Executive Outlook 2009: On the right track?
There is light at the end of the tunnel. Despite a recession, a Democratic administration and a long-term energy problem, you can improve your business this year. You need to. Do you know how and where?
Our roundtable participants-executives at leading flexible packaging manufacturing and converting companies-share their outlook and ideas for sustainable growth in 2009.
• William (Bill) Burke, president/chief operating officer, Nordenia USA-an integrated flexible packaging company with the ability to extrude film, engrave cylinders, print, laminate and convert films into a variety of bag and pouch configurations.
• Mike Curia, vice president and general manager, Food & Specialty Flexibles, Alcan Packaging Food Americas-part of Alcan Packaging, the No. 1 food flexible packaging company worldwide, and converter of film, foil, resins and paper able to offer multi-material, concept-to-market capabilities.
• James (Jimmy) Love III, vice president, international business, Printpack-one of the largest flexible and specialty rigid packaging converters in the United States.
• Jon McClure, founder/chief executive officer, ISO Poly Films Inc.-a leading provider of plastic films for the laminating, printing, coating and converting markets.
• Sal Pellingra, innovation and marketing director, Ampac Flexibles-an international flexible packaging company that makes more than 200 custom and proprietary film blends, stand-up pouches (with a variety of closures, fitments and spouts) and high-end performance rollstock.
What are your top flexible packaging challenges and/or opportunities for 2009?Jon McClure: Obviously, the 800-pound gorilla is the economy.
We’ve had unprecedented rise in resin costs over the last three to four years. And now we’ve had unprecedented fall. It’s difficult to manage on the way up because of price pressures, and it’s equally difficult on the way down, even though you like to see the price of resin come down. When it comes down so quick, customers think, “Why order today when we can order tomorrow and the price may be cheaper?”
The opportunity is: How are you going to manage these challenges? We’re looking at every penny. You make money in pennies and you lose in dollars.
The guys who are technologically advanced are going to do better than the ones who aren’t. And we feel like we’re in that “technology, quality, service” [group that] is going to create the opportunities to survive and thrive.
Bill Burke: There’s a huge amount of volatility in the general economy with the financial crisis. Trying to understand how that volatility is going to work its way through our customers and then down to us is probably the biggest short-term challenge we’ve got.
We’re expecting some customers to do better in a tight economy. We’re also seeing certain segments where we’re expecting a softness that could be significant-like some of the more discretionary purchase items. Our challenge is trying to balance this softness as we look at least through the first half of 2009, so we can set how we’re going to operate our business and where we can find opportunities.
Not knowing where the train is going to go and how fast it’s going to run is a big issue.
Sal Pellingra: I echo both comments. The biggest challenge in the current economy is forecasting and planning. Our customers are also trying to figure this out-even with new product launches. Certain market segments that were strong are suddenly slowing down, while others that were slow are picking up. Intimate customer contact for raw material planning is key in this environment.
So it’s really how to keep assets full, and how to assign resources to the right projects and the right market segments when you have this uncertainty.
Managing the volatility in raw materials [prices] is another big issue. It is difficult to manage with pricing rising or falling faster than materials can be used in inventory. Having the right escalators/de-escalators in place benefits everyone in this climate.
Mike Curia: The worsening global economy is something that all countries, industries and companies will have to contend with. There hasn’t been an economic slowdown like the current one in a generation, perhaps longer. So, in a way, the flexible packaging industry’s challenges are no different than the challenges facing other industries.
Specifically, we have to manage how the economic slump will affect our customers. It is foreseeable that there will be an impact on sales for converters. Planning for that impact-positively or negatively-will be one of the keys to success in 2009.
There are other challenges, of course, that directly affect our business and are largely unchanged by the economic downturn-concerns that remain consistent from year to year. Staying ahead of volatility in cost in raw materials is important. Staying ahead of problems with supply due to natural disasters like Hurricane Ike is crucial.
Jimmy Love: Our industry faces a basic challenge of sustainable profitability. The direction of margins and returns has been going south for several years, and our industry is hyper-competitive. Are we unique across American manufacturing? Probably not.
Over the last 15 to 20 years, there have been significant step-changes in capability, quality, productivity of major equipment. Most converters were motivated to upgrade and recapitalize their older equipment to remain cost competitive. But the problem is that a lot of that older equipment is still in use. So there’s a lot of capacity. There’s no way the demand has been or will be growing fast enough to use all that additional capacity.
That’s a dynamic that’s longer term, looking backward, than just the recent spikes in material costs. But the most recent fundamental impact on the industry is rapid increases without the ability to pass them on.
