STATE OF THE INDUSTRY ON THE OFFENSIVE

In an uncertain economy, package printers should stay in aggressive pursuit of profit-generating capabilities and growth markets.

NEWS FROM THE NPES 2002 Print Outlook® conference was predictably somber. Printing Industries Association (PIA) Chief Economist Ron Davis related before the terrorist attacks of September 11, projections forecast print industry sales to grow to $169 billion in the following year, a meager 3 percent annual gain. Post-September 11 predictions for 2002 were scaled back to $166 billion. NPES Consulting Economist Michael Evans also had dismal tidings for equipment manufacturers: total printing equipment shipments had dropped approximately 18 percent from last year's levels in both the third and fourth quarter of 2001, and were expected to fall further through the first half of 2002.

Fortunately, most package and label printing appears on the brighter side of the spectrum. According to PIA's recent report, "Package Printing 2001-2005," both the flexible packaging and label sectors are charted for a compound annual growth rate of 4.5 percent between 2000 and 2005. (A 2.5 percent growth rate is anticipated for the folding carton industry; corrugated will grow 3.5 percent.)

The havoc wrought by the digital revolution on commercial printing hasn't and won't affect package print businesses in the same way—digital formats don't directly compete with packaging as they do in advertising, publications, etc. But a tight fiscal market and heavy M&A activity have contributed to the emergence of two distinct prototypes of successful package printers: the fully integrated, "do-it-all," large converter; and the smaller, niche-oriented printer.

The PIA study found package printers' largest challenge to be the adoption of "direct-to" technologies and a fully digital workflow—investment dedication to such equipment/processes may determine the longevity of firms in future. For the present, a renewed focus on core competencies, paired with an investigation of under-exploited markets, seems to be a key strategy in weathering the economic downturn.

—Jessica Millward, Associate Editor

Tag and Label: Raring to Grow

New areas of growth and profitability are still very much up for grabs in the tag and label market. "During 2002, the growth of the U.S. label market should outpace the performance of the Gross Domestic Product," says Richard Gasper, president of NorthStar Print Group, a producer of glue-applied, in-mold and pressure-sensitive labels. "While the days of double-digit gains are behind us, we expect to see solid growth in both revenues and profits."

After a flat first quarter, Mike Dowling, president of CL&D Graphics, a converter of prime labels for consumer product companies, is "cautiously optimistic" about the second and third quarters of 2002. "Capital equipment manufacturers are seeing an uptick in activity," he reports, "and more customers are giving the go-ahead for work than even a month ago."

Though prospects for the label converting market remain favorable for the foreseeable future, converters must be realistic about the time it may take for the economy to right itself. Freedonia Group's World Label Study, released in November 2001, forecasts just over 5 percent growth for the U.S. label market through 2005 (in real terms, or sq. m). Pricing is estimated to grow 7 percent during this period. "As far as [label market growth in] 2002 specifically, it depends on the economy, and that's anyone's guess right now," remarks Paul Bailin, senior industry analyst for packaging and security. Bailin notes large converters are likely to continue to turn their focus internationally as growth in the United States continues to be slow.

The pressure-sensitive picture

The largest component of the label converting market, pressure-sensitive labels, continues to fare well. According to the 2001 North American Label Study published by the Tag and Label Manufacturers Institute, pressure-sensitive label revenues are forecast to hit $5.53 billion in 2002, fueled by the deterioration of glue-applied market share and growth in plastic container usage. Seventy-two percent of end-users polled planned no migration away from pressure-sensitive over the next one to three years.

The Freedonia Group study places pressure-sensitive labels' U.S. market share at 54 percent in real terms, a presence that is projected to grow to 59 percent by 2005. "Pressure-sensitive labels have gained some market share back from in-mold labels due to pricing issues," adds Bailin.

Bill Klein, executive director of the Packaging and Label Gravure Association and author of They Built an Industry, emphasizes several technologies—namely heat transfer, in-mold, and shrink tube labels—are poised to apply a little competitive pressure to pressure-sensitive. "Shrink tubes are a key area to watch," he elaborates. "Many used to be pressure-sensitive labels, wet glue-applied labels, or lithograph containers." The shrink tube's appeal, he notes, lies in its ability to provide 360° coverage, offering a "whole package concept" encompassing graphics, information, and promotional material.

Nailing down niches

Niche know-how will be a major determinant in which label converters pull in the most profits this year. "Our end markets drive us," says Dowling. "Depending on the niche, narrow-web converters could be doing well, or could be hurting."

