From PROFIT magazine, April 2008
Recyc PHP: Of vision and volume
By transforming diapers into a saleable commodity, Recyc PHP helps save the planet and cuts manufacturers' costs. So, why is the firm still scrambling for growth capital? Our judges weigh in.
Case study 2C: Recyc PHP Inc., Drummondville, Que.
Launch date: Mid-2006
Business: Post-industrial material recovery
Initial target: Third-year sales of $12 million
Diagnosis: The firm needs to break out of the mere commodity business and/or find a strategic investor
It seemed like a no-brainer, a red-hot idea for a greening world.
As space in landfills grows scarcer, the cost of dumping industrial waste will only rise. Meanwhile, manufacturers are under growing pressures to maximize productivity. To Ontario forest-industry executive Jeffrey Butler, these two trends pointed to a classic opportunity to buy low, sell high.
In mid-2006, with his son David and two Quebec-based partners, Butler launched Drummondville, Que.-based Recyc PHP Inc. to buy rejected inventory from local producers of disposable diapers and turn it back into raw material for resale. The founders were convinced they would be heroes twice over: first, for transforming waste materials into a saleable commodity, and second, for providing manufacturers with cheaper sources of pulp and plastic.
Thanks to creative financing, tireless marketing and continuing quality improvement, Recyc PHP is now up, running and almost profitable. But the founders haven’t been hailed as heroes yet. “People like to talk about recycling,” notes Butler, “but when it gets put to the test, they aren’t always so willing to pay for it.”
Fortunately, PHP’s backers have created a low-cost producer that can probably survive the fickleness of the recycling marketplace. But can they find the funds they need to boost production, so that PHP can truly become an industry leader?
At 57, Jeffrey Butler doesn’t want to build a small business. The forest engineer has been around big businesses all his life, including 27 years with Montreal-based Domtar Inc. In his last position, as vice-president of forest management and operations, he oversaw 18 mills across North America. Since leaving Domtar in 1999, he has run his own consulting firm, Butler Consultants, from his home in Niagara-on-the-Lake, Ont. His projects have included advising global companies on new paper mills and writing or reviewing business plans for other mills — and an unsuccessful bid for a mill of his own.
He was recently joined in the family business by his 32-year-old son David, who cut short his minor-league hockey career in 2004 to study for an MBA from the University of Waterloo. After graduation, the marketing plan David submitted as an MBA assignment — for a producer of “recovered pulp” that would post sales of $3.5 million in its first year and $12 million in Year 3 — formed the basis of PHP’s business plan.
The Butlers’ strategy was simple: focus on the growing personal-care market, which includes baby diapers, adult incontinence products and feminine hygiene products. These items consist mainly of absorbent “fluff” pulp surrounding a core of super-absorbent polymers (SAPs), wrapped in thin plastic. (SAPs are the tiny granules that absorb more than 100 times their weight in fluid, keeping baby dry all night long.)
The manufacturing process creates a lot of trimmed or “off spec” waste material, which usually goes into the garbage. Huge producers such as SCA Hygiene Products, which makes adult diapers in Drummondville, are too busy to chase after the scraps. Enter the Butlers, with their plan to chop up and dissolve the waste diapers, and reduce them to their component parts.
The original vision included messier lines of business, such as recycling milk cartons and recycling used incontinence products. Post-consumer diapers not only take up a lot of space in landfills, they contain toxic organic waste. But that initial plan would have cost $7 million or more, an amount that proved out of reach. “As entrepreneurs, you start out dreaming big,” says Jeffrey Butler, “and then you come back to reality.”
Three years ago, the Butlers began turning their plan into a business. But while pulp prices were high and Canadian cities were beginning to run out of space for their garbage, they found no private backers to finance their dream. “When we talk about risk capital in Canada, I call it risk-averse capital,” Butler grumbles. In Montreal, however, David met Arthur Grafftey, son of two-time Progressive Conservative leadership candidate Heward Grafftey, who was working with government and business to research just the sort of recycling the Butlers were pursuing. Grafftey introduced them to Daniel Fortin, a mechanical engineer working at SCA’s Drummondville plant. Deciding to pool their interests, the four invested a total of $100,000 to launch PHP.
Then the stars began to align. After considering locations in Drummondville and Montreal, the partners set up shop in the smaller city, an hour’s drive east of Montreal. Real estate prices were lower, and the workforce more entrepreneurial. Besides, says Butler, “In Montreal, we’re a small cog in a big wheel. Drummondville is looking to attract businesses like ours.” The city of 70,000 even had a building just the right size, 15,000 square feet, in an industrial park on the site of a former textile plant.
