Document 3eqVok7ynq18MzE8G1wqao71x

cc: N. T. Johnson J. H. Davidson INDUSTRIAL HYDRAULIC FLUIDS TRANSITION PLAN T. L. Gossage The Situation In the past, our major strength in the industrial hydraulic fluids business was our low cost chlorinated raw materials giving superior fire resistance to our fluids. These same materials had good solubility with oil and allowed us to formulate the Pydraul 312 series. The result was a very real and sizeable competitive advantage in terms of both quality and price over other synthetic fire resistant fluids. That is all changed now. Polychlorinated biphenyls are out and polychlorinated terphenyls, in addition to being contamin ated with PCBs, are also out. This leaves us with a line of resale water glycol fluids (available now) a straight phosphate ester (available shortly), and an oil-phosphate ester blend available late in the first quarter of 1972. In terms of cost and quality, none of these products will give us any significant advantage over our competitors. In addition, the changeover (the third in two years) will create an adverse , ^Of s '7;' affect, particularly on our major customers, the top 20 of pp i ' which account for (pQ______ ^ of our business. This means that when the transition has been completed, we will be left with considerably less market share than we now have, with ill will at certain customers and potential accounts, V o TOWOLDMONOQ56191 -2- and with no technical or cost advantage to regain our position. With these difficulties our sales growth In the future can not be as steep as our sales growth In the past, and our base will be less. Objective Our objective In this transition program simply stated Is to be out of PCB's/PCT's by July 1 1972, and to salvage as large a share of the market as possible at a profit. We expect to keep at least 50$ of our business^, biH (We must take several steps as quickly as possible In order to achieve this. General Motors G. M. alone accounts for fB______ $ of our business. We must move Immediately to convert G. M. to our phosphate ester fluid. Vte-havp hean told- by'The Chevrolet Division, which is over half of the G. M. bus! what all of G. M. does itch will probably determine will drain and flush all PCB containing fluids from their machines and refill with a new product. We will try to sell them our phosphate ester fluid at list price and charge fully for incineration of the old fluid. If necessary to salvage the business, we will capitulate on Incineration and give some price concession on Initial fill. In return, we will ask for a three year supply period to recover our costs. We will not sell a low price phosphate ester as a replacement 0065857 TOWOLDMONOQ56192 -3- for A200B, If General Motors goes to the phosphate ester and If we sell a low priced phosphate ester to one location, we will have to sell It to all of them. Due to the large share of our total business that G.M. represents, selling to them at a low price would undermine the profitability of our total Pydraul program. In addition, due to their size. It Is possible that such a move would deteriorate the pricing of the phosphate esters at all accounts. Johnson Motors Johnson Motors is in trouble with the State of Illinois because of too high phenollcs dlscharg_ln their effluent. However, they appear to be so i^j^synthetlc fluid, which means phosphate esters, and all synthe-t-lc fluids will create phenollcs In their effluent. We have gone to them and suggested they -V ' ` tralght phosphate ester to avoid PCB problems phenollcs problem with treatment of their effluent. In terms of pricing and Incite ration, we will handle them in the same way as General Motors and, if necessary, make the same concessions. Check Point This