Shorewood Packaging

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Shorewood Packaging is a provider of packaging solutions, specializing in high-end packaging for consumer products, particularly in the beverage and tobacco industries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Shorewood Packaging operates primarily within the specialty packaging sector, focusing on high-end, branded packaging solutions. They serve a diverse range of clients, mainly in consumer packaged goods, but with a substantial emphasis on the beverage and tobacco industries. Their product portfolio includes cartons, folding cartons, rigid packaging, and labels, offering both design and manufacturing capabilities. The company emphasizes both quality and innovation, seeking to provide aesthetically pleasing and functional packaging for their clients’ products.

  • Revenue Distribution: Their revenue is primarily derived from the sale of packaging solutions, with a significant portion stemming from contracts with well-known brands in beverage and tobacco. They have also diversified to serve beauty, confectionery, home & personal care, and other consumer markets.
  • Industry Trends: The packaging industry is influenced by several key trends:
    • Sustainability: Growing consumer and regulatory interest in sustainable and recyclable packaging options.
    • E-commerce: Increased demand for packaging that can withstand shipping conditions and is more consumer friendly.
    • Brand Differentiation: The need for high-quality, premium packaging to differentiate products and enhance brand identity.
    • Customization: Growing demand for tailored packaging solutions that meet the specific marketing needs of clients.
  • Margins: Shorewood reports consistent margins, indicating stable pricing power, mostly in their higher value add, premium packaging lines. They aim for profit improvements through operational efficiencies and by serving their most profitable and stable customer segments.
  • Competitive Landscape: The packaging industry is highly competitive, with many players ranging from large multinationals to small regional businesses. While there are some big players like WestRock and Graphic Packaging, it’s a bit more fragmented at the specialty side of the business that Shorewood operates in. Competition comes from both established packaging suppliers and also from newer entrants looking to capitalize on evolving consumer preferences.
  • What Makes the Company Different: Shorewood positions itself as a premium packaging provider, emphasizing innovation, quality, and the customer experience. The company tries to focus on the “premium” side of packaging, where their design and custom packaging solutions can stand out. Their strength also comes from their close relationships with large brand companies, leading to repeat, long-term contracts. They also focus on serving customers’ ESG needs as well, providing sustainable alternatives for the packaging needs.
  • Recent Concerns / Controversies: The most recent earnings calls focus on the supply chain issues for the raw materials, such as paperboard, which may affect margins in the near-term, the company has also reported increases in labor and energy costs. A possible recession or economic slowdown is another challenge cited by management. They have also pointed to weakness in specific markets and with certain customers, although no specific names were given. A main growth driver was organic growth and a continued focus on premium products. Lastly, customer growth is still seen, but the pace of it has slowed down.

Financials

Here’s a deeper dive into Shorewood’s financials:

  • Revenue: Shorewood’s revenue has been growing at a slow, albeit stable, pace. The company has focused on organic growth and market expansions, also they expect growth from their strategic business initiatives. While overall revenue growth has not been dramatic, it’s still seen as satisfactory for the management. Recent results have been skewed by macroeconomic conditions such as lower customer demand and currency exchange rates.
  • Profitability: The company has had declining profits, due to lower sales and increase in costs. Gross margins and operating margins are down from previous years, so it is a priority for management to increase margins while also reducing working capital and debt.
  • Cash Flow: In their recent calls, they have shown a clear focus on free cash flow generation. They had a good start of the year with strong free cash flow, and anticipate having sufficient funds for potential acquisitions. They have reported decreasing capital expenditures and an expectation to free up cash flow, especially as they have finished some major capital projects.
  • Debt: They have an average amount of debt and are working on cutting it down in the future. They are aiming to maintain an efficient capital structure. The target debt-to-EBITDA ratio is around 2.75x.
  • Acquisitions: The company has been focused on acquisitions and stated they are targeting to acquire companies that are adjacent to the current business or provide complimentary advantages, as acquisitions are needed to hit long-term revenue and profit goals.

Moat Rating: 3 / 5 Shorewood Packaging has a narrow economic moat based on a combination of the following factors:

  • Established customer relationships: The company has contracts with large, well-established brands, mainly in tobacco and beverage, and their specialization for high-end printing and custom design gives them some degree of customer stickiness.
  • Specialized capabilities: Their capabilities in high-end packaging, including custom design and specialized printing, create a barrier to entry for some potential competitors that do not possess these specific capabilities.
  • Strong customer base: The companies that they have contracts with are large players, who have little options to switch to competitors, as switching has high costs involved. However, this moat isn’t quite “wide” because:
  • The packaging sector is prone to competition, and any advantage is at constant risk of eroding
  • Some of the customer contracts