International Metal Decorators Association 2004 Annual Convention May 20th, 2004 Holiday Inn...

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. BurnsCranial 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

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• Is a leading Independent Packaging Industry Research & Advisory concern serving:

•

• Products and Services:– Company and market research reports

– Corporate development / strategic development

– Merger & acquisition advisory

Cranial Capital, LLC

PackagingIndustry

Institutional InvestorsEnd User/Suppliers

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 Market 2003E Sales1 North America $120.02 Western Europe 115.03 Japan 70.04 Asia 45.05 South America 18.06 Australia 7.07 Africa 4.08 Rest of the World 36.0

Total $415.02

World Packaging Market by Material: $400 Billion

Paper & Board38%

Rigid & Semi Rigid Plastic

21%

Flexibles17%

Metal10%

Other4%

Glass6%

Packaging Machines

4%

Key End Use Segments(United States Market)

Product Sales in Bil. % Growth

Corrugated $22.5 1%-3%

Flexible Packaging 19.0 3%-5%

Food Service 12.0 4%-6%

Labeling & Product ID 12.0 3%-5%

Plastic Containers 10.0 3%-5%

Folding Cartons 9.0 0%-2%

Beverage Cans 6.5 0%-+/-2%Glass Containers 4.5 (2%)-(4%)Machinery 4.0 2%-3%

Key End Use Segments(United States Market)

Product Sales in Bil. % Growth

Wood Packaging 3.5 1%-3%

Paper Food 3.5 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

90

95

100

105

110

115

120

125

130

135

140

5/16/03 7/7/03 8/29/03 10/21/03 12/12/03 2/3/04 3/27/04 5/19/04

Index (%)

Dow Jones S&P 500 NASDAQ Packaging Index

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 % Change

Greif Inc. 64.3%

Toyo Seikan 63.0%

Silgan 58.4%

AEP Industries 49.4%

West Pharma 48.8%

Polyair Inter Pack 45.4%

Multi-Color 29.8%

Rexam 23.3%

Packaging Shares – The Losers

(1-Year ended 5/19/04)

Company % Change

Constar (49.6%)

Amcor (14.1%)

Winpak (8.6%)

British Polythene (6.0%)

Intertape Polymer (5.2%)

RPC Group (1.7%)

CCL Industries 0.3%


30

50

70

90

110

130

150

5/18/01 10/21/01 3/27/02 8/31/02 2/3/03 7/10/03 12/14/03 5/18/04

Index (%)



Metric 5/18/01 5/19/04


DJIA 100.00 88.84

S&P 500 100.00 85.20

NASDAQ 100.00 73.09


(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%



Company % Change

AEPI (83.5%)

Applied Extrusion (74.7%)


Chesapeake (12.1%)

Toyo Seikan (8.5%)

Nihon Yamamura (7.0%)

MeadWestvaco (3.4%)

Sonoco Products (0.7%)


0

50

100

150

200

250

5/18/99 2/3/00 10/21/00 7/9/01 3/27/02 12/13/02 8/31/03 5/18/04

Index (%)



Metric 05/19/99 05/19/04

DJIA 100.00 92.72


S&P 500 100.00 82.62

NASDAQ 100.00 64.83


(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%



Company % Change

Applied Extrusion (80.8%)


Crown Holdings (74.3%)

AEP Industries (72.0%)

Graphic Packaging (57.1%)

Owens-Illinois (51.6%)

Chesapeake (40.1%)

Toyo Seikan (26.2%)

Profitability & Returns

EBITDA Margin

20.5% 20.1% 19.7%

16.9% 16.2% 15.7% 15.6% 15.4%13.9% 13.8%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

OI PTV SEE WPK GPK AETC ATR BMS SON LABL

EBITDA Margin

13.7%13.1% 12.6% 12.5%

11.5% 11.4% 11.1% 10.7%10.1%

6.8%

4.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

REX BLL AVY SLGN CCK HUHT CCL RKT AMC AEPI CSAR

Return on Assets

24.0%22.8%

19.3%17.5% 17.4% 16.7% 16.4% 15.3% 14.2% 13.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

