The Light at. container industry into a new era of financial and environmental sustainability

Transcription

1 The Light at the End of the Bottle Leading the glass container industry into a new era of financial and environmental sustainability A report submitted to Powering the Global Supply Chain by Team #20, led by Andrew Wallmeyer, on February 12, 2010

2 Glass continues to lose market share to aluminum and plastic containers Raw materials costs are on the rise Much recycled glass is not being reused Breakage leaves glass too small to sort Lack of economic incentive hinders adoption of sorting technology Customers want green products but have few standards to guide them OVERVIEW CULLET PROCESSING GLASS COLLECTION COMMUNICATE BENEFITS OTHER CONSIDERATIONS SUMMARY

3 Collect glass for in house cullet production and communicate the environmental benefits to SGS customers in a way that is easy for them to share with both retailers and consumers. OVERVIEW CULLET PROCESSING GLASS COLLECTION COMMUNICATE BENEFITS OTHER CONSIDERATIONS SUMMARY

4 Enter cullet processing market Install sorting/grinding equipment at SGS plants Establish freestanding cullet plants Act quickly others are already moving Collect used glass from partners SGS customers Retailers Quantify and communicate benefits Provide data for Wal Mart sustainability index Explain advantages of glass over aluminum and plastic OVERVIEW CULLET PROCESSING GLASS COLLECTION COMMUNICATE BENEFITS OTHER CONSIDERATIONS SUMMARY

5 Only half of recycled glass becomes usable cullet 1 15% of glass lost due to breakage during collection Hand sorting recovers 60% Optical sorting systems can recover 90 95% MRFs have little financial incentive to invest in optical sorting 1 Market price per ton of recovered Recovered Material Prices glass is extremely low Many find it cheaper to landfill cullet than to ship it to processing facilities Of the roughly 500 MRFs in U.S., US only three have optical glass sorters An $87 million opportunity Aluminum Plastics (high) Plastics (low) $250 Steel $195 Glass $ million tons of glass containers produced annually in U.S. US million tons recycled million tons not converted to color separated cullet by MRFs $67.54 / ton 3 = $86.5 million in potential glass container manufacturing savings SOURCES: 1 EUREKA! RECYCLING, FEB. 5, 2010; 2 CASE DATA; 3 GREEN MOUNTAIN GLASS $500 $0 $500 $1,000 $1,500 $1,500 OVERVIEW CULLET PROCESSING GLASS COLLECTION COMMUNICATE BENEFITS OTHER CONSIDERATIONS SUMMARY

6 Step 1: Install cullet production equipment at all SGS plants Two machine, three color sorting system = $360,000 Processing capacity of 5 tons per hour Other system costs $1.1 million Feed conveyors, crushers, air compressors, engineering work, etc. Step 2: Establish standalone facilities in metro markets Possible partner: ecullet (ex. Saint Gobain in Seattle) Act quickly it s a race to establish regional monopolies ecullet Operating in Oakland and Seattle; looking at Minnesota Strategic Materials Operating in Chicago and Los Angeles; looking at Florida and Minnesota SOURCE: EUREKA! RECYCLING OVERVIEW CULLET PROCESSING GLASS COLLECTION COMMUNICATE BENEFITS OTHER CONSIDERATIONS SUMMARY

7 Partner with existing customers Reward customers who collect and return used glass with discounts on future orders SGS delivery trucks could backhaul used glass SGS customers could pass savings down the supply chain to incentivize glass collection Identify new partners Retailers (Wal Mart, etc.) OVERVIEW CULLET PROCESSING GLASS COLLECTION COMMUNICATE BENEFITS OTHER CONSIDERATIONS SUMMARY

8 Quantify environmental benefits of new process Help define cross industry sustainability index Likely criteria Recycled content in product Potential for further recycling Environmental impact of obtaining raw materials Energy egyconsumed in production o & ta transportation spotato Amount & impact of waste generated in production Publish SGS figures and promote index Encourage SGS customers to adopt index Make information available to consumers online OVERVIEW CULLET PROCESSING GLASS COLLECTION COMMUNICATE BENEFITS OTHER CONSIDERATIONS SUMMARY

