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STRATEGIC PLANNING FOR THE INDEPENDENT CONVERTER
WHAT KEY TRENDS SHOULD YOU BE WATCHING
WHAT ACTIONS SHOULD YOU BE CONSIDERING BOTH IN
THE SHORT TERM AND LONG TERM
INITIAL THOUGHTS
• THERE IS NO PAPER SHORTAGE IN NORTH AMERICA
• PEOPLE SHORTAGES ARE A MUCH BIGGER PROBLEM
• SPEED KILLS
• A RECESSION IN THE NEXT FEW YEARS IS MORE LIKELY THAN NOT
• INNOVATION IN THOUGHT AND PROCESS IS AS IMPORTANT AS TECHNOLOGICAL
ADVANCES IN EQUIPMENT
• MILL PROFITS ARE AT HISTORICALLY HIGH LEVELS – ESPECIALLY WITH OCC DOWN
• CONSOLIDATION WILL LIKELY CONTINUE AT ALL LEVELS, BUT WHO’S LEFT?
ECONOMIC FORCES AT PLAY
• (STILL) HISTORICALLY LOW INTEREST RATES
• AN (ALMOST) UNPRECEDENTED EXPANSION
• MAJOR TAX CUTS FOR BUSINESS (AND MAJOR DEFICITS FOR THE ECONOMY)
• A VERY STRONG DOLLAR
• RECORD STOCK MARKET HIGHS
• A VERY TIGHT LABOR MARKET
INDUSTRY SWOT (INDEPENDENT SECTOR)
• Strengths
• No acceptable alternative for paper based packaging (yet)
• Relatively inexpensive, highly recyclable, lot’s of innovation and technological advances
• Weaknesses
• Slow growth
• Rapidly rising costs
• Increasingly high cost of capital investment
• Not as attractive to potential employees as other possibilities
INDUSTRY SWOT (INDEPENDENT SECTOR)
• Opportunities
• Continue to out service the customers of large paper based companies
• Provide lower cost innovative alternatives with high performance recycled paper and innovative
board combinations
• Threats
• Continued price increases cause customers to look harder for alternatives
• Integrated companies actually figure out how to service customers with needs for smaller orders
with there new fast set up high speed equipment
CONTAINERBOARD MARKET SHARE 1980’S
CONTAINERBOARD MARKET SHARE TODAY
INTERNATIONAL PAPER 32%
WEST ROCK 23%
GEORGIA PACIFIC 11%
PCA 10%
CASCADE 4%
PRATT 4%
ALL OTHERS 16%
100%
PARTIAL LIST OF INDUSTRY CONSLIDATION
St. Regis Paper Continental Can Company Owens Illinois Container Corporation of America Pineville Kraft Hoerner Packaging Champion Packaging Crown Zellerbach Great Northern Nekoosa Manville Forest Products Bathhurst Packaging Southwest Forest Industries Mead Macon Kraft Canadian International Paper (CIP) St. Joe Paper Love Box Insterstate Resources Orange County Container
Chesapeake Bell Packaging Corp. Weston - Wabash Stone Container Willamette Gaylord Champion Paper St. Laurent Packaging MacMillan Bloedel Alton Corrugated Midland Container Box USA Westvaco Great Southern Paper Union Camp Linpac Weyerhaeuser Mead Westvaco Bates Container
CONTAINERBOARD SUPPLY AND DEMAND
• IN 1980 NORTH AMERICA HAD 40% OF THE WORLDS CONTAINERBOARD CAPACITY
• ALMOST ALL OF THIS MILLS ARE STILL IN OPERATION
• EQUILIBIUM IS ONLY ACHIEVABLE WITH LARGE EXPORTS
• OVER 6,000,000 TONS PER YEAR ARE CIRRENTLY BEING EXPORTED AND IN EXPECTED TO TREND
TOWARDS 7,000,000 TONS IN THE NEAR FUTURE
• EXPORT LEVELS WERE CLOSER TO 4,000,000 TONS PER YEAR IN 2010
• THERE ARE MAJOR MILL PROJECTS UNDERWAY IN MOST OF OUR CURENT EXPORT MARKETS
• THERE ARE MAJOR MILL PROJECTS UNDERWAY IN NORTH AMERICA
• DEMAND HAS BEEN GROWING FAIRLY SLOWLY IN NORTH AMERICA
BASIC M & A ECONOMICS
• MILL EBITDA BASED UPON TODAYS ECONOMICS (SALES PRICE, OCC COST, PULP
COST, ENERGY COSTS, ETC.) CAN BE ANYWHERE FROM $250 TO $400 PER TON,
WITH AN AVERAGE SOMEWHERE IN THE LOW $300’S.
