Thermoformers maintain steady business but remain cautious

   
That sentiment reflects the optimism that rang in 2012 and the slow path to more pessimistic feelings as the year has worn on toward the elections. However, as many noted, thermoforming didn’t suffer the drastic drop in business that hit the injection molding segment several years ago. That is likely due to the fact that many thin-gauge formers are in packaging, which is produced near the fillers and/or brand owners. Heavy-gauge formers typically make very large parts that would be too expensive to ship from Asia.

Another  driver of the continued steadiness of the thermoforming business is the fact that thermoformers “tend to have a lot more customers than other plastic industry segments,” commented Jeff Mengel in his latest "Report on the Thermoforming Industry." Mengel, a partner with Plante & Moran in that group’s Plastics Industry business unit, noted in his presentation to attendees that heavy-gauge thermoformers do a greater number of runs of smaller quantities of large industrial products. The thin-gauge thermoforming companies do a lot of “custom high-volume business” such as packaging.

While the thermoforming business might be staying steady, that’s not necessarily a good thing. Mengel pointed out that what was troubling about Plante & Moran’s latest survey of the thermoforming industry is that two years of sales growth only averaged 2%. “Sales are not there for the industry as a whole,” Mengel noted, adding that there’s been a consolidation in the industry.

“By and large, the thermoforming industry is a very well-financed industry,” he said. “The Altman Z scores for this group show that a score above 2.9 shows 'good financial wherewithal' and three-fourths of the thermoforming industry responding to Plante & Moran’s survey are above 2.9.

Complexity is the big number in these surveys that Mengel conducts. The number of thermoforming machines, tools, and resins a company has determines the complexity of its business. Complexity is “modest in the lower and median quartiles” of Plante & Moran’s survey. “Then it shoots up in the upper quartile,” Mengel commented. “This increasing number of machines, tools, materials and customers means that you’re scheduling all of this—that’s complexity and complexity measures stress on your manufacturing environment.”

The survey revealed both the good and the challenging. The inability to find talent is driving very low turnover among employees in the industry—from 63% in 1999 to 9% in the most recent survey. Machine utilization averages 23% and the average age of the thermoforming equipment being used is 14 years old as many companies are sitting on older assets and semi-retired equipment. “In a contracting market, utilization does not drive increased profitability,” Mengel stated. “If you’re not improving on an annual basis, you heading toward the brink.”

Commenting on the packaging side of the thermoforming industry, Mengel said that it is more “cut-throat” than the industrial side, and has lower margins with the dollar value to labor ratio declining. “The packaging market wasn’t hurt as much as the industrial side,” he noted, adding that the thin-gauge operations had “good balance sheets overall” with less complexity. However, 40% of the sales of the respondents in the packaging market had less than 10% margins. “There a lot of pressures in the packaging market,” Mengel said.
   
The industrial thermoforming operations (heavy-gauge) have a lot more complexity with a greater number of customers. While sales per customer are lower, the industrial thermoformers have better earnings per unit. “The bad news is,” Mengel stated, “you’re smaller, have less sales, and tended to have depressed growth. After a brief increase, you went flat. Sales were lower in the industrial thermoforming segment, but profits tended to be higher, with 65% in value add because of the additional secondary services offered.”