Winning in the Packaging World How the Most Successful Companies Create Shareholder Value 2 Roland Berger Focus – Winning in the Packaging World

September 2019

Winning in the packaging world How the most successful companies create shareholder value 2 Roland Berger Focus – Winning in the packaging world

Management summary

Over the last 15 years, our extensive work in the Thirdly, Winners drive financial scale via larger market Industrials sector has led us to take an in-depth look capitalizations (size) and a clear risk-reward proposition. into how companies create value for their shareholders Lastly, Winners prove their ability to execute by clearly – the main objective of publicly traded corporations communicating their strategic intent, pursuing a in North America and Europe. As an analytical disciplined approach to achieve competitive advantage, underpinning to our strategy and operations support to actively managing their portfolio, and systematically the packaging industry, Roland Berger regularly standardizing their functions and processes. monitors the financial performance of nearly 60 packaging companies headquartered in the US or in Europe.

The Winners Analysis is both a diagnostic framework to understand historical performance and a blueprint for future corporate strategy development and execution. Winners are companies that consistently deliver superior risk-adjusted profitability and growth. These companies deliver superior shareholder returns. This tool helps companies understand their performance relative to the industry.

Our study shows that Winners share four discrete strategic characteristics. Firstly, Winners possess a comprehensive understanding of their core competencies, develop a unique business model that leverages these competencies, and focus their participation in market segments where the business model is advantaged. Secondly, Winners have strategically coherent portfolios, derived from a combination of clear strategic intent, a portfolio of businesses that enables the intent, and a parenting advantage over these businesses. Winning in the packaging world – Roland Berger Focus 3

Contents

1. The Winners Analysis ...... 4 What are the financial metrics that drive shareholder value?

2. Who wins in the packaging industry? ...... 7 Any type of company can succeed

3. The foundation of success ...... 8 The Winners in the packaging industry share four distinct strategic characteristics gerenme/iStock Cover photo: photo: Cover 4 Roland Berger Focus – Winning in the packaging world

1. The Winners Analysis What are the financial metrics that drive shareholder value?

While the packaging industry has been strong overall of 2. Who are the companies that consistently deliver top- late, some companies have proven that they can tier financial performance relative to the industry consistently outperform the pack – Roland Berger takes (Winners)? an in-depth look into how the most successful packaging 3. Can we identify the key strategic attributes common companies are creating value for their shareholders. to the Winners? Given the wide range in shareholder returns across the industry (median returns of 10.8% per year for the top The result of this multi-year effort is a product that we quartile vs. -2.2% for the bottom quartile), we set out to refer to as the Winners Analysis. It provides a diagnostic answer the following three questions: framework to understand historical performance as well 1. What are the financial performance metrics that as a blueprint for future corporate strategy development drive shareholder returns? and execution. A

A: The Winners Analysis A diagnostic framework to understand historical performance and a blueprint for future strategy

INPUTS OUTPUTS Strategic characteristics Financial performance and shareholder return performance 25 PROFITLESS GROWERS WINNERS 20

15 5% 11%

Business Strategic Financial 5 leadership coherence scale 0

-5

-10 Invested capital growth Invested

Proven ability to execute -15

-20 -2% 5% UNDERPERFORMERS CASH GENERATORS -25 -20 -15 -10 -5 0 5 10 15 20 Source: Roland Berger Risk-adjusted profitability Winning in the packaging world – Roland Berger Focus 5