The best opportunities to "do well," according to TLMI's study, likely lie in the food, beverage, and security sectors. The security market is forecast to grow 14 percent to 15 percent by 2005.

Bailin recommends going after less mature niches (such as security applications), as well as healthy mature markets going through an opportunistic transition, such as the current progression to full-bodied labels occuring in the beverage market.

More and more label converters are pursuing new niches by integrating new technologies into their operations, namely digital presses and combination presses, Bailin reports. There are currently more than 100 digital label press installations in North America. Combination press installations are strongest in small- to medium-size converters. Larger companies are more likely to focus on core competencies, he explains.

These days, any expansion must be a well-calculated initiative. "Narrow-web converters are diversifying, but there's a difference between what's possible and what's practical," says Dowling. "Converters are more likely to dedicate a press to a specialty than split it three ways over labels, flexible packaging, and cartons. The more likely scenario is one niche or a handful of niches exploited efficiently."

Exploring labels' "softer side"

While contending with this year's challenging business climate, converters shouldn't overlook problem-solving resources outside their operation. Dowling, who is currently president of TLMI, emphasizes the importance of "the soft side of the business," e.g., association meetings and trade shows. He points out that knowledge gained from networking, attending events, and mining associations' informational resources can build value for converters' services, lead to better dialogue with customers, and ultimately, generate more sales.

Another source for gathering new narrow-web solutions will be Labelexpo Americas 2002, scheduled for September 10-12, which will feature a number of new exhibitors. Debuting on the floor will be press manufacturer Paper Converting Machine Company, which acquired Webtron in 2001; offset ink manufacturer Alden & Ott, which recently launched a new flexo ink division; and ETI Converting, a manufacturer of equipment for producing custom-made label stock. An expanded roster of prepress manufacturers, such as Kodak Polychrome Graphics, will also exhibit.

Labelexpo's seminar program will focus on identifying emerging technologies, and examine eight major label end-use markets. "This is an industry of forward-thinking individuals who, as they consider new directions for their business, are facing new issues in accountability, responsibility, and the learning curve," comments Stephen Krogulski, senior vice president and show director.

Planning for profits

The profitability picture for 2002 might be a little fuzzy, but it's clear label converters can't afford to be complacent about their products or services.

"Production is no longer a routine," says Klein. "Just putting ink on paper is not enough. And, a label is not just a label. It's a package, a logistics tool. Up and coming converters are those who see themselves as multi-task capable. Multi-task printers will not only survive, they will grow."

"Label producers must make a wider range of products and be a specialist at every one of them ... at a cost that is comparable to other vendors," comments Tom Pagel, president of Nashua Corp.'s Label Products Division. Over the past several years, Nashua has addressed this challenge by making significant investments in UV printing technology and prepress capability. "For 2002, we will continue to invest in these areas and focus on delivering the best possible plates to the printing press," Pagel adds.

At stock and custom cut-sheet label producer Pinnacle Label, the next 12 months will bring "substantial investments in testing and qualifying new manufacturing components," reports President W. Ches Cochran. Another area of focus will be new technology for online order capabilities, to streamline JIT delivery systems.

Implementing these and other operational efficiencies to offset increased costs of health care, labor, and production will continue to be a major industry objective, believes Gasper. But every investment, whether intended to boost efficiency or build specialized capabilities, must be an educated one. Gasper emphasizes building value and profit margins requires label converters to understand the dynamics of their customer's industry and markets as well as their own.

—Susan Friedman, Editor

For more information: Freedonia Group's World Label Study/(440) 684-9600

TLMI's 2001 North American Label Study/(800)-533-8564

Flexible Packaging: Say Goodbye to Shortcuts

THERE IS NO longer a short path to profitability, even in the flexible packaging market, pegged as the brightest spot on the package print industry horizon. While growth opportunities still abound in the flexible arena, the more obvious share-grabs from rigid packaging have already been made.

"Two years ago, growth could be found easily by just adding capacity," observes Huston Keith, principal at rigid and flexible packaging consultancy firm Keymark Associates. "Now, more market research will be needed prior to spending millions of dollars for expansion."

Optimism in economics

Flexible packaging bests most other printing segments in growth predictions. The Freedonia Group's study, "World Converted Flexible Packaging," charts the industry as advancing 4.6 percent per year through 2005, with total shipments reaching 14.3 million metric tons.

Emerging markets, such as Asia, Latin America, and Eastern Europe will provide the most opportunity for accretion; developing nations will comprise 40 percent of the total market by 2005. In comparatively mature markets like North America, Western Europe, and Japan, flexibles will expand their presence through innovations in stand-up pouches and enhanced barrier packaging.