LABL PTV WPK SEE ATR BMS BLL CCL SON SLGN

Return on Assets

10.3%9.9% 9.9% 9.7%

9.4%

8.6%

6.0%

4.2% 4.1%

3.0%

1.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

AVY OI CCK REX AMC RKT GPK AETC HUHT AEPI CSAR

Financial Leverage

41%29%

31%

14%

17%57%

10%

0

1

2

3

4

5

6

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Debt/LTM EBITDA (x)

B BB BBB A Debt/LTM EBITDA

Leverage Remains an Important FactorAggressive debt-financed acquisitions through the 1990’s have left many companies focused on meeting debt service and maturities

Change in Leverage and Ratings Profile

Source: S&P, Company Reports

A

BBB

BB

B

A

BB

B

TOTAL DEBT / EBITDA COVERAGE

13.3

7.7

5.6 5.6 5.3 5.2 5.1 4.9

3.7 3.7

0

2

4

6

8

10

12

14

CSAR AETC GPK CCK AEPI REX OI SLGN BLL SEE

TOTAL DEBT / EBITDA COVERAGE

3.53.2

2.52.2 2.1

1.9 1.91.6

1.4

0.90.7

0

0.5

1

1.5

2

2.5

3

3.5

4

RKT HUHT CCL AMC SON AVY PTV BMS LABL WPK ATR

M&A Activity Summary

Year 1999 2000 2001 2002 2003

# of Deals 21 23 17 15 20

Total Value ($bn) $7.9 $11.0 $3.6 $6.0 $3.6

% Deals Sponsor Related 29% 35% 18% 20% 25%

AVG. LTM EBITDA Multiple 7.0x 7.4x 6.4x 6.8x 6.2x

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)

Rank Market size

(US$bn) CAGR (%)

1 Protectives 5 6–8

2 Custom 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 PressuresTop-line growth continues (aided by currency movement), offset by margin pressures from material cost volatility and increasingly demanding customers and retailers

28.4

18.3 16.9 16.5 15.4 13.9 11.8 10.7 9.0 8.6

1.7

(0.5) (1.6)(5.5)

9.1 9.1

na na

5.55.6

(10.0)

0.0

10.0

20.0

30.0

AMC≤ AVY ATR BLL WPK MMK BMS CSAR PTV SEE SLGN RPC OI SON RKT CCL REX≥ HUH CCK GPK

Average: 8.6%

Sales Growthπ (%)

(6.6)

(1.6)

1.5

(0.5)

0.4

(4.3)

(0.9) (0.3)

(3.6)(2.2)

0.6

2.5

(1.8)

1.7

(3.1) (2.1)

(0.8)(1.7)

(0.1)

na

(8.0) (6.0)

(4.0)

(2.0)

0.0

2.0

4.0

6.0

AMC AVY ATR BLL WPK MMK BMS CSAR PTV SEE SLGN RPC OI SON RKT CCL REX≥ HUH CCK GPK

Margin Change (%)Average: (1.0%)

Notes:1 Calculated as the year over year sales growth for the LTM ended 6/30/032 Includes pro forma results for Schmalbach acquisition3 Year over year sales growth for LTM ended 12/31/024 Calculated as EBIT margin for LTM ended 6/30/03 less EBIT margin for LTM ended 6/30/02

Packaging Industry Value ChainOld Business Model

End Use Consumers

DistributorsOutsideServices

Packaging Converters

EquipmentSuppliers

Raw MaterialsSuppliers

Packaging Customer Pool Self Mfg.

Source: Cranial Capital, LLC

Packaging Industry Value ChainNew Business Model

End Use Consumers

Materials Science Specialists

Equipment/Machinery/Technology Suppliers

DistributorsOutsideServices

Traditional Packaging Converters

PackagingCustomer

PackagingCustomer

Self Mfg.

