RE:First Observations
To Set the Record Strait The iGPS pallet is made of HDPE, not PU. iGPS contracted Schoeller Arca Systems (SAS) to make 30 million pallets in 2008. iGPS launched in 2008 with +/- $630 Million and by 2010 was on track to generate $225 million in sales with its initial pool of 10 million pallets. iGPS did, not tried, go nationwide with its initial pool. iGPS used traditional logistics networks including Belacon and others to retrieve and Ryder and others to deliver their pallets. iGPS pallets contain EPC RFID tags, just like the Axios pallet. In 2010 iGPS placed M2M cell phones in a small number of pallets to discover who was damaging and stealing them. iGPS successfully prosecuted several thieves using the M2M trackers. iGPS failed, not because the pallet had flaws or it had an irrational business plan, but because it was attacked by Brambles and slaughtered by the banks. In 2009 iGPS represented an existential threat to Chep, because with a proposed pool of 30 million pallets, iGPS would capture more than 60% of Cheps market share in 3-5 years. iGPS was on track to generate $225M sales with just 10 million pallets, and the largest companies in the FMCG industry where switching to plastic as soon as they became available. Brambles and Chep had to react fast. Brambles indirectly sued iGPS using the Torrey patents, which Chep USA had previously abandoned in 2008 because they were unpatentable. SAS had to defend iGPS against the lawsuit (a hold harmless clause was in the iGPS contract), because the iGPS pallet was a supposedly patented design owned by SAS. The wood pallet recycling industry also felt threatened and began to intentionally damage the iGPS pallets collected during their dock sweeps through improper handling fork impacts, pallet jack part separation and the like. Up to 2.8 million pallets were catastrophically damaged in a period of two years. The wood pallet industry also pushed the Deca fire retardant issue to build resistance to the iGPS onslaught. It turned out that the parties (Brambles/Chep/Schultz, SAS/IFCO and iGPS) were all owned by the same global investment banks. The banks settled the dispute to protect their larger investment in a wood pallet pooling environment. This is what killed iGPS. Brambles would buy IFCO from SAS for the value of the 30 million pallet supply contract ($1.3 B). SAS got walk away from $250M worth of warranty claims for damaged pallets its IFCO business and others had caused. SAS would buy iGPS in a rigged bankruptcy proceeding for $30 million and exit from the USA market allowing Chep to recover its market share lost to iGPS. The equity partners who funded iGPS lost $680M in bankruptcy and must have been paid-off with back room deals orchestrated by the same banks that will never be exposed. The marketplace has since become even more concentrated in the hands of Brambles/Chep/IFCO and iGPS only survives as a small player with a pool of +/- 4 million pallets. The iGPS web site is www.igps.net. The docket report for the iGPS bankruptcy is found at www.igps-info.com. RM2 is a new contender, essentially launching in 2014 with a $200 million IPO on the London Stock Exchange. The company used the proceeds to pay off the early investors and settlement costs for disputes RM2 had with the company that helped develop the pallet. RM2 used the capital to establish a state of the art manufacturing facility in Ontario. The company began to manufacture the new pallet without validating it or its business model in the marketplace. RM2 is not the first company to offer such a pultruded composite pallet. Several earlier entries failed when they were put through their paces in the factories of P&G and Craft where it was discovered the fibreglass strands create dust and slivers due to abrasion and a surface co-efficient of friction that is so low it resulted in slippage and pallet handling problems. Like the Axios pallet, the RM2 pallet is not a game changer. RM2s initial business model was also flawed. The initial idea was to sell the pallet to the FMCG industry for use in their internal operations. However, this concept did not gain traction because the goods for shipment had to be transferred to a wood pallet for external distribution. This transfer cost reduced the ROI for an internal pallet pool. RM2 did not provide a reverse logistics service to help its customers recover their pallets, and so the take-up by industry was not forthcoming. RM2 shifted gears in 2015 and began to hire ex-iGPS employees to establish a pooling model more closely linked to the iGPS model. Apparently there was some success in marketing the pallet to the paper and newsprint sectors, among a few others. But the pallet recycling players servicing this sector uniformly dislike the RM2 pallet because it is heavy, splinters and is too slippery requiring extra handling costs that they are unable to recover in their fees. The fate of RM2 has not yet been determined, and I do not expect they will succeed as originally envisioned. The website is www.rm2.com. The discussion board used by RM2 investors can be found at www.lse.co.uk/SharePrice.asp?shareprice=RM2 Moving on to Axios. First, the management must be commended for their persistence and continuing diligence to establish a pallet pooling business model having a few interesting twists. However, as indicated by many in previous posts, the Axios pallet is NOT disruptive. In fact I believe VPofFNE is correct in suggesting the pallet design, pallet material and pallet RFID tags are not disruptive. The biosecurity washing and carbon credits services are not new either. Bob Moore (ex-CEO of Chep and Founder