Foil has it covered

Deliveries of both thin and thicker gauges of aluminium foil have made a bright start in the first quarter of 2014, according to figures released recently by EAFA, the European Aluminium Foil Association. In particular, exports from Europe recorded an excellent increase compared with the same period in 2013.

Overall alufoil production during the first quarter reached 219,000 tonnes (2013: 208,000 tonnes), an increase of 5.5%. After a slowdown through most of last year there was a welcome return to growth for thicker gauges, used typically for semi-rigid containers and technical applications, which saw a 10% improvement compared with the first three months of 2013. Thinner gauges, used mainly
for flexible packaging and household foils, added 3.3% to continue the steady recovery seen for most of last year.

Inside Europe the still slow, but improving, economic situation led to a 2.2% increase in production to 193,000 tonnes. Markets outside Europe, where economic activity is increasing sharply, accounted for shipments 26,000 tonnes

Why Foil?
Aluminum foil has a number of qualities that make it an excellent material for converters. It's strength, barrier properties, deadfold
characteristics and the ability to stand extremes of heat and cold, coupled with its light weight are just some of its main attributes. Foil's decorative qualities and the fact it can be printed on, lacquered, embossed and laminated with other materials means it can support packaging integrity as well as graphic and visual needs, and this can all be done efficiently and without excessive consumption of energy or loss of time.

For technical applications it adds lightness, reflective ability, conductivity and robustness to the properties listed above. Added to this is the fact that aluminium foil saves more resources than are consumed in its production, through the complete value and supply chain.

Flexible trends
Packaging producers have come under pressure to reduce process scrap as the cost of lost material cannot be recovered from
customers (although a degree of scrap is usually priced into print runs, and unprinted film and trim can generally be reprocessed).
At the same time, customers have also putpressure on producers to reduce the material content of packaging (basis-weight) -- a
process commonly referred to as "downgauging."

To remain competitive, manufacturers have had to make process improvements and invest in equipment designed to minimize scrap and deliver the required lower basis-weight materials in sufficient quality and quantity. Simple process improvements can deliver significant results: for example, by altering the way changeovers are performed, significant amounts of start-up waste can be eliminated from printing or extrusion processes.

However, in most cases, improvements have required significant capital expenditure (capex) investment. Recycling equipment, wider machines and new printing and extrusion technologies can all have a significant impact on scrap and basis weight. Those manufacturers that have not invested in a timely fashion -- and have not decommissioned outdated equipment - have suffered the consequences of becoming uncompetitive on cost and inflexible in their supply capabilities.

KPIs
Top performers use the overall equipment effectiveness (OEE) metric hierarchy. OEE is widely used in manufacturing, but is
particularly applicable to packaging, given that value creation is driven by the efficient conversion of a small number of costly raw
materials into a product using expensive machines and a fairly fixed labour cost. OEE is expressed as a percentage, with 100%
representing perfect conversion of the inputs into product without any losses.

There are three sources of losses, namely availability, performance and quality. OEE is the product of the percentages of these three.
In packaging, these losses come from characteristic areas:

¦ Availability losses come from machine downtime (changeovers, maintenance or repair).

¦ Performance losses come from operating machinery slower than its rated speed (inexperienced crews or product mix and
formulation changes)

¦ Quality losses come from scrap - which is the percentage of material produced that is not good for sale (depending on the process, some of this may be recycled or re-introduced into the process as mentioned above).

Utilisation of total available (unattended) machine time on a 24/7 basis is not included in the OEE calculation as it is not an indicator
of operational performance. It is also important to record and review working capital metrics, the most notable of which include days sales outstanding (DSO), days payable outstanding (DPO)and days inventory outstanding (DIO).

Companies within the industry are actively monitoring these metrics and striving to improve them as part of a continuous focus on working capital management.

Capex: getting"bang for the buck"?

Management needs to be skilled at determining how much to spend on maintaining and adding to the capabilities of its machine park. Spend too little and your competitiveness (and EBITDA) erodes over time. Spend too much on the wrong projects and your cash flow suffers. Therefore, finding the quantum and mix of capex spend that sustains EBITDA and cash flow is key. This is not to suggest that high spending on capex is always the right thing. It depends on the nature of the packaging subsector in question. As a general rule, companies exposed to large, sophisticated FMCG customers and fast moving consumer markets have to spend more to sustain a higher EBITDA margin.

"Sustaining" capex is described as expenditure required to support the revenue and EBITDA margin of the business as it stands. This may include spending on machine replacement, maintenance, safety and efficiency. This is distinct from "expansion" capex -- large, discrete projects that deliver incremental sales and EBITDA, such as new products, plants or lines.

Clearly, the level of "sustaining" capex has a bearing on future cash flows. Also, any significant period of below-target "sustaining"
capex spend will result in a capex backlog, which has to be caught up to prevent EBITDA erosion. Since both of these have direct bearing on the value of the business, it is important for management to know what "sustaining" capex should be for its business and make sure it is maintained.

Benchmarking and historical project analysis can be helpful in quantifying these. High performing packaging companies tend to have straightforward yet rigorous capital approval processes that apply the above principles. Best practice requires not just a business case with clear Return on Investment (ROI) requirements and projections, but also post-investment reviews to verify whether investments delivered their budgeted payback.

Alufoil trophy 2014 winners
A peelable lid blister pack, consisting of lidding foil and a Formpack cold-formed bottom web provided by Amcor Flexibles for Merck Sharp & Dohme Australia won for its greatly improved openability and product protection. The EMEND Tri-pack Formpack with peelable lidding is used for medication to prevent nausea and vomiting. The totally alufoil pack provides complete barrier protection, and is easier for the patient to handle. It replaces a larger walleted tri-pack that required the patient to push the tablet through the lidding. As a result of the change, MSDA has seen a dramatic reduction in the number of impacted products.

Beverage producer Belmoca is packaging five flavours of premium coffee and a milk portion in diamond faceted aluminium capsules created with Amcor Flexibles material. The eye-catching design, incorporated onto the shape of the container surface, has helped to distinguish it as a premium brand in the fast growing market for coffee capsules. The container comprises 100 micron alufoil with an outside stove lacquer, which can be produced in various colours, finished with a heat seal lacquer. The lid is made with 40 micron alufoil with a colourless stove lacquer which is embossed and heat seal lacquered.

Italian printing specialist Rotoprint Sovrastampa received recognition for helping multinational dairy and food producer Parmalat to save the costs of recycling reels of alufoil printed to lid a discontinued product and enabled its use on a completely new line, thanks to a patented process called 'total recycle overprint'. The result has given back the appearance of alufoil to a piece of material which had been previously printed in many deep and concentrated colours.

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