Flexible Packaging Segment - Integrated Report Grupa KĘTY 2022

Production characteristics and major assets

The Flexible Packaging Segment is represented by the leading company of Alupol Packaging S.A. in Tychy and its subsidiaries, Alupol Packaging Kęty and Alupol Films. The Segment is a leader in manufacturing flexible packaging materials in Poland, with the estimated market share of nearly 20%, as well as a recognised packaging manufacturer in Europe. At the same time, the Segment is the largest Polish manufacturer of recyclable polypropylene films, with production capacity of 60-80 thousand tons a year, and over 5% share in the BOPP films market in Europe.

The packaging manufactured by the Segment is intended for the instant food sector mainly, but the company also sells to the confectionery, fat, dairy, meat, pharmaceutical and chemical industries. The main recipients of polypropylene films are mainly European companies in printing, floral, textile, haberdashery or adhesive tape industries, such as Sylvaphane Holland B.V., Delo, Laszlopack, Perfon, Saba, Dalpo. Polypropylene film is a recyclable material, which is important in the context of achievement of the environmental objective to replace classic multi-material packaging with such that complies with the circular economy concept. Given the scale of production, both of polypropylene films and sustainable, more homogeneous packaging laminates, recyclable products already account for nearly 90% of the volume produced. The films manufactured at the Oświęcim plant are partially used and refined (printing, lamination, cutting) by Alupol Packaging S.A. and Alupol Packaging Kęty Sp. z o.o.

Rafał Lechowicz

President and Chief Executive Officer of Alupol Packaging S.A.

The Flexible Packaging Segment generated revenue at the level of PLN 1,517 million (+30% y/y), including PLN 836 million of revenue on foreign sales (+34% y/y) and improved its position among the largest manufactures of BOPP films and flexible packaging in Europe. Launched at the turn of 2016 and 2017, the investment in the production of BOPP film proved to be extremely well-timed and well executed – it enabled the company to gain a share of around 6% in the European BOPP film market within a short period of time, and its share of sales in the FPS product basket was nearly 50%.

Plant in Tychy

Plant in Oświęcim

The long-term strategy for the FPS has been prepared in the period of major transformations on the packaging market, where expectations have been changing dynamically as a result of environmental pressures, focus on cost reduction and food safety, and the related legislative changes. The strive for sustainable development is forced by the necessity of creating and marketing new forms of laminates, i.e. mono-structures characterised with lower weight and higher material homogeneity. Despite the observed pressure on plastic packaging and replacing it, where possible, with packaging based on refined paper, the position of the former seems not to be threatened. Plastic-film-based packaging protects the packed food as no other packaging, extending the food shelf-life, which finally prevents food wasting.

In 2022, similarly as in the earlier years, the packaging sector was strongly affected by the environmental protection trends within the world’s economy. Despite the absence of unequivocal regulations and guidelines defining sustainable packaging, the FPS has concentrated on activities that follow market trends, i.e. improvement of the manufactured laminates (thinner structure, higher material homogeneity, smaller printed area), while still guaranteeing the safety of the packed products. It is a very fast process of replacing classic multi-material laminates with packaging based on refined paper, and homogeneous structures of polypropylene and polyethylene films. Intensive work on creating more environment-neutral solutions and their implementation at the customers’ is related to making many additional tests and adjusting the packing lines to the specifics of new laminates. Following the investment projects completed in the recent years, the EPS – a leader in the market of packaging materials in Central Europe – avails of optimal production facilities in reference to customer expectations. The recent investments in plastics processing (manufacturing of recyclable polypropylene and polyethylene films, including high-barrier ones), as well as further development of the technology of paper refining, will contribute to consequent strengthening the FPS position on the market.

Due to the increase in affluence and expectations of the society, which entail marketing of increasingly processed and easy-to-prepare food, the packaging industry in Poland has been developing fast. The situation is enhanced by the presence on the Polish market of the major international concerns, such as: Amcor, Mondi, Constantia, Huhtamaki, Schur Flexibles, Walki Group, Wipak, and Südpack, as well as a great many small and medium-sized Polish companies, including KB Folie, Drukpol, Supravis Group, Marpol, Ergis, and Bogucki Folie. In addition, suppliers from Turkey, Egypt and Saudi Arabia have recently become increasingly active on the European packaging market, taking advantage of cheaper raw materials and energy, and introducing products at very low prices. Such a large number of players competing with each other, as well as the oversupply of production capacity in the industry, is forcing an increasingly strong competitive struggle. This phenomenon, coupled with the growing trend among the customers requiring specific suppliers of raw materials to be used in the packaging produced for them, has resulted in growing pressure on margins.

