Battle-tested and bloodied — but unbroken — North American plastics processors showed what they were made of in 2009.
“I'm amazed at the entrepreneurial spirit and gumption displayed in 2009 by our industry,” plastics veteran Jeff Mengel told attendees at the 2010 Plastics News Executive Forum, held March 7-10 in Tampa. “There were some bankruptcies during the year, but a lot were deferred by entrepreneurial magic.”
A sizable number of processors also were able to reduce their debt-to-equity ratios during 2009 by liquidating their balance sheets and paying off debt, according to Mengel, a partner at the Plante & Moran PLLC financial consulting firm in Southfield, Mich. In the latest version of the firm's “North American Plastics Industry Study,” completed March 1, fewer than 10 percent of responding firms had debt-to-equity ratios of more than 4-to-1 in 2009.
By comparison, 30 percent of respondents were at that level the year before. More than half of responding companies had debt-to-equity of less than 1-to-1.
As a result, many companies didn't change their banking arrangements during 2009, since liquidating gave them the results they wanted: Some 65 percent of survey respondents reported no change.
“We were surprised, because we thought banks would be more involved,” Mengel said. “But liquidating [processors'] balance sheets made banks irrelevant in many institutions in 2009. [Processors] didn't have to renegotiate.”
And although a recovery clearly is welcome, banks might begin to tighten things up for processors as demand improves in 2010. The study showed that 44 percent of respondents said credit limitations will prevent them from investing in new machinery in 2010.
Processors “are worried that, as growth occurs, bank financing will reduce and they won't be able to grow like they want to,” he said. “As long as you're making payments and paying down debt, banks are happy. Once you're healthy, they'll take a harder stand.”
That probability has led Mengel's firm to expect “a rash of exits once the market stabilizes.”
“The paradigm made it exhausting for those running out of energy or money,” Mengel said. “People want to get out or retire. That should lead to more M&A activity in 2011 and 2012.”
Low-price options for machinery, tooling or other acquisitions also might become more scarce in 2010.
“There's a lot of junk out there very cheap, but good assets are hard to find,” Mengel explained.
“People are still looking to the auction market for machinery and tools, but at some point the auction market will be used up and they'll be looking to buy new again.”
Longer-term, Mengel said that tooling advances will help keep tooling in North America. “It's one of the advantages we have,” he said.
Pat Beirne, who owns injection and blow molder Mergon Group of Castlepollard, Ireland, agreed. Mergon Group used to source molds from China, but now buys U.S. molds and ships them to Europe.
The company has made connections through its 12-year-old factory in Anderson, S.C.
“I did it because the U.S. became more competitive. Our experience is the quality is better,” Beirne said during an interview at the Executive Forum.
Mengel said the industry's resin-supply base needs to regain its health. “Until resin suppliers are healthy, there are going to be fluctuations in [resin] pricing,” he said.
Other results from the updated Plante & Moran study include:
* Two-thirds said their firms are surviving or maintaining in 2010. A quarter said they are growing, while 9 percent said they are shrinking.
* For 2010, 56 percent said they expect a slight recovery with a full recovery in the future. Fifteen percent said they expect a full recovery in 2011.
* Almost one-third said they lost more than 10 percent of annual sales because of customer bankruptcies or transfers. About 71 percent said they lost more than 10 percent of annual sales because of price volatility or price reductions. Price reductions were cited by 70 percent of respondents.
* 47 percent said they are doing market testing, including opening contracts to competitive bidding.
* On the employment front, 59 percent said they cut more than 10 percent of their salaried and hourly workforce in 2009. Another 25 percent said they cut more than 25 percent.
Conversely, almost 30 percent said they have hired more internal sales reps. Firms aren't expecting to restore many of their salaried workers in 2010, but they do expect a modest restoration in hourly staff.
* In tooling, 37 percent expect more than a 15 percent sales increase from new tools in 2010, while 9 percent said they expect more than 15 percent from tool transfers for the year.
“There's compelling evidence that there's been some lasting impact from the Great Recession, and that will be felt for some time,” Mengel said.
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