9 Ride trends and mitigate risks Invest in glass sorting sorting technologies Consider possible acquisitions ecullet Green Mountain Glass Enter bottle reuse market Investigate possible market approaches (i.e. acquisition) Promote higher recycling rates Lobbying Statewide bans on MRFs landfilling collected glass Education REFER TO APPENDIX SLIDES 9 AND 10 FOR ADDITIONAL DETAIL OVERVIEW CULLET PROCESSING GLASS COLLECTION COMMUNICATE BENEFITS OTHER CONSIDERATIONS SUMMARY

10 Cullet Processors Container Makers SGS Bottlers & Packagers Glass Container Life Cycle MRFs* Distributors & Retailers Waste Haulers Consumers * MATERIALS RECOVERY FACILITIES OVERVIEW CULLET PROCESSING GLASS COLLECTION COMMUNICATE BENEFITS OTHER CONSIDERATIONS SUMMARY

11 Cullet Processors Container Makers SGS Bottlers & Packagers Step 1: Backward Integration MRFs* Distributors & Retailers Waste Haulers Consumers * MATERIALS RECOVERY FACILITIES OVERVIEW SUPPLY CHAIN OPERATIONS LONG TERM STRATEGY RISKS SUMMARY

12 Cullet Processors SGS Container Makers Bottlers & Packagers Step 2: Encourage Customers to Collect MRFs* Distributors & Retailers Waste Haulers Consumers * MATERIALS RECOVERY FACILITIES OVERVIEW CULLET PROCESSING GLASS COLLECTION COMMUNICATE BENEFITS OTHER CONSIDERATIONS SUMMARY

13 Cullet Processors SGS Container Suppliers Bottlers & Packagers Step 3: Establish Future Business Lines MRFs* Distributors & Retailers Waste Haulers Consumers * MATERIALS RECOVERY FACILITIES OVERVIEW CULLET PROCESSING GLASS COLLECTION COMMUNICATE BENEFITS OTHER CONSIDERATIONS SUMMARY

14 Recommendation addresses key concerns Cuts long term costs by increasing i cullet supply Improves environmental sustainability Strengthens partnerships with supply chain members Communicates benefits to all stakeholders Positions SGS to capitalize on emerging trends OVERVIEW CULLET PROCESSING GLASS COLLECTION COMMUNICATE BENEFITS OTHER CONSIDERATIONS SUMMARY

15 Appendix

16 (millions) E 2010E 2011E 2012E 2013E U.S. Glass Bottle Use (mil tons)* Growth Rate of Bottle Usage 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% U.S. Glass Bottle Recycling Rate** 29% 31% 33% 35% 37% 39% U.S. Tons of Recycled Glass Bottles Market Cost Savings From Glass Bottle Recycling: Conservative Case (Recycling Savings = $20/ton***) $64 $69 $75 $81 $86 $92 Expected Case (Recycling Savings = $67.54/ton***) $160 $173 $187 $201 $216 $231 Aggressive Case (Recycling Savings = $90/ton***) $287 $312 $337 $362 $389 $416 Assumed SGS Market Share 35% 35% 35% 35% 35% 35% SGS Cost Savings From Glass Bottle Recycling: Conservative Case (Recycling Savings = $20/ton***) $22 $24 $26 $28 $30 $32 Expected Case (Recycling Savings = $67.54/ton***) $56 $61 $65 $70 $76 $81 Aggressive Case (Recycling Savings = $90/ton***) $100 $109 $118 $127 $136 $146 Sources: * WasteAge, ** WasteAge, *** Green Mountain Glass, Team Estimates Assumptions: U.S. glass bottle usage increases at a rate similar to what it did during the period U.S. glass bottle recycling rates increase 10% over next five years; an aggressive assumption, but not quite as aggressive as that of some industry trade groups (i.e. CRI s 50% goal) APPENDIX SLIDE #1

17 Recycling Cost Savings per 1 Ton of Cullet Customer Discount Calculation Raw Material Cost Savings Assumed margin for SGS 15.1% 1,300 lbs. of sand $15/ton $ 9.75 Cost to customer for 1 ton of glass $ lbs. of soda ash $200/ton $ Cost savings from 1 ton of cullet $ lbs. of limestone $380/ton $ 4.75 Cost savings passed along to customer 80.0% Total Raw Material Cost Savings $ Discount given to customer $ Customer discount as percentage of current cost 7.6% Energy Cost Savings Energy cost per ton of glass produced $ Energy cost as percent of total cost 20% Total cost of producing 1 ton of glass $ Energy cost savings is 2% for every 10% of cullet used Expect to use 50% cullet Total Energy Savings $ Total Direct Cost Savings $ per Ton SOURCE: GREEN MOUNTAIN GLASS, GLASS INDUSTRY CORPORATE FILINGS APPENDIX SLIDE #2

