Future Opportunities in Paper Based Packaging Markets Prepared for 2011 ICE Conference By Frank Perkowski Business Development Advisory April 7, 2011
Why Paper Based Packaging Materials Warrant a Second Look Sustainability focus has changed the game Historic share losses to film have stabilized paper demand at a base level Improved paper supply chain dynamics Paper process / product improvements have opened the door to new markets Raw material costs reflect improved value proposition versus film and other materials Predictions by some for continued high growth for plastic materials questionable. 2
Presentation Outline Paper Industry Overview Paper Packaging Markets and Grades Growth Opportunities and Challenges in Paperboard Packaging Markets Growth Opportunities and Challenges in LWT Paper Packaging Markets Paper Converter Opportunities and Implications 3
Paper Industry Overview US paper industry is mature with overall volume flat to declining in certain segments Industry returns have fallen short of its cost of capital in 16 of the past 20 years US Industry has undergone significant consolidation and mill rationalizations in the past 15 years Industry investment has shifted dramatically to lower cost developing countries US global competitiveness has declined, assets are aging, and current investment levels are well below depreciation levels. 4
Paper Industry Overview - Continued US decline being driven by electronic substitution in printing / publishing markets, plastic substitution in some packaging markets, and a shift to lower cost production facilities in Asia and Latin America Recessionary periods driving use of lower cost substitutes New growth opportunities emerging in energy (bio refineries and renewable energy), globalization, sustainability, new fibers, value added papers. New business models emerging: Global focus within selected markets More consolidated supply base with market leverage Bankruptcy followed by leaner organizations Increased focus on outsourced operations Forward integration into converting / related businesses 5
Paper Based Packaging Overview 6
Paper Based Packaging Industry Overview Paper demand in packaging markets has kept pace with GDP growth overall Shift to overseas manufacturing has been major source of volume loss for paper mills and converters Displacement by plastics in some applications has also resulted in capacity reductions is certain segments Containerboard / corrugated business is still world class despite relatively flat demand Folding cartons and boxboard markets are stable and threats are minimal New growth opportunities exist for lightweight papers. 7
Paper Based Packaging Supply Base Trends Higher concentration levels across every segment has led to higher / more stable price levels and cycles Financial buyers, fewer mills, and historically low returns have led to increased discipline within the industry in recent years No new capacity - many machines being shutdown or re-focused Producers / mills have become more focused on a limited number of grades and markets Commodity grades being increasingly supplied by low cost, pulp integrated mills with large scale paper machines More specialized grades provided by smaller, non integrated mills with broader paper machine capabilities (but much higher costs) Mid level machines continue to be repositioned to compete with smaller machines that eventually get shutdown. 8
Broad Array of Paper Based Packaging Grades and Applications Major Packaging Paper / Board Grades Major Paper Grade Primary Packaging Approx Tons CAGR % Comments Product (millions) (2010-2014) Containerboard (Linerboard / Corrugated boxes 21.5 0.4% Little substitution threat Medium) White Top Linerboard Graphic corrugated 2.2 1.5% Expanded applications Uncoated Recycled Board Cores / tubes / 1.5 0.4% Stable / low value business backing Coated Recycled Board Folding cartons 2.5 0.4% Sustainability is main driver Coated Unbleached Kraft Carrier cartons 2.1 0.7% High strength Bleached Board (SBS) Folding cartons 2.4 0.6% Premium positioning Total Paperboard 32.2 0.5% Label Facestock Labels 0.6 2.1% Still high growth but maturing Release Base / Liner Labels 0.7 2.2% Follows label demand Kraft Papers Multiwall and kraft 1.5-0.8% Still in decline but recovering bags Packaging Papers Product wraps / bags 0.9 1.5% Well positioned in flexible / covers packaging Bristol papers Tags 0.2 1.2% Niche applications Foodservice / Processing Sandwich /food 0.5 1.6% Little substitution threat Papers wraps Total Paper 4.4 1.3% 9
Paper Raw Material Prices Have Lagged Plastic Raw Material Prices 170 Raw Packaging Material Price Trends 160 Plastic resins and materials 150 US Price Index (2001 = 100) 140 130 120 110 Woodpulp Aluminum sheet / plate / foil 100 90 All commodities 80 2001 2002 2003 2004 2005 2006 2007 2008 1 2009 2010 2011 YTD 0
This Has Led To Growing Relative Price Advantage for Paper Packaging Materials 180 170 Finished Packaging Material Price Trends Nondurable manufacturing 160 150 Unsupported plastic film/sheet/other shapes US Price Index (2001 = 100 0) 140 130 120 110 100 Single-web film specialty bags, pouches, and liners All other coated /processed papers Paper boxes and containers 90 80 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1 YTD 1 Packaging and industrial converting paper