The main goal of publicly traded companies is to create companies with different models. For example, for an value for shareholders in the form of share price investor looking at two companies with USD 1,000 in appreciation (capital gains) and dividends. According to sales and 10% EBIT margin, the one requiring USD 200 financial theory, shareholder value is driven by investor of investment is more attractive than the one requiring expectations of future financial performance. USD 2,000. B Although share prices tend to change with earnings announcements and one-off events in the short term, we find that they are primarily driven by the net present value of investor expectations of long-term financial performance, particularly in mature exchanges like those found in North America and Europe. The Winners Analysis When developing their expectations of the financial performance of a company, investors are analyzing its provides a diagnostic profitability and growth potential, and adjusting these metrics for risk. Typically, investors will develop a framework to financial forecast to build a free cash flow model. Revenue growth will be used as the growth metric, EBIT understand historical margin percentage as the profitability metric, and the cost of capital will represent the risk adjustment. performance as well We believe the best metric to analyze growth is the real growth in the invested capital of a company, as a blueprint for future which represents the capital on a company's books that finances its assets. This is a better metric to measure corporate strategy growth than revenues, which are more commonly used. Revenue trends can be misleading due to price volatility, development and driven by cost fluctuations or supply and demand dynamics. Invested capital growth measures the growth execution. in assets and represents additional investment in the enterprise and is not as affected by fluctuations in costs. We believe the best metric to measure risk-adjusted profitability is the difference between the return on invested capital (ROIC) and the weighted average cost of capital (WACC). This is better than EBIT margin because it is a normalized metric, which measures not only profitability, but the amount of capital required to generate the profitability. EBIT margins provide no perspective on the capital intensity of a company and therefore may be misleading when comparing 6 Roland Berger Focus – Winning in the packaging world

B: The right metrics to measure growth, profitability, and risk Definition of economic profit in Winners Analysis

INVESTED CAPITAL Total Debt + Total Equity

RISK-ADJUSTED PROFITABILITY ROIC – WACC

ROIC WACC Return on Invested Capital Weighted Average Cost of Capital

NOPAT Cost of Equity Net Operating Profit After Tax x Equity x After Tax + Cost of Debt x Debt

INVESTED CAPITAL INVESTED CAPITAL

Source: Roland Berger Winning in the packaging world – Roland Berger Focus 7

2. Who wins in the packaging industry? Any type of company can succeed

In this study we looked at 60 packaging processors and converters headquartered in North America and Europe. We plotted the two dimensions described above: growth There is indeed a and risk-adjusted profitability for the past five years, creating the Winners Matrix. Of the 60 companies common set of analyzed, 18 stand out with both superior growth in invested capital and superior risk-adjusted profitability. characteristics that Predictably, these companies delivered superior shareholder returns over the period. We call these Winners share. companies the Winners. Winners include well-known, large players such as Packaging Corporation of America, AptarGroup, and Berry Global as well as a number of lesser-known niche companies. Half of Winners from the most recent 5-year timeframe (2013-2018) were also Winners from the previous 5-year timeframe (2008-2013), and only 2 of the 18 Winners were previously Underperformers. This consistency suggests that the Winners did not simply get lucky over the past 5 years. They are companies that have been executing winning strategies for years, leading to long-term success. Knowing that certain companies perform better than others, by itself, is not very useful. The value comes in knowing what the Winners are doing that is making them successful. To this end, we examined the Winners and compared them to the Underperformers (those companies in the lowest performance quadrant) and found that there is indeed a common set of characteristics that Winners share. The remainder of this study is dedicated to exploring each of these winning characteristics. 8 Roland Berger Focus – Winning in the packaging world

