Certain Uncertainty

What a roller coaster ride we’re on. No matter what the industry, the cloud that’s hanging over the general economy (national and worldwide) seems to dwarf other factors. Companies of all sizes and shapes are dealing with higher costs and soft demand—which isn’t a particularly good combination.

In the recently released second quarter earnings report for Graphic Packaging Holding Company, CEO David Scheible summed up some of his company’s challenges. “We continued to experience soft demand in some core end-markets like beer, soft drink, and cereal. Persistent high unemployment and higher fuel prices are forcing end consumers to continue to tightly manage discretionary spending.”

Despite all the challenges, companies in the folding carton segment have been able to post some positive results. For the most part, these have occurred due to management actions taken to reduce costs and focus on core businesses—actions that are necessary during recessionary periods.

Graphic Packaging posted second quarter results that were 4.3 percent above 2Q10. “We posted a solid quarter despite a difficult operating environment in our key end-use markets,” said Scheible. “Our top line increased over 4 percent as we continued to recapture prior input inflation through higher pricing. At the same time, our earnings more than doubled as higher prices, strong operating performance, and improvements in our cost structure more than offset input cost inflation.”

MeadWestvaco Corporation (MWV) reported record 2Q income, with 2Q11 sales from continuing operations increasing nine percent versus 2Q10. The company attributed its strong performance to gains in global consumer packaging markets, including food, fragrance, and beverage markets outside North America. Like Graphic Packaging, MWV noted beverage packaging declines in North America.

“MWV delivered another very strong performance during the second quarter,” reported John A. Luke, Jr., chairman and CEO. “We are consistently generating higher sales and profits by executing specific, market-based strategies in our businesses—including a transformed product and geographic mix that has strengthened our earnings power. Even as some of the challenges we expected began to emerge in the second quarter, including uneven economic recovery in developed markets and input cost inflation, we continue to prove that the step change in our performance is sustainable.”

It’s not just the industry behemoths that are enjoying good performance in these difficult times. Both Pawtucket, R.I.-based Packaging Graphics LLC and 3C Packaging (Clayton, N.C.) report strong results in their folding carton businesses.

Nick Carafa, executive VP of sales for Packaging Graphics LLC, says, “The folding carton segment continues to be a strong and growing part of our business. For us, the folding carton industry has outperformed the general economy and we expect this growth will continue for the foreseeable future.

“We have forecasted growth in this market segment for the immediate future,“ he continues. ”Our forecast is based on market research that indicates the folding carton industry is estimated to grow at a rate of four to six percent annually over the next five years.”

Likewise, Joe Elphick, president and CEO of 3C Packaging, shares a positive view of the industry. “According to discussions I have had with other owners in our industry, business has been very good over the past year. 3C’s revenues increased 20 percent this year. All things considered, I believe our industry has fared well compared to the general economy.”

Elphick has a continuing optimistic view for 3C packaging in the months ahead. ”We are forecasting double-digit growth for our company next year,“ he says. ”I think the economic/market conditions over the next few years are very fertile for companies that invest in new technologies, and can offer innovative solutions.“ He cautions, however, ”In order to sustain an existence in the marketplace, converters must be both lean and high performance—that is not an option, it is crucial.“

One of the reasons why being lean is so important is due the continuing pressure on profit margins, which is nothing new to this industry, says Ben Markens, president of the Paperboard Packaging Council (PPC). “Converters are squeezed in the middle between their suppliers and their customers,“ he says. “Board prices continue to inch up and folding cartons, in general, are competing against other packaging systems, such as flexible packaging.” Overall, however, Markens notes a fairly optimistic view of the market.

Growth trends

Pira International recently released a study, The Future of Folding Cartons: Market Forecasts to 2016. In this report, Pira predicts the global end-user demand for folding cartons to grow at an average annual rate of 4.4 percent during the period from 2010 to 2016. The highest growth sectors in percentage terms include spirits, healthcare, confectionery, tobacco, hardware, and chilled foods. On the other side of the coin, Pira predicts lower growth segments to include pet food, soft drinks, savory snacks, and baked products, which will be impacted by competition from flexible packaging.

One of the bright spots for folding cartons, as it is for many packaging components, is the healthcare market. Pira says in its study that healthcare is already the largest single market, with more than 9 percent of the total volume demand in 2010. With populations around the world both growing and aging, consumer demand for products in general will increase, ”but also more specifically [demand will increase] in the healthcare and personal care markets, with clear implications for folding carton demand,“ notes the report.

Carafa sees similar growth opportunities for his business. “It’s our experience at Packaging Graphics that growth will occur primarily in the electronics, home office products, cosmetics, and home and personal care markets,” he says.

Trends/developments

Sustainability will be an ongoing factor in all segments of packaging for the foreseeable future, and Markens sees this playing into the hands of the paperboard/folding carton market. “Folding cartons have a great story to tell in sustainability and I believe consumers think so too,“ he says. It is truly a renewable resource and now can meet claims to be recycled and recyclable (per Federal Trade Commision definitions).

Scorecards, such as Walmart’s well-known effort and P&G’s environmental scorecard launched last year, will keep the focus on environmental accountability throughout the supply chain. In addition, many companies are setting corporate sustainability objectives, with regular reporting to investors.

Carafa notes a customer-driven shift towards sustainability. “We have experienced customers converting their folding carton substrates to a recycled stock for sustainability reasons,“ he says, and notes a caveat. ”This is causing a strain on the folding carton market due to the increased demand for the recycled substrates. The increased demand is putting pressure on the availability and/or lead times for stock and causing price increases for the raw materials.”

The evolution of digital printing into the folding carton market is another area that folding carton printers should keep a close eye on. “Digital printing is definitely targeting the folding carton market,“ says Markens. For this to happen in earnest, he says, two issues need to be addressed by system suppliers: speed and size. Interestingly, Markens says there are signals appearing in the industry that digital printing could provide some noteworthy developments at drupa next year.

3C Packaging’s Elphick has a similar assessment of digital printing’s impact in folding cartons. “I don’t think digital printing will play a significant role in folding carton converting in the next year or two. It is, however, evident that the digital press manufacturers are focused on entering the folding carton market, and I look forward to any new digital technologies that we might see at drupa 2012.”

Innovation is a major factor for success and growth in all packaging segments. The Pira study highlights several trends in which technology innovations will be rewarded as they meet customer needs: interactive packaging, anti-counterfeiting, and barrier coatings.

According to the study, one area where interactive packaging is being applied is the healthcare market. Printed circuitry in folding cartons can allow medical staff to remotely monitor patient usage or can also be used to alert patients when medications need to be taken or replenished.

Pira estimates that five percent of about $7 billion spent in 2008 on anti-counterfeiting and security packaging was for folding carton applications. Driven by potential health threats and financial ramifications to counterfeited brands, this segment could grow between 10 and 15 percent a year from 2008 to 2016. This could put anti-counterfeiting applications for folding cartons in the range of $1 billion in 2016.

For barrier coatings, new developments are targeted toward environmentally compatible products; improved functionality, such as the application of nanotechnology to prolong shelf life; and the use of coatings on folding cartons that could allow bagless boxes for dry products. Pira predicts these developments could grow this segment to $1.2 billion in 2016 from about $860 million in 2008.

Going forward

The more things change, the more they seem to stay the same. This might sum up Elphick’s view of how to succeed in today’s environment. He believes the challenges in the folding carton manufacturing arena are the same as always: highly capitalized, labor intensive, and low profit margins. “As in years past, we must keep our balance sheets healthy, we must treat our work force well, and we must reinvest in new technologies today, for tomorrow’s benevolence,” he offers. pP