A major shift took place among packaging companies that attended Pack Expo 2019 versus those that attended in 2018: Sustainability moved “head and shoulders” above all other topics. That analysis comes from CIBC World Markets, a Toronto-based investment banking subsidiary of the Canadian Imperial Bank of Commerce. Competition, labor availability, capital, M&A, resin pricing and even the economic outlook were all subordinate to sustainability, reported CIBC.
“Sustainability will also play a significant role in the consolidation of the highly fragmented packaging industry: Smaller companies without sufficient scale and financial resources to invest in product development and marketing may look to join larger packaging outfits or risk being left behind,” said the report.
Takeaways from a packaging M&A conference in Chicago, hosted by AWA Alexander Watson Associates, also cited sustainability as becoming a "table-stakes" issue, according to CIBC. “Sustainability is now the most important topic throughout the packaging value chain, reaching from the materials supplier to the converter to brand-owner customer through to the end-use customer,” said CIBC. It’s also a hot topic in every packaging company boardroom.
While single-use plastic (SUP) packaging is taking hits from all quarters, it is not under immediate threat of being completely obliterated. “We won’t dispute that single-use plastics do not constitute a growth market. However, intelligent plastic packaging will continue to have its place,” said CIBC. “Compared to other packaging materials, plastic offers superior product protection/safety, [a better] life-cycle carbon footprint (including transportability because of smaller size and lighter weight) and consumer convenience.”
That said, it doesn’t mean that SUPs won’t have sustainability challenges, including technical issues related to product safety and health considerations; substitute and competing technologies; the higher cost associated with sustainable packaging initiatives; and changing consumer behaviors, including a shift in mindset to one that is more driven by data and economic viability, said the report.
Sustainability will also impact M&A activity. “Simply put, we see the required investment in R&D and manufacturing equipment as a factor that will incentivize smaller companies to sell,” said CIBC. “From the buyer’s perspective, a target’s sustainability positioning will materially influence valuation.”
In the short term, the impact on valuations may not be great as the economy continues to chug along and capital, both private and public, remains available, explained CIBC. “However, a deteriorating macro picture should eventually cause packaging company valuations to recede from the current 8 to 11X EV/EBITDA multiple range,” noted CIBC. It suspects that the balance between buyers (based on capital availability, motivation to deploy and risk appetite) vs. sellers (competitive positioning, company size and ability to finance sustainability measures) will be skewed in the buyer's favor. The combined macro/sustainability outlook suggests packaging companies will need greater scale and financial resources in order to compete.”
Some sustainability perspectives were offered on CIBC’s names under coverage.
CCL Industries’ efforts as a label converter “are largely process-focused” that will reduce its carbon footprint in product transportation, reducing production waste and increasing the use of recyclable materials. Because CCL, like most label converters, must meet the demands of customers in terms of technical requirements and materials specs, the function of the label within the packaging structure is “primarily decorative, informative and regulatory.” Additionally, CCL “is limited in its ability to determine or influence the sustainability level of its products.”
As a member of the Sustainable Packaging Coalition, Winpak has demonstrated its commitment to sustainability, noted CIBC. Some of its initiatives include the advancement of multi-layer flexible packaging, reducing packaging materials, using renewable sources of feedstock, evaluating use of bio-based thermoplastics and using more recycled content in products. However, “one of the main challenges in increasing the use of post-consumer recycled content in packaging is meeting the required client specification and approval for food contact.” Winpak estimates that approximately 40% of its rigid packaging is recyclable.
“We see CCL and Winpak as best positioned on key success criteria,” CIBC commented. “We give Winpak the nod on sustainability strategy and relative financial strength (it has almost $400 million net cash position). That said, CCL has the undisputed label leadership, global reach and financial wherewithal to execute on necessary sustainability initiatives.”
IPL Plastics has taken what CIBC calls “an active approach to sustainability, starting with reduced materials product design” and engaging EY Consulting for guidance on best practices and aligning “its sustainability strategy to U.N. Sustainable Development Goals.” About 50% of its products currently contribute to the circular economy: Its products are all single-resin, made from recyclable polypropylene and polyethylene. The company recycles all its production waste, and products contain up to 100% recycled plastics. It also has a “take back” program from customers for resin recycling.
“We view IPL Plastics as having a sound sustainability platform and some good products, giving it the potential to come out a winner, provided it continues to grow margins and produce free cash flow,” stated CIBC’s report. “The need to de-lever from the current 3.5X level could keep IPL Plastics from realizing on good acquisition opportunities in the short to medium term.”
Intertape Polymer’s sustainability efforts have focused on resource efficiency, tailored solutions and product innovation, said CIBC, noting that its management highlighted “reducing non-renewable waste streams and increasing the recyclability of product offerings.” The company uses both paper and plastic in its products, giving it “material flexibility” and “sensitivity to public perception” on both of those materials. Its goals are focused on recyclability, composting and packaging reduction.
“Intertape Polymer has scale in the tape business and good free cash flow; however, we view ITP as challenged on product differentiation and balance sheet strength (3.5X current leverage). We remain cautious on its ability to execute on an ambitious, M&A-assisted growth and margin-improvement strategy given its leverage.”
CIBC concluded that “sustainability will separate winners from losers and accelerate M&A, particularly when the economy stalls. We see scale, product differentiation, free cash flow stability, customer relationships and balance sheet strength as the crucial underpinnings to support existential sustainability initiatives and realize acquisition opportunities.”
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