profitability of CHEP Europe. 
 
The first step in the programme was the reorganization of our management team into a  
pan-European structure that replaces the old country-based structure. We have  
also created a new Asset Productivity organization operating across Europe. 
 
Action is underway to recover and relocate excessive pallets in the European pool.  
This is absolutely critical to improve asset productivity.  
 
The new management team is beginning to standardize business processes across  
Europe to align them with new CHEP global standards to reduce overhead costs and  
improve efficiency. 
 
Similarly to what we did in the US, we have started a project to review and reconfigure  
service centres and logistics offices in Europe to lower our cost base. 
 
A new pricing model is being developed to more closely align prices with activities and costs. 
 
CHEP is also working hard to improve customer service and enhance service differentiation. 
 
This restructuring programme of CHEP Europe is expected to cost approximately £85 million  
or A$238 million and will be shown as an operating exceptional item under UK accounting  
practices. The overall programme will have an 18-month cash payback period. 
 
It is composed of two components: 
 
• £45 million (A$126 million) of the restructuring cost is related to the collection and relocation  
of excessive pallets. Future benefits will be the reduction in capital expenditure in excess of  
£100 million pounds (A$280 million) and lower depreciation costs. 
 
• The rest of the restructuring costs of £40 million (A$112 million) is related to the restructuring  
of CHEP Europe's organization and operations, with a 2.5 year pay back period.  
 
Following the restructuring, CHEP Europe will be operating with lower costs, a healthier  
pallet pool, a pan European structure and will be competing even more effectively, leveraging 
its reach, scale and improved customer service. 
 
It is important to point out that the profitability improvements we are driving in the U.S. and  
Europe are not happening in isolation. They are perfectly aligned with key initiatives that  
we have launched across CHEP all over the world. I would like to conclude my segment  
with a brief overview of some of these global initiatives. 
 
The opportunity for further penetration into pallet markets around the world is very large,  
and we have been quite successful in driving aggressive growth in what we call 'growth'  
and 'infant' markets. 
 
A few months ago I appointed a global leader for our Container Business, which offers enormous 
growth potential. 
 
We have launched a global program called '1 CHEP' to leverage our global scale to drive 
efficiency and productivity gain everywhere.  
 
We continue to invest in the development of innovative new products. We have centralized 
product development. We have upgraded our engineering team with top notch talent and  
have focused them on a few key projects such as the plastic pallet. 
 
The application of technology to improve asset management and the user friendliness of  
our service is another key global initiative. An example is the use of radio-frequency tags  
to track our assets. We have a pilot program underway in Florida involving 250,000 tagged 
pallets.  
 
Last, but not least, we are launching a global quality program for implementation in all  
CHEP regions. The goal is to continually improve customer satisfaction. Every pallet 
and container must travel through our customer network in a predictable, error-free  
fashion - from delivery through invoicing. We call this program the 'Perfect Trip'. 
 
CHEP is a business with a strong value proposition: 
 
• we have a new team in place; 
 
• a recovery plan that is working well in the USA; 
 
• a robust restructuring program in Europe; 
 
• strong performance everywhere else; and 
 
• a set of global initiatives that will drive profitable growth going forward. 
 
SIR CK CHOW 
 
As you just heard from Victor, we are addressing the issues at CHEP Europe and 
are successfully turning around CHEP in the US. The rest of CHEP is performing 
strongly, and CHEP as a whole remains a strong and profitable business. 
 
Let me now move on to the Group's other businesses. 
 
First, Cleanaway. 
 
In 2002, Cleanaway achieved both revenue and profit growth, with particularly strong 
performance in the U.K. 
 
It started an advanced recycling centre in Rainham, Essex. The PET bottle recycling 
plant in Rostock, Germany is now fully operational.  
 
It won a number of significant contracts in Australia, and started a landfill gas to energy 
plant in Nanjing in China. 
 
Recall is our Information Management business. 
 
In 2002, Recall's revenue grew by 20%. Profit growth was even higher and operating 
margin reached a record 18%. 
 
It has increased its information centres including new mega centres in Toronto, Milan 
and Sao Paolo. 
 
It made 14 tuck-in acquisitions and entered three new markets in Hong Kong, Mexico  
and India.  
 
Brambles Industrial Services include the Steel Services operation in Europe and  
the United States, as well as Industrial Services in Australia. 
 
The performance of BIS was outstanding last year after its successful restructuring.  
Although sales were slightly down as we sold many unprofitable operations, profit  
improved by nearly 50%.  
 
A leading edge pulverized coal injection plant to serve BHP Steel at Port Kembla, was  
commissioned in April 2002. 
 
In France it won three significant contracts from Arcelor, the largest steel company in 
the world, at its Dunkirk site. 
 
It also won some major contracts in Australia in Woodside, BHP Steel and Alcoa. 
 
Brambles Industrial Services is now positioned for steady progress ahead. 
 
The first year of the new Brambles has been one with many challenges. The management  
team has worked hard to meet these challenges with great determination. We have  
achieved much and yet more needs to be done. 
 
In the next three years, we shall focus our effort in four areas. 
 
In CHEP USA, the Magnificent Five is already making positive impact on the business.  
Our priority is to successfully complete implementation this year. This will significantly  
improve the profit margin and cashflow of CHEP Americas. 
 
The second strategic imperative is to return CHEP Europe to profitable growth. We  
are committed to improve the efficiency of the pool by recovering excess pallets and  
reducing capital expenditure by more than A$280 million or £100 million. 
 
We are implementing a comprehensive programme to restructure the operations  
and organization of Europe to lower its cost base, and to improve customer service.  
Our objective is to reduce cost base by A$210 million (£75 million) within the next three years. 
 
We are committed to returning CHEP Europe to profitable growth. 
 
