If you headed a packaging company in 2004, it was a good year to duck for cover.
Major packaging firms that switched leaders in 2004, or are doing so now, include Pliant Corp., Amcor Ltd., Owens-Illinois Inc., HuhtamÃ¤ki Oyj, Rexam plc, Applied Extrusion Technologies Inc., Linpac Group Ltd., Exopack LLC and PVC Container Corp.
The reasons vary, from simple retirement to underperformance to more-serious troubles. But the result is that many large companies are left to chart a new direction, said Timothy Burns, president of equity firm Cranial Capital Inc. of Solon, Ohio.
Burns did not have a simple explanation for the turnover. Yet, all packaging companies last year faced some stress: Margins were pressured due to an upswing in resin costs, sales and stock prices were relatively flat and conversions to plastic slowed somewhat.
That leaves 2005 as a year for new starts for many companies hopeful that resin prices will level off and merger and acquisition work will rise. Right now, there are at least five potential deals being discussed, Burns said. ``Companies are still being a little cautious, making sure they don't overspend due to the cost pressures,'' he said.
The biggest headline-grabbing story of the year for packaging firms was the continued rise in resin prices. Prices for linear low density polyethylene, for instance, have more than doubled since January 2002.
``It's the largest resin price increase in the history of the industry,'' said Thomas Blaige, chief executive officer of Chicago-based investment banking firm Thomas Blaige & Co. LLC. ``Nobody knows when it's going to stop, and it's affecting the psychology and behavior of packaging companies.''
The increases have hurt profit margins and forced companies to contain costs. Following a trend of the past few years, packaging companies have shut down underperforming plants, consolidated operations and laid off hundreds of employees at a time. The list is too numerous to recite, but firms such as Sonoco Products Co. Ltd., Tyco International Ltd. and Amcor PET Packaging are in the midst of cost-cutting programs that have led to plant closures.
Ghansham Panjabi, research analyst for New York-based Lehman Bros., said companies have been cautious with product development and capital spending.
``Packaging companies are more focused on increased productivity and taking a smarter approach to customers and supply-chain issues. If the economy hangs in there, they could benefit from margin expansion and better trends,'' Panjabi said.
Companies that have invested heavily in new products and technology have been bitten by the low-margin bug. One example is film extruder AET, said packaging analyst Huston Keith of Marietta, Ga.-based Keymark Associates Inc. The firm overinvested against the market and has not been able to capitalize to the extent it had hoped, he said. AET plans to exit Chapter 11 bankruptcy protection with new funding under private ownership.
One question facing companies is how to pass on resin increases to customers. It is a balancing act: Customers may accept some increases, but could turn to other suppliers, or materials, if prices move up too much, Panjabi said.
Most packaging analysts are hopeful that 2005 will be a better year. Firms might not squeeze the nickel quite so hard on capital expenditures, and acquisitions are expected to pick up, Burns said.
A lot more consolidation is due in plastics packaging, Panjabi added. A combination of smaller companies hurting because of high resin prices and buyers hungering for action could make 2005 a good year for acquisitions, he said.
``It's perfect for some guys to throw in the towel and say they've had enough,'' he said. ``They've seen too many business cycles where resin prices are high. Strategic buyers have been on the sidelines for too long.''