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U.S. Containers & Packaging Newsletter: Issuers Still Waiting For A Growth Inflection

Revenues for most rated U.S. containers and packaging issuers remained lackluster through the third quarter of 2023. The impact of destocking, which had been caused by a strong build up in inventory (in response to high demand and supply chain issues) was met with a sudden drop in volumes, has lingered much longer than originally anticipated and continues to affect some end markets. We expect a modest improvement in the fourth quarter of 2023, but overall revenues for the year to be down in the high-single to low-double digits for many issuers.

We believe EBITDA will be slightly more resilient, partly as a result of cost pass throughs and companies implementing cost savings initiatives. In 2023, there were two downgrades to 'CCC+' and two selective defaults across the sector. This reflects the pressure on the lower end of the ratings spectrum from lower volumes and higher operating and debt costs, which in some cases could result in the need to restructure the balance sheet.

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We expect volumes to improve modestly in 2024, with sequential quarterly improvement as companies have worked through most of the inventory overhang. Various cost savings and restructuring initiatives, which included closing older and less efficient facilities to better balance supply with demand, should help steady earnings.

However, we are cautious that a weaker consumer may plague packaging issuers after moving beyond the destocking issues. Persistent high costs from previous inflationary pressures, consumer credit costs, and slowing real income will continue to curtail disposable income. S&P Global economists expect real consumer spending growth to decrease to 1.8% in 2024 and 1.6% in 2025, compared with 2.2% for 2023.

We expect certain sectors to remain soft due to weaker consumer buying power, such as durables, alcoholic and nonalcoholic beverages, and packaged foods. Industrial demand may also remain weak as the Purchasers Manufacturers Index remains below 50. In a down economy, consumers typically move toward private-label products. Packaging companies typically play in both branded and private labels, making them somewhat immune to this switch.

However, many consumer products companies continue to pass on higher inflationary prices to customers. This has been very profitable for them but has had a negative impact on volumes for packaging issuers. If they continue to push through higher pricing and use cost savings and efficiency gains for margin expansion and offset loss in volumes, this could contribute to a softer 2024 than we are anticipating.

Under the challenging operating environment and with high interest rates, issuers have been focusing more on conserving cash flows. Mergers and acquisitions were rather limited in 2023, but there were a few larger deals that were announced or executed. Notably, Ball's sale of its aerospace segment, WestRock's sale of RTS Packaging to Sonoco, and Smurfit Kappa's pending merger with WestRock.

We expect issuers, particularly on the lower end of the ratings spectrum with tighter liquidity and cash flows, will keep acquisitions and capital spending to a minimum and manage costs until the sector reaches an inflection point. We still believe the highest risks for the sector are refinancing risks and interest rates remaining elevated, which will have a disproportionate impact on lower rated issuers. Still, most of the issuers we rate in the lower speculative-grade categories do not have long-term debt maturities due until 2026, which will give them some runway to navigate the current operating environment.

Related Research

Rating actions in 2023
Full Analyses in 2023
Tear sheets and bulletins in 2023

This report does not constitute a rating action.

Primary Credit Analyst:Michael Tsai, San Francisco + 1 (212) 438 1084;
michael.tsai@spglobal.com
Secondary Contacts:Morgan Wilson, CFA, Englewood + (303) 721-4927;
morgan.wilson@spglobal.com
Matthew O'Connor, Boston + 1 (617) 530 8318;
matthew.oconnor@spglobal.com
Andrew Manuel, CFA, Boston (617) 530 8024;
Andrew.Manuel@spglobal.com

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