PackagingCustomer


Retail Merchandising Value Chain

Brand Owners

Packager Suppliers

Retail Channels

“Old Model”

Retail Merchandising Value Chain

Retail Channels

Brand Owners

Packaging Suppliers

“New Model”

Wal-Mart (The Pipeline)

China/Asia(The Suppliers)

Extreme Purchasing(The Madness)

“The Axis of Evil”

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 MarginsR&D Spending vs EBIT Margin (Before R&D)

Innovation requires investment, but typically achieves attractive returns

Notes:1 7 year average2 As of most recent fiscal year-end

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Bespak

AptarGroupWinpak

Sealed Air

Avery Dennison

Portola

Owens-Illinois

PactivPrintpack

Rexam Bemis PliantBall Berry

R&D Spending

0

5

10

15

20

25

EBIT Margin (Before R&D)

R&D Spending EBIT Margin (Before R&D)

• 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

What is Innovation in Packaging?

• 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

Keys to Value Creation

• What are the Critical Parameters for Success in R&D? “The capability to build in new layers of value for our customer’s products!”

Question #12

Acquiring Proven New TechnologyBemis Case Study

Source: Factset, Bloomberg and Company Reports

10/95Banner Packaging

10/02Walki Films

7/02Clysar Shrink Film

9/01Duralam

11/00Kanzaki Pressure Sens Mat

8/00Viskase Specialty

1/00Morgan Adhesives

6/98Techy lntl

2/98Dixie Toga

1/97Paramount Packaging

8

9

10

11

12

13

Mar-95 Jun-97 Aug-99 Oct-01 Dec-03

Bemis EBIT Margin (%)

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

Business Models of Packaging

Proprietary Materials

Proprietary Designs

Systems Integrator

Operational Excellence

Turnkey Bundler


Bemis, Sealed Air, Winpak, Avery, Klockner…

Aptargroup, Silgan,Kerr, Graham…

Fuji Seal, Winpak, Tetra Pak, Sealed Air…

Berry Plastics, Essel Propack, OI, Toyo Seikan, Ball…

Multi-Color, Alcan,Pactiv, Sealed Air…

The Labeling & Product Identification Industry

Primary Substrate:

CategoryGrowth Rate

(%)Paper(%)

Plastic(%)

Shrink Sleeves 15–20 0 100In-Mold 10–15 50 50Reel-Fed/Wrap Around 15–20 50 50Cut and Stack Films 5–10 0 100Self Adhesive 6–7 80 20Stretch Sleeves 3–5 0 100Wet Glue 1–3 95 5Cut and Stack Paper 1–3 100 0

Market Background

Comments Label Making Technologies

Primary Labeling Technologies

• 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 continues to be primary and inexpensive marketing tool for food, beverage, personal care and media customers

• Industry returns/margins continue to deteriorate due to:

– low barriers of entry

– constant investment necessary to maintain leading edge technologies

– consolidated/large customers and suppliers squeezing converters

Self-Adhesive

45%

In-Mold3% Gummed

1%

Shrink/StretchSleeving

5%ReelFed/WrapAround

5%

Wet GlueAppliedPaper41%

Key TrendsPlastic, currently 20–25% of volume, continues to take market share from paper as primary material for labels and product ID

Change ofBottle Form

Plastic growth is expected to accelerate as thinner, more cost effective substrates evolve

Multi-Process

Plastic BottlesGrowth 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

Performance Features

Plastic products provide increased performance benefits paper is not capable of• water resistant, tougher, tamper banding, UV protection, graphic capabilities

Clear on ClearNeed for transparent labels on clear bottles provides avenue for plastic substitutes

• Strong demand for “No-Label Look” labels 13

Key Drivers Comments

New Markets

Entry of labels into new markets as self-adhesive applications take hold• wine, beer• telecommunications• tires

Changes in bottle form–convex or concave–demanding sleeving technologies• especially full-body sleeves

Emergence of one-pass, multi-process label application equipment• wet glue applied, PS label and sleeving all in one pass

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!

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. BurnsCranial Capital, LLC

5753 SOM Center RoadSolon, OH 44139

[email protected]

International Metal Decorators Association 2004 Annual Convention May 20th, 2004 Holiday Inn...

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