Transcript The 2004 Label Institute

International Metal Decorators Association
2004 Annual Convention
May 20th, 2004
Holiday Inn Conference Center
Willowbrook, IL
Packaging Industry
Outlook & Review
Creating Sustainable Valuable in an
Unsustainable Business
Environment
Timothy P. Burns
Cranial Capital, LLC
Agenda
•
•
•
•
•
•
•
•
Packaging Industry Overview
Recent Investment Performance
Profitability / Financial Leverage
Consolidation Trends
Key Trends / Market “Hot Spots”
The Labeling & Product ID Market
Creating Sustainable Value
Discussion on Metal Packaging & Decoration
Quic kTime™ and a
TIFF ( Unc ompres s ed) dec ompr es sor
are needed to s ee this pic ture.
Cranial Capital, LLC
•
Is a leading Independent Packaging Industry
Research & Advisory concern serving:
Packaging
Industry
•
End User/Suppliers
Institutional
Investors
• Products and Services:
–
–
–
Company and market research reports
Corporate development / strategic development
Merger & acquisition advisory
Packaging Industry Defined
• $415
billion plus global market
– includes components, machinery, services.
• Generally grows at GDP
– some sectors growing/declining at multiples of
• Virtually everything is packaged!
– Exceptions: aircraft, ships and locomotives.
• Consumer Packaging: 70% of output.
Industrial: 30% of output.
Packaging Industry Defined
•
•
•
•
Plastics is growing share as a material class
Composite structures are back in vogue
Flexibles are the rage in terms of structure
Systems sales approach is gaining favor:
– container, closure, label & filling system.
• Outsourcing of historically “critical”
activities: R&D, packaging, logistics,
warehousing, distribution and fulfillment.
Leading World
Packaging Markets
(US $ in billions)
Rank
1
2
3
4
5
6
7
8
2
Market
North America
Western Europe
Japan
Asia
South America
Australia
Africa
Rest of the World
Total
2003E Sales
$120.0
115.0
70.0
45.0
18.0
7.0
4.0
36.0
$415.0
World Packaging Market
by Material: $400 Billion
Packaging
Machines
4%
Other
4%
Glass
6%
Paper & Board
38%
Metal
10%
Flexibles
17%
Rigid & Semi
Rigid Plastic
21%
Key End Use Segments
(United States Market)
Product
Corrugated
Flexible Packaging
Food Service
Labeling & Product ID
Plastic Containers
Folding Cartons
Beverage Cans
Glass Containers
Machinery
Sales in Bil.
% Growth
$22.5
19.0
12.0
12.0
10.0
9.0
6.5
4.5
4.0
1%-3%
3%-5%
4%-6%
3%-5%
3%-5%
0%-2%
0%-+/-2%
(2%)-(4%)
2%-3%
Key End Use Segments
(United States Market)
Product
Wood Packaging
Paper Food
Sales in Bil.
3.5
3.5
% Growth
1%-3%
1%-2%
Contract Packaging
3.0
8%-10%
Metal Food Cans
3.0
(1%)-(3%)
Closures
3.0
2%-4%
Specialty Rigid Plastics
1.7
3%-5%
General Line Cans
1.5
1%-2%
Protective Pkg.
1.5
4%-6%
Relative Share Price Performance
1-Year Share Price Performance
140
135
130
125
Index (%)
120
115
110
105
100
95
90
5/16/03
7/7/03
8/29/03
Dow Jones
10/21/03
S&P 500
12/12/03
NASDAQ
2/3/04
Packaging Index
3/27/04
5/19/04
1-Year Share Price Action
Metric
5/16/03
5/19/04
NASDAQ
100.00
122.37
S&P 500
100.00
116.55
CCI PKG Index
100.00
116.27
DJIA
100.00
115.67
Packaging Shares – The Winners
(1-Year ended 5/19/04)
Company
Greif Inc.
Toyo Seikan
Silgan
AEP Industries
West Pharma
Polyair Inter Pack
Multi-Color
Rexam
% Change
64.3%
63.0%
58.4%
49.4%
48.8%
45.4%
29.8%
23.3%
Packaging Shares – The Losers
(1-Year ended 5/19/04)
Company
Constar
Amcor
% Change
(49.6%)
(14.1%)
Winpak
British Polythene
Intertape Polymer
RPC Group
(8.6%)
(6.0%)
(5.2%)
(1.7%)
CCL Industries
0.3%
3-Year Share Price Performance
150
130
Index (%)
110
90
70
50
30
5/18/01
10/21/01
3/27/02
Dow Jones
8/31/02
S&P 500
2/3/03
NASDAQ
7/10/03
Packaging Index
12/14/03
5/18/04
3-Year Share Price Action
Metric
5/18/01
5/19/04
CCI PKG Index
100.00
119.18
DJIA
S&P 500
100.00
100.00
88.84
85.20
NASDAQ
100.00
73.09
Packaging Shares – The Winners
(3-Years ended 5/19/05)
Company
% Change
Polyair Inter Pack
360.5%
Multi-Color
233.9%
Ball Corp.