Demand Dynamics are Shifting Within Paper Based Packaging Markets Historic shift from paper to film based substrates across paper packaging segments has slowed and in some cases may be going the other way Sustainability movement has increased the overall desirability of paper based packaging materials Paper based cans, bottles, closures, pouches, blisters Growing demand for lightweight materials and more efficient packaging formats that reduce material usage Shelf ready packaging / tray packs Lightweight corrugated and better designs Lighter weight / higher performing paper substrates Disposability still a core consumer requirement Returnable bins for produce has not caught on But reusable grocery sacks / containers increasing slightly 12
Paper Packaging Offers Solutions That Meet Emerging Customer Needs Major Gaps / Unmet Needs More environmentally friendly packaging Security features that reduce counterfeiting Packaging with additional functional benefits Smart / intelligent packaging features Paper Solutions High recycled content, certified paper, exotic fibers, chlorine free, low impact processes, cradle to cradle Watermarks, embedded fibers, laminations, printing solutions Durable substrates, exotic surfaces / finishes, functional coatings, reusability, high impact features Chemical sensors / reactors, embedded chips, battery inserts, nano materials More efficient supply chains Better information systems, increased responsiveness, forward integrated processes, broad-based solutions. 13
Paperboard Packaging Overview 14
Paperboard Packaging Markets Will Undergo Significant Shifts in Future More concentrated supply chains will result in a more healthy, stable supply base In corrugated, volume / demand will be impacted by light weighting initiatives, more efficient packaging designs, retail ready packaging, and increased use of pallet wraps and trays to replace standard corrugated boxes Improved print surfaces and technologies will fuel continued share growth in retail applications In folding cartons, bleached board, recycled board and coated unbleached board will continue to trade business but with no major volume shift overall But some traditional folding carton applications will continue to shift to mini flute corrugated and flexible packaging solutions that better meet performance / sustainability needs. Major growth opportunities exist to displace metal and other rigid containers for sustainability / cost benefits. 15
Recent / Developing Innovations in Paperboard Packaging Materials Retail ready packaging / high graphics Metal can replacement Molded fiber bottles Bag in Box cartons/ glass replacement Laminated / barrier treated cartons Mini flutes / wax replacement 16 Plastic clamshell replacement
Lightweight Packaging Papers Overview 17
LWT Packaging Paper Product Overview 2009 US Packaging Paper Demand by Major Application Category 9% 5% 4% 4% 14% 10% Multiwall bag 11% 13% 17% 13% Release base papers Label papers Product packaging papers -1 ply Kraft bag papers papers Product packaging papers -M ply Industrial wrapping papers Foodservice papers Source: BDA NA Packaging Paper Study Tag packaging papers Food processing papers 18
LWT Packaging Paper Growth Rates Have Varied Significantly By Application Average Annual % Change 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% -7.0% -8.0% -9.0% Multiwall bag papers Historic Growth Rates by Major Application Category Sorted Based on Last Five Year Growth Rate % 1999-2004 2004-2009 Kraft bag papers Tag packaging papers Industrial wrapping papers Food processing papers Product packaging papers -M ply Product packaging papers -1 ply Foodservice papers Release base papers Label papers Total Packaging Papers Significant differences in the paper value proposition, consumer preferences, and substrate alternatives across these applications yield very different growth dynamics and potentials. 19
Packaging Papers Account for About 25% of the US Flexible Packaging Market US Paper Packaging Share of Major Flexible Packaging Materials Billions of Finished Packaging Material Costs 14.0 12.0 46% 45% 43% 50% 45% Billions of Flexible Pa ackaging Costs 10.0 8.0 6.0 4.0 15% 27% 22% 22% 23% 40% 35% 30% 25% 20% 15% 10% 2.0 5% 0.0 Retail Food Instit Food Retail Nonfood Institutional Nonfood Consumer Products Industrial Products Medical / Pharma Composite / Other 2.4 0.2 0.1 0.1 0.3 0.1 0.4 0.0 Film 6.9 1.3 1.2 0.4 1.6 1.7 1.2 1.4 Paper 2.4 1.9 1.2 0.8 1.0 0.7 0.7 0.6 Retail bags Paper % Total 15% 46% 45% 43% 27% 22% 22% 23% 0% 20
Paper Converters Add Different Levels of Value Depending on Application 1,800,000 Paper Material Cost as % of Total Packaging Cost By Major Paper Packaging Paper Segment 90% 2009 Estimated US Packa aging Costs ($000) 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 72% 65% 65% 60% 70% 36% 45% 80% 45% 55% 80% 70% 60% 50% 40% 30% 20% 10% - Grocery/ foodservice bags Multiwall bag Industrial wrapping / interleaving Foodservice wraps / papers Food processing papers Label facestock Release base papers (labels) Paper tags Product packaging papers - Multi ply Product packaging papers - Single ply Other Costs 145,342 207,274 166,027 158,037 62,551 1,064,077 931,162 39,732 562,667 480,042 Paper Material Cost 373,736 384,937 308,336 237,055 145,953 598,544 761,860 158,928 460,364 586,718 Paper % Total 72% 65% 65% 60% 70% 36% 45% 80% 45% 55% 0% 21
About 70% of Packaging Paper Volume is Coated or Laminated in Some Way Lightweight Packaging Papers Most Common Surface Finishing Clay Coated only 17% Laminated / Coated 7% Laminated / Uncoated 3% Uncoated 29% Clay + Barrier Coatings 18% Barrier / Other Coating only 26% BDA 2010 Packaging Paper Study 22
Examples of Recent / Developing Innovations in Packaging Papers New / safer barrier treatments Embedded / printed electronics Windowed packaging / cellophane laminations Folding carton replacement Improved / digital print surfaces New pulp based films Smart / reactive papers & labels 2 3 Paper pouches
