By the time this is published, the global coronavirus pandemic will have been raging for several months, hugely impacting economies with consumer income plummeting and unemployment claims soaring.
Revised GDP projections by the International Monetary Fund (IMF) in March and later from the Organisation for Economic Co-operation and Development (OECD) are shown in
Table 1, but even these expectations may be lowered by government action. Yet the one group of products that will be in great demand throughout the crisis is likely to be processed foods – especially canned products and beverages.
Demand in every major industrial sector, with the probable exception of food and drinks, will decline with the impact of lower incomes; supply may be constrained as transportation and workplace schedules are interrupted. In addition, canmaking plant operations will have been strained by staff absence and the delay of capacity additions and renovations by many months. All these developments are occurring at record speed, far more damaging to the world economy than the experience with the severe acute respiratory syndrome (SARS) in 2005 and Ebola in 2010.
The coronavirus pandemic is a new order of health crisis, one not experienced for a century. The challenge for the canmaking and packaging industry is to provide adequate volumes to meet human needs for processed foods and beverages, which will not abate when or after the peak of the infection rate is reached. This could spark a new appreciation of processed foods, and a resurgence of changes in workplace locations, as potentially a way to reduce the virulence of other outbreaks.
Outlook positive for food cans
Recent past volume numbers do not provide insight into a post-coronavirus world, because there were special factors impacting the market last year, namely massive pre-buying of cans in the last quarter of 2018 in anticipation of much higher metal prices at the beginning of 2019.
Thus, the US food can industry had lower volumes in the fourth quarter of 2019 compared with a year earlier. According to the Can Manufacturers Institute, food can volume in the US declined by 6.1 per cent in the quarter and by 4.1 per cent for the year, as shown in Table 2.
The fall-off was most notable in cans for vegetables, which in the final quarter dropped by 15.1 per cent compared with the same period a year ago, due to pre-buying in 2018, but also to lower demand from packers because of weather-related factors. At the same time, some of the end-uses showed strength, including cans for soup which rose by 5.6 per cent in the final quarter of last year. Cans for pet food, the second largest category, despite pre-buying, only declined by 2.4 per cent.
In the soup market the largest producer, Campbell Soup, increased advertising and promotional expenditure over the winter, with its retail sales up by 1 per cent and strong performance shown by condensed soup and broth. According to Campbell’s chief executive Mark Clouse, the market is widening, noting that its “tomato soup gains came from millennial households, a trend that many believed was not possible”.
As the pandemic continues, further reports are expected. Also, canned soups such as chicken noodle, cream of mushroom and cream of chicken continued a volume turnaround. Finally, Campbell reported a strong gain in Prego pasta sauce – maintaining its leading position – and its V8 juice – especially V8 Energy – and in its multi-pack single serve.
Conagra Brands also reported strong gains in grocery products, such as Chef Boyardee and Hunt’s tomato products – both geared to easy-to-prepare meals for home consumption – as workers are encouraged to work from home and avoid crowds. These trends may accelerate in future quarters.
Readers should note that this report cannot include two important producers of food cans: Ball Metalpack and Trivium, which is part owned by Ardagh, because reports on their operations are not available from public sources.
Trivium includes food can operations in the US set up by Ardagh to serve customers such as Conagra. It also includes significant plants in Europe making both two-piece and three-piece cans formerly owned by Impress, once the second largest canmaker in Europe behind Crown.
Nevertheless, we show results for the other main companies, Crown and Silgan, in Table 3 as well as figures on Trivium for the two final months of 2019.
In mid-2018, Ball – whose operations are mainly in the US – sold its steel food and aerosol can business to Platinum Equity, retaining a 49 per cent interest. Last year, Ardagh sold 58 per cent (retaining 42 per cent) of its Food & Metal Packaging operations to Ontario Teachers private equity fund, which combined the company with Exal, a leading producer of aluminium containers.
Ardagh’s glass business shines
As noted in the industry report in April’s issue, Ardagh reported higher sales and ebitda in the fourth quarter of 2019. Its business is now split almost evenly between beverage cans and glass containers, its original business.
The glass sector showed notable gains in segment earnings, partly due to recovery in North America, where its margins rose to 14.9 per cent from 12.5 per cent a year ago, as detailed in Table 3.
On the food can side, segment margins were some 10 per cent for the final two months – the only recent data that is available – before the food and aerosol can business was part sold to create Trivium.
Chairman Paul Coulson noted that Ardagh had repositioned its US glass business to emphasise bottles for wine, liquor and food categories. This is aimed at offsetting the continued drop-off in beer packaged in glass. Ardagh’s European glass business had better performance with ebitda margins rising to more than 25 per cent after recovering cost increases.
Also, according to Coulson there is growing “sustainability awareness … and an appreciation by consumers of the infinite recyclability of glass packaging to drive growth through premiumisation and innovation”. This is a message that also applies to its canmaking operations.
Silgan grows in pet food and soup
Silgan is the leading supplier of cans to the US food industry, accounting for more than a half of total shipments and 54 per cent of the company’s total sales. Food can volume dropped by a modest 1 per cent in the fourth quarter, compared with the sharp decline expected earlier. This was due to considerable customer pre-buying in the fourth quarter of 2018 before metal costs rose in early 2019. Silgan also placed less emphasis on customers and end uses that are declining or sectors that had low margins.
Pet food can volume continued to grow as well as cans for soup. Slightly lower segment margins in the quarter also reflected incentives for renewals of seven-year supply contracts, which were recently renegotiated. At the same time, Silgan is dealing with industry overcapacity, noting that it plans to reduce its US canmaking capacity by half a million units in the near future. Overall, its capacity reduction worldwide could involve closing six canmaking plants, including operations in Serbia and Jordan.
Positive trends for last year in the canmaking sector also include protein products (meat and fish) as well as soup, due to increased promotion by the canners. In addition, soup is expected to be one of the end-uses gaining from state and local regulations that require the closing of offices and factories, as employees from improvised home offices increase home-prepared meals due to restaurant closures.
Silgan’s second largest segment is closures, which accounts for 32 per cent of total sales. This segment had lower sales and operating profit, due to a weaker seasonal pack, with volumes declining by 1 per cent. The segment includes White Cap, which produces twist-off metal closures as well as plastic closures for water, juices and other drinks.
The other category in this segment is dispensing systems, a leading global business acquired in 2017, with sales then of US$575 million. It supplies triggers, pumps and sprayers to major branded consumer goods companies, reporting higher volume and profit.
The company’s plastic container segment, representing 14 per cent of final quarter sales, had a volume gain of 2 per cent and a lift in segment earnings of over 20 per cent.
Capital spending in 2019 was $231m, adding lines for two-piece cans and reducing volume in three-piece cans. Silgan projected free cash flow for 2020 of $275m, unchanged from that in 2019.
More information from Arthur Stupay, Tower Research, 12526 Cedar Road, Cleveland Heights, Ohio 44106, USA.
Tel: 1 216 241 3078.
Email [email protected]