171.2%
CCL Industries
113.6%
Silgan Holdings
112.9%
Graphic PGK
102.1%
Crown Holdings
87.4%
Rexam
86.8%
Packaging Shares – The Losers
(3-Years ended 5/19/04)
Company
% Change
AEPI
(83.5%)
Applied Extrusion (74.7%)
Intertape Polymer (53.2%)
Chesapeake
(12.1%)
Toyo Seikan
(8.5%)
Nihon Yamamura
(7.0%)
MeadWestvaco
(3.4%)
Sonoco Products
(0.7%)
5-Year Share Price Performance
250
200
Index (%)
150
100
50
0
5/18/99
2/3/00
10/21/00
Dow Jones
7/9/01
S&P 500
3/27/02
NASDAQ
12/13/02
Packaging Index
8/31/03
5/18/04
5-Year Share Price Action
Metric
05/19/99
05/19/04
DJIA
100.00
92.72
CCI PKG Index
100.00
91.30
S&P 500
NASDAQ
100.00
100.00
82.62
64.83
Packaging Shares – The Winners
(5-Years ended 5/19/04)
Company
% Change
Multi-Color
457.0%
Ball Corp.
147.2%
Mayr Melnhof
116.6%
Rexam
108.9%
Silgan Holdings
105.1%
Winpak
55.4%
Bemis Company
48.3%
Greif, Inc.
31.9%
Packaging Shares – The Losers
(5-Years ended 5/19/04)
Company
Applied Extrusion
Intertape Polymer
Crown Holdings
AEP Industries
Graphic Packaging
Owens-Illinois
Chesapeake
Toyo Seikan
% Change
(80.8%)
(77.0%)
(74.3%)
(72.0%)
(57.1%)
(51.6%)
(40.1%)
(26.2%)
QuickTime™ and a
TIFF (Uncompressed) decompressor
are needed to see this picture.
Profitability & Returns
EBITDA Margin
25.0%
20.0%
20.5% 20.1%
19.7%
16.9%
16.2% 15.7% 15.6%
15.4%
15.0%
13.9% 13.8%
10.0%
5.0%
0.0%
OI
PTV
SEE
WPK
GPK
AETC
ATR
BMS
SON
LABL
EBITDA Margin
1 6 .0 %
1 3 .7 %
1 3 .1 %
1 2 .6 %1 2 .5 %
1 1 .5 %1 1 .4 %1 1 .1 %
1 2 .0 %
1 0 .7 %
1 0 .1 %
1 0 .0 %
1 4 .0 %
8 .0 %
6 .8 %
6 .0 %
4 .2 %
4 .0 %
2 .0 %
0 .0 %
RE X
BLL
A V Y SLG N C C K H U H T C C L RKT
A M C A E P I C SA R
Return on Assets
30.0%
25.0% 2 4 .0 % 2 2 .8 %
1 9 .3 %
20.0%
1 7 .5 % 1 7 .4 % 1 6 .7 %
1 6 .4 %
15.0%
1 5 .3 %
1 4 .2 % 1 3 .3 %
10.0%
5.0%
0.0%
LA BL
PTV
WPK
SEE
A TR
BMS
BLL
CCL
SON SLGN
Return on Assets
1 2 .0 %
10.3%
1 0 .0 %
9.9%
9.9%
9.7%
9.4%
8.6%
8 .0 %
6.0%
6 .0 %
4.2%
4.1%
4 .0 %
3.0%
1.5%
2 .0 %
0 .0 %
AVY
OI
CCK
REX
AMC
RKT
GPK
AETC
HUHT
AEPI
CSAR
Financial Leverage
Leverage Remains an Important Factor
Aggressive debt-financed acquisitions through the 1990’s have left many companies
focused on meeting debt service and maturities
Change in Leverage and Ratings Profile
Debt /LTM EBITDA (x)
6
5
A
57%
BBB
A
4
3
31%
BB
BB
2 14%
1
10%
17%
B
B
29%
41%
0
1990
1991
1992
Source: S&P, Company Reports
1993
1994 1995 1996
B BB BBB A
1997 1998
Debt/LTM EBITDA
1999
2000
2001
2002
TOTAL DEBT / EBITDA COVERAGE
14
13.3
12
10
7.7
8
5.6
6
5.6
5.3
5.2
5.1
4.9
4
3.7
3.7
BLL
SEE
2
0
CSAR
AETC
GPK
CCK
AEPI
REX
OI
SLGN
TOTAL DEBT / EBITDA COVERAGE
4
3 .5
3.5
3.2
3
2 .5
2.5
2.2
2.1
2
1.9
1.9
1.6
1 .5
1.4
0.9
1
0.7
0 .5
0
RKT HUHT CCL
A MC SON
A VY
PTV
BMS LA BL WPK A TR
M&A Activity Summary
Year
1999 2000 2001
17
2003
15
20
# of Deals
21
Total Value
($bn)
$7.9
$11.0 $3.6
$6.0
$3.6
29%
