Making money on your capital expenditures


What kind of return does your packaging-converting company get on capital expenditures? Thanks to a new study by BMO Capital Markets, we now have a pretty good idea of how well that group’s universe of 28 packaging companies did over the past few years. To calculate the metric, BMOCM took the increase in sales over the 2005-Q1 2010 period and divided that by cumulative capital expenditures over the same time period. (It also took pains to deal with the impact acquisitions and divestures had on historical growth.)

So, here are the results: The overall packaging industry had a median Sales Return on Capital Expenditures (SRCE) of 39 cents; this implies a sales-payback period on capital expenditures of two and a half years. Rigid-packaging companies had the highest median Sales Return on CapEx of 59 cents; or a sales-payback period of less than two years. On the flip side, flexible-packaging and label converters had the lowest SRCE of only 26 cents; or a nearly four-year sales-payback period. Paperboard converters were pretty much in mid-stream with 36 cents (a payback timeline of almost three years).

How individual companies did truly ranged up and down the scale…from Crown’s high of $1.79 in sales returning for every dollar spent, down to Solo Cup’s low of losing $2.22 in sales for each dollar it spent on capital expenditures. Fortunately, 80% of BMOCM’s field of companies had positive returns on their capital investments. Some of the better performers: Graphic Packaging, Rock-Tenn, Multi-Color Corp. and Cascades. Who didn’t do so well? Bemis, CCL Industries, MeadWestvaco and Intertape Polymer.

My Thoughts: Nobody spends money on capital expenditures without crunching the numbers six ways to Sunday. But conversely, nobody should LOSE anywhere near more money in sales than they actually spent to increase them through production or efficiency investments. Does your company have a rule when it comes to Sales Returns on CapEx? The consensus among suppliers I’ve heard from say converters now want one-year payback, 18 months tops. When it comes to the aforementioned metric, only those making metal cans and glass bottles come close to such a rapid return. Flex-pack and label makers are seriously behind the curve.

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This entry was posted in flexible packaging, labels, paper/paperboard/cartons and tagged , , , , , , , , . Bookmark the permalink.

2 Responses to Making money on your capital expenditures

  1. Yuval Golan says:

    Hi Mark,

    Great reference, very important insights for me coming from the equipment vendors side – at the end of the day we need our value prop adhering to the ROIC benchmarks and requirements just as much as to the technical specifications.

    Just one question – I couldn’t find the research on BMO’s site, do you have a direct link to it?

    Thanks, Yuval

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