should be a check point in our plan. If either General Motors or Johnson Motors are lost, we should re-evaluate our situation and decide again how best to proceed. Selector I Accounts After testing the water with General Motors and Johnson Motors and as soon as sufficient phosphate ester becomes available, we TOWOLDMONOQ56193 -4- wlll move laaadiatcl-y to convert all Selector I accounts to straight phosphate esters. Selector II Accounts cuf 0*> Cc We will proceed i-mmedirately to develop, test and get Factory Mutual approval on a line of truly fire resistant oil/phosphate ester fluids. As soon as the development Job is done and as soon as phosphate ester for these fluids becomes available, we will begin converting all Selector II accounts to these new products. Reclamation We should move -i-mmerilafcsiy to work with Findett Service Co. on reclamation of the Pydraul fluids. This means quoting, in conjunction with Findett, for x'eclamation business wherever we can find it. Assuming this relationship is profitable, we will continue it and expand it to all places where we can be competitive. If it turns out that due to geography we'cannot be competitive in conjunction with Findett in all locations, we will establish relationships with other reclaimers in those locales. C..& ru 0.^ Note that reclamation ultimately should have a substantial negative affect on our new fluid sales. This along with our loss of business during the transition must be taken into consideration when planning the capacity of our new phosphate ester plant. ' 0065859 TOWOLDMONOQ56194 -5Vltal 29 Type Fluids Withdrawal of current Pydraul 312A type fluids from the market will force customers to go to either higher priced phosphate ester fluids, inferior quality water glycol fluids, or the Vital 29 type fluids which are not fire resistant after shear down of their polymer. To combat this we should go immediately to Factory Mutual, explain the situation on the fire resistance of these fluids and ask for Factory Mutual's position. If they-remove their approval, that should essentially solve the problem. If not, we will develop a line of fluids in direct competition with Vital 29 and Dasco 300. Customer Notification On April 15, 1971 I sent out a letter to the Pydraul mailing list saying: "There are now no PCBs in any of our Pydraul fluids." This letter is not true and has irritated the Chevrolet Division of General Motors and probably anyone else who knows that it is not true. We should write another letter Immediately to the same list clearly stating that the letter was not true and giving them the facts on the PCB contamination. If possible, we can temper the letter with our plans for future fluids. However, getting the letter into our customers' hands before they get this information from our competitors should be our primary consideration. Field Sales/Product Group Relationship Major accounts where the Product Group may directly assist in 0065860 TOWOLDMONOQ56195 -6- converslon are listed in Appendix ^ . Current opinion is that all other accounts can be handled directly by the Field Salesmen(assuming we do have lower cost Selector II replacements). To help prepare the salesmen for this transition, a meeting will be held in St. Louis 4? which will focus on strategic salesmXL-and_their managers who will be in attendance. At-.a. -^-aisnuiiirfJe will lay out for them why we must transition, the reasons we will give the customer, replacement products with prices and benefits relative to our old products and competition, pollution aspects of PCBs, PCTs, and phosphate esters with a discussion of phenolics, B.O.D. and C.O.D., and oil contamination, and the legal aspects of our situation. We will leave them with a "Transition