Pandemic drives complexity, consolidation for North American plastics processors

North American plastics processors should examine operational complexity and labor costs as the "dust settles" following the impact of the COVID-19 pandemic, according to Plante Moran's annual North American Plastics Industry Study.

In the study, presented at the MAPP Benchmarking and Best Practices Conference Oct. 19 by management consultants Ted Morgan and Greg Alonso, nearly 50 percent of respondents had "at least" 25 percent of their end markets in automotive.

Such customer concentration in certain industries can subject processors to more risk, Alonso said.

"On the one hand, it's easier to manage," he said. "But the challenge is that it may give customers undue leverage on pricing."

A good processor-customer relationship should be "based on proprietary capabilities that you have as a processor," Alonso said. If the relationship, he said, is "more out of convenience and there really isn't anything that's driving those customers to you specifically … concentration can put your business at more risk."

But processors need to be "strategic" and "targeted" when looking to diversify their end markets, he said.

"How much investment is going to be required for you to enter that market?" Alonso said. "Is the market profitable, competitive, does it have needs in line with your capabilities?

"Complexity is an equation that involves how many molds, resins and presses you are managing," he said.

That equation can include operational issues like higher head-count, higher material handling cost, increased working capital and difficulties scheduling production, Alonso added.

Delivery, which has been slightly trending down over the last few years, according to the study, is also "made more difficult" by operational complexity, he said.

"How many different production scheduling variables are you trying to manage?" Alonso said. "Depending on the industry, [delivery] is not something that's going to gain you customers. ... It's almost a cost of entry. If you don't have solid delivery performance, it's difficult to grow business with a customer."

Medical and electronics companies have the highest levels of complexity in the industry, he said, and "need to be very good at" managing it.

"The way you offset it," Morgan said, is hiring labor. "As we know, that's not cheap.

"There are companies that do it great," he added. "If you do it poorly, though, you can get crushed on the income statement."

M&A activity is expected to pick up further in the fourth quarter of the year, Morgan said, with "the range of alternatives to sustain and grow or exit being a lot bigger now than what they were 12 months ago."

Overall, he said, processors' valuations went down this year, "because so many plastics processors' volumes were hurt by COVID," though the health care market remains high.

"Where you had some markets get crushed at the beginning of COVID, other markets went through the roof," Morgan said. "That really drove a lot of operational complexity."

High concentration in some markets, he added, "will impact you negatively for valuation," which is critical when companies look to restructure, refinance or sell.

"We have seen an uptick in processors across a variety of industries trying to find that next one or two industries that could help out," Morgan said.

Profitability in the industry has seen a long-term trend down, Alonso said, something Plante Moran found last year was "some cause for concern, but not panic."

Coming out of the great recession, he said, "as the economy recovered, the companies replenished their workforces and weren't able to maintain those profit margins based on those very lean staffing models."

"We have a large contingent of automotive-serving processors," Alonso said. "Volumes over these last few years have started to drop … along with rising wages and a very tight labor market," lead to compression in gross profit.

While year-to-date M&A activity is down, Alonso said, it is starting to rebound.

"The one area that's actually seeing growth is the resin and compounders," he said. "Similar to prior years, most of the activity taking place is through strategic buyers."