Graham Packaging Co. LP experienced explosive growth in the 1990s but had a very difficult year in 2000.
A $20 million-plus investment to make single-serve PET bottles for Tropicana Products Inc. did not bear immediate fruit.
PET bottle-resin prices rose nearly 20 percent in seven months, slowing the conversion from glass bottles to plastic.
Wall Street indifference forced Graham to cancel an initial public offering of common stock.
Graham's European business suffered from declining performance at its French operations. Then, an economic slowdown hit late in the year, complicating the firm's comeback attempt.
Now, however, a $50 million infusion of cash has Graham officials considering new growth plans for 2001 — while at the same time working to return the company to profitability.
The Tropicana twist
Graham, one of the world's largest blow molders, reported $824.6 million in 2000 sales, up 15 percent from 1999. But the York, Pa., company also reported a loss of $45.6 million, compared to a slim profit of $1.3 million a year earlier. Much of that loss was the result of high debt payments from previous acquisitions and expansion projects.
Chief Executive Officer Philip Yates says the company learned some hard lessons last year, made some changes and is off on the right foot this year.
"Despite the fact we had a number of challenges, we felt we had not a too bad year compared to some of our friendly competitors," Yates said in a recent telephone interview from his headquarters in York. "I'm feeling good about how 2001 is shaping up."
Yates admitted the delay of the single-serve bottle launch for Tropicana hit Graham pretty hard.
During the summer, Graham had leased a 150,000-square-foot facility in Montgomery, Ala., leased a new, 210,370-square-foot plant in York and increased capacity at plants in Rancho Cucamonga, Calif., and Selah, Wash., specifically to serve Tropicana.
The juice company had planned to switch from glass to PET barrier bottles. By September, everything was in place on Graham's end. However, Graham's customer was not quite equipped for the switch. The project was pushed back to the first of the year, Yates said.
When the announcement about the Montgomery plant was made, the company reported it was spending $20 million on the project for Tropicana. Yates declined to reveal the total Tropicana-related investment. But he acknowledged that having that equipment sit idle for four months put Graham in the hole instead of ahead.
Yates said the delay cost the company a 15 percent sales increase for 2000.
"It was the largest capital investment in a single project in the company's history," he said. "We hired and trained all the people, had taken out a lease on one building in Montgomery and opened a new plant in York specifically for the single-serve barrier bottles, and in addition to injection molding and blow molding equipment, we had to put in a coating line in those facilities.
"In this case, we were ready, and they weren't."
Now, however, production of the single-serve, coated bottles is in full swing. And Yates expects this venture to pay off handsomely for the company in 2001.
"The good news is that the single-serve ramp-up is not a ramp-up any more — it's a stampede," Yates said. "We are now running our PET single-serve network seven days a week and 24 hours a day and having a difficult time keeping up with the demand."
In addition to PET, Graham is a leading producer of high density polyethylene bottles. End markets include food, beverage, household, personal-care and automotive products, including motor oil.
In all fairness, the bad-news scenario was not unique to Graham last year. Several of its publicly traded competitors, including Crown Cork and Seal Co. Inc. and Owens-Illinois Inc., suffered similar setbacks.
Graham had hoped that a planned IPO in 2000 would help it erase a big chunk of debt and allow for additional growth. But investors showed little interest in packaging companies last year, and Graham was forced to withdraw the offering.
Instead, Graham got some big help recently in the form of $50 million in new equity funding from the Graham family and Graham's majority owners, Blackstone Capital Partners III Merchant Banking Fund LP. Graham announced the investment April 2.
The funding will be used to pay down debt and will be injected into growth plans that Yates would not specify but could include additional plants, he said.
Joel Tiss, a packaging analyst and vice president of equity research at Lehman Bros. Inc. of New York, suspects the $50 million is just enough for Graham to build two plants. And it wouldn't be a bad idea, Tiss thinks, to spark needed growth for the company.
"What Graham needs to do is continue to grow with their customers," Tiss said. "Graham was out of capacity and out of money. It's a typical problem of a fast-growth company.
"When you start to turn into a big company, it doesn't take much to need big amounts of money."
More good news recently came for Graham in the form of the nationwide distribution of Ocean Spray Cranberries Inc.'s new 64-ounce PET grip bottle designed by Graham.
Ocean Spray's complete line of juices are now available in a soon-to-be patented bottle with the juice company logo incorporated into the grip.
The company also has new business from PepsiCo Inc.'s newly acquired Quaker Oats Co.'s Gatorade product, Coca-Cola Co.'s Minute Maid, and Snapple Beverage Group Inc.
The new business from the Pepsi subsidiaries (including Tropicana) is expected to account for 12 percent of total company sales, according to Graham's annual report.
Contrary to some analysts' doubts about food and beverage packaging prospects, sales in those segments actually have risen at an annual rate of 38 percent during the last three years for Graham, according to 2000 Securities and Exchange Commission filings.
"In 1992, food and beverages represented 3-4 percent of our company," Yates said. "Today they're about 50 percent. Food and beverages is where we've been investing the majority of our capital and resources."
That goal also is evidenced in the several on-site plants constructed in Europe to produce bottles for Paris-based Groupe Danone's drinkable yogurt.
Yates announced that three facilities recently have been built, or are under construction, for Danone, in Rotselaar, Belgium; Bierun, Poland; and Aldaia, Spain.
Graham also has expanded capacity at one of its facilities in Nyirbator, Hungary, for Unilever NV, one of its largest personal-care and household-container customers.
Europe wasn't always this nice to Graham in 2000 — especially toward the second half — Yates and the SEC filings revealed. Late in the year, the company experienced a decline in operations in the United Kingdom and France, according to the annual report.
Yates said — with a complete management overhaul in place in Graham's European operations, coupled with steady, long-term business like Danone — its European business should be on an upswing.
"Key global customers and long-term contracts — a combination of that and a heavily experienced operations team, and I think we've got our European business finally under control and heading in the right direction," Yates said.
The expansions Graham invested in for Unilever alone signify improved performance this year, at least in the household and personal-care side of the business, according to Tiss of Lehman Bros.
"Consumer products companies were on this efficiency cost-cutting drive. Now they're re-looking at their brands in an attempt to get their brands to grow," Tiss said. "For anything that relates to critical spending for consumer products companies, there's definitely a revival.
"Even 3-5 percent volume growth in this kind of environment is going to stand out like a sore thumb on the positive side."
Tiss said Graham can pull itself up by its bootstraps this year if the company watches out for the trends that caused 2000's slump and focuses on the customer service it is recognized for.
Even if Graham's sound reputation was not enough to support the IPO last year, Yates and Tiss are confident the business climate will be more receptive to a public offering at some later date.
Yates did express a desire one day to take the company public. Tiss thinks that would be a wise choice once Graham makes the complete turnaround it appears to be making.
Tiss said if the company could make its way back up to an ideal 17-20 percent profit margin, investors' eyebrows might rise a little, and they may be inclined to view Graham as having the right mix of growth and cash flow that makes a company worth the investment.
"I think [Yates] still wants Graham eventually to be a public company," Tiss said. "I think he wants to get this balance thing down. He wants to figure out what the optimal mix between growth and profit is.
"He's got a great story to sell to the stock market."