18 Plant Location Regional Recycling Rate Assumptions CA 45% Usage rate (Mton/person) IN 22% Bottle Bill state recycling rate 64% MA 38% Non bill state recycling rate 12% NC 12% Overall recycling Rate 27% TX 12% SOURCES: USAGE RATE AND REGIONAL DIVISIONS DETERMINED FROM CASE (PAGE 6) RECYCLING RATES FROM RECYCLING.ORG/FACTS/ALL/DATA/RECRATES DEPNON 3MATS.HTM RECYCLING ORG/FACTS/ALL/DATA/RECRATES DEPNON HTM CURRENT STATE POPULATION ESTIMATES FROM US CENSUS BUREAU, POPULATION DIVISION, RELEASED DECEMBER 2009 APPENDIX SLIDE #3

19 Region Plant Equalized Surplus Location Population Potential Returned Recycle rate Amounts (Need) Northeast MA % Midwest IN % (90294) South NC % (258178) Texas+ TX % (175855) West CA % United States SGS % Optimal Shipping to Equalize Amounts From To Miles Mtons MA NC CA TX CA IN CA NC Carbon Dioxide equivalent of Total Shipping Cost was found using the following website: lators/business_&_org_calculator.pdf APPENDIX SLIDE #4

20 Key findings among U.S. consumers were the following: 98% prefer glass bottles for liquor. 96% prefer glass for beer. 89% opt for plastic bottles for water. 42% like plastic bottles best for soda while 36% prefer aluminum cans and 22% desire glass bottles. APPENDIX SLIDE #5

21 Electronics industry already has producer responsibility bl laws in 19 states requiring manufacturers of electronics to recover the items they sell at end of life ( approves major statewide e waste recycling program.php) h /fil / / /i id li h Packaging responsibility is already a requirement in EU; in UK, everyone in the chain (above a certain size) is charged a fee ( agency.gov.uk/business/topics/waste/32214.aspx) If SGS can be ahead of these laws in the US, pre compliance must make economic sense since competitors will not be required to take responsibility for waste In the US, there may be up to 50 different schemes for packaging law (so it may be easier to choose the toughest if it s feasible) ( Legislation_in_packaging_A_push_for_extended_producer_responsibility.php) APPENDIX SLIDE #6

22 Key glass input costs have risen substantially Soda Ash has Doubled Past Five Years Energy Prices in Long Term Secular Rise SOURCE: R.W. BAIRD CONTAINERS & PACKAGING INDUSTRY REPORT, PP , BLOOMBERG, PURCHASING PRICE MAGAZINE APPENDIX SLIDE #7 Sources: R.W. Baird, Bloomberg, Purchasing Price Magazine, InfoMine.com

23 Aluminum prices are also rising SOURCE: INFOMINE.COM APPENDIX SLIDE #8 Sources: R.W. Baird, Bloomberg, Purchasing Price Magazine, InfoMine.com

24 ecullet Headquarters: Palo Alto, CA Annual Revenue: $290,000 Employees: 5 Founded: 2008 What they do: Technology based glass processing company that produces high quality, color sorted, contaminant free cullet. Currently operates facilities in Oakland, CA, and Seattle, WA. Looking to enter Minneapolis, MN, market. APPENDIX SLIDE #9

25 Green Mountain Glass, LLC Headquarters: What they do: Other info: Bryn Mawr, PA CulChrome technology allows creation of amber or green glass from mixed color cullet Owners GR Technology Inc and FCR LLC (a subsidiary of Casella Waste Systems, Inc.) currently in a court battle to dissolve the LLC SOURCES: corporations/vermont court declines jurisdiction over dissolution of delaware llc/ APPENDIX SLIDE #10

26 Wine Bottle Recycling, LLC Headquarters: Building Size: Founder: Stockton, CA 92,000 sq. ft. Bruce Stephens Founded: 2009 What they do: Mobile on site de labeling, collecting, sorting, de labeling, washing, sterilizing, and repackaging bottles APPENDIX SLIDE #11