The challenge is: We can’t keep going the way we’re going. The general competitiveness of supply and demand and capability of the equipment creates margin pressure. Then with dramatic increases in materials, that’s a double whammy. Can you recoup over the next year or two?
Most people would say we’re going to get those margins back because now materials are going to come down. Will the next couple of years be better than the last few? Most people would certainly hope so, but I’m not sure that there’s a definitive answer.
One way to plan in all this uncertainty is to correctly identify the growth markets. Which markets might be more stable in this uncertainty?Jimmy: Customers, mostly big consumer products companies, still have to package their goods, especially food. Packaging is still a fundamental part of our society, so the underlying baseline support for our industry is solid.
Bill: Some hygienic markets tend to be driven by population and reuse and are not driven by the general economy. We supply components for baby diapers. It’s not flexible packaging, but it’s an example of an end market segment that would have less volatility.
But, at the same time, inside those markets, you’ll see some change in buying patterns. People won’t buy the high-end brand, but they’ll buy store brands or private label to save a few pennies or a few dollars.
Sal: Bill has a good point on the private-label versus brands. When the economy is down, people look for lower-price alternatives. It’ll be interesting to see what the major brands are doing versus what the retailers and private label are doing. Will private label begin to outperform key brands? Ampac has seen some recent delays or changes in new product launches for major brands that could be due to the economy.
One of the challenges is building a higher margin of error around forecasting so you’re not hurt as much in these new product launches. Compounded with that is there’re fewer human resources both internally and externally. It’s important to ensure resources are working on the right projects.
Bill: To echo Jon’s earlier comment, everyone is watching all the pennies inside their own house.
Mike: Sales, input costs, supply are all things that directly impact your bottom line. And sometimes, as was the case with Hurricane Ike, they can be affected by unexpected events. Or as with the global economy, they can be things outside of your control. What you have to do is manage as best as possible for these things. It is essential to identify similar causes for concerns, put a good, sound plan in place and execute as swiftly as possible.
How can you still have a strategy of growth in this uncertainty?Bill: You have to grow or shrink. We’re charged with a responsibility to grow our business, and our plans tend to be longer term in focus.
We’re expecting this to be a one year to 18 month economic slow down. For some of our businesses, the sell cycle on new innovations tends to run 12 to 18 or 20 months long with some customers. We’ll stay focused on those types of projects and make a financial commitment in them irrespective of what the economy is doing because we feel, long term, we have to sustain the future of the business by doing them.
In 2009, the healthier businesses are going to fare much better. Anybody marginal is going to have a real struggle on their hands.
Mike: Challenge and opportunity go hand-in-hand. In a way, challenges are an opportunity to prove yourself to customers. At Alcan Packaging Food Americas, our customers are our highest priority and we stay focused on all the different ways we can help them succeed.
Jimmy: The innovation theme is not something new. Doing something better, different, adding more value is generally what everybody should focus on as the way that they or the industry will succeed and prosper. Because if you’re a “me too,” there’s plenty of competition.
Customers are also looking to be different. They need the packaging to help set them apart on the shelf and in the consumer’s mind. It’s not just the ink or the printing or the structure. It could be the way it interacts, it could be the shape, it could be the way it’s presented on the shelf-just something that helps communicate the value.
The good news-customers who are also trying to create differentiating products are probably amenable to buying more flexible packaging. Flexible might help products stand out and be recognized as something different.
Jon: You never stop looking for new opportunities. But, from the day we see an opportunity until it comes to full commercialization, it could be 18 months or as much as three years. We have a pipeline of things we started working on years ago.
As far as markets are concerned, we see less volatility and more consistent order patterns with customers that are tied to consumer food and medical applications.
We’ve seen slowdown in some customers dating back to 2007. We’re trying to position ourselves not to wait on those customers to rebound.
Jimmy: The double-edged sword with flexible packaging is it’s about as inexpensive as you can imagine to packaging something. But the downside to that is that generally leaves little room for profit and returns on investment. It certainly leaves little margin for error.
Flexible packaging might have some upside because it might replace other forms of packaging. But that theme has been prevalent for 10 and 20 years and it’s not like there are some wholesale, massive changes out of ‘X’ into flexible.
It’s not quite as easy to make money in this industry as outsiders might think. It’s a fragmented industry but also polarized. Only a handful of companies have more than $200 to $300 million in revenues and then there are hundreds that are far smaller than that. A lot are little niches.
Companies that have a niche and are focused on doing some kind of unique item that’s got plenty of margin in it, they can probably make money. But when you get to $50 and $100 million, you can’t do it on those niches. Now it gets broader, more competitive. So differentiation among major players is hard.
