The majority of public packaging companies turned in respectable 2014 financial reports, in a year that was punctuated by two large merger announcements in the fourth quarter that will remake future industry share rankings.
While last year’s story of revenue and earnings was mostly positive and margins in some sectors are at multiyear highs, the industry faces some key issues going into 2015.
Among them are tepid volumes in developed markets/countries and slowing volumes in emerging markets; and currency headwinds due to a stronger dollar. Another worry for companies with food and beverage customers is that U.S. packaged food industry growth has been relatively flat, as consumers are opting more healthy or fresh alternatives over processed and frozen foods. Some packagers have had success by partially offsetting increased costs with price increases. Plus a sharp drop in energy prices should benefit most companies in terms of lower transportation and resin costs.
“Some companies have become more consistent operators. Others represent compelling turn-around stories. Most are generating strong cash flow,” wrote BMO Capital Markets analyst Mark Wilde in a research note March 15.
However, a handful of companies have posted less than 5% earnings growth over the last five years including AEP Industries Inc. (NASDAQ: AEPI), Graphic Packaging Holding Co. (NYSE: ), Greif Inc. (NYSE: GEF), MeadWestvaco Corp. (NYSE: MWV), Myers Industries Inc. (NYSE: MYE), Owens-Illinois Inc. (NYSE: OI), and Sealed Air Corp. (NYSE: SEE).
Among some of the stars of this last earnings season were Bemis Co.(NYSE: BMS), Crown Holdings Inc. (NYSE: CCK), AptarGroup Inc. (NYSE: ATR), Silgan Holdings Inc. (NASDAQ: SLGN), and RockTenn Co. (NYSE: RKT).
Here’s a snapshot of some notable full-year results that are detailed on the accompanying chart.
Aptar posted record earnings of $2.85/share, up 6.7% from $2.67/share in 2013. Strong performance in the pharmaceutical segment aided results. However, food and beverage performance was lackluster.
Morningstar analyst Todd Wenning wrote that he expects to see slight improvements in the beauty and home and food and beverage segments this year “as a result of rising U.S. consumer sentiment, partially offset by adverse currency effects and volatile resin prices.” He also wrote that “there is strong possibility” that Aptar could acquire MeadWestvaco’s plastic packaging operations once it merges with RockTenn. “We believe this would be a good strategic fit, given the overlap of the companies’ portfolios.”
On Feb. 19, Ball Corp. (NYSE: BLL) announced the much anticipated acquisition of Rexam PLC for $8.4bn. The transaction would further consolidate the global beverage can market. In North America, Europe, and Brazil, Ball and Rexam would have a combined market share of 60%, 69%, and 74%, respectively.
If regulatory approvals are received, Ball is pointing to a first-half 2016 closing. But what potential divestitures might be required is a big unknown. Ball has the right to terminate the transaction should divestitures exceed about 25% of 2015 revenue. Ball is pointing to a first-half 2016 closing after regulatory approvals are received.
For full-year 2014, the company reported net earnings of $470.0mn, including after-tax charges of $82.8mn or $0.58/share for consolidation, debt refinancing and other costs, resulting in $3.30/share on sales of $8.57bn. That compared with profit of $406.8mn, or $2.73/share on sales of $8.5bn in 2013.
Bemis is a top pick for Wilde at BMO, who noted that, “With new leadership, we are optimistic about conditions for a turnaround in margins and cash flow. We also see a more energetic approach to balance sheet management.”
For 2015, Bemis expects diluted earnings per share to be $2.52-$2.67, reflecting growth of 10%-16%. Revenue is projected to reach $5.8bn by 2019, from $4.3bn in 2014, assuming constant currency, and is anticipated to be equally balanced between organic and inorganic growth.
For the full-year 2014, Bemis reported adjusted diluted earnings per share from continuing operations rose 10.0% to $2.30. Excluding the impact of currency translation, acquisitions, and divestitures, sales rose 2.1%.
In the fourth quarter, Bemis sold its pressure-sensitive materials (MACtac) business for $170mn (resulting in a $44.7mn charge), and in April it sold its paper packaging division to Hood Packaging Corp. Analysts at Zacks wrote March 15 that, “These divestments will allow the company to focus on strategic opportunities in high-barrier flexible packaging, medical and pharmaceutical packaging businesses, as well as in emerging markets.” The company also closed nine plants, as part of a cost reduction program.
Berry Plastics Group Inc. (NYSE: BERY) had a mixed performance in the fourth quarter but saw increased revenue and profit for the year. The company is likely to benefit from falling resin prices. While there was some softness in the rigid segments, “flexible packaging and engineered materials continue to improve,” wrote Wilde.
Investors like Berry Plastics because of the upside potential with its Versalitecups (that are a replacement for Styrofoam) and growth opportunities from M&A and international expansion.
In a call with analysts following the earnings release, CEO Jon Rich said: “We have faced an environment now for several quarters … where consumer and customer demand has been sluggish. So far in the December ending quarter trends seem to be continuing along the normal path, so no worse, no better. It seems like a continuation of what we have seen now for several quarters.”