3. The foundations of success The Winners in the packaging industry share four distinct strategic characteristics

What are the attributes common to Winners in the Over 90% of the company's revenue comes from its packaging industry? We believe that Winners share four three largest business units: CCL Label, Avery, and distinct strategic characteristics. Checkpoint Systems. Each of these three businesses is a leader in its respective market. CCL Label is the world's largest converter of pressure sensitive and specialty 1 | extruded film materials. Avery is the world's largest WINNERS ARE INDUSTRY LEADERS supplier of labels and label software for short-run Winners own businesses that are leaders in their fields printing by businesses and individuals. Checkpoint of play: they have the ability to set the agenda across Systems has an approximate market share of 40% in their entire portfolio of businesses. In each of their electronic article surveillance (EAS) label technology. businesses, they possess a true competitive advantage CCL's scale means that its businesses have the ability to enabling them to define the price-setting mechanism, invest in the state-of-the-art manufacturing facilities and often set pricing, in their chosen market segments and new technologies required to stay ahead of the of participation. competition. Additionally, as a price-setter in its primary Winners drive business leadership by combining markets, CCL can pass increases in raw material costs three elements. Firstly, Winners possess a comprehensive on to its customers. understanding of the core competencies in each Looking more closely at the Avery business segment, business. Secondly, Winners develop a unique business we can clearly see the effect that industry leadership has model that leverages these competencies to both create on the company's profitability. Avery has achieved a level value for their customers and capture and defend this of brand recognition that is unique in its industry, value for them. Thirdly, Winners focus their participation allowing it to market its products directly to consumers in customer segments in which this business model is in a way that most companies in the packaging industry advantaged, with the total size of the customer segments cannot. Avery can also charge a price premium for its large enough to allow for business unit scale, i.e. the branded products, which is unique in an otherwise business is viable even by focusing exclusively on these commoditized market. As a result, Avery's EBITDA segments. margin has hovered around 21% over the past 3 years For Winners, business leadership manifests itself in compared to a packaging industry average of about 12%. the financial performance of their reporting segments, As the packaging industry undergoes an era of which achieve leading market shares or the highest level unprecedented disruption, Winners are finding it of risk-adjusted profitability in the broadly defined increasingly necessary to embrace innovation. In markets for the products that they sell. 2018, Winners had median R&D spend of USD 13.2 m To illustrate, let's look at CCL Industries. CCL of revenue on R&D compared to USD 5.2 m for Industries, based in Canada, is a global supplier of Underperformers. Over the past five years, Winners have labels and label technology to businesses as well as grown their R&D budgets by a median of 24% compared individuals. CCL, whose market capitalization has risen to -7% for Underperformers. Being at the forefront of by ~600% since the beginning of 2013, serves has a innovation and emerging trends is essential for Winners prime example of the importance of occupying to maintain their ability to continue setting the agendas leadership positions in areas of participation. in their respective markets. Winning in the packaging world – Roland Berger Focus 9

2 | WINNERS HAVE STRATEGIC COHERENCE Strategic coherence begins with strategic intent. "These strategic Winners articulate a clear vision that describes what they want to be, supported by a distinct, overarching investments further value proposition that captures what they stand for as a company. strengthen our Once a company has defined its strategic intent, it then needs to focus on building a portfolio of best-in-class pharma businesses that is coherent with this intent. We believe a disproportionate amount of attention is given to the business and increase synergy potential of businesses within a portfolio rather than the coherence of these businesses to the strategic our ability to improve intent. In our view, synergies (production assets, customers, markets) help maximize the value of a our long-term growth strategically coherent portfolio or enable a buyer to ascribe value to an acquisition target but should not pipeline by adding be paramount to the strategic rationale behind a combination or a divestiture. Winners tend to promptly depth to our service divest businesses that are neither coherent nor have such a cash generation or efficiency role to play in the offerings." transition towards the strategic end state. Stephan Tanda, President & CEO of AptarGroup For an example of strategic coherence, we can look to AptarGroup, a leading global supplier of packaging solutions. While Aptar participates in a number of different industries, the company has stated that growing its pharmaceutical business is a top strategic priority. Pursuant to this goal, Aptar has made a handful of acquisitions over the past twelve months that demonstrate its commitment to building a coherent portfolio. In 2018, Aptar supplemented its own R&D efforts by achieve a global leadership position in the emerging acquiring CSP Technologies, a leading provider of active field of active packaging. packaging for the pharmaceutical industry, among Earlier this year, Aptar announced the acquisition of others. While CSP did not add much to Aptar from a two more pharmaceutical companies. Nanopharm, scale perspective, its proprietary material technology, based in the UK, helps developers of orally inhaled and which controls the absorption and release of gases for nasal drug products understand the impact of materials' sensitive products, has served as a catalyst for Aptar to properties and processing conditions on product 10 Roland Berger Focus – Winning in the packaging world

functionality. The second company, Gateway Analytical, provides testing services for developers of drugs and C: Differences in "scale" and "scale gained via M&A" medical devices. At first glance, this pair may appear to between Winners and Underperformers be strategically inconsistent for Aptar as neither company Winners perform significantly better is a packaging supplier. However, through these new businesses, Aptar will be able to leverage its expertise in AVERAGE MARKET CAP AVERAGE MARKET CAP materials as well as its existing customer relationships [USD bn; 2018] GAINED VIA to participate in a new area of the pharmaceutical value ACQUISITION chain. [USD bn; 2013-2018] In addition to establishing strategic intent and 3.5 building a coherent portfolio of businesses, Winners Winners have ensure that they have a parenting advantage over their a market cap individual business units. As described above, the 4x that of portfolio of a Winner shares a common business model Under- performers in order to drive a clear overarching value proposition to its customers. The corporate management of Winners typically has strong competencies and industry knowledge to deliver this business model successfully across different businesses.