What about investments in equipment and technology? Are you looking to optimize your plants or are you still expanding?Mike: There are parts of our business that we continually work to improve. We look to reduce costs, increase efficiencies and improve safety at our facilities. At the same time, we partner with our customers in terms of new product launches, innovations and strategies to help them win in the marketplace. All of these concerns are important and doing them well is a critical part of continuing our success.
Sal: We’re still going to invest in the right technical areas. We’ve been strategically investing in areas of high growth. We’ve just installed a new extruder in Seattle and a new pouch machine just went in to our Elk Grove Village, Illinois, plant.
But at the same time, you’re not investing just for investing’s sake and growth. It’s trying to get more out of the assets you have today and then investing in the right areas. The opportunity is to lower the cost of goods sold and get higher quality output. That’s in terms of people, as well as equipment.
For growth in research and development, it’s looking at trends in the marketplace. Take sustainability, for example. Can you invest in technologies that are reducing the amount of packaging that’s there? Can you develop structures that can do the same as a thicker structure used to do? Can you provide barrier in different ways? Flexible packaging replacing rigid encompasses all of these. As Mike said, partnering with customers in this development provides key competitive advantages for both parties.
Jon: We have plans to put in another barrier film line in 2009. We hope to put it in right away because we need it. We also have plans to upgrade one of our mono lines to a coex line. It’s replacing older technology with newer technology for all the reasons that Sal mentioned. It’s all about functionality. What can you bring in improved performance, in sustainability? These are all important for our customers.
Jimmy: The challenge really is, “I need to do something unique and better.” With this capability, that’s how I want to win new business with customers.
Now, if I just want to jump in there and say I’m more efficient and will lower prices, that’s generally the wrong attitude. Machinery suppliers have been selling around the theme of higher productivity, and lower costs, for years: “This will make you more efficient, more productive. You better step up or you’ll be left behind.”
If it’s all about letting me lower my costs, but we’re not really focusing on the value that I can derive for being different or the value that I can deliver to my customer for differentiating his products, then it tends to make the industry less sustainable from a margin standpoint. That’s what’s been happening.
The last year or two, people are probably not buying quite as much machinery and upgrades as they were for the previous 10. This margin squeeze from the material side has probably curtailed some of that. “I need to make money first and lower my costs second.” Innovation, being different, adding value-those are the challenges for the industry.
Let's talk more about sustainability. Where are you at with it?Bill: We’ve done lightweighting continuously over the years, reducing the amount of material in the structure. We have some components we’re adding to portions of the film structure that are non-petroleum-based that help avoid using oil-based components. So we’re changing the composition of the structure.
We are working with bio-based or renewable-based films. We’ve done a number of active projects between us and our customers looking at the whole lifecycle and how we can take costs out that impact the overall sustainability of the end use of the product at retail.
We’re looking at the whole picture to see where we can find ways to operate in a more sustainable fashion. Some initiatives are product-based and some are systemic-based across the whole supply chain.
Mike: Sustainability approaches like down-gauging and material substitutions help us add value for our customers. We believe the best way-the only way-to manage through these challenges is working closely with our customers. The better we understand their market challenges, the better we can together formulate strategies beneficial for both organizations.
Innovating, improving efficiencies and managing variables help us meet challenges and serve our customers better.
Bill: But we can’t take our eye off the fact that, five or 10 years down the road, the severe tightness in costs that we saw in June or July of 2008 could possibly be the norm in 2011 or 2012 and continue to become a much more pressing issue. There’s only so much oil. Globally, there’s a population hugely increasing at a faster rate than ever and they all demand an energy that’s driven primarily off of fixed resources. This issue is going to become core and at a much higher sensitivity than any of us are aware of.
Jon: I would agree. Long term, we definitely have an energy problem that, hopefully, the new administration will have a more sincere approach to than past administrations.
This is serious and we need to approach it because we are running out of these scarce resources. Will it happen in the next year? No. Will it happen in the next decade? Yes.
There will be pressure to come up with alternative films and packaging. If the economics today do not work, you’re not going to see near the push from the big-box retail chains to pay more for packaging. They want the green approach for less money.
Back to your original question: How do you make a profit? Well, it’s back to sustainability. If your business is not sustainable, then why would you do it? There’s got to be profit motivations from both sides. You’ve got to reduce the cost to the customer and, in some way, hopefully improve your own profits.
Sal: I’ll quickly mention another piece of sustainability that Jon touched on: It’s just good business. Sustainability is in your own house, too-what you can do smarter to use less energy, less materials and get more output from your machines. We’re looking at our processes and assets so we’re getting more out of them and reducing the amount of energy and resources we put in to make the same amount of product.