In February, Crown completed the acquisition of Heineken’s Mexican packaging business Empaque. The $1.23bn acquisition will help fortify Crown’s global beverage business and add to 2015 earnings. In April 2014, the company acquired Mivisa Envases SAU, a leading Spanish food can manufacturer.
For 2014, Crown reported net income of $2.79/share versus $2.30/share in 2014. For the full year, net sales were $9.1bn compared with $8.7bn 2013; the increase was primarily due to the impact of the Mivisa acquisition and increased global beverage can volumes, and was partially offset by $52mn of unfavorable currency translation.
“Crown is one of the best-run packagers and has significant deleveraging potential in the wake of its Mivisa and Empaque acquisitions,” wrote Wilde.
International Paper Co. (NYSE: IP) reported full-year 2014 net earnings of $555mn ($1.29/share) compared with $1.4bn ($3.11/share) in full-year 2013. Full-year 2014 operating earnings were $1.3bn ($3.00/share) compared with $1.4bn ($3.06/share) in 2013. Fourth-quarter 2014 earnings included a $0.40 per share noncash foreign exchange charge, an Ilim joint venture loss of $136mn, and restructuring charges.
Wilde wrote that the stronger U.S. dollar will create headwinds for IP. But, “IP is executing well, cash flow is solid and should continue returning cash to shareholders.”
Mead reported increased sales due to volume, pricing and share gains in targeted packaging and specialty chemicals. Income from continuing operations for full-year 2014 was $262mn or $1.53/share compared with $320mn or $1.78/share for 2013.
On Jan. 26 RockTenn and Mead announced a merger, which some analysts said looked like a RockTenn acquisition. Wilde wrote:” We believe the financial, operational, and strategic logic is widely apparent. MWV has well-capitalized low-cost mills and interesting market niches.”
Net earnings were $0.87/share compared with $1.11/share in 2013 and sales fell almost 3%.
O-I’s short-term outlook remains challenging. Sluggish demand for glass containers and currency pressures affected fourth-quarter and year-end earnings. Wilde also noted that while European operations and margins improved in 2014, comments about increasing competition there are concerning and “could dampen 2015.” He also said that softening demand and inflation in South America could be a major challenge. “It’s hard not to envision some new, unforeseen challenges arising in subsequent years.”
The company reported strong full-year results. For the year, the company reported profit of $182.4mn, or $2.86/share on revenue of $3.91bn. The company gave 2015 earnings guidance of $3.20-$3.40/share,
During the year, the company acquired the North American metal assets of Van Can Co. In the earnings release, management announced the construction of three new manufacturing facilities in 2015: a $100mn North American metal food can and two plastic container plants. It also shut down operations in Venezuela because political instability and monetary policy there made it difficult to import raw materials.
Commented R.W. Baird analyst Ghansham Panjabi on the capital expenditures: “We believe that 2016 and 2017 will be larger beneficiaries of the net investment while also cementing Silgan’s legacy as a low-cost producer in NA metal food.” However, he noted in a research report that more consolidation is necessary globally in both plastic containers and metal food.
Sonoco Products Co. (NYSE: SON) benefitted from a strong fourth quarter, said Panjabi. “Q4 was the single-strongest quarter in several years,” he wrote in a research note.
For the year, earnings were $2.32/share, up 9% from $2.12 in 2013. The increase stemmed from productivity improvements, volume growth, acquisitions, a positive price/cost relationship and lower pension expenses. Revenues rose 3.4% to more than $5bn from $4.85bn in 2013.
On March 10, Sonoco announced it will acquire a two-thirds stake in Graffo Paranaense de Embalagens S/A (Graffo), a Brazilian flexible packaging company. With approximately 230 employees, Graffo serves the confectionary, dairy, pharmaceutical, and industrial markets in Brazil. No terms were disclosed; the deal is expected to close in the second quarter. Graffo had sales of about $35mn in 2014.
“The agreement is in sync with Sonoco’s initiative of organic sales growth, new product development, expansion in emerging international markets and strategic acquisitions,” wrote Zacks analysts.
RockTenn announced in late January it will merge with MeadWestvaco to create a combined company with combined market value of about $18bn.
The company performed well across the board with significant sales increases in its corrugated packaging consumer packaging, and merchandising displays segments, with only its recycling segment seeing a decline compared with the same period last year. The CEO stated in its latest earnings call that the strong sales trends have continued into January of this year.
For the 12 months ended Sept. 30, 2014, RockTenn reported net earnings of $3.29/share, compared with $4.98 the year before. When adjusted for restructuring charges, a pension settlement expense and other charges, the company returned $3.76 vs $3.65 in 2013.
During fiscal 2014, CEO Steven Voorhees said that the company invested $534mn in capital expenditures and $474mn in acquisitions. Regarding the latter, the company in August completed an acquisition of A.G. Industries from American Greetings, a deal that more than doubles the permanent display business.
He said that the company plans continued capital investment of $500mn-$550mn over the next three years.