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Companies
Exclusive interview with the Pratt dynasty
Peter Shmigel - October 15, 2007
In a week that saw Australia’s third richest man Richard Pratt facing judgement over one of the most series breaches of business law – engaging in a price fixing cartel with rival Amcor (see Cardboard king prepares for judgement) - CompareShares catches up with the heir to the Visy fortune, son Anthony Pratt for an exclusive interview in the US.
While the Federal Court considers a penalty in the order of $30 to $40 million against Visy this week, on the other side of the world the Pratt dynasty has launched a $1 billion green business – a move to leverage into key environmental areas in the lucrative US market. Peter Shmigel reports from the US
Last week at a business and political leaders’ summit called by former President Bill Clinton in New York, Pratt announced $US 1 billion of capital infrastructure development by his family’s US packaging and recycling operation.
In what may be the single biggest ever act of ‘environmental entrepreneurship’ or green business, the money will fund construction and operation of three new paper recycling mills, four waste-to-energy (WTE) plants, and 30 materials recovery facilities (MRFs), as well as ancillary packaging plants to fully integrate the company’s paper mills.
"I can see a day when aside from manufacturing recycled content boxes we will be a major player in a totally new and distinct 21st century economy based on environmental aspects," Anthony Pratt exclusively told CompareShares.com.au.
The Bottom Line
Pratt Industries’ new US growth plan includes both geographical expansion and business diversification – and environmental strategy underpins it all.
The company with the Melbourne HQ will first develop a new $US 150 million paper mill in the mid-west at Shreveport, Louisiana, complementing its two current mills in New York City and Conyers, Georgia.
Operational by December 2008, the new mill will use Visy’s tried and tested Australian techniques, such as total integration in supply. The company goes out and gets low cost recyclate as its mills’ primary feedstock – often ‘closing the loop’ by recovering materials of its own initial manufacture.
Pratt Industries also looks to leverage into new activity areas and markets. A key move is the construction at the Georgia paper mill of a WTE plant to convert wood waste into energy for first the mill’s need and then potentially those of off-site energy users. It will be operational by March 2009 at an establishment cost of $US 50 million.
While the Pratts have been building a US business for some twenty years and have achieved the number seven position in the American packaging market, some question their US commitment. This is despite their audacious entry into New York’s ‘Soprano-like’ waste game and their employment of some 3200 people. Made on national television, the high-profile investment announcement looks to be the Pratts’ reply to questioners and the family’s shot at the American business heavyweight title.
"While home will always be Australia, we like it in America. If nothing else, it provides an enormous and creative range of refinancing opportunities that don’t exist back home, not to mention more competitive lending rates," Anthony Pratt says.
Strategic Settings
Anthony Pratt isn’t scared of big goals, such as tripling his company’s turnover to $US 2.5 billion and getting 10% share of the US packaging market. He outlined the flanks of his business vision to CompareShares.com.au.
Focus on high end customers
Recognising the limitations of its primary output – the cardboard box – Pratt Industries is aiming its US business at customers in niche segments with higher end products.
"We don’t necessarily buy box plants per se. We buy their customers. In doing so, we focus on added-value segments of the economy, such as cosmetics and pharmaceuticals as opposed to food and beverage. Their producers are less price-sensitive and more focused on other attributes, including environmental performance," Pratt says.
Differentiate through environmental performance
Historically, the big constraint on packaging players is customers’ tendency to ‘commodify’ packaging. Purchasing considerations – particularly by high volume users such as food and beverage - have been driven by the lowest possible price.
One exit from this downward spiral is via a unique ‘green’ value proposition. Anthony Pratt believes that his customers will see a distinct and bankable value in boxes sourced from recovered materials, which are significantly less energy intensive than boxes made from virgin forests.
"While America is not yet as environmentally conscientious as some other places, it is definitely happening and will continue to happen. We believe that it is realistic to expect our customers to specify ‘carbon neutral’ packaging in the future. A key focus will be on reducing not only our own greenhouse gas footprint, but helping our customers reduce theirs," Pratt said.
Leverage skills
One of the most significant input costs to any paper and packaging operation is energy. It makes sense and save cents for Visy to have pioneered both energy efficiency and energy self-sufficiency approaches. Partially as a result, its US mills are believed to be the lowest cost operations in their category.
The company is now poised to do more than just keep its own energy-related production costs down.
Using its own IP and experience, Pratt Industries now looks to extend the range of materials it brings back to its facilities (such as wood waste to the new Georgia plant) and to develop further capacity to actually sell energy to others.
"Murdoch transitioned his business from newspapers to electronic media. He built on a strong but limited base to a limitless one. Similarly, we are going to transition from being primarily a box business to an environmental business. We will make our money and create jobs through diverting a wide range of waste material to recycling and providing lower energy costs," Pratt says.
Prime the pump
If you are a company that relies on recycling for your supply, you do what you can to secure that supply.
For Pratt, this means promoting environmental awareness to Americans through a series of high profile educational and PR initiatives. It doesn’t hurt when you have celebrity allies like Al Gore and Muhammad Ali who are willing to appear in your videos and help you create a ‘recycling movement’.
"Recycling is an important weapon against climate change… I believe we'll increase the understanding amongst opinion formers, policy decision makers, and the public of the importance of recycling on a much larger scale than is being undertaken at the moment," Pratt says.
One of the ironies is that - like other US recyclers – Pratt Industries sometimes struggles to get supply due to strong demand and prices for recyclate from China and other overseas markets.
To this, Pratt replies: "There is still a huge amount of potentially recyclable material going to landfill. Rather than compete for what’s already captured, we focus on intercepting the waste that still ending up going to the landfill. We’re going straight to waste haulers and offering them incentives, such as $US20 per ton diversion payments."
Crystal Ball
If it’s such a solid model, surely the North American competitors would be hitting out in the space or following quickly into it.
Apparently not, according to Pratt: "They seem hand-cuffed to their forests. There’s a mind-set behind virgin pulp production. Frankly, they can’t afford to change from their long term course. The Australian and European approach has always been different and we’re going to capitalize on that difference by getting further into the environmental space."
Having just put $US 1billion of his family’s money where his mouth is, Pratt adds: "It’s a privilege to be a private company. Our ownership structure lets us do many things that others can’t. It would be difficult to give that away."
With climate change and environmental contours increasingly shaping the business landscape, some Australian investors might be hoping he changes his mind and lets them come along for the journey.
More articles from this week's newsletter:
Companies: Exclusive interview with the Pratt dynasty
Stocks: Stock picks for the long haul: Reece Australia and ARB Corporation
Politics: Who are the better economic managers?
Commodities: Wheat prices soar
Technical analysis: Elliott Wave theory spells doom and gloom for the US market
Stock of the week: Imdex Limited
Resident trader: How to profit from volatility
Smart investing: Counting the cost when confidence is lost
Economics: Australian employment data signals rate hike
Stocks: Construction: a two-speed industry
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