For U.S.- and Canada-based printers/converters, the flexible packaging market is not likely to veer too far from the direction of the general North American economy. Consultant George Gaffey, with Kline & Company, qualifies: "Some segments of flexible packaging will always remain intact." The best example, he states, is the food industry—it is considered noncyclical and is therefore minimally affected by the economy.

Earnings results for industry leaders have been mixed, but optimistic. Bemis determined its net sales of $437 million were down 1.6 percent from 2000, but operating profit as a percentage of net sales jumped from 14.2 percent in 2000 to 15.8 percent for last year. Pliant reaped the benefits of a 12 percent increase in sales volume in the third quarter of 2001. Net sales for that quarter therefore hit $220.4 million, a 4.5 percent increase over the previous year. Pactiv's fourth-quarter earnings were down 6 percent, while Sealed Air Corporation saw its food packaging segment's net sales increase 5 percent in the 2001 year.

Function and form

End-use applications with the most potential for flexible packaging in the near future are markets the industry has already cultivated: fresh produce, drugs, medical/surgical, pet food, and snacks.

Gaffey attests PE blends and combinations have been used extensively in the fresh produce arena for the past five years. With more than 50 percent of the fresh produce market employing flexible packaging, the segment is approaching saturation, he states.

The drug and medical/surgical markets promise growth, but Gaffey admits it is difficult to project precisely where that growth will evolve. Currently, the most talked-about development is blister packaging.

Pet foods benefit from heavy conversion potential; currently, cans dominate the arena but are slowly being replaced by flexible packaging. To fully exploit the pet food business opportunity, Gaffey insists retort pouchstock prices must come down.

Finally, the snack food market is characterized by competitive pricing, many converters, and significant regional differences. "Growth appears to be limited by modest product innovation and cost considerations," maintains Gaffey.

Design/construction features likely to make big waves in the flexible packaging pool include oxygen absorbers, retort pouches, and food safety enhancements like antimicrobials.

In sectors such as processed meat, prepared foods, premium bakery products, and some pharmaceuticals, the demand for oxygen absorbers to extend shelf life of particularly oxygen-sensitive products is on its way up. Keith reports usage is currently at an annual growth rate of 19 percent.

Retort pouches have found an expanding niche in pet food and tuna packaging applications, Keith notes, and will most likely make future strides in prepared meals and baby foods.

The increased awareness of consumers regarding E. coli, salmonella, and listeria infection has encouraged the development of antimicrobial-fortified flexible packaging materials. These materials are currently in test phases, but, as Keith points out, recent anthrax scares may heighten the anxiety regarding toxins in foods and drugs, and, in turn, spur the rapid establishment of antimicrobials in future flexible consumer packaging.

Consolidation consequences

While the flexible packaging industry is still a relatively diverse marketplace, continuing M&A activity has forced many small and mid-sized converters to redefine their business agendas. Overall, as Gaffey asserts, the market is fragmented, with none of the largest companies accounting for more than 10 percent of total share. "The five largest film and flexible packaging makers control only 25 percent of the market, while 80 of the 100 largest fall between $5 million and $100 million in sales," he says.

Recent merger and acquisition activity has birthed both expanded-capacity companies, and more fully integrated printer/converters. Pechiney Plastic Packaging will extend its reach into the medical packaging market with its planned purchase of Phoenix Health Care Products. Late last year, Lithotype Company purchased Eclipse Packaging and rechristened it the Lithografix Company. Pliant Corporation acquired assets of film manufacturer Uniplast Holdings in summer of 2001, while Bemis completed its acquisition of Duralam in September of last year.

Consolidation within the industry is on an upward swing. For those involved in such transactions, Gaffey warns, "the only drawback may be the slowing of [the converter's] ability to react to market trends."

That drawback may be the key element to smaller converters' success strategies. "Small converters especially need to emphasize their agility and responsiveness to meet changing customer needs, and when they develop new opportunities, they need to guard them with proprietary processes and close customer relationships," Keith recommends.

—Jessica Millward, Associate Editor

For more information:

Freedonia Group's World Converted Flexible Packaging study, call (440) 684-9600

Keymark Associates, call (770) 579-5979

Kline & Company, call (973) 435-6262

Folding Cartons: No Cutting Corners This Year

AS MOST FOLDING carton converters will tell you, 2001 was a tough year. Many smaller companies pulled through by reducing inventories and holding off on purchasing, while others worked to improve their offerings and customer service, hoping to find profit behind the "survival of the fittest" theory. "Over the last few weeks, printers have had a much more hopeful tone," says Ben Markens, president of the consulting firm Converter's Resource. "January got off to a slow start, but sales leads seem to be increasing. One of my clients even used the word 'good' to describe February's outlook."

