summary report of the plastics processing industry - Plante Moran

NORTH AMERICAN PLASTICS INDUSTRY STUDY | 2011INTRODUCTIONWe are pleased to present the fall 2011 edition of the NorthAmerican Plastics Industry Study Summary Report. This reportsummarizes data from 86 completed surveys collected throughSeptember 30, 2011, representing more than 142 facilitiesin a broad array of processes from throughout North America(most of the participants are based in the United States).We have focused our survey efforts in 2011 on post-recessionperformance (after June 2009). As a result, data is reportedas 2009/2010 data. As a reminder, we now publish this benchmarkingreport twice annually, with our next two plannedreporting periods in the spring and fall of 2012. Companies thatwant to participate can submit data anytime during the yearand receive our full tailored benchmarking report comparingtheir performance against previously published data within twoweeks. Companies that submit data prior to March 31, 2012,will receive an updated report in the fall of 2012.We extend our sincere appreciation to our survey participantsfor their time and feedback, as well as to the ManufacturingAssociation of Plastics Partners and Plastic News for theirvaluable support.1

NORTH AMERICAN PLASTICS INDUSTRY STUDY | 20113OUR OBSERVATIONS AND OPINIONSThe following graph shows year-over-year adjustments toproductivity as measured by value-add per employee, theequipment utilization percentage, and gross profit marginsfor the last 13 years. For the most part, the sample populationyear-over-year change was consistent — that is until this lastyear. See FIGURE 1.TREND BREAKERS — HOW THE NEW NORMAL REIGNSAs the economy was crashing around us in 2008 and 2009,it was difficult to identify trends that were permanent (“newnormal”) versus those that were a reaction to the sudden dropin credit availability and consumer confidence. A full year postrecession,we now have a glimpse of a few trend breakers fromthe norm of prior years. It will still be years before we can fullygrasp whether any of these trend breakers represent a “newnormal” or just a slow return to the old normal. The followingtrend breakers are noteworthy for 2010 and contributed to ahealthy increase in gross profit margins:1. We saw a 44 percent recovery in earnings before interest,taxes, and owner’s compensation (47 percent for returnon assets), exceeding 8 percent on average. This recoveryis remarkable both in scale and timing. The historicalmedian return on sales has hovered between 5 and7 percent for 15 years. Gross profits, which nevervaried more than a few percentage points for the past13 years, increased almost 20 percent. We speculatethat there are a number of reasons for the extent ofthe recovery, including:a. Press utilization increased 9 percent over 2008/2009.Utilization is still depressed considering that averageutilization remains under 40 percent based on a24/7 calculation. Normally press utilization does notcorrelate with profitability as many weak companiesroutinely low ball quotes to keep the presses running.Also, increased utilization often comes with increasedcomplexity and thus higher labor costs. Still, this isonly the fourth year out of the last 15 years with anincrease in utilization. For those with good margins,any increase in utilization results in improved profits.FIGURE 1: 13-year Productivity Measurement40%30%20%10%0%-10%-20%-30%-40%-50%31.9%14.9%1998 2002 2004 2006 2008 2010-31.0%Cumm productivity changeCumm GP changeCumm utilization change“Increasedutilization oftencomes withincreased complexityand thus higherlabor costs.”b. Total labor costs decreased 2.9 percent on averageper employee. Many had reduced labor costs inreaction to the massive drop in sales orders. Mostof these pay reductions were temporary in nature,but apparently a small percentage were retainedas permanent.