Thirdly we shall pursue a value creation strategy for Brambles going forward. This 
can be measure by growth and BVA improvements. In the mid term, we aim to achieve 
return on capital invested of 16% by 2006, as compared with 13% last year. We also 
aim to strengthen our balance sheet and to reduce our gearing to the range of 46% to 50%. 
 
Brambles is a service company. Our ultimate differentiation is the quality of our  
service provided by our people. Customer service and our belief in our people are  
at the core of Brambles values. Through total quality and total service management,  
we shall engage our people at all levels of Brambles in our effort to form long term  
partnerships with our customers.  
 
In summary, Brambles has strong and profitable businesses with good growth prospects. 
 
We have identified a number of significant legacy issues in CHEP USA and Europe. 
We are tackling these issues vigorously. 
 
CHEP Americas has already been turned around with profit up 22% in the first four months. 
 
In Europe, a comprehensive restructuring programme is being put in place. This 
programme, when completed will lead to a stronger, more effective CHEP  
Europe, offering better customer services on a pan European basis. 
 
Our other businesses are performing steadily in today's challenging market environment. 
 
We have a clear strategy which focuses on value creation. 
 
We have a strong management team and a dedicated work force. We face challenges 
with determination and we treasure winning as a team. 
 
We will work together to build a stronger Brambles and to create value for our shareholders. 
 
DON ARGUS, AO 
 
Before moving to the formal part of the meeting, let me talk for a moment about what  
we are doing differently this year in an effort to bring the whole issue of executive 
remuneration closer to shareholders. 
 
As you know, at the time of the merger, we committed ourselves to adopting the better  
of the prevailing standards of governance across the entire Group - whether those  
standards were UK or Australian based. 
 
This policy means that you will have seen differences in the information contained  
in the Annual Report and also differences in the items of business that we are asking you 
to consider today.  
 
First, we have prepared an extensive report on remuneration. 
 

This report contains information that goes beyond what shareholders will have been  
familiar with in the UK and in Australia. 
 
As well as setting out information on remuneration rates, it also includes an outline 
of Brambles' policy on remuneration. 
 
The second difference is that we are asking shareholders to consider and vote on that policy. 
 
The rationale for Brambles' remuneration policy is to put a significant part of our senior  
managers' pay at risk. We tie a big proportion of their remuneration to a number of performance 
hurdles. 
 
Their cash bonus, options and performance shares all require them to meet specific  
predetermined performance targets.  
 
In some cases these targets are meeting operational goals, performance against the 
most valuable companies in Australia and the UK, and earnings per share growth.  
 
In all cases, the hurdles also include improving what we call Brambles Value Added or 
BVA. Brambles Value Added measures the difference between the return we generate  
on our capital and the cost of that capital. Sustainable shareholder value depends on us 
earning competitive returns on our cost of capital. 
 
Another point on executive remuneration is that we continue to support the issue of options 
to our executives. There is nothing wrong with option schemes if, and only if, they  
contain sufficiently testing performance hurdles. 
 
Options are not free. They are simply a right to buy a share at a certain price if designated  
performance hurdles are met.  
 
The three questions often asked about options are: 
 
First, what is the cost of the option scheme? A second, related question is whether 
Brambles will expense its options and, if it did, what would be the charge to the Group's  
profits. 
 
At the moment, there is no accounting standard which indicates how companies should  
expense options in their accounts. Without such a standard, it is difficult to provide a  
reliable estimate of what the charge to profits would be. However, making some 
assumptions about how the International Accounting Standard will develop, we believe 
the fair value of options granted during the year ended 30 June 2002 would have been in 
the order of A$28 million or £10 million. It is important to understand, however, that this  
is not necessarily what would have been charged to the profit and loss account last year 
for the options we issued. Rather, this amount would be spread out over 1 - 5 years to 
reflect the option vesting period. 
 
I might add that, if we were able to show the full impact on the profit and loss statement  
of options granted in the previous two financial years, on the same basis the fair value 
of options granted during those years would have been $26 million or £9 million in 2000  
and $15 million or £5 million in 2001. These amounts would similarly be spread out over  
1 - 5 years. 
 
Brambles very much looks forward to new accounting standards being introduced,  
which we hope will allow us to comprehensively account for options. We urge the authorities 
to try to get at least this part of the international standards in place as soon as possible. 
 
The final question is whether there is any cap on the number of options which can be  
allocated to executives. 
 
The answer is most definitely 'Yes'. Under the rules approved by shareholders, we 
cannot allocate more than 10% of the combined capital to all employee option schemes. 
 
My final point about remuneration is this: there has been a lot of comment about the 
retirement payments made to Brambles former CEO John Fletcher. 
 
There are two important aspects to these payments. 
 
The first is that John Fletcher was with Brambles for 27 years - eight as manager of 
the Australian operations and the final eight years as CEO of the global business. So it  
is important to recognise that this payment included his pension and the superannuation  
entitlements he built up over those 27 years with the company.  
 
Secondly, what I think has been missed in the discussion about his total entitlement 
was that this payment was discussed openly and endorsed by shareholders at the  
Brambles Industries Limited AGM two years ago. 
 
 
 
For further information, contact: 
 

                                                                                                        
                Sydney     
                                                                             
                All Enquiries:         Edna Carew                                                       
                                       Group Manager Communications               +61 (0) 2 9256 5204   
                London     
                                                                             
                Media:                 Richard Mountain, Financial Dynamics       +44 (0) 20 7831 3113  
                Investor and Other:    Sue Scholes, Head of Investor Relations    +44 (0) 20 7659 6012  
 
 
The Brambles Industries Group is globally headquartered in Sydney, Australia. 



                      This information is provided by RNS
            The company news service from the London Stock Exchange