Meanwhile, the partners negotiated a 10-year supply deal with SCA. They found the production equipment they needed, barely used, from a plant in Belleville, Ont. Butler says they paid $500,000 for two production lines that would have cost $1.2 million if purchased new. And the enterprising staff at Drummondville’s economic-development agency helped PHP secure a loan from the local Caisse Desjardins to set up shop. In all, PHP raised about $500,000 from Desjardins and other lenders, thanks to federal and Quebec loan-guarantee programs. Butler still marvels at how quickly things fell into place: “We pulled it all together in about six months.”
Today, the company is run by the four partners, with Jeff Butler as president, David as VP of corporate development, Grafftey as VP sales and Fortin as senior VP of operations. The Butlers continue to work on both PHP and their consulting projects, with one or the other man trying to get to Drummondville every week or so, and the whole management team getting together once a month.
Production work is handled by PHP’s seven employees, who receive regular truckloads of rejected product from SCA and process 500 kg per hour in two shifts that begin at 8 a.m. and end at 11 p.m. The waste material is broken down by knives, cyclones and gravity separators into its original parts — mainly pulp and plastic, with a tiny portion of SAPs.
So far, PHP has found willing buyers for the fluff pulp and SAPs — although not at the prices they’d hoped for. The pulp, which is generally bought by brokers for resale to other diaper manufacturers, goes for about US$425 a tonne. That’s well short of the US$506 that David Butler projected in his MBA thesis, even though world pulp prices are 40% higher than anyone then foresaw. The SAPs sell for a heftier US$1,500 a tonne, mainly to a U.S. brokerage firm that resells it to a diaper producer in China. But it accounts for only about 2% of PHP’s production.
With worldwide demand weakening for recycled plastic, PHP’s plastic fetches just over US$100 a tonne. The plastic sells mainly to producers of low-grade plastic products such as industrial containers and fencing. “The global market in plastics is fairly saturated right now,” admits Jeffrey Butler. “We’re managing to move it all, but it’s harder than we would like.”
As the designated marketer, David Butler is looking for long-term buyers for PHP’s plastics, especially given the company’s hope to start a second production line later this year. He checks out industry directories and walks trade shows. He also chats up industry brokers, although he prefers to deal directly with customers after one broker used PHP to land a supply deal and then began selling to the manufacturer himself. “Plastics is a dog-eat-dog world,” David sighs.
The good news, he says, is that “people are starting to call us instead of us calling them. We’re getting over the startup hurdle. People know they can count on us.” Backing up that statement is Bernice McKenna, who manages logistics for JSL Partners Inc., a broker in High Point, N.C. Her company began buying PHP products last fall for resale to other manufacturers. “We’re getting exceptional service,” she says. “They’re good people to deal with — whatever we ask for, they give us. These things are very important in our business.”
Quality is also important. PHP hopes to boost its prices by improving the quality of its finished product. “Our pulp price rises as we clean it up,” says Jeff Butler. “Our quality used to be lower than 70%, but we’ve worked very hard at cleaning it up. It’s now about 90% pure. Reaching 100% is quite challenging, but we’ll get there.”
This year, PHP expects to process about 2,300 metric tonnes of pulp and 50 to 60 metric tonnes of SAPs, which would produce revenue of $1.3 million. After posting a loss last year on sales of $306,000, Butler says he expects that higher production and higher prices will give PHP its first profit this year.
But he is still looking for more. With another $100,000 to $200,000 in capital, Butler says PHP could set up its second assembly line, perhaps by accepting rejected material from Johnson & Johnson Inc., which produces feminine-hygiene products in Montreal. Beyond that, he still dreams of getting into “wet” systems, to divert used diapers from municipal landfills. David Butler says the company is also looking at setting up a plant in the southern U.S., preferably right on the site of a diaper producer to facilitate deliveries. “We have a lot of ideas,” says Jeffrey. “All we’re missing is the money.”
Butler says he is still looking for funds, preferably from equity investors. “We’ve found that it’s nice to borrow money, but sometimes the interest on your debt can be overwhelming.” So far, he’s been disappointed by the lack of support for a product with such clear environmental benefits, but he knows it takes a special person to understand post-industrial diaper markets. “We realize that we have to find someone that will share the same vision we do,” he says. “Sometimes we feel like Don Quixote. It’s frustrating, but we’re not giving up.”