35% 18%
20%
25%
7.0x
7.4x
6.8x
6.2x
% Deals
Sponsor
Related
AVG. LTM
EBITDA
Multiple
23
2002
6.4x
Key Trends and Market Hot Spots
Pursuit of Profitable Growth:
•
•
•
Plastics still gaining share in terms of packaging material mix
– flexibles continuing to displace rigids
– Dispensing Function
Packaging firms emphasizing features and cost reduction
– light weighting
– reducing SKUs for line efficiency
– elimination of secondary packaging through enhanced print quality
– shaping of structure
Incorporating services for pay
– package R&D, design and testing
– pure research and development
– purchasing peripheral components
– product filling
– warehousing and distribution
Fastest Growing Packaging Markets
(Europe and North America)
M arket size
(US$bn)
Rank
CAGR
(% )
1
Protect ives
5
6–8
2
Cust om PET
6
6–8
3
Foodservice
20
6–8
4
Labelling and Product ID
20
5–7
5
HABA
15
5–7
6
Flexibles (value added)
20
4–6
Total
86
Recent Results Reflect Margin Pressures
Top-line growth continues (aided by currency movement), offset by margin pressures
from material cost volatility and increasingly demanding customers and retailers
Sales Growth¹ (% )
30.0 28.4
20.0
10.0
18.3 16.9 16.5
15.4 13.9
11.8 10.7
9.1 9.1
9.0
8.6
5.6
na
1.7
na
0.0
(0.5) (1.6)
(5.5)
(10.0)
AMC² AVY ATR BLL WPK MMK BMS CSAR PTV SEE SLGN RPC
Margin Change (% )
Average: 8.6%
5.5
OI
SON RKT CCL REX³ HUH CCK GPK
6.0
4.0
2.5
1.7
1.5
0.6
2.0
0.4
na
0.0
(0.1)
(0.5)
(0.8)
(2.0)
(0.9) (0.3)
(1.6)
(2.1)
(1.8)
(2.2)
(1.7)
(4.0)
(3.1)
(3.6)
Average: (1.0%)
(4.3)
(6.0)
(8.0) (6.6)
AMC AVY ATR BLL WPK MMK BMS CSAR PTV SEE SLGN RPC OI SON RKT CCL REX³ HUH CCK GPK
Notes:
1
Calculated as the year over year sales growth for the LTM ended 6/30/03
2 Includes pro forma results for Schmalbach acquisition
3 Year over year sales growth for LTM ended 12/31/02
4 Calculated as EBIT margin for LTM ended 6/30/03 less EBIT margin for LTM ended 6/30/02
Packaging Industry Value Chain
Old Business Model
End Use Consumers
Packaging
Customer Pool
Packaging
Converters
Distributors
Equipment
Suppliers
Source: Cranial Capital, LLC
Self Mfg.
Outside
Services
Raw Materials
Suppliers
Packaging Industry Value Chain
New Business Model
End Use Consumers
Packaging
Customer
Packaging
Customer
Packaging
Customer
Self Mfg.
Materials Science Specialists
Equipment/Machinery/Technology Suppliers
Distributors
Source: Cranial Capital, LLC
Traditional
Packaging Converters
Outside
Services
Retail Merchandising Value Chain
Brand Owners
Packager Suppliers
Retail Channels
“Old Model”
Retail Merchandising Value Chain
Retail Channels
Brand Owners
Packaging Suppliers
“New Model”
“The Axis of Evil”
Wal-Mart (The Pipeline)
China/Asia
(The Suppliers)
Extreme
Purchasing
(The Madness)
Quic kTime™ and a
TIFF ( Unc ompres s ed) dec ompr ess or
are needed to s ee this pic ture.