c. Resin costs shrank 3 percent as a share of total costsas early resin price increases were quickly passedon to customers. Fortunately for the industry, theresin costs tended to stabilize at a lower cost for theremainder of the year. The net result was a positivepurchase price variance during a time of increasingvolume. However, subsequent to 2010, resin pricesincreased on average 4.5 percent creating a new burdenfor those slow to pass along the price adjustment.See FIGURE 2.d. There was a continued reduction in spending oncontrollable costs including various travel, maintenance,repair, and operational supplies (MRO), andcapital investment. While these costs are generallynot significant in total, the attention to the spendingdetail helped secure the gains won from production.e. A clean manufacturing environment with limited newprogram launches and tryouts, along with a 16 percentlower manufacturing complexity, contributed to an efficientrecovery. Complexity (ratio of molds x presses xresins) measures the factors that need to be managedto create throughput. Complexity typically generatessafety stock and additional indirect headcount tomanage the production.2. Personnel turnover decreased by 23 percent to an all-timehistorical low for our survey of 25 percent. More importantly,it has stabilized with the best performers being retained.The ability to manage a complex environment is mucheasier (and productive) with a skilled and stable workforce.3. Limited growth opportunities. In prior years more than50 percent of our survey participants achieved over5 percent sales growth in nominal terms over the twoprevious years. Obviously, material inflation contributesto some of the sales growth. Still, less than 20 percentof our current survey participants can boast of a salesgain exceeding 5 percent over the last two years. Formost companies, while sales have recovered from 2009,they are still not back to pre-recession levels. Interestingly,larger companies have recovered faster than therest of the participants and smaller companies continueto suffer lower sales.FIGURE 2: Polypropylene price | Homopolymer Injection GP1.301.201.101.000.900.800.700.600.502010Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-114. The automotive industry has enjoyed the fastest growthof any industry in the prior year. However, you have toconsider that the industry first plummeted to 50 percentof its former self, before recovering 40 percent from thelow point. Still, if you can make money when the industryis producing 12 million vehicles, you should be able tomake a lot more money should the industry recover tothe 15 million plus vehicle production level that it used toregularly enjoy. Although, perhaps the relaxation of theaggressive supply chain practices during the recessionhad more impact on the desirability of the industry thana volume recovery.5. Construction, furniture, and durable industrial productsare still suffering. These industries were hammeredduring the recession and have not seen much recoverythrough 2010. Although, the tax incentives of 100 percentbonus depreciation on new equipment purchasesthrough 2011 may spur industrial product sales.TREND CONTINUATIONSome trends survived the recession without much impact.These trends are normal — not a new normal.1. Continued higher labor productivity as measured byvalue-add (sales less material and outside processing)divided by total full-time equivalents. The industry hasbeen able to process more material with fewer and fewerpersonnel ever since we have studied the industry. As theeconomy has globalized, the domestic processors have4

NORTH AMERICAN PLASTICS INDUSTRY STUDY | 2011had to innovate to compete at a global level. We do notsee that trend abating as global competitors are gettingbetter each year.2. Limited investment in new capital has been occurringsince way before the recession. The average age ofproduction equipment has been increasing with eachyear we conduct the industry study. The new equipmentstatistics from the Society of the Plastics Industrysupport a low level of new press purchases (under 4,000injection presses) in the United States since 2000.Unfortunately, China molders are easily buying 10 timesmore presses each year than the United States. It is onlya matter of time until old machines in the United States,even managed with keen production skills, cannotcompete with presses supported by newer technologyand improved production skills.3. Weak balance sheets (as evidenced by the Altman ZScore) still afflict many companies. The smaller companiestend to have both a weaker balance sheet and lessaccess to capital. In today’s market, a strong balancesheet is a weapon. Warning: a 0.25 Fed Fund rate is NOTthe new normal. If you are having difficulty with yourcurrent debt load, be prepared for increasing interestrates as inflation rears its ugly head. Banks are nowready (and willing) to take action on weak performers.4. The medical industry still shows strong performancefrom top to bottom with the packaging industry closebehind. Generally, a good performer can make money inany industry, but the stronger industries allow the weakerand average performers to make decent money as well.Furthermore, the medical industry is the only industrythat had continued growth during the recession.“The plasticsprocessor shouldmake moneyon conversionefficiency andtechnologyunder itscontrol …”FIGURE 3: 10-Year Annual Inflation Rate5.50%17.12%14.30%5OMENS/PREDICTIONSNot all current trends will continue. Which trends will becomethe new normal is still in debate, but rest assured we willcontinue tracking emerging trends as part of our surveyobjectives. Reading the tea leaves and tarot cards providesus with some opinions that we wish to share.Material pricing vagaries will continue. The commodity resinwill have greater global demand and greater price fluctuation.3.10%PC ABS PP GasolineThe 10-year history of polypropylene pricing demonstratesnot only the unpredictability of its cost, but the 17 percentyear-over-year inflation. See FIGURE 3.