Handbook". Also at this meeting we specifically define who will handle what accounts, the order in which they will be handled, and the timing on handling them. Advertising To counter the negative affects of reformulation, we should plan and execute an advertising program that will explain why we are making this move and point out the advantages of our new fluids versus competition. Execution of this should begin wow. I < Appendices Attached are appendices which give some background on what our new Selector I and Selector II fluids will be along with their TOWOLDMONOQ56196 -7- costs, prices and gross profit; what a typical conversion might cost us depending upon whether we get full price for the fluid and who pays for Incineration; a list of our major customers; and what our profitability for 1972 may look like based on certain assumptions of conversion rates and costs of our new products. /pep C. L. Bradford J,f}' 0065862 TOWOLDMONOQ56197 APPENDIX A Fluid Proposed Pydraul Line and Pricing _________ ;___________________ ,,Pri.ci.ng1 T/T T/L Drums 10-T/L Drums 5-9 Drums Selector 1 Pydraul 10 E Pydraul 29 E-LT Pydraul 30 E Pydraul 50 E Pydraul 65 E Pydraul 95 E 1 Pydraul 115 E 4. 55 3. 60 Quote Quote Quote Quote Quote 4.75 3. 80 3.65 3. 65 3.85 3.95 4.95 4.00 3.75 3. 75 3r75 3.S' 3.95 4.05 5. 00 4.05 3.80 3. 80 3.-80 3^1) 4.00 4.10 1-4 Drums 5.10 4.15 3. 85 3. 85 3t88 3.<tS' 4. 05 4.15 Selector 2 Pydraul 135 C Pydraul 230 C Pydraul 312 C Pydraul 540 C 2. 25 2.25 2.15 2.15 2.45 2.45 2.35 2. 35 2. 65 2. 65 2. 55 2.55 2.70 2.70 2.60 2. 60 2. 80 2. 80 2. 70 2. 70 ^5 gallon can pricing - add .25/gallon to 1-4 drum price 0065863 TOWOLDMONOQ56198 APPENDIX B Pydraul Profitability Fluid jj Cost-Short Term Cost-Long Term Gross S. P, ___________ __(Dixie CP) _____________(Monsanto CP) (10-T/L Drums) Long Term Gross Profit ^ Selector 1 lbs, /gal. 9.1 Pydraul 10 E 9.4 Pydraul 29 E-LT 9.9 Pydraul 30 E 9.8 Pydraul 50 E 9.7 Pydraul 65 E 9.7 Pydraul 95 E ? 9.6 Pydraul 115 E -.222/lb .204/lb .227/lb .268/lb' .285/lb .295/lb . .191/lb .215/lb . 198/lb . 213/lb .238/lb .250/lb .256/lb . 545/lb .425/lb .378/lb . 383/lb W( .407/lb .422/lb 63% 45% 43% 40% 33%r 35"% 34% 35% Selector 2 8.44 Pydraul 135 C ' 8.44 Pydraul 230 C 8.44 Pydraul 312 C 8.49 Pydraul 540 C .170/lb ' .168/lb .170/lb .175/lb .165/lb .160/lb .160/lb .165/lb . 314/lb . 314/lb . 302/lb . 302/lb 42% 44% 40% 38% * Finished Product Cost Including Conversion and Drum Costs 2 Average Freight and Warehousing at $. 03/pound 0065864 TOWOLDMONOQ56199 APPENDIX C Pydraul Blends All prices, costs and profit figures based on the following blends. Pydraul 10 E Pydraul 60 Pydraul 65 E NCP 76% ' TPP 24% Pydraul 29 E-LT N CP - 35% S^141 - 63% Polymer - 2% Pydraul 95 E ? NCP 88% TPP 12% Pydraul 30 E N2CP 40% TPP 30% CDP 30% Pydraul 115 E NCP 100% Pydraul 50 E n2cp 70% TPP 30% Pydraul 135 C N'CP 20% S141 46% *Oil 33+% Polymer <1% Pydraul 540 C N,CP 56% *Oil 43+% Polymer <1% Pydraul 230 C N. CP 41% si41 16% *Oil 42+% Polymer Cl% Pydraul 312 C N CP 46% S 141 9% *Oil 44+% Polymer <1% ' Oil could be Sunoco 800 N, Mobil 750 or H 230 but cost of all is $. 04/pound 006586^ TOWOLDMON0056200 APPENDIX D Typical Customer Conversion Customer Used for Calculations: Chevrolet - Bay City Date for calculation of cost to customer and cost to Monsanto for conversion from Pydraul 312 A to Pydraul 65 E: Machine Capacity = 50 machines x 300 gallons/machine = 15, 000 gallons Flushing fluid = 15, 000 gallons petroleum oil Freight Cost = $2. 00/cwt. = $. 22/gallon Cost of Incineration = $. 03/pound Case 1 Chevy Bay City pays full price for new fluid plus flushing fluid plus freight for returned fluid plus $. 03/pound to incinerate returned fluid. A. Cost to Chevy 1. 15, 000 gallons Pydraul 65 E @ $3. 