Innovation: The New, New Thing
 Supplier reductions
 Partnerships
 TQM
 Six Sigma
 Supply Chain Management
 Reverse Auctions
 Innovation
– Radical Innovations Hubs  Value Enhancement?
Cost
Reductions
R&D Spending Drives Margins
R&D Spending vs EBIT Margin (Before R&D)
Innovation requires investment, but typically achieves attractive returns
4.0
25
3.5
20
2.5
15
2.0
10
1.5
1.0
5
0.5
R&D Spending
Notes:
1
7 year average
2
As of most recent fiscal year-end
EBIT Margin (Before R&D)
Be
rry
Ba
ll
Pl
ia
nt
is
Be
m
Re
xa
m
pa
ck
Pr
in
t
Pa
ct
iv
s
en
sIlli
no
i
la
O
w
De
nn
Po
rt o
iso
n
r
Ai
Av
er
y
Se
al
ed
W
in
pa
k
ta
rG
ro
up
0
Ap
Be
sp
ak
0.0
EBIT Margin (Before R&D)
R&D Spending
3.0
What is Innovation in Packaging?
• Line Speed & Light-weighting
(2-L’s)
• Design & Structure
• New or Improved Processes
Incremental Features:
– Enhanced print
– Barrier / heat resistance
– Closure / Re-closure / Dispensing
– Interactivity
Keys to Value Creation
• Market & Customer Selection!!!!
• The commodity fallacy:
making $ in the down & dirty markets
• The proprietary fallacy:
losing your shirt making unique product!
• Being a low-cost producer is not enough!
• “Toll Booths”
Trade secrets, “IP,” Product Branding.
NPD Skills, Bundler, Controlled Distribution
Keys to Value Creation
• Size & scale is not the
primary requirement for
success
– Aptargroup
– Winpak
– Multi-Color
– Pechiney Plastic Bottles
Question #12
• What are the Critical Parameters for
Success in R&D?
“The capability to build in new
layers of value for our customer’s
products!”
Acquiring Proven New Technology
Bemis Case Study
1995
Current
ROIC
20.8
16.7
Long-Term Growth (% )
14.2
8.7
Total Debt/EBITDA (x)
0.8
1.6
TEV/LTM EBITDA (x)
7.4
7.6
1-Year Forward P/E (x)
16.0
16.7
5-Year Total Return (% )
11.2
25.6
13
Bemis EBIT Margin (% )
12
11
7/02
Clysar
Shrink
Film
11/00
Kanzaki Pressure
Sens Mat
1/00
Morgan Adhesives
2/98
Dixie Toga
10/95
Banner Packaging
10/02
Walki
Films
10
8/00
Viskase Specialty
9
1/97
Paramount Packaging
8
Mar-95
Source: Factset, Bloomberg and Company Reports
Jun-97
6/98
Techy lntl
9/01
Duralam
Aug-99
Oct-01
Dec-03
Business Models of Packaging
Proprietary Materials
Bemis, Sealed Air, Winpak,
Avery, Klockner…
Proprietary Designs
Aptargroup, Silgan,
Kerr, Graham…
Systems Integrator
Fuji Seal, Winpak,
Tetra Pak, Sealed Air…
Turnkey Bundler
Multi-Color, Alcan,
Pactiv, Sealed Air…
Operational Excellence
Berry Plastics, Essel Propack,
OI, Toyo Seikan, Ball…
Source: Cranial Capital, LLC
The Labeling & Product
Identification Industry
Market Background
Comments
•
•
•
•
Global labeling and product identification has
estimated revenues of approximately $30bn and
average growth rate of 4–6%
Self-adhesive labels have been historic growth vehicle
in market
–
growth for PS lables declining to a more
modest 4–6% recently
–
future growth expected due to new substrates, printing
schemes and technical features (i.e.–tamper evidence,
RFID)
Label Making Technologies
Reel
Fed/Wrap
Around
5%
–
low barriers of entry
–
constant investment necessary to maintain leading edge
technologies
–
consolidated/large customers and suppliers squeezing
converters
In-Mold
3%
Gummed
1%
Self Adhesive
45%
Wet Glue
Applied
Paper
41%
Primary Labeling Technologies
Label continues to be primary and inexpensive
marketing tool for food, beverage, personal care and
media customers
Industry returns/margins continue to deteriorate due
to:
Shrink/
St ret ch
Sleeving
5%
Primary Substrate:
Ca tegory
Shrink Sleeves
In-Mold
Reel-Fed/ Wrap Around
Cut and S tack Films
Self Adhesive
Stretch Sleeves
Wet Glue
Cut and S tack Paper
Growth Ra te
(%)
15–20
10–15
15–20
5–10
6–7
3–5
1–3
1–3
Paper
(%)
Pl astic
(%)
0
50
50
0
80
0
95
100
100
50
50
100
20
100
5
0
Key Trends
Plastic, currently 20–25% of volume, continues to take market share from paper as primary
material for labels and product ID
Key Drivers
Plastic Bottles
Performance
Features
Clear on Clear
Comments
Growth in the use of plastic bottles over the last 10 years has increased use of plastic