Often times, the plastics processor is told which resin topurchase and who to purchase it from AND STILL is expectedto maintain historical pricing. The plastics processor shouldmake money on conversion efficiency and technology underits control, not by hedging or controlling resin prices. Everycontract should have some form of material price adjustmentsthat do not require begging, cajoling, or sleight of hand. Hopefully,contracts without material price adjustment triggers havesufficient margins to support the processor’s commodity risk.See FIGURE 4.Launch headaches will return. The respite of new programsin 2009 and into 2010 cannot continue. OEMs will need torefresh their product or risk losing their brand or technologyto knock-off companies in low-cost countries. All productseventually become commodities if not enhanced in some way.While new programs are a good thing to possess, they willcreate some production interruptions in 2012 and beyond.Our concern is that the lack of practice in launching newprograms may create inefficiencies. These inefficiencies mayaffect companies with weak balance sheets, ultimately resultingin a new wave of distressed companies.Employee turnover, averaging 17 percent, is at an all-timelow since we started this industry study in 1995. We believethe poor job prospects for those fortunate enough to retaintheir jobs and the lack of mobility related to depressed homeprices contribute to this low level. Currently, both job prospectsand real estate values are slow to recover. We believe thatcompanies will experience higher turnover once the economycorrects these issues.Customer purchasing habits — did they really change? Thekinder, gentler automotive industry of 2009/2010 may havejust been a moment of weakness. The same people with thesame compensation structures and metrics are still in control.Any new purchasing philosophy will be harder to implementthan reverting to the old philosophy. While we hope a sanepurchasing process emerges, we will not hold our collectivebreath as there is still too much capacity in the industry. Theentrepreneur running the plastics processor enables insanepractices in an effort to consume excess capacity. Our studieshave shown over the years that good companies choose theircustomer wisely and bad companies suffer with the rest.FIGURE 4: Polypropylene Homopolymer GP14012010080604020-Mar-02 Mar-04 Mar-06 Mar-08 Mar-10New capital investment and investments in technology willincrease. In the current credit market, new investments intechnology will be easier for larger companies than for smallercompanies. Regardless, the plastics industry is a technicalindustry and you must embrace technology to defend yourbusiness model. Particularly for those whose local customershave drifted off to a lower cost environment; unless youwish to follow them, you need to compete on technical skillsto make geography irrelevant. We are seeing companies withstrong balance sheets aggressively enter the M&A marketto capture the right geography, equipment, customer base,and talent. The bonus depreciation allowed by the tax code willencourage investment in new equipment (and may jump startthe durable goods industry recovery).REQUIREMENTS FOR SUCCESSFlexibility is required to address the vagaries of manufacturing.Whether you need to manage material fluctuation, skillavailability, or the effects of tsunamis from halfway aroundthe world, you need the ability to manage the unknown.Perhaps that is one reason this industry is so fragmentedwith small companies. Efficient organizational structure withfewer levels is the best method to embrace change andreduce risk. Currently, companies are as efficient as theyhave ever been due to the cutbacks of the recession. Theconundrum is the need for sales growth while retainingyour efficiency. Figure that one out and you are a winner.6