27 Strategic Materials Headquarters: Houston, TX Founded: 1896 What they do: Other info: Glass processing, NPI (plastic recycling), CAW and RSI (collections). Also supplies other industries including abrasives, fiberglass, beads, frictionators, etc. Largest processor of glass cullet; processing more than 1.25 million tons annually. Customers include O I, Anchor, Fevisa, and Gallo Winery. APPENDIX SLIDE #12

28 Owens Illinois Headquarters: Annual Revenue: Perrysburg, OH $7.9 Billion Employees: 23,000 Founded: 1903 What they do: Other info: Leading producer of glass packaging with significant presences in food packaging gand alcoholic and non alcoholic drink containers. 79 manufacturing facilities in 21 countries, with 161 furnaces and 433 machines Traded on the NYSE stock exchange under ticker OI Market cap of $4.6 Billion $3.7 billion in debt, but $1.0+ billion in cash on hand APPENDIX SLIDE #13

29 SGS: A strong player in a consolidated market U.S. Beverage Container Industry $225 billion revenue in 2006 U.S. Glass Container Industry $34 billion annually Bottled Water All Other By Segment 15% PET PLASTIC 15% Beer 56% GLASS Food 18% Soda Other 10% 11% Beer 15% ALUMINUM CANS Soda 29% Wine & Spirit 2% Beer 13% Non Alcoholic 8% Beverages Wine & Liquor 8% By Manufacturer Owens Illinois 43% SGS* 31% Anchor Glass 18% Other 8% SOURCE: CONTAINER RECYCLING INSTITUTE OF AMERICA, R.W. BAIRD * INCLUDES SGS IN PLACE OF SAINT GOBAIN APPENDIX SLIDE #14

30 Existing process leaves significant opportunities for improvement Home Hauler collects recyclable materials MRF sorts materials MRF cleans and crushes glass Cullet distributed evenly to all SGS plants, regardless of distance Glass containers emptied SGS produces new bottles Bar or Restaurant Many recyclable glass containers end up in landfills Virgin raw materials mined, purchased, and transported to plants APPENDIX SLIDE #15

31 New process would cut cullet shipments and capture more used glass Hauler collects recyclable materials MRF sorts materials MRF cleans and crushes glass Cullet transported to nearest SGS plant Home Glass containers emptied Less recyclable glass in landfills Fewer virgin raw materials required SGS produces new bottles Bar or Restaurant Distributor Bottler collects SGS collects collects empty empty bottles empty bottles bottles when when making when making making deliveries to deliveries to deliveries distributors bottlers SGS sorts, cleans, and crushes glass APPENDIX SLIDE #16

32 Why Should SGS invest in glass recycling? Favorable trends U.S. recycling market is large and getting larger Rising recycling rates Recycling rates have increased steadily in the U.S., from 26% in 1995 to 29.1% in 2000 to 32.5% in (m millions) $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 US U.S. Recycling Market E 2011E 2012E 2013E 2014E Emerging legislative pressures (i.e. European Union mandates) Opportunities for SGS License acquired and/or developed processing technologies to other processors If in house demand is met, sell processed cullet SOURCES: U.S. ENVIRONMENTAL PROTECTION AGENCY, IBISWORLD INC. APPENDIX SLIDE #17

33 Quantifiable / Direct Benefits Raw materials savings: $55.50/ton Energy savings: $12.04/ton Indirect Benefits Increase furnace life Increase marketability Hedge against rising commodity costs Avoid future tax liabilities External/ Environmental Benefits Reduce greenhouse gas emissions Reduce landfill dependence Reduce byproducts REFER TO APPENDIX SLIDE FOR REFER TO APPENDIX SLIDE 1 FOR ADDITIONAL DETAIL ON ASSUMPTIONS AND CALCULATIONS APPENDIX SLIDE #18 Source: Don t Know Yet

34 SGS can cover the necessary start up costs Equipment costs are material, but likely less than $1 million, given proposed scope and proposed costs of similar programs elsewhere. Labor Management team (logistics, marketing, etc.) Warehouse and loading dock employees Cullet machine operators Training Capital Equipment Readily available grinders and mills Warehouse Space SOURCES: TRIM CO. LTD., FLORIDA DEPARTMENT OF ENVIRONMENTAL PROTECTION APPENDIX SLIDE #19

