Cranial Capital, Inc.

Injured Once Again by the Innocent Plastic Clamshell

tim — Aug 2009

PLASTIC CLAMSHELL PACKAGING IS NO JOKE, IT’S DANGEROUS

Last fall I wrote a Packaging Market Observer entitled “Packaging We Love to Hate!” The categories of packaging that annoy or injure us are many, but we chose to limit the group to 10 real buggers. This morning I was reminded of one of the worst offenders - Clamshell and Other Thermoformed Packaging.

It looked like a nice pen. It was called the “G2 Limited” and was made by a writing instruments power PILOT. I was running low on pens so if picked it up at Office Max. That afternoon in my office, as my conference call wore on, the ink from current pen was almost spent. Fortunately, my trip to Office Max at lunch time provided backup.

IT LOOKED LIKE A NICE PACKAGE

The G2 Limited was housed in a blue tinted thermoformed clamshell, equipped with multiple layers and “trap” compartments. The heat sealed corners of the pack looked innocent enough, almost like a Hefty or Glad “Zip Lock” storage container where you can put your finger nail underneath the top surface and conveniently flip it open and then reseal it later.

PACKAGING SURGEON

But this was not true for the G2 Limited. The heat sealed ends where not easily openable, indeed they were impenetrable. After nearly losing several nails I moved to a manual separation of the plastic blister. After a couple of tugs I opted for the scissors. I sliced off the top 10% of the pack and then snuck a couple of fingers into the blister to try and pop it open or possibly lift the pen out from its “cradle.” The cradle had a form fit cover over it so the pen was essentially housed in a blister within a blister. (you have got to be kidding me!) Not willing to go back to the scissors yet, I tried to forcibly separate the heat sealed clam shell walls only this time I was cut. It was about a .375″ inch long cut that hurt like hell and bleed for quite some time.

INSTRUCTIONS NOT INCLUDED

We have to ask ourselves at what price point do we sacrifice safety? Is a $9.99 writing instrument worth scarring oneself? How about a $39.00 children’s toy? Or how about a $69.00 consumer electronic device? All I know is this. I don’t want my kids nor my wife to be using scissors, steak knives or fingers to open any of that stuff! The PILOT G2 Limited package had no directions on how to open it! Its buyer beware. Obviously, millions of Americans are cut and scarred each year, but no one dies or gets really sick, so there is no driver to change on the product manufacturers part. Its really too bad as there should be. PILOT should have enough smarts or a corporate excellence program to weed out and fix problems their workers, the supply chain, the retailer and end user have concerning any product they make include product experience!

WHY AMERICAN’S DEAL WITH CLAMSHELLS

The main reasons why clamshells are tolerated are threefold: Most mass market stores rely on point-of-purchase / point of sale (POP/POS) marketing where visual packaging (clear containers) are hung on pegs and customers can select their own needs. This is good as less labor is required to operate the store. Secondly, the product manufacturers use clamshells because they are very labor efficient to assemble and pack product into. Finally and most importantly, the clamshell is a very good deterrent to theft and product shrink. Companies that take a hyper-focused approach to theft deterence at the expense of customer experience will lose sales not by kids running out of the store with a pen in their pants, but by legitimate customers buying other brands or walking out of the store with no purchases.

PACKAGE DESIGNER’S /CONSUMER PRODUCT SAFETY COMMISSION TO THE RESCUE

This most recent tangle with a clamshell has got my dander up. I am not going to give up like I do with my US Representative(s) in Congress. Here is the game plane: 1.) Every time your wounded opening a less than adequately packaged product, call the company’s customer service department and register a complaint. 2.) Alert the CPSC to your experience and speak out for package redesigns that are balanced. We don’t need “tanks” when a “jeep” will do. 3.) I would also offer up the suggestion that we tax such “dumb packs” and use the proceeds for a prize awarded to the best replacement package design. 4.) Let us tap our colleges and universities that specialize in Packaging to organize the competitions: RIT, Michigan State, Clemson, Rutgers etc. Finally, would it not feel good to enact positive change from the market place given Congresses total lack of ability to do anything?