According to a study completed by the National Paperbox Association (NPA), folding carton sales were down 5.66 percent for the calendar year of 2001 (as compared to 2000). January was the only month to see financial gains (sales rose from $44.9 million in 2000 to $46.6 million in 2001). With a few exceptions, the year seemed to run its normal course. The problem came when the typically slow months cashed in much slower than normal—November was down by 12.57 percent and December was down by 8.76 percent.

Credit will be key to improving the numbers in 2002. Markens elaborates: "If you don't take some risk in credit, then you won't sell—especially in this economy. Right now, it's a tight rope between letting people have enough credit to make purchases, but not so much that if their own business doesn't do well they end up stiffing you for more than you can handle. Just be mindful of credit inventory," he says.

Ward McLaughlin, president of folding carton converting company Boutwell, Owens & Co., believes printers need to be in tune with technology's next step, while leading customers in a way that helps them minimize costs both today and in the future. "It is the printer's responsibility to give input to prevent printing problems and maximize results, without compromising its customer's goals," McLaughlin says. "We must be involved in not just the printing aspect of our customer's business, but also in design and manufacturing—they need to be part of the team,˝ he says.

Supporting customers with vendor-managed inventory, structure designs, artistic design, and input in working with the manufacturing process are a few of McLaughlin's ideas for cementing the printer/customer relationship.

Falling numbers: A bad thing?

The American Forest & Paper Association's (AF&PA) 42nd Annual Survey says total paper and paperboard capacity declined 1.3 percent in 2001. It also quotes production of folding carton grades as falling 3.8 percent during the first seven months of 2001 (compared to 2000), reporting the first decline ever recorded in aggregate domestic capacity. According to the survey, total folding boxboard capacity (including recycled, bleached, and unbleached) will show only modest changes during the survey period. In particular, folding boxboard capacity is estimated to have decreased by 0.9 percent in 2001; it is expected to rise just 0.2 percent in 2002, 0.1 percent in 2003, and then hold steady in 2004. What does this mean for folding carton converters?

During slow years, decreased capacity is O.K. for this industry, says Marken. Companies are reducing their inventories, and as long as the numbers begin to improve at the same rate as the pipeline starts to empty, things should stay on track. Victor Pupo, president of Wright Brother Paper Box (Hialeah, Fla., facility), agrees.

Pupo explains other challenges lie in the ever-changing market conditions. "We are working very closely with our suppliers to secure prices that will not change in the middle of long term contracts. The suppliers seem to understand our needs, and they are helping."

Major mergers (such as Westvaco-Mead and Weyerhaeuser-Willamette) will hopefully take some of the capacity off the line, which can only be good for the small converter. However, the industry is already beginning to see the effects on the bigger players will depend strictly on how each individual company balances its finances.

•Graphic Packaging is tackling the slow year by closing down a plant and focusing on lowering costs and improving operating efficiency. It has also plans to refinance debts.

•After experiencing success in combining its label and carton businesses, Smurfit-Stone announced plans to combine its Consumer Packaging and Specialty Packaging businesses into a single organization, the Consumer Packaging Division. They are also discontinuing operations at a Mississippi corrugated plant.

•In late 2001, Chesapeake Corporation agreed to sell senior subordinated notes once used to repay outstanding debt. Chesapeake also announced a restructuring plan, which included the realignment of senior management to reflect its global focus.

Sunnier skies in 2002

The demand for food containers in the US is expected to grow more than 3 percent annually to $12.6 billion in 2005, says The Freedonia Group's January 2002, study, "Food Containers." It continues: "Paperboard will remain dominant in many traditional applications due to its strength, stiffness, competitive pricing structure, and favorable environmental profile. Improved graphics and stronger moisture barriers will also aid growth." Although faster growth is expected for aseptic and gabletop cartons, the study predicts folding cartons to provide the best opportunity.

The Flexographic Technical Association (FTA) sees the folding carton sector as a tremendous opportunity for the flexo process. "At present, less than one-quarter of all [folding carton] output is printed flexographically and 125 plants produce the materials," says FTA's 2002 Business Forecast. "Still, the sector represents 19.3 percent of flexographic printing revenues, with 2002 business expected to translate to $16.5 billion."

—Kate Tomlinson, Assistant Editor