45/gallon 2. 15, 000 gallons oil flushing fluid @ $. 50/gallon 3. 15, 000 gallons (138, 000 lbs. ) 312 A plus 15, 000 gallons (112, 000 lbs. ) oil incineration @ $. 03/pound 4. Freight on returned fluid: 250, 000 lbs. x .02/pound = $51,175 = 7, 500 = 7,500 ' - 5,000 TOTAL Cost = $71,175 Cost per Gallon of new fluid = $4. 74/gallon (Does not include labor or downtime ) 0065866 TOWOLDMONOQ56201 (Ca6e I Con't) B. Gross Profit to Monsanto Sales: 15, 000 gallons @ $3. 45/gallon COGS: 138, 000 pounds x . 223/pound Freight: 146, 000 pounds x . 02/pound Gross Profit % Gross Profit = . _ 17, 581 51,175 - 2,920 = 36.4% $51,175 30, 774 $20,401 2, 920 $17, 581 Case II Chevy - Bay City pays full price for new fluid plus flushing fluid but Monsanto pays for incineration cost and freight. A. Cost to Chevy 15, 000 gallons Pydraul 65 E @ $3. 45/gallon 15, 000 gallons oil flushing fluid @ $. 50/gallon $51,175 7, 500 TOTAL Cost $58,675 . Cost per gallon new fluid $3, 92/gallon (Does not include labor or downtime) B. Gross Profit to Monsanto Gross Sales Less: COGS $30,774 Freight (New 2,920 Fluid) Incineration Cost 7, 500 Freight (Returned 5, 000 Fluid) = $5ljl75 = $46,194 % Gross Profit = 4, 981 51,175 - 2920 oot>*b7 TOWOLDMONOQ56202 Case III Chevy-Bay City pays full price for fluid but Monsanto pays for flushing fluid plus incineration costs and freight A. Cost to Chevy IS, 000 gallons Pydraul 65 E = $51,175 Cost per gallon new Fluid (Does not include labor or downtime) = $3. 45/gallon B, Gross Profit to Monsanto Gross Sales COGS Freight(New Fluid) Flushing Fluid Incineration Cost Freight (Returned Fluid) 30, 774 2, 920 7, 500 7, 500 5, 000 Net Loss = $51,175 = 53, 694 = $2,519 00b5868 TOWOLDMONOQ56203 APPENDIX F 1972 Financial Results Case 1 1972 Financial results as currently budgeted: (ooo's lbs. ) ProductVolume ____ Pydraul 60 Pydraul 150-A 45 1000 Pydraul A-200-B -2300 Pydraul F-9-A 1150 Pydraul 625-A 275 Pydraul AC-A 600 Pydraul AC-A W. G. 24 Turbinol 153 325 Pydraul 135-A 1400 Pydraul 230-A 240 Pydraul 312-A 6850 Pydraul 540-B 125 Total 14, 334 (Projected 1971 Results) 14, 267 {ooo's $) Sales 22 400 621 380 83 192 7 107 336 59 1507 26 3740 4200 (ooo's $) Gross Profit 9 185 171 148 24 67 -36 98 16 407 7 1168 1300 0065869 TOWOLDMONOQ56204 APPENDIX F 1972 Financial Results Case II 1972 Financial results based on: A. (1) Selector 1 fluids sold at 75% 1972 budget volume through 3/31/72 (2) NCP fluids replace Selector $ fluids on 3/31/71 and sold at 50% 1972 budget volume from 3/31/72 through end of 1972 B. (1) Selector 2 fluids sold at 75% of 1972 budget volume through 6/30/72 (2)NCP/oil fluids replace Selector 2 fluids on 6/30/72 and sold at 50% 1972 budget volume from 6/30/72 through end of 1972. C. General Motors plants on NCP from 1/1/72 - A-200-B to 50 E - 312-A to 65 E Product * V olume (ooo's lbs) Selector 1 Pydraul f>0 E Pydraul 29 E- LT Pydraul 30 E Pydraul 50 E Pydraul 65 E . Pydraul 95 E Pydraul 115 E 560 193 1910 1225 340 152 . Sales (ooo's $) Z-T' K 222 63 656 437 128 59 Gross Profit (ooo's $) 1 5 101 , 31 261 147 43 18 Selector 2 Pydraul 135 C Pydraul 230-C; Pydraul 312 C Pydraul 540 C 825 144 2800 72 263 39 689 17 72 12 221 5 TOTAL 8246 2585 9 fZO - # Financial results for new products includes results for old products as specified above. 0065&70 TOWOLDMONOQ56205 APPENDIX G Incineration Costs Gallons* 100, 000 150, 000 200, 000 250 , 000 300, 000 400, 000 500, 000 Incin. Cost @ $. 03/pound Freight @ . 025/pound $28, 800 $24,000 43, 200 36, 000 57, 600 48, 000 72, 000 60, 000 86,400 72, 000 115, 200 96, 000 144, 000 120, 000 Total $52, 800 79, 200 105, 600 132, 000 158, 400 211, 200 264, 000 ^Average density oi fluid @1.15 = 9. 6 pounds/gallon 0065871 TOWOLDMONOQ56206