Give Me Guidance

tim — Mar 2009

Back in the eighties when I was an equity research analyst, following the Packaging Industry, there was no such thing as “Giving Guidance”. We had more independent access to Senior Managements, which implied at any one time, the analyst who had spoke last to the company, had the most actionable information for investors. This independent access also brought with us the potential for insider information.� Some used it, other analysts did not.� When I started out, companies basically sent press releases to a handful of analysts via fax and at some later time made the news available on a Reuters Terminal or a Quotron. The 5-6 analysts who followed the company then reviewed the earnings or other announcement and called Investor Relations to fine tune the message in company’s announcement. Then the analyst called the “Buy Side” (Investors) to discuss the company’s results. There were no conference calls, their were no management presentations, and almost none of the Institutional Investors called the companies directly.

Today is quite different, I think you’ll agree. Three things have changed to materially impact the rolls of the constituents involved.� First of all senior managements began to have earnings or news worthy event conference calls. Technology played a key roll as emailed files and global teleconference or webcasts put all investors on the same playing field. While this trend began prior to SOX or the Sarbanes Oxley Act. This law came into effect in 2002, and introduced major changes to the regulation of financial practice and corporate governance.� The two big elements were the tightening up and enhanced 3rd party oversight of financial statements (quality & security) and corporate governance where by any and all information was made transparent to the markets at the same time. Finally, and this had begun even prior to earnings calls and SOX was the increased communication between Institutional Investors and senior managements. If FMR or Cap Research owned 5% of your shares, you said yes when they wanted to come visit.� This begs the question of whether such investors did not become just like the equity research analysts of the 70’s-90’s.

Today it is not surprising to get a press release stating the Chairman went home from work early so he or she could play golf!

Back to the point of this piece.� In old days, equity research analysts got the story way in advance of other investors.� Indeed, it was not uncommon for analysts depending on their forecast to send buy or sell tickets to the trading floor before they issued their reports.� In many cases their securities trading profits far exceeded their total compensation packages! Why could I have not been born 30 years earlier?� Analysts have it tough today.� With SOX their compensation is derived directly from the trading desk.� No more contribution from Investment Banking, which in some years could account for 50%-60% of one’s bonus.� Now analysts have to read the press releases at the same time as their competitors and clients, sit and listen to the conference calls with the same crowd and even have their firm’s “special” conferences� poached by anyone who can do a webcast or peel the conference slides off the company’s website.

In this era, equity analysts are given piles of data along with everybody else. They get to ask questions and get answers on conference calls that quickly become public record. The most outrageous thing is management provides Guidance or an Outlook for the pending quarter and full year. This was fine when the economy hummed along and ranges were used.� But in today’s period of unknown, making predictions is for the “Gods.” Yet analysts demand CEO’s provide Guidance so they can backward project their forecasts and wedge their estimate into the range provided by the company.� Should I be at the high end or the low end? During the recent year-end conference call season, their were many managements who were willing to give some form of guidance, some that would give some scenarios that analyst might consider to work into their models and some that refused to provide any guidance. In one case, a large, global container company was badgered by analysts for a lack of guidance. After trying to be nice to the analyst(s) the CEO turned sour.� He responded gracefully with questions back to the analyst(s).� Tell me what the average price of a barrel of oil will be in 2009. How about Soda Ash, what should we expect for it in 2009? In terms of FX, how will the US$ be valued against the GBP, Euro, and AUS$? What about Consumer Demand, will Brazil and Mexico be able to recover? What will our price/mix be like in this uncertain world? Interest rates, where are they going? Guidance? You have got to be kidding me!

Equity analysts are an inquisitive lot, who soak up loads of information that can possibly provide a competitive advantage.� They still do it today, that is soak up a lot of information.� During the 10-years I spent doing equity research, more than once did I hear, “you guys are the research analysts, you make the assumptions: read the SEC filings, press releases, trade journals etc.”� “Quit taking me down last year’s P&L and working me over to come up with a positive or negative variance to each line item from last year’s annual report to estimate this years earnings!� I actually remember a CFO who was a real character, he used to tell analysts “I will tell you our EPS for this year when you tell me how the “Peach Crop” in South Carolina would do and while your at it how much Corn will the Northern Midwest produce?”