Bill: That’s a good point. We just put in new thermal oxidizers, where we’re regenerating heat to do the curing of the inks and the ovens. We have a variety of projects to save money throughout the facility on motors and lighting and such. They’re all cost savings as well. Taking a look at the whole picture, inside your house as well, is very important.
Sal: Even the simple things. We may be recycling better at one plant than another, or even in office areas. Installing light switches so they automatically shut off. Taking small but diligent steps makes us more efficient, while reducing our impact on the environment.
Jimmy: We sell a fairly significant part of our waste stream to recyclers. It’s become increasingly valuable as the prices of plastic and oil have gone up.
I want to go back to Jon's earlier comment about the new administration and ask a question. Does the flexible packaging industry need more government intervention?Jimmy: The bigger issue is the health of American manufacturing. I’m not anti-free trade. I have a responsibility for our operations in Mexico, Europe and some of our operations here in the U.S.-about a third of Printpack’s total worldwide business.
We want to make sure that the landscape is fair and reasonable for American manufacturers. For gosh sakes, don’t let things undermine the ability of an American manufacturer to compete on a level playing field. We just want to make sure regulations don’t get misdirected.
Even though the industry doesn’t need more regulations, there might be more of a chance of them because it will be a Democratic administration. From the point of view of a manufacturer, regulation almost always means more expenses for you. It’s just going to cost you. With the climate with the way it is, that would be the worst thing.
For example, let’s say our plants capture 99% of the solid waste emissions. So the amount of pollution or environmentally hazardous waste is very small. But if you say it’s got to be zero, wow. Chasing that last one percent would be extremely costly.
Jon: No, we don’t need more government intervention. We’ve had so much of not working together as a country, I think we’re in a crisis as a nation, economically.
You say, “Well, what does that have to do with packaging?” It means that people will buy less stuff in packages. If our economy recovers and we have an administration that says they’re going to focus on returning the health of manufacturing to America, that could be good for America.
We do not need more regulation. We need more true free enterprise.
Sal: I agree. Hopefully, the administration will focus on fixing the economy and that will help all businesses, including flexible packaging. Manufacturing improves and retailing improves and then our businesses will go right along with that.
The one concern, always-and with a Democratic administration it’s a larger concern-is, will there be more regulation of materials? A lot of that is done on perception rather than fact. Now there’s a regulation saying a grocery sack has to be a certain thickness to be reusable instead of lightweighting it as much as possible. The regulations are all over the place. Smart, versus feel good, or knee jerk, regulation is key.
Bill: I agree. Number one, they need to get the economy going. I think the administration is focused to do that. We have to give them the benefit of the doubt and good faith to see where they’re going to go.
I do expect, with a Democrat administration in total control, they’ll have more propensity for regulation that could impact our industry. From our side, it has to be intelligent regulation, not misinformed. As an industry, we need to do everything we can to make sure our voice is heard and that the education process of those who vote for the legislation is adequately represented by us.
WEB-EXCLUSIVE CONTENTFP: In a slowdown, are human capital and R&D the first areas to be cut?
Jon: At ISO, we are not going to cut in the research and development area. But we’re not going to add to that in any sizable way, either. And we’re not going to cut in the sales and marketing area. But have we tightened the belt in human capital? Absolutely.
Sal: We’re definitely leaner than we were a couple years ago. You have this large bucket of potential projects and the challenge is putting the resources in the ones that will make the biggest impact. The other issue is, our customers have fewer resources, too. If you can provide customers help in areas where they are lean, that can give you an advantage as well.
Bill: We’re not looking to increase significantly anywhere in the organization here, but we are planning to get more productivity with the people we already have. We’re actually adding to sales, and the R&D area is relatively flat. Some of our production areas, we’re redeploying as we get attrition.
FP: Reducing the amount of material is good from a sustainability point of view, but it often means reducing costs for your customers. How can you make enough profits if you’re making products that cost less?
Sal: In a way, we have alluded to the answer. You do it through technology. You’re getting more out of thinner structures. Can you produce a thinner sealant film that still gives you hermetic seals and holds up to over-the-mountain shipping and cold-temperature burst? Can you provide a thinner structure that gives you the same shelf life and barrier as a thicker structure?
But you’re also often replacing a rigid container with a flexible packaging that uses less material.
FP: So you compensate a bit by gaining new business, perhaps because of sustainable packaging trends. OK. What’s the future in flexible packaging for bio-based products?