of iGPS) built a million dollar mobile iGPS pallet washing machine in 2010 and his plan was to distribute many of these machines among the master pallet recyclers like Belacon. With respect to selling carbon credits, the Korean Aluminum Pallet Co. started offering CCs in 2006 (a year after Kyoto), and IBM wrote and patented a pallet recycling method for calculating such offsets more than a year before Axios filed its pending application. So, technically, there is not a lot that is new let alone disruptive. There is nothing wrong with the essential business model of Axios in so far as a competition with wood pallets is concerned. Chep buys a wood pallet for +/-$22 compared to +/-$80 for Axios. However, Chep also pays $225 to recover, inspect and repair each pallet over its useful year life (Brambles records this cost as DIN in their financial statements). One problem with the Axios pallet, the RM2 pallet and Cheps wood pallet is that they are of little value at the end of their useful life. Commodity grade resin pallets, like the iGPS pallet, on the other hand, can be resold in ten years, after inflation, for their original cost. This means close to 100% of CAPEX in pallet material is potentially recoverable, making the cost of thermoplastic plastic pallets far superior to the Axios bio-based or RM2 thermosetting resins. I might suggest Axios used it soya based thermosetting material because it offered lower tooling costs during its early stages of development +/- 8 years ago. The company now has fewer options, greater restraints on production, less flexibility and reduced adaptability using its process. I feel the company would do better to abandon this selling point and revert to thermoplastic. In so far as its cross-platform tracking system is concerned the company has with the addition of Mobius taken a furtive step toward executing on this service offering. I mean it is impossible to track a pallet with an EPC RFID tag because there are not enough reader devices to maintain 100% visibility. Axios had to supply shipping equipment with RFID readers to track the pallets to calculate the carbon credit offsets that it hopes to monetize. VPofFNE might agree this was an intrepid move to buy Mobius? Despite all of the above, I for one hope Axios survives and succeeds because the elephant in the room, Brambles or Chep US in North America, offers industry a less sustainable wood pallet. We need to do better and Axios is a step in the right direction. Unfortunately, I predict Axios will be beset with problems. For example, if the Axios pallet is mishandled by third parties in the recycling community, the damage and loss rates could become a problem. This happened to iGPS when there were 10 million pallets in the pool. The lanes involving IFCO resulted in the loss of 2.8 million pallets. It simple to damage a pallet.... Axios could anticipate this malpractice and abuse by adding sensors, in addition to its RFID tags, to its pallets. The sensors could record and report events indicative of damage as they occur in the supply chain, to pinpoint the accountable party. Axios could then bill and recover the cost of such damage from those responsible. This technology option is blocked however. iGPS installed thousands of M2M trackers in its pallets beginning in 2010 in an effort to discover who was responsible for catastrophically damaging its pallets and to discover where the lost pallets were going... to be ground up and exported to China. iGPS was threatened with a patent infringement lawsuit just months before it filed for bankruptcy. Chep also installed 12 thousand M2M trackers on its wood pallets beginning in 2013. The project was designed to test the waters for smart pallets for the IoT with several big box retailers and their suppliers. Chep discontinued this project due to threats of patent infringement in 2015. Information on the technology Axios has acquired through Axsense for $2.5 million is light on details. However, one must assume the technology is closely matched to the technology described in the Axios patent application which defines an M2M device having a cell phone and a WiFi or BT communications device. With such technology and sensors the pallet tracker could document the path traveled by the pallet in order to calculate a verifiable carbon credit. Plus the pallet could generate actionable data concerning the pallet which is useful to Axios and data concerning the product which is useful to its customers. The problem is however, that such a device infringes the same patents that iGPS and Chep could not overcome. How will Axios overcome these potential threats. I wonder if Relay Ventures conducted due diligence to discover the IP hurdles the company will have to confront in order to implement this technology? These guys obviously invested in Axios because of the potential mobile data content and revenue a smart pallet could generate. Look at all of the investments in their portfolio. MishaPBJ has commented the Rely investment will take them to 200,000 pallets. I do not believe this number is accurate if Axios intends to add real time pallet tracking. These devices are going to cost in the neighborhood of $80 each and require a data plan costing more than $1 per month per device. I may be wrong, but I doubt Rely would have made their investment without a pallet tracking plan. It will certainly be interesting to observe what the New Year brings. I for one hope Axios crosses the chasm and succeeds because the elephant in the room (Brambles and Chep USA) is doing everything in its power to preserve its monopoly and thwart progress toward smart sustainable plastic pallets.