I guess the bottom line here is that equity research analysts are a smart, hard working bunch. Nonetheless, they must understand that their companies are only human.� Who could have predicted the Financial and Economic Turmoil that has overwhelmed the globe as we speak? If a Packaging Executive could predict the average cost of oil or FX movements, he certainly would not be talking to you on a Earnings Call! My advice to the analyst community is to do your own work when it comes to external events because your companies and economists know about as much as you do. Furthermore, an independent approach to their business workings is merited. I once knew a Mining & Minerals analyst who refused to talk to management. His thesis was “their not bad guys, its just that they don’t know anymore than I do. As such, I don’t want my work to be polluted by them.”� Today, this old friend would be doing real research while his peers would be getting polluted by a management presentation!

1818

There is a Garage Sale on Crystal Balls!

tim — Jan 2009

This is an extremely tough time for investors as they try to make sense of corporate sales and earnings trends moving forward.� While the Q4 2008 results were mixed and thus a little better than expected, 2009 is what really matters now! Some companies are providing 2009 guidance in a fairly normal fashion. Others are using the wide angle strategy, opening up the “goal posts” for maximum safety.� Finally, many companies refuse to provide any guidance at all.� At the most they will provide scenarios for analysts and investors to work into their models to help them project their own sales and earnings.� Project sales and earnings? Lets be realistic here. The world is nearly spinning out of control and investors are trying to place bets?� Many are angry at companies who cannot provide them with a reasonable forecast range of sales and earnings for 2009.� I guess the analysts and investors could do much better in forecasting energy and raw materials costs? What about foreign currency? Can George Soros make money in the FX markets today? How about the consumer, don’t you have a feeling that they are hanging on for dear life? Would anyone want to predict where unit volume and prices will come out? Lets face it, nobody knows and if they say they know well then the Madoff Character really was the genius that people all over the world thought he was. The phrase “There is a Garage Sale on Crystal Balls” is really brilliant and I wish it were mine. However, the credit must go to OI Chairman & CEO Al Stroucken.� Al pulled this out of his tool box after OI would not provide guidance given the limited amount of specificity that could be applied to OI’s forecast.� A Crystal Ball is an object that some turn to seeking clairvoyance or the ability to derive information that we cannot obtain through our own intelligence or other means.� Garage sales are normally held to get rid of items we no longer want or that do not work effectively. The theoretical Garage Sale on Crystal Balls that Stroucken references implies that not even a “clairvoyant tool” can help us clarify the future today.� I only wish that Wall Street figured this out long ago.

Packaging Share Prices: Where Next? Who Really Knows?

tim — Jan 2009

Packaging shares declined significantly in 2007, but you already knew that. Our 27 company universe fell by some -29% yet still out performed the major indices: DJIA -32.7%, S&P 500 -37.6%, the FTSE -30.9% and finally the Nikkei 225 -58.2%. To many, the modest outperformance was the difference between being decapitated and bleeding to death. Many executives take a myopic view of why their company’s shares did so poorly. This in and of itself is not necessarily a bad thing. However, no executive could have prevented the historic inflation and now deflation of inputs used in our businesses. Nor could the unprecedented demise of the economy be halted with productivity and slashing prices. But as they say, “it is what it is.” In a soon to be released Packaging Market Observer you will see that we actually had 1 company whose shares went up by 6% and 4 others whose share prices declined by 10% or less. Why did this small grouping of Packaging concerns do better than the peer group and the major Indices? Lets find out. Packaging shares are supposed to be defensive, recession resistant in “normal recessions.” But these are uncharted waters. Packaging shares historically have followed their consumer customers in terms of investor interest. Packaging shares have improved somewhat from the beginning of Q4 2008 to date, but what does the future hold? Well, as it appears, those people “in the know” (Economists, Bankers etc.) tend to be less knowledgeable than the cab drivers or dry cleaners! As for myself, I will go out on a limb and forecast that historically Packaging shares have been a self contained market of winners and losers. 2009 will be the same. Get on your spectacles!

If this subject matter is of interest to you, we have released a more detailed piece in our Packaging Market Observer product line. “Packaging Shares”