Jimmy: There’s a lot of research and development work around, for example, PLA [polylactic acid film]. Is PLA coming from corn better? You’ve got to grow a lot of corn and put a lot of fertilizers and a lot of energy in the entire supply chain to get there.
All things considered, that kind of biomaterial is a little more form than substance, a little more perception versus reality. We’ve done plenty with PLA. We’ve been able to convert, print and make flexible packages out of PLA films but I don’t think it’s a drop-in substitute on performance and total sustainability anytime soon.
Sal: We offer a PLA-based film. It is a functional film and has better properties than other PLA-type films. But without a cost advantage, it’s difficult to sell. You have to develop solutions that offer an economic benefit as well.
There are PLA-type materials, but then there’s the concern over their availability and higher cost. And they don’t have the same functionality. Then there are degradable additives which don’t necessarily add to the cost, but you have to be careful that these materials don’t get into the recycle stream.
The public perception is that a degradable or renewable material is a better choice. You have to somehow appease the public perception and some of your customers’ perceptions. In the end, lightweighting is the primary way to reduce the impact on the environment without the question marks about the technology.
Bill: The technical success rate is much higher with other concepts, such as lightweighting.
Short term, we are seeing economics on the resin side, though, that will make the timing of some bio-based products look less attractive because of the way resin prices have gone in the last three months.
FP: What other materials could be used for flexible packaging that aren’t oil-based or bio-based. Is there a new, magic technology out there?
Sal: There’s not necessarily a wave of new technologies out there, but there are more opportunities that we haven’t attacked yet with flexible packaging that still provide growth. We’ll be smarter with the materials that we have at our disposal and the ways to manufacture those materials.
Jon: Most of the films made in America are derived from byproducts of natural gas. In our lifetime, we’re not going to run out of natural gas. Some people say we have as much as 200 to 300 years supply. I’m sure you’re familiar with the Pickens plan to convert diesel to natural gas and take wind power out of the energy system.
How that comes back to how people buy resin produced in North America-it’s a byproduct of natural gas not crude oil. What are the resin companies doing to innovate?
FP: How to get your needs fulfilled from resin suppliers?
Bill: We’re not big enough at Nordenia to influence capacity changes at resin suppliers. But, in terms of specific application developments, we do have a lot of interaction with them.
Jon: Some resin manufacturers seem to have taken the lead in continuing to develop new materials. We’ve worked closely with our suppliers on new films and run trials in their facilities. It’s worked and served us well.
But the industry has changed in the last 10 years, with mergers. Big companies have become even larger. Now Dow has teamed up with what amounts to the Kuwait government. Dow has always been known as the innovative leader. It will be interesting to see if they’re going to continue that. They say they are. I hope they do.
The merger [with the Kuwaitis] may be a good thing. Obviously, the Kuwaitis have a material cost advantage.
FP: What about some new technologies, such as printed electronics and nanocomposites?
Jimmy: We’ve been looking at both of them, certainly nanotechnology, for years. These things have extremely long lead times and long lead times usually mean uncertain outcomes. You can’t really bet the farm that you’re going to have a quantum leap or step-change from A to B.
Significant changes don’t really happen very quickly. Particularly when it comes to packaging, because the consumer product companies are hesitant to make a real dramatic change in the style, look, feel of a major brand.
Those things are slow to change, so if you’re out there hunting elephants, you might be out there awhile to have massive step-changes to an industry or a segment of the industry. What you’re seeing are small, incremental changes in packaging around the edges.
Sal: Printed electronics is fairly specialized. We may do only a small percentage of these types of products. Although…it is a lucrative business and you’re always looking for those niches.
In terms of nanotechnology, it’s about picking the right R&D projects to work on. We’re all looking at opportunities to replace current technology with new technology. Whether it’s putting particles in film or using small particles in coatings or on the surface of a film, they offer strategic benefits.
You have to understand what new technology is out there and capitalize on it before someone else. Nanotechnology would be an example of something that’s a little bit more of a longer-term project.
Jon: We’re not active in either area. We’ve joined in on specialized research with Clemson University and the Natick Army facility that we can’t discuss. We’ve heard about nano for some time. There’s a lot of R&D in that area. But I don’t see huge commercial applications personally that are taking off at this point. There may be some that I’m not aware of.
Bill: There’s a lot of intuitive action going on [with nanotechnology] but as far as seeing a definitive application need coming from a customer, we’re not there yet.
As far as printed electronics, I agree with what Sal said. It’s specialized and niche-oriented. It’s expensive, so you have to have a viable market to support it.
FP: Are there any other technologies you want to mention?
Jon: There are other technologies we’re looking at but I’m not going to mention them here. (laughter all around)