In the discussed period, the Segment generated record high results, including sales revenue of PLN 1,516,628,000 (growth by 30% y/y), of which PLN 835,844,000 from export sales (growth by 34% y/y). Such high dynamics resulted mainly from the situation on the raw materials market and the extraordinary event of the outbreak of war in Ukraine. For entities with secured access to raw materials, which also referred to the Flexible Packaging Segment, the turbulence enabled to achieve attractive margins, mainly in the area of BOPP film production. In addition, thanks to high operating efficiency, export sales exceeded 55% of total revenues, which also contributed to strengthening the Segment’s position on the European market. The largest export markets were Western European countries, such as: Germany (20% of export sales), the Netherlands (16% of export sales), and Italy (11% of export sales). The main recipients of flexible packaging were international concerns such as: Nestle, AB Foods, Upfield, McCormick, Dr. Oetker, Brüggen, Koninklijke Douwe Egberts, Aryzta, Orkla Foods, Perfetti van Melle, Lorenz, Danone, and respected regional companies, which apart from their own brands offer private label products to chain stores. These include, among others: Prymat, Maspex, Tarczyński, Mlekovita, Mokate, Foodcare, Bakalland, Animex, Serpol Cosmetics, Sokołów, Koral, Mlekpol, and Woseba.

The packaging industry across the EU has been facing a number of problems in recent years (the pandemic, broken supply chains, armed conflict in Ukraine), which resulted in limited availability of raw materials. The problems with materials originated mainly from broken delivery chains and higher demand and translated into price increases. These affected virtually all raw materials for food packaging – paper, aluminium foil, polyethylene granulates or ethylene vinyl alcohol (EVOH). The relatively high prices of raw materials were due not only to limited supply, but also the fact that additional costs had to be incurred in order to comply with new regulations, including those aimed at reducing the quantity of plastic in the environment and implementing the circular economy model. The segment uses multiple sources of raw materials. Aluminium and polyester films are mainly purchased from Far East countries, polyethylene and polypropylene granulates are sourced from the Middle East, Asia, and Europe. Other raw materials and production materials are purchased mainly from European suppliers. The share of none of the raw materials, semi-finished products or materials suppliers exceeds 10% of the total purchases made by the Segment.

The year 2022 will go down in history not only for its spectacular financial results, but also, and perhaps above all, for the accelerated pace of changes in the structure of marketed packaging. Classical structures that have been successfully manufactured for several decades began to be replaced on a large scale by new, environmental solutions. Numerous projects were carried out together with our customers in this area, which led to the introduction of laminates in new configurations, such as mono-film, characterised by lighter weight and greater material homogeneity, which is easy to recycle. New solutions in flexible packaging are based mainly on the use of polypropylene and polyethylene films in laminates. There are also being implemented new PPB^TM films based on polypropylene, produced in the blown-film-extrusion process. These are used as a component of homogeneous two-layer laminates, where the second layer is made of BOPP film manufactured at Alupol Films in Oświęcim. BOPP/PPB^TM laminates reflect very good mechanical and barrier properties. Therefore, they may be used in packing many types of food, e.g. instant foods, seasonings, coffee, fresh meat, cold cuts, bread, etc. The laminates comply, at the same time, with the guidelines of the European strategy for closed-circuit plastics. In that regard the OPP/PPB laminate was awarded the ‘Made for Recycling’ certificate, confirmed by research carried out at the German Fraunhofer Inistitute, in compliance with the bifa Umweltinstitut GmbH methodology. At the same time, laminates are being developed on the basis of paper, paper refined with heat-sealable, high-barrier varnishes, or thin polymer layers with heat-sealable and barrier properties. The new-technology laminate has been tested with regard to fitness for recycling, and a positive result confirmed with a certificate has been achieved. All the proposed solutions guarantee food safety and may be printed either with the rotogravure or flexographic techniques. Due to the specific properties of the PPB^TM and HBF9^TM, the 3-, 4- and 5-layer laminates available on the market, containing aluminium, plastic and paper, may be replaced with 2- or 3-layer laminates of lower basis weight and more homogeneous structure. This means that the laminates require less material than the ones applied so far, which contributes greatly to reducing the quantity of plastics introduced to the market and reduces the impact on natural environment.

Following the 2021–2025 Strategy, the investment projects of the Segment will be limited in the Strategy period to maintaining production potential at a high level. In 2022, all capital expenditures referred to such projects.