NORTH AMERICAN PLASTICS INDUSTRY STUDY | 2011For comparison purposes, we aligned the MEDIAN of level of sales size versus the successful company performance. 12009/2010 DataTotal Sales (USD)Sales per Customer (USD)Value Added per Employee (USD)Value Added per Labor Dollar (USD)Earnings Before Interest, Taxes, andOwner’s Compensation (EBITOC) as a % of SalesReturn on Assets (ROA)Two-Year Sales GrowthReturn on Net Capital Employed (RONCE)Altman Z Score (a Composite Financial Score)$8.6 & $15 & $35.6$20,953,179$602,729$82,174$2.3010.1%16.3%9.5%26.9%3.8>$35.6 Million$56,000,000$133,910$80,599$2.377.7%7.9%7.5%15.8%2.7SuccessfulCompany$16,831,915$642,496$78,824$2.2614.3%30.7%21.7%53.7%4.1Inventory TurnoverCurrent RatioDebt to Equity5.61.11.17.31.91.07.52.21.08.11.61.36.62.11.0Complexity (Probable)* — Injection Molding**Employee TurnoverPress Utilization in Total — Injection Molding217,33816%24%224,64016%42%520,52025%39%12,775,08311%44%2,576,13523%35%Lean Manufacturing Savings as a % of EBITOCTotal Training and Education Costs per Employee16%$137.2911%$90.835%$117.6612%$189.455%$125.84On-Time Delivery Performance CustomMolding/Extrusion98.0%98.9%98.2%98.9%99.5%Percentage of Sales with Gross Margin Less than 10%PPM - ExternalPPM - Internal13%3808,88710%27210,49615%5106,78222%71427,31014%595,889*Complexity equals frequently used resins x (active molds + inserts) x presses.**Some molding process statistics are available for those companies with other processes.91A successful company exceeds 10% return on sales (before interest, taxes, and owners compensation), return on assets in excess of 15%, and sales growth greater than 5%

NORTH AMERICAN PLASTICS INDUSTRY STUDY | 2011For comparison purposes, we aligned the AVERAGE of the statement of operations versus the successful company performance. 2Median Data by Sales Quartile2009/2010 DataSalesProduction SalesTooling SalesLess: Tooling COGSOther Operating RevenueTotal Sales$8.6 & $15& $35.6 >$35.6 Million99.3%5.2%(4.6%)0.1%100.0%99.0%4.4%(4.0%)0.6%100.0%93.6%11.1%(5.2%).5%100.0%99.7%2.4%(2.3%)0.2%100.0%SuccessfulCompany96.9%8.2%(6.4%)1.3%100.0%Cost of SalesRaw MaterialsPurchased ComponentsOther Direct CostsDirect LaborOverhead Costs32.8%3.6%3.4%11.9%24.7%36.8%4.5%3.1%8.8%26.8%35.7%7.5%2.9%9.6%23.3%39.8%10.7%3.7%8.7%20.9%32.1%6.9%2.4%8.3%23.2%Total Cost of Goods Sold76.3%80.0%79.0%83.9%72.9%Gross Profit23.7%20.0%21.0%16.2%27.1%Selling, General, and Administrative Costs19.8%16.0%12.5%10.2%13.6%Operating Income4.0%4.0%8.5%6.0%13.6%112A successful company exceeds 10% return on sales (before interest, taxes, and owners compensation), return on assets in excess of 15%, and sales growth greater than 5%