• EXPORT TONNAGE IN GENERAL, DUE TO FREIGHT AND COMPETETIVE FORCES
ARE LESS PROFITABLE THAN TONNAGE CONSUMED HERE
• THEREFORE A MILL THAT CAN PRODUCE 400,000 TONS PER YEAR CAN
GENERATE IN EXCESS OF $120,000,000 IN CASH FLOW.
BASIC M & A ECONOMICS
• AN ACQUISITION PRICE THAT IS BASED UPON 5 X EBITDA WILL TAKE MORE
THAN 5 YEARS TO PAY FOR ITSELF
• THEREFORE, NO ONE WOULD MAKE SUCH A DEAL UNLESS:
• THE ACQUISITION FULFILLS A STRATEGIC NEED
• THERE ARE TREMENDOUS SYNERGIES ASSOCIATED WITH THE DEAL
• VERTICAL (OR HORIZONTAL) INTEGRATION PROFITS CAN BE ADDED
• CONVERTING EBITDA PLUS MILL EBITDA
• THE MULTIPLE IS FAR LOWER THAN THE MULTIPLE THAT THE PUBLIC COMPANY MAKING
THE ACUISITION IS TRADING FOR
BASIC M & A ECONOMICS
• No one will buy a company that doesn’t have management in place
• If your company needs new long term assets a potential acquirer will discount the price based
upon the perceived required investment (unless it is a shut down)
• No one wants to buy a plant that needs fixing
• Non-compete and/or non-disclosure agreements with anyone who controls or interacts with
customers are essential
• To get top dollar sheet plants need to be able to unlock the value of their tonnage
• Independent sheet buyer with sheet buying clout and alternatives
• Member of a sheet feeder with a reasonably short requirements contracts
CURRENT AND FUTURE TRENDS IN M&A FOR THE INDEPENDENT CONVERTER
• NEW AND FAIRLY NEW ENTREES INTO THE U.S.
• SMURFIT KAPPA
• D.S SMITH
• POSSIBLE NEW INVESTMENTS IN THE U.S.
• SUN PAPER
• NINE DRAGONS
• SEICA
• NEW CONTAINERBOARD INITIATIVES
• ATLANTIC
• KRUGER
• PRATT
• HOOD
• GREEN BAY
• PCA
• CASCADES
M & A ALTERNATIVES
• GREENFIELD OPERATIONS
• Advantages
• Much lower price of entry
• Much larger tax Deductions if structured properly
• No bad culture or other entrenched issues to overcome
• Generally less costly up front
• Your equipment and plant set up choices and your systems
• Disadvantages
• No sales
• Tough to find good people today
• Training issues
• Must fund losses until you become profitable
CORRUGATED EQUIPMENT 1980 - 2018
150% CORRUGATING INCREASE
800% CONVERTING INCREASE
Klingher Nadler LLP
15
3 SHIFT
WIDTH SPEED OUTPUT
1980's CORRUGATOR87" 400/MIN 85000 MSF/MONTH
2015 CORRUGATOR 110" 1000/MIN 210,000 MSF/MONTH
SET UP PCS/HR
1980's CONVERTING 30 MIN 5000/HR 1,260,000 PIECES/MONTH
2015 CONVERTING 5 MIN 20000/HR 9,240,000 PIECES/MONTH
NEW TECHNOLOGIES AND TECHNOLOGICAL ADVANCEMENTS
• The 2 minute set up flexo that runs 20,000 plus pieces per hour fully installed, depending on
the configuration (pre-feeder, stacker, robotic take off, palletizing, conveyor) will cost between
$3,000,000 and $5,000,000
• Brand new stat of the art digital printer will cost between $4,000,000 and $6,000,000
• Wide with fast corrugators will cost between $8,000,000 and $12,000,000
• Rotary die cutters with inside and outside printing capabilities will cost between $2,500,000
and $4,000,000.