Concerns About Plastic s Impact on the Environment Growing 24
What Will it Take to Replace Flexible Films in Packaging? Major Paper Hurdles Better Barrier Protection Clear wraps for product visibility More durable substrates, improved tear / burst strength High gloss / excellent print surface Leverage environmental advantages / benefits Paper Solutions Improved capabilities to add functional coatings on or off line Commercialize cellophane or other cellulose based films Chemical enhancements, coatings, new fibers, laminations, enhanced processes, nano materials Special coatings, surface enhancements, laminations, high impact features Biodegradable, recyclable, compostable, lower energy / water consumption, cradle to cradle. 25
Paper Based Materials Positioned To Gain in Flexible Packaging Markets Paper still remains the preferred material in many applications Historic plastic share growth at the expense of paper has slowed Paper is perceived by most to be a more sustainable material Sustainability weaknesses (energy and water usage) are less apparent and more difficult to demonstrate Major CPG s are seriously considering paper based options to reduce plastic exposure Improved barrier treatments, print surfaces, and environmental profiles for paper relative to film. 26
Final Thoughts and Implications 27
Future Paper Packaging Solutions Will Focus More On Higher Value Offerings Paper Based Packaging Materials - High and Low Growth Segments High Growth Low Growth Barrier treated paper Kraft and multiwall bags "High sustainability" paper substrates Standard weight paper / board substrates Digital print compatible surfaces Standard / commodity grades of paper Wax / PFOA replacement barriers Smart packaging features Security packaging features Lightweight / high strength substrates Laminated substrates Retail ready packaging Graphic corrugated Dual function package designs High performance labels and release liners 28
Prediction: Plastic Packaging will Become Increasingly Vulnerable to Paper Retailer / CPG sustainability initiatives P&G announcement to replace 25% of all petroleum-based packaging materials with "sustainably sourced" renewable by 2020. MacDonald's Corporation just announced its Sustainable Land Management Commitment (SLMC) which requires that, over time, its suppliers will only use agricultural raw materials for the company's food and packaging that originate from sustainably managed land. State bans of plastic grocery sacks, Styrofoam, and other plastic materials. EU pressure to ban all single-use plastic bags across Europe as part of plans to reduce the environmental impact of plastic waste. Italy decision implemented in January, 2011. Market momentum against petroleum based packaging materials - governments, manufacturers, suppliers, retailers, consumers.. 29
But Several Factors Will Reduce Demand for Paper Packaging and Threaten Growth Continued manufacturing outsourcing to overseas locations Historic preference for flexible / clear films in pouches, bags, and wraps (which should continue but growth may slow) Increasing demand for higher barrier and durable materials (film substrates) to protect food and freshness Existing installations of lower cost converting / filling systems for film based packaging materials Increased availability of lighter weight, more durable, PLA based, high impact film based substrates Limited paper industry R&D efforts and associated investments 30
More Integrated Paper Supply Chains Will Develop Implications??? High cost, non integrated specialty paper mills must differentiate themselves and capture more revenue dollars / ton. One way to do this is forward integration Forward integration business model within paper industry has been very successful where implemented: Retail and commercial tissue Corrugated and folding cartons Release liners Opportunity for industry to streamline the supply chain and reduce total costs through forward integration, converter consolidation, strategic supply agreements Backward integration by converters provides opportunity to secure a more reliable / consistent paper supply, reduce total supply chain costs, and exert more control over the product development process 31
Other Implications For Packaging Converters Increased paper price stability, fewer supply options, stronger suppliers, better but higher cost materials Need to regularly review your paper supply strategy and supplier performance / plans to ensure a strong capability fit Important to align yourselves with mills that are well positioned in their markets with sustainable business models Make an effort to develop preferred supplier agreements that commit volumes via long term contracts Consider investment / strategic partnerships which can provide competitive advantages to both parties. 32
Flexible Packaging Converter Next Steps Relative to Paper Identify / leverage paper sustainability benefits to provide added value to customers Pursue strategic partnerships (backward integration?) with paper suppliers to reduce supply chain costs and strengthen your value proposition Identify / focus on paper suppliers that can offer real sustainability benefits / solutions (e.g., high recycled content, FSC / SFI certified pulp, chain of custody, renewable energy sources, sustainable chemicals, waste collection systems, etc) Pursue closed loop, collection, process, and material changes within your operation that reduce packaging waste. 33
Who is BDA? Growth development consulting firm focused on paper and packaging markets Based in Marietta, GA Contact: Frank Perkowski frank@bd-advisory.com www.bd-advisory.com 770-643-0981 34