labels use of plastic substrates highly correlated to plastic container growth
Plastic products provide increased performance benefits paper is not capable of
• water resistant, tougher, tamper banding, UV protection, graphic capabilities
Need for transparent labels on clear bottles provides avenue for plastic substitutes
• Strong demand for “No-Label Look” labels 13
New Markets
Entry of labels into new markets as self-adhesive applications take hold
• wine, beer
• telecommunications
• tires
Change of
Bottle Form
Changes in bottle form–convex or concave–demanding sleeving technologies
• especially full-body sleeves
Multi-Process
Emergence of one-pass, multi-process label application equipment
• wet glue applied, PS label and sleeving all in one pass
Plastic growth is expected to accelerate as thinner, more cost effective substrates evolve
The Big Picture:
“An Over-the-Horizon View”
• The world is shifting from West to East
• Developing Countries will become world leaders in raw
materials: China, Russia, Taiwan
• Purchasing/RD&E/NPD to stay local
• “Ship to points:” i.e. converting & assembly assets will
become increasingly mobile!
• NA Packagers should gear their portfolio around high
value exports and defensive domestic products
• Japanese Trading Company Model could be template for
success!
Too Much of the
“ Charlie Hustle” Model
• Doing the same old things faster & faster
–
–
–
–
–
Capital Investment
New Equipment
New Capability
Lower Pricing
New Business
• COMPETITION DOES THE SAME!!!
How Do You Define High
Technology in Packaging (Today)
• Plants of “outrageous” proportion!
– Volume of raw materials procured
– “Filled to the gills” for maximum utilization
– Shipping & warehousing costs associated with
“Mega Site” are absorbed like candy
• Subsidized by:
– Lower fixed and variable costs
How Do You Define High Technology in
Packaging (Tomorrow)
• Micro-factories
• Located in the market of consumption
• Despite Size differential, production costs
are not at a premium to the current scale
model!!!!!
Resolutions
• Do not take business on price alone!
– Especially without supported cost /
productivity/design benefits
• Don’t do business with customers/vendors
who don’t appreciate:
– Your company, your right to a reasonable ROIC
and you as a person.
• Just say no to reverse auctions!
Focus on the Win, Win, Win!
• Win # 1: Technical breakthrough on cost
with no functionality loss and possibly
enhancement
• Win # 2: Sharing a portion of this cost
savings / technical gain with your first
customer
• Win # 3: Providing cost savings to the
merchandising chain and final customer!
Quic kTime™ and a
TIFF ( Unc ompres s ed) dec ompr ess or
are needed to s ee this pic ture.
Metal Decoration & Packaging
•
•
•
•
You are only as good as your horse!
Can your horse change/transform?
Plastic Inroads continue, although nearing an end!
Decoration Technologies Evolve
– Labels not standing still!!!!
• Success is a function of structural improvements
& evolution of Decoration cost/quality
• Glass, Metal & Plastic Packaging will soon settle
into their respective niches
How to Best Serve a Slow/No Growth Market
• Rationalize capacity now!!
• Focus on highly flexible equipment
• Retain an investment in paradigm shifting
technology:
– High Volume, High Quality, No cost premium
• Should Decoration Cells be in the filler’s
plant?
– Run by whom: can makers, fillers, 3rd parties
We Have Seen it All!!!!
• BWAY recapitalizes Print Centers (a Flop)
• USC decides to acquire metal services firms
– What were they thinking
• Process printing of 2-piece Beverage Cans?
– Wha happened?
• Shaping to take over the NA market (right)
• Japan & Europe have made it happen!!!!
– Totally different perception of Metal Packaging
Advice
• Breakthrough in finished “Bright Can”
container decoration
• Coatings / Ink Development
• Onsite Decoration mentality
• Pray, Pray Pray!!!!!!
Thank You!
Timothy P. Burns
Cranial Capital, LLC
5753 SOM Center Road
Solon, OH 44139
440-498-9161
[email protected]