CONCLUSIONAs noted, successful companies have a strong value propositionand often support their value proposition with quotingdiscipline. Companies that misfire often have high manufacturingcomplexity (number of presses, molds, and resinsto monitor and schedule) and misaligned organizationalstructures. We have prepared a report card that may help youassess your performance. Even the most successful companieshave some mediocre grades (C’s), but they generally do nothave many D’s or F’s and more importantly, they have the rightA’s and B’s to create a mix that has a synergistic effect.You can increase your chances of success by taking aholistic approach to looking at your business, surroundingyourself with talent that can keep up with today’s pace ofchange, and becoming an adaptive enterprise. Each year weparticipate in the Manufacturing Association of Plastics ProcessorsBenchmarking Conference. Participants in this surveyreceive a discount for their attendance at this conferenceand are encouraged to attend. At the conference, we willexplore how to use this report and become an adaptive andhighly successful company. Please visit www.mappinc.comfor more information.We also strongly recommend you participate in the Societyof Plastics Industry. The world has become much smaller,yet you cannot control the environment around you. SPIsupports you to influence rational legislation — both at thelocal level, addressing issues such as litter control, and atthe national level, addressing concerns such as energy policyand safety regulations.Technical advancement can be cultivated with active participationin the Society of Plastics Engineers. Your team ofengineers and process technicians has to see beyond thepractices of your organization to grow and develop thetalents necessary to compete.Finally, we provide some materials on our website (http://plastics.plantemoran.com) to help you assess your organization’slevel of financial stress and develop your strategy. It’s abrave new world — regardless of new normal trends. Embracingthe challenges facing you with a plan is half the battle.We are ready to help. Please feel free to call us if we canhelp you with your improvement process, and thanks againfor your participation.Jeffrey F. MengelPartnerPlante MoranPlastics Industry Team312.602.3515 (direct)248.223.8638 (direct fax)jeff.mengel@plantemoran.comTed MorganConsulting ManagerPlante MoranPlastics Industry Team248.223.3575 (direct)248.327.8933 (direct fax)ted.morgan@plantemoran.complastics.plantemoran.com12

NORTH AMERICAN PLASTICS INDUSTRY STUDY | 2011INFORMATION PROVIDED IN FULL REPORTPARTICIPANT REPORT CARD+ Results Measures+ Regrets Measures+ Desired MeasuresSURVEY DEMOGRAPHICINFORMATION—BACKGROUND+ Plastics Processing Method Used+ Total Production Sales Allocated byIndustry+ Supply Chain Role+ Production Volumes+ Size of Molded Parts Produced+ Value per Unit of Sales+ Sales Size Snapshots+ Processing Method Snapshots- Injection Molding Process- Extrusion Molding Process- Other Processes+ Industry Served Snapshots- Transportation (Automotive) Industry- Packaging Industry- Appliance, Office, & ConsumerGoods Industry- Electronics Industry- Medical Industry- Building and Construction- Industrial & Machinery- Other Industries+ Supply Chain Role Snapshots- Process-oriented Processor- Component Specialist- Proprietary ProcessorSTRATEGY AND MARKETING+ Planning Processes Utilized+ Amount of Prior Year’s Sales Lost inCurrent Year+ E-Bid Participation+ Pricing and Payment Issues+ Narrow Gross Margin and RetainedWarranty Sales+ Quoting StatisticsOPERATIONAL DATA+ On-time Delivery Performance+ Parts Rejected in Parts per Million+ Descriptive Press Statistics —Injection Molding- Number of Presses- Average Age of Presses- Cost Rate per Hour- Percent Utilization- Average Time for Setup- Average Number of Setupsper Week+ Descriptive Press Statistics—Profile/Tube/Pipe Extrusion- Number of Lines- Average Age of Lines- Percent of Lines with Down-lineAutomation- Percent of Lines Co- orTri-extruded- Percent of Lines with CrossheadExtrusion- Percent Utilization- Average Time for Setup- Average Time of Setups per Week+ Descriptive Press Statistics—Thermoforming- Number of Presses- Average Age of Presses- Percent Utilization- Average Time for Setup+ Descriptive Press Statistics —Compression+ Molding- Number of Presses- Average Age of Presses- Cost Rate/Hour- Percent Utilization- Average Time for Setup- Average Number of Setupsper Week+ Descriptive Press Statistics—Blow Molding- Number of Presses- Average Age of Presses- Cost Rate/Hour- Percent Utilization- Average Time for Setup- Average Number of Setupsper Week+ Shift Activity+ Lean Manufacturing Techniques Employedand Estimated Results+ Tooling Attributes- Classification of Mold Type- Source of New Obtained- Resin Usage and Consumption- Complexity CalculationHUMAN RESOURCE STATISTICS+ Human Resource Deployment+ Safety, Attendance, & Other HR Statistics+ Press Statistics per Employee+ Press Operator TrainingFINANCIAL PERFORMANCE+ Condensed Balance Sheet+ Operating Statement+ Component Costs and Cash Flow13

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