1.9 3 | Winners have WINNERS HAVE FINANCIAL SCALE prioritized building scale Winners drive financial scale by achieving larger market via acquisition capitalizations. The greater a company's market capitalization, the more likely it is to be included in well- known, actively traded financial indices such as the S&P 1.0 500 and the Dow Jones Industrial Average (DJIA) in the US, the FTSE 100 in the UK, or the German DAX. Inclusion in such indices generally enables companies to achieve greater relevance to investors: it projects trust and implies that the company's stock will be actively 0.3 traded by investors trying to replicate or exceed the performance of the index. It also drives higher analyst coverage, which makes information about the company Winners Under- Winners Under- more widely available. The associated higher trading performers performers volume increases the liquidity of listed stocks, ultimately leading to a lower cost of capital. Source: Capital IQ, Roland Berger Winning in the packaging world – Roland Berger Focus 11

We find that Winners are more likely than Under- performers to have larger market capitalizations, and D: Share of group that is traded on one of therefore achieve higher representation in actively the world's top 20 exchanges as measured traded indices. In our analysis, approximately 62% of by USD bn traded per month Winners were members of one the world's most actively Winners are members of the world's most actively traded stock exchanges, compared to less than 39% of traded exchanges Underperformers. Looking at the companies in Roland Berger's Packaging Index (the set of publicly-listed companies used in the Winners analysis), we can see a large difference in market capitalization and revenue between those identified as Winners and the Underperformers. Winners had an average market cap of USD 3.5 bn vs. USD 1.0 bn for Underperformers. Not only do Winners WINNERS have scale, but they are also committed to further increasing their scale. Over the past five years, Winners have added approximately USD 1.9 bn in market capitalization via acquisition compared to just USD 300 62% m for Underperformers. C D

4 | WINNERS HAVE A PROVEN ABILITY TO EXECUTE Winners deliver superior results by developing and implementing strategies to drive business leadership, strategic coherence, and financial scale. We believe 39% there are four key facets to execution: i) clear communication of the strategic intent, ii) disciplined approach to achieve competitive advantage, iii) active portfolio UNDER- management, and iv) systematic standardization of PERFORMERS functions and processes.

4.1 Clear communication of the corporate vision and strategy Winners clearly communicate their strategic intent and successfully execute against it. By providing investors with line of sight into their future trajectory, Winners manage investor expectations. Source: Capital IQ, Roland Berger 12 Roland Berger Focus – Winning in the packaging world

4.2 Disciplined approach to achieve competitive E: Average # of M&A deals completed advantage Winners have done more M&A deals Winners follow a disciplined approach to identify and [2013-2018] deploy their competitive advantage to drive business leadership: they understand their core competencies and how to translate them into an advantaged value proposition and business model. 5.5 4.3 Active portfolio management Divestitures 0.8 Winners engage in active portfolio management to drive business leadership, strategic coherence, and financial scale. Winners typically do 50% more transactions Acquisitions 4.7 than Underperformers, with a mix of bolt-on and large acquisitions, as well as divestitures. The majority of Winners also conduct large, transformational acquisitions. While these transactions provide Winners 3.6 with financial scale, the main driver is generally to either 0.9 accelerate the pace towards business leadership in their existing businesses or to acquire new leadership positions that are coherent with the company's strategic intent. E 2.7 4.4 Systematic standardization of processes and centralization of key functions Winners deploy corporate processes across their businesses and centralize key functions, enabling them to strengthen their parenting advantage over their portfolio of businesses and achieve efficiencies in their indirect costs. This systematic approach to standardization and centralization enables Winners to achieve scale economies in their sales, general, and administrative costs (SG&A).