• The industry has an alarming long term trend of “commoditizing” innovation
• At the end of the day speed is what sticks and throughput is what pays the bills
NEW METRICS AND OPERATIONAL PLANS
• Focus on machine hours
• Focus on uptime
• Focus on throughput
• Focus on time at all levels of the operation
• But …
• make sure you take care of the customers needs
• Make sure you charge for doing so!
• Keep your measurements simple and consistent and share them with your people
• An order is only a good order if the variable profit per machine hour is within acceptable levels of if it has other intangible
value
• Older equipment may take 5 times as much time to generate the same contribution as newer equipment. At the end of the day,
this is such a competitive advantage that the cost of the equipment (almost) doesn’t mater.
• Don’t load your estimating system down with more cost, focus on the opportunity that enhanced converting speeds bring
THE CURRENT MARKET FOR PEOPLE
• Current unemployment rate 3.9% - considered to be “almost” full employment by the
experts (considered to be between 4.1% and 4.7% unemployment)
• 327,000 manufacturing jobs have been added in 2018 through July
• The following chart shows employment and unemployment trends since 2008
MINIMUM WAGE
• Established by the Fair Labor Standards Act of 1938 - $.25/hour (about $4 adjusted for
inflation)
• Current Federal minimum wage $7.25
• CA will be $15 by 2022
• MA will be $15 by 2023
• NY will be $12.50 by 2021
• Factory work is hard and not for everyone – the very nature of the work requires a
premium over minimum wage jobs
HOW TO ATTRACT AND KEEP TALENTED PEOPLE
• NEW IDEAS TO DIFFERENTIATE YOURSELF
• STRATEGIES
• MOTHERS
• MILITARY
• RETIRED PEOPLE
• PART TIME AND WORK AT HOME STRATEGIES
• WORKPLACE INNOVATIONS FOR YOUNG PEOPLE
• SOCIAL
• MOBILITY
• TRAINING
• HIGHER COMPENSATION LEVELS
• BETTER BENEFITS
THE ECONOMIC EXPANSION
• Business cycle basics
• Expansion, Peak, Recession, Trough, Recovery
• Average expansion since 1945 has lasted 58 months across 11 cycles
• 1961 – 1969 lasted 106 months
• 1991 to 2001 lasted 120 months
• Current expansion has lasted from June 2009 to September 2018 (111 months)
• Historical causes of recessions
• 1949 – followed a period of monetary tightening by the Federal Reserve
• 1953 – followed a period of monetary tightening by the Federal Reserve
• 1958 - followed a period of monetary tightening by the Federal Reserve
• 1960 – followed a period of the Federal Reserve raising interest rates
• 1973 – Arab Oil Crisis and stock market crash
• 1980 - followed a period of the Federal Reserve raising interest rates
THE ECONOMIC EXPANSION
• Historical causes of recessions (cont.)
• 1990 – Federal Reserve raised rates from 1986 – 1989 + oil price spike + real estate bubble
• 2001 – 9/11 attacks, Dotcom bubble
• 2007 – subprime mortgages and real estate bubble
• What’s going on today
• Federal Reserve is raising interest rates
• Real estate values high
• Stock market at an all time high
• DJIA on 12/31/17 when tax reform passed was 24,834
• Tax reform cut the tax rate for all publicly held companies by 25%
• DJIA today – 25,974 4.5% increase
THE ECONOMIC EXPANSION
• What will happen to public markets when long term sustainable, risk free interest rates
approach 4%
• Currently trending toward 3%
• What will the effect of higher mortgage rates be on the housing market
• The current national debt is approximately 21.5 trillion dollars
• Federal government takes in about 3 trillion dollars and pays out about 4 trillion dollars
• Interest on the debt is approaching 500 billion dollars per year
• What will this be as rates increase
• What is this as a percentage of overall GDP
• The president has declared a trade war
• Plan on a recession in the next few years
FINAL THOUGHTS AND RECOMMENDATIONS
• If you want to stay in the game the time to invest in plant and equipment is now
• Continued low interest rates and fairly easy credit, but this will change
• Favorable tax climate as long as the democrats do not gain control
• Recession drums can be heard in the distance
• To attract and keep good people you need to “up” your game
• Have a plan in place for the next recession
• 2008 – 2009 is the best thing that happened to those that survived
• This may create an opportunity to find displaced talent
• Make sure that your passthrough’s can take advantage of QBI
• Understand the effect of speed and throughput on your markets
• Lightweights are coming – have a plan to corrugate and convert them
• If paper prices keep rising, this will become more and more important
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