35 A long term hedge with an immediate upside Wine bottle reuse business is feasible now Wine Bottle Recycling LLC forecasts 250 million cases of wine produced in California annually 1% expected retrieval rate for rewash $6 of revenue per washed case 250m x 1% x $6 = $15 million opportunity Bottle processing complements existing business Same product, same customers Enhances reputation for sustainability If reusable bottles become popular p again, SGS revenues could decline Staking dominant position in the bottle washing market now mitigates risk of lost sales SOURCE: REFER TO APPENDIX SLIDE 11 FOR ADDITIONAL DETAIL APPENDIX SLIDE #20

36 Greenfield is the best option for market entry Relatively low cost requirements makes the build your own option attractive. Partnership would reduce start up t and management costs, but dilute profits. Method Pro Con Greenfield Technology is not proprietary Start up time Joint Venture w/ Wine Bottle Recycling, LLC Control of scale SGS would continue to own the customer relationship Leverage their investment Learning curve Greater monetary risk Increased competition ii More limited control Leverageour relationships Less upside opportunity Acquire Wine Bottle Recycling Learning curve Embryonic stage Willingness Reduced competition Technology is not proprietary Company is not established REFER TO APPENDIX SLIDE 11 FOR ADDITIONAL DETAIL APPENDIX SLIDE #21

37 Higher recycling rates mean higher profits Total benefit could surpass $400 billion by illions Recycling Co ost Savings M GLASS CONTAINER INDUSTRY ESTIMATED ANNUAL SAVINGS FROM CULLET USE $450 Aggressive Case (Recycling Savings = $400 $90.00/ton) 00/ton) $350 $300 $250 Expected Case (Recycling Savings = $200 $67.54/ton) $150 Conservative Case $100 (Recycling Savings = $50 $20.00/ton) $0 2009E 2010E 2011E 2012E 2013E REFER TO APPENDIX SLIDE 1 FOR SOURCES: GREEN MOUNTAIN GLASS, WASTE AGE, TEAM ESTIMATES ADDITIONAL DETAIL ON ASSUMPTIONS AND CALCULATIONS APPENDIX SLIDE #22

38 Moving mountains of glass, but for what benefit? Cumulative Impact of Cullet Shipments Total annual cullet shipments: 524,000 metric tons Average distance per metric ton: 1,615 miles CO2 emissions: 26,000 metric tons REFER TO APPENDIX SLIDES 3 AND 4 FOR ADDITIONAL DETAIL APPENDIX SLIDE #23

39 Eliminate waste; use cullet where it is collected To equalize utilization levels, SGS ships 23% of acquired cullet between facilities, i though cullet utilization ratio has no effect on finished products Using cullet at the factory closest to collection would Reduce CO2 emissions by 26,292 metric tons* Save all associated shipping costs * SOURCE: REFER TO APPENDIX SLIDES 3 AND 4 FOR ADDITIONAL DETAIL APPENDIX SLIDE #24

40 Cullet use ratios could be a marketing tool Differentiate a commodity product West and Northeast regions could market products with higher cullet ratios to environmentally conscious customers Where multiple lines or batching allow for further variation, create eco premium products with % post consumer content Additional Considerations Higher operating costs at low cullet plants would be offset by lower transportation costs Simple strategy to implement just stop shipping APPENDIX SLIDE #25

41 Material cost changes are covered Material costs will likely continue to trend upward If increased demand d increases cullet prices, new strategy will increase SGS s access to cullet Consumers/Government still value sustainability US will continue to follow EU, which already has extended producer responsibility laws Even in economic crisis consumers have been willing to pay for sustainable products Competition from aluminum Transparency is still an unmatchable benefit Consumer glass preference is strong in alcohol segment REFER TO APPENDIX SLIDES 5 8 FOR ADDITIONAL DETAIL APPENDIX SLIDE #26

42 Defensive measures against copying of glass return program First mover advantage Distributors ib t less likely l to support returns to two or more companies Accepting all usable glass simplifies process for packagers Largest competitor (Owens Illinois) has significant debt, making the capital costs of copying the program difficult Does not reduce current cullet supply source, dampening competitive response from cullet suppliers (e.g. Strategic Materials) Primary defense against competitive price cutting: SGS greater cullet supply will improve the company s cost structure in a way that will be difficult for competitors to match REFER TO APPENDIX SLIDES 12 AND 13 FOR ADDITIONAL DETAIL APPENDIX SLIDE #27