In 2018, Winners spent on average less than 10% Winners Under- performers on SG&A expenses (not including R&D), while Underperformers averaged over 15% during this time, maintaining fairly high administrative costs since Source: Capital IQ, Roland Berger 2013. Winning in the packaging world – Roland Berger Focus 13

For an example of a company with a proven ability to F: Berry Global's profit margin has grown along execute, we can look at Berry Global. Against the with its revenue backdrop of a rapidly consolidating plastic packaging Berry's revenue and profitability from 2009-2018 industry, US-based Berry Global has established a consistent and well-communicated strategy of achieving BERRY GLOBAL REVENUE & a global leadership position in the industry through EBITDA MARGIN building scale. [USD bn] 7,869 In March, Berry announced the acquisition of RPC, a leading European producer of plastic packaging. The deal increases Berry's revenue by about 50%, taking it to ~USD 13 bn and putting it into an approximate first 17% place tie with Amcor as the world's largest plastic 14% packaging company. The acquisition not only drives top- line growth as Berry's commercial reach is expanded to 11% Europe, but also serves to build production scale by doubling the company's global manufacturing facilities 4,958 to around 300. The acquisition of RPC is consistent with Berry's 4,257 well-established pattern of growing scale in a strategically coherent manner via M&A. In fact, over the past ten years, the company has increased its revenue from USD 3 bn to USD 13 bn largely through inorganic growth. During this period, Berry has made at least six major acquisitions of plastic packaging companies with revenues ranging from hundreds of millions to several billion dollars. Berry has built a reputation for its ability not only to acquire but to successfully integrate new companies and operations. Berry has typically been able to achieve synergies of ~5% of acquired revenue over the course of its many acquisitions through the implementation of standard processes, increased bargaining power, and company-wide integration of newly acquired technology. The benefits of Berry's ability to execute can be seen in 2010 2014 2018 its EBITDA margin, which has increased from 6% to

Revenue EBITDA 10% over the period. F

Source: Capital IQ, Roland Berger 14 Roland Berger Focus – Winning in the packaging world

Stay tuned

As a follow-up to this study on the winning characteristics of packaging companies, Roland Berger will further look at how packaging Winners are realigning their approach to market in recognition of the greater need for agility and innovation to address longer- term trends in the industry. We will take a close look at the key trends that will impact the packaging world and examine how leading companies are positioning themselves for future success. Below is a snapshot of some of the trends that we will further examine as part of our follow-up study.

Sustainability Growing demand for sustainable packaging solutions is leading waste-reduction initiatives and a focus on the recyclability of materials. New regulations such as an envisioned EU ban of certain plastic materials will serve to further push sustainability to the forefront of the industry agenda.

End-consumer focus Consumers are demanding greater customization for premium and/or easy-to-use packaging. There is also a rise in end-consumer-driven innovation such as performance/ intelligent packaging (e.g. time-temperature indicating).

Efficiency & transparency Cost remains a key focus for customers and packaging industry participants. Packaging players must focus on material optimization, investment in equipment to support material efficiency, and greater ownership of capital investment and design for proprietary advantage, or they must standardize and emphasize lean, service-based solutions – both with enhanced TCO focus based on full equipment lifecycle. End-to-end manufacturing and supply chain transparency will mean a new set of requirements for the industry.

Technology & innovation The advent of digitalization and IoT will reduce costs through automation, but also generate new solutions for supply chain management and information tracking for end consumers. The boom in e-commerce requires greater agility from converters to support last-mile delivery and innovate new products that meet changing packaging requirements. Winning in the packaging world – Roland Berger Focus 15

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AUTHORS PUBLISHER

Oliver Hazimeh Roland Berger GmbH Partner Sederanger 1 +1 734 276-3446 80538 Munich [email protected] Germany +49 89 9230-0 Fred Choumert www.rolandberger.com Partner +1 617 310-6622 [email protected] Roland Berger LLC 300 N LaSalle St, Suite 2000 Neury Freitas Chicago, IL 60654 Principal USA +1 312 662-5534 +1 312 662 5500 [email protected]

Dilhani de Silva Project Manager +1 312 256-4597 [email protected]

John Brussock Augustin de Labeau Senior Consultant Consultant +1 312 508-1183 +1 617 283-0789 [email protected] [email protected]

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