Going Around in Circles, To Solve a Big Problem

As human beings we generally associate circular arguments as a waste of time for problem solving. We are told to think outside the box, come up with new ideas and often products. While this linear approach has taken us out of the cave, it has also brought upon us a few problems, such as social inequality, climate change, etc. Maybe a circular approach to problem solving can come to the rescue. In today’s Arcus, my learned colleague Conrad Werner will share with you how a circular approach in the short term can not only clean up very visible waste issues, but also help in solving some long-term climate challenges.


Happy Panvesting,


Munib Madni.


At Panarchy Partners we continuously try to stay abreast of key thematics across environmental, social and human capital. Admittedly, that is a wide menu. How to prioritize? On the environmental side, one approach we have found useful is applying the split of GHG emissions by source as a rough guide on how to allocate research time.


Third-party sources that quantify and analyse GHG are generally aligned in highlighting the monolithic “Energy” bucket as the main contributor of emissions (~75%). Along those lines, it may not be surprising that, say, Hydrogen has commanded a reasonable amount of our attention, as shared in previous editions of Arcus.


At the same time, our sense is that the default ‘energy focus’ vis-à-vis GHG has come somewhat at the expense of other interesting analytical cross-sections. Thankfully, we have organizations like the Ellen MacArthur Foundation who look through alternative lenses: Their report Completing the picture: How the circular economy tackles climate change, co-authored with Material Economics, notes that 45% of GHG can be attributed to “the way we make and use products and food." [1] In that sense, Circular Economy’s seat is right next to Energy’s at the sustainability table.


Circular Economy concepts offer alternatives to the traditional “take, make, waste” economic model, and are a crucial complement to themes like renewable energy as we push for a more sustainable future. For example, Completing the picture shows how Circular Economy principles, when applied to the cement, aluminium, steel, plastics and food sectors, can “eliminate almost…9.3b tonnes of CO2e in 2050 – equivalent to cutting current emissions from all transport to zero.” [2]


Thinking inside the box


We believe that companies who are researching, developing and implementing novel solutions ‘on the ground‘ will play a key part in crystallizing theoretical CO2e savings. And when it comes to identifying the potential vanguards of the Circular Economy, we have some useful guidelines: “Companies who want to be more circular should aim to design and make products that:

  • Eliminate waste

  • Keep materials in use

  • Regenerate natural systems [3]

Taking into account all of the above, an area we have found to be prospective is the Containers and Packaging Industry within the GICS Materials sector. Admittedly, the space is often associated with more staid and cyclical names. But closer investigation unveils important agents-of-change, who not only demonstrate solid historical financial profiles, but also carry the promise of value compounding in the future, as they implement their compelling Circular Economy solutions.


Sealed Air: An Agent of Circular Change


Inventor of Bubble Wrap in the 1950s, Sealed Air (SEE) has since expanded its range through innovation and acquisition (other well-known brands include Cryovac, Autobag and Airbag). Today the company is a leading global provider of packaging materials, equipment and services. In line with the discussion above, SEE’s portfolio aims to maximize product safety, security and protection, all while minimizing waste. As per its purpose statement:


“We are in business to protect, to solve critical packaging challenges, and to make our world better than we found it.” This ethos is further embodied in SEE’s 2025 Sustainability and Materials Pledge which sets forth “the company’s commitment to design or advance 100% of its packaging solutions to be recyclable or reusable by 2025, to eliminate waste by incorporating an average of 50% recycled or renewable content into our solutions, and to collaborate on advanced recycling technology and infrastructure by 2025.” [4] As of 2020, the company had already achieved 47% recyclability and 19% renewable content. How will it further close the gaps to its ambitious Pledge goals? SEE’s forward-looking management is leveraging three complementary core competencies, which are backed by a portfolio of no less than 2,950 US and foreign patents and patent applications: 1.Materials Science at the core SEE has longstanding, deep expertise in the optimal usage and, increasingly, the re-usability of highly engineered packaging materials. Composition, weight, protection, space and thickness are some of the many variables that require continuous and simultaneous optimization. A good illustration of SEE’s innovations in materials recycling and circularity is the Jiffy Shurtuff poly mailer, which is made with 80% recycled content. In 2020 the Australian Post switched to this type of mailer, and was able to divert approximately 240 tonnes of plastic waste away from landfills. The mailer is recyclable through any soft plastics recycling stream and, given its form factor (smaller and lighter than a regular paper mailer), the Shurtuff also saves on transport costs. [5] For readers interested in additional detail around the latest trends and innovations in the fast evolving area of packaging materials, we recommend reading the Steve Garland interview transcript from May 2021, available on the Sealed Air website. 2. Automation paves and pays the way forward Automation has become a major focus under CEO Ted Doheny, who significantly expanded SEE’s range of offerings with the acquisition of Automated Packaging Systems in 2019. SEE’s portfolio now has applications across a range of industries, providing many benefits:

  • Automation provides operational efficiency gains, as would be expected. These have proven invaluable against a backdrop of COVID-constrained labour supply.

  • From a longer-term Circular Economy perspective, Automation furthers the important goal of eliminating waste. SEE provides relevant examples across various end markets, including apparel, e-commerce and pharma, among others.

  • And finally, Automation enables the usage of the sustainable materials cited earlier, which tend to be more expensive than their legacy counterparts. Automation achieves this by lowering the operational portion of costs incurred during packaging processes (the payback on SEE’s equipment is <3 years).

This last point is crucial in our view, and Mr. Doheny elucidated it very well at a recent investor conference, the transcript for which is also available on the Sealed Air investor relations site:

“We're pretty public. We tell our customers three-year payback. You might pay a couple of cents more for that bag that we're going to make better than the previous bag, and we're going to make it sustainable. You're going to pay a couple of pennies more, but we're going to save you millions in your operation.” [6]




3. Digital: Here today, more tomorrow Digital solutions imbue SEE’s product portfolio with an additional layer of efficiency. For example, rather than make fully formed Bubble Wrap at its own factories and ship it, SEE can provide machines with which customers can inflate and make the final packaging material on-demand at their own premises. The system handles a wide range of films and form factors (cushioning, pouches, pillows) and saves significantly on the transport costs of the packaging material itself. SEE is also increasingly leveraging printed code technology to enhance traceability, safety, and recycling, while cutting down on energy use. And additional digital solutions are waiting in the wings: At the above-mentioned conference, SEE pointed to new innovations set for release in the coming months and quarters. We will look out for those with interest. Bringing it all together… A good example that brings many of the concepts above to life would be SEE’s Cryovac SVS45 soft vacuum system, which addresses the EU’s 9m ton annual cheese market. From a purely commercial standpoint, the system’s appeal is a highly automated and protective process for removing air during the packaging of hard and semi-hard cheese (here is a good video). At the same time, the SVS45 is highly aligned to Circular Economy concepts: It consumes about half the electricity of a traditional vacuum system, uses lighter Cryovac brand shrink bags as its input, and is manufactured with two times less metal than other systems. [7] …While recognizing the importance of customer buy-in In driving its Circular Economy solutions, a key aspect of SEE’s approach has been to maintain close dialogue with its customers. And while that may sound like an obvious strategy, its importance can’t be over-emphasized, we think. Given the ever strengthening focus on sustainability, customers would surely welcome the carbon footprint reductions that SEE’s packaging innovations bring. Indeed, many would be party to similar plastic reduction pledges as SEE itself. But there is often a near-term cost to adopting sustainability. As alluded to above, that would include sustainable materials. And when the incremental costs of sustainable packaging are compounded by intermittent inflationary pressures, buy-in across the supply chain becomes paramount. Without it, Circular Economy ambitions will surely face a slower and steeper road to adoption. In this context, we wanted to highlight SEE’s collaborative and solution-ready approach. We were, for example, impressed by SEE’s communication of a recent set of price changes via an open press release. [8] Such transparency might seem like a risky approach in a competitive industry. But it gave management another opportunity to re-emphasize SEE’s cost-saving Automation solutions, which can soften the impact of those same price increases. Closing our own loop: Credible financial causation At Panarchy we have our own Circle, which starts with industry changing purpose, impact, thematics, progresses through sector and company analysis, and ends with investment. But what ends up closing the loop for us is “financial causation”, i.e., are the themes that drew us to a particular investment showing up in the numbers? From this standpoint, SEE itself has provided a clear guideline for us to track, calling for medium-term organic revenue growth of 3-5%p.a. While modest to some, for us it’s sustainable and impactful. It is also ahead of underlying industry revenue growth of 1-3%, and management is pointing to its Sustainability and Automation initiatives as the twin drivers fuelling this outgrowth. Guidance further calls for operating leverage is to increase margins, and magnify organic earnings growth to >10%, an acceleration from the mid / low single digit average over the last five / ten years. With its operating model converting net earnings to cash at a near 100% clip, SEE provides our fund with not only Circular Economy exposure, but also very attractive value at current levels. Conclusion With a 45% share of “addressable GHG”, Circular Economy’s seat is right next to Energy’s at the sustainability table. And as a key enabler of goods and food consumption, the Containers and Packaging industry fits squarely within this thematic. We hope the discussion above also underscores Sealed Air’s credentials as a Circular Economy vanguard within that same industry. The clear financial causation seals the deal from our perspective. Finally, we’d like to take this opportunity to wish all of our fellow Panvestors and Arcus readers Happy Holidays. Please spare a thought for your packaging this festive season; thankfully those recycling bins never get a day off!

Happy Panvesting, Conrad Werner

Financial Panvestor

Sources


[1] Ellen MacArthur Foundation, Completing the picture: How the circular economy tackles climate change (2021)

[2] Ibid

[3] https://ellenmacarthurfoundation.org/articles/circular-economy-products

[4] https://www.sealedair.com/company/media-center/press-releases/sealed-air-announces-bold-2025-sustainability-and-plastics-pledge

[5] https://www.sealedair.com/company/sustainability?_ga=2.157480184.333346202.1637545280-457720463.1634019913#GlobalImpactReport

[6] https://ir.sealedair.com/events/event-details/morgan-stanley-virtual-9th-annual-laguna-conference

[7] https://www.sealedair.com/company/sustainability?_ga=2.157480184.333346202.1637545280-457720463.1634019913#GlobalImpactReport

[8] https://ir.sealedair.com/news-releases/news-release-details/see-announces-global-price-increases