Profitability vs Financial Resilience- Why it matters when choosing a Packaging Machinery Vendor

Thu, Apr 9, 2020

Rovema_Think_Longevity_Financial_Security_Blog

New Supply Chain Reality

Every company works hard to cultivate great culture, build a great team and produce great products. In January 2020 those were key measures we used to compare vendors.

In March 2020 many realized belatedly that it’s not enough. In fact, if you can’t get key materials, components or services, your business stalls. All the most important factors become a mere footnote.

Important supply chain lessons are being learned - actually relearned - and new best practices will be written as disruptions move through stages. Warren Buffett said that when the tide goes out you learn who’s swimming naked. Here’s how we believe things will unfold in the primary and secondary packaging machinery space, and how the naked swimmers will be revealed.

  • Phase one - Short-term Inventory availability
  • Phase two - Medium-term Disruption adaptability
  • Phase three - Long-term Resilience

Complex Systems - Machines, Parts, Expertise

It’s been easy to take for granted that a process like vertical bagging is simply an engineering challenge compared to the complexity of running an entire business.

Multiple machinery manufacturers vied for business. Parts have been available from OEMs and aftermarket specialists which have sprung up opportunistically. And the biggest challenge most companies have had is retaining their experienced operators, supervisors and technicians who have the know-how to keep lines running well.

That’s changed suddenly.

Asian manufacturing shutdowns left some consumables deliveries unfilled.

Just-in-time parts operations have been suddenly exposed for reliance on networks of material supply and machine shops which are facing mandatory closure, employee illness and severe financial duress.

And it’s likely to change more as suppliers are shuttered by order, illness and supply disruption.

Process and Mindset Changes

Smart people running strong businesses will adapt. Consumables procurement will become more rigorous. Inventory levels will be adjusted. Details of component supply chains will be explicitly researched. Multiple vendors will likely be engaged - trading a bit of price efficiency for supply redundancy.

Those are the short-term, easy to anticipate (harder to execute) process changes. Costs will certainly rise. Vertically integrated, geographically convenient, quality manufacturers will understandably demand a premium.

Second-order challenges will lead to a larger mindset change.

Some capital equipment will become unsustainable as parts and technical support become unavailable.

Buying teams which already include engineering, maintenance, finance, operations, safety, controls and other functions, will consider more factors related to machine vendor resilience.

Changing a consumables supplier may take weeks or months of research and testing. Tearing out and replacing machines, which may not even be fully depreciated, will take months or years of disruption and enormous expense.

Good Times = More Vendors

A long-standing packaging machinery industry tradition is the splintering of companies during good times. Common DNA in design is often apparent when engineers and technicians see an untapped opportunity in growing markets, grow frustrated with management that’s slow to respond, and hang out their own shingle.

Often they were right. There was an opportunity. Through hard work and ingenuity they grow a business. Sometimes it’s full machinery (e.g. VFFS.) Sometimes it’s an ancillary component (e.g. auger filler.) And sometimes it’s a parts business which they start because they’re troubled by what they see as excessive OEM replacement part costs.

And then the cycle turns. Business slows. Growth contracts. Orders decline.

And they’re swimming naked.

There’s a fundamental financial explanation.

But it’s one that’s forgotten over the decade long business cycle and it takes downturns to remind the market.

The Balance Sheet Matters for Packaging Machinery Manufacturersrovema_financial_accounting_strong_balance_sheet

During good times it’s relatively easy for companies to get financing. If sales are growing, and they’re profitable, they can get the cash they need to grow more. Essentially they’re leveraging projections of linear growth to justify their plans to lenders. And the cash lets them buy more and hire more in a cycle of filling more orders.

Those orders come from customers who often feel personal loyalty and affinity to these corporate rebels, and who are intrigued by unique and different approaches to technical challenges. The resulting innovation moves the industry forward.

But the manufacturers and their customers are exposed as the cycle turns. Operations profitability, which is reflected in the P&L or Profit and Loss accounting statement, declines - or even turns negative - and things unwind quickly.

In challenging markets most equipment manufacturers lose money. In other words, profits are negative. (That’s the nature of boom/bust cycles of capital investment and part of the reason more manufacturers and customers are exploring recurring revenue / subscription models.)

When companies lose money, their resilience depends on how much they have in reserve to continue to serve customers, maintain inventory, retain experienced staff and continue operations at a loss. That’s reflected on the Balance Sheet which is the accounting statement of assets and liabilities - or how much the company has in “dry powder.”

The strength of the balance sheet doesn’t get much attention during strong markets. It’s the most important factor to understand in challenging markets. That will almost solely determine ongoing parts availability, continued R&D, the ability to retain the engineers and technicians who have years of accumulated science and black magic and the anecdotal familiarity with various circumstances, particular customers and unusual configurations.

Economic Contagion and Machine Builders

Just as we now know some members of the population are particularly susceptible to the coronavirus, the financial model of some machine builders makes them potentially susceptible to negative market conditions.

Machinery down payments are used to finance operations.

That has two key implications.

First, as soon as new machine sales slow, operating cash starts to deplete. Tough decisions follow quickly. Should we use parts to finish pending orders? Or keep them for machines in the field? Can we afford to pay technicians who are desk bound? Can we continue to improve our HMI if cash is needed to support family lifestyles?

Second, just when companies most need outside cash, the cyclical nature of their business most jeopardizes their ability to obtain it.

Some machine builders are shown to be swimming naked even earlier than many other leveraged businesses.

Even though you might evaluate machines as an engineer, maintenance manager, operations leader or marketer (you want maximum package style flexibility, right!?) you should also keep financial considerations in mind. Your assumptions about a primary and secondary packaging machinery vendor’s ability to meet your needs will at some point rest fully on their financial strength.

Balance Sheet Based Procurement

It’s true, most primary and secondary packaging machinery manufacturers are privately owned.  Privately owned companies are not required to reveal their financial performance and strength to the public. Therefore it can be difficult to ascertain during the procurement process. So how can a capital equipment buying team collect this critically important information? There are some key questions to ask.

Your team will develop your own list. Here are some you might consider depending on your role. (You may find that their willingness to respond will tell you just as much as the answers themselves.)

Finance

  1. How many recessionary cycles have you endured?
  2. What is your current ratio (assets/liabilities which are collectible or due within six months)?
  3. What are key covenants of their commercial credit facilities (what rules has their lender set which could be violated and would result in their loan being called - or due immediately...leaving them swimming naked)?
  4. How did revenue change during the last two recessions and how did staffing change accordingly?

Maintenance

  1. How many machines >10, >20, >30 years old do you currently support?
  2. How do you manage parts/components obsolescence?

Operations

  1. How was your staffing affected by the economic conditions of the last 2 recessions?
    • Field service
    • Parts
    • Engineering
  2. What portion of your parts are made in house vs. outsourced?
  3. How do you vet/monitor component suppliers?
  4. What redundancy do you have in component supply chains?

Engineering

  1. How many new models have you introduced in each of the last decades?
  2. When was your last complete drive and controls overhaul?
  3. How many programmers do you have on staff and how are programs documented and preserved?

Potential vendors may refuse to answer. That’s their prerogative - and a factor for you to consider. Their comfort vs. your business resilience is a choice only you and they can make.

In general, though, a company’s experience managing through down markets is the best predictor you’ll have for how they will do so when it inevitably happens again.

Logo_Franz_Haniel_&_Cie._GmbH

Rovema, Haniel, Your Company and 2050

So how does Rovema measure up?

Well, not only did we develop the first continuous motion VFFS bagger in the world, but in over 60 years we have endured 8 US recessions. And many of our employees have been with the company through many of them.

And while our balance sheet is strong and durable, it’s further backed by our owners, the Haniel Group. Founded in 1756 (264 years ago!) Haniel has survived and prospered through plagues, world wars, historical epochs and natural disasters. 

The financial strength - the balance sheet based resilience - of Rovema, therefore, is immense.

While that might not have been a critical factor in many 2019 VFFS purchase decisions, we know that it will be going forward.

Our strength means that:

  • Parts - Our US based spare parts inventory (currently >$2.5MM) will be managed based on customer needs, not tightening cash (and is even larger globally)
  • Expertise - Our team of engineers, technicians and support experts will be maintained for continuity of support for existing machines and important, new projects
  • Support - The hundreds of machines currently running in the US - in many cases working overtime to continue to keep the critical food supply chains full - will continue to run with upgrades, rebuilds and remote support even for those that have already yielded many decades of reliable service

Your Questions

We anticipate that these and other questions will be important to you and your team as you evaluate vendors for upcoming machine projects.comparison-matrix-vffs-machinery-rovema

And we’re committed to answering as fully as prudent business and mutual confidentiality agreements allow. John Panaseny, our CEO, and Suzanne Hanks, our CFO, are available to answer questions, provide reassurance and offer insight into our ongoing sustainability and resilience to support your procurement team.

We know that selecting a machine builder is an important choice. There are price and lead-time considerations today. Technical capabilities including speed, filling accuracy and package consistency are important. And long-term resilience is key.

To help you compare vendors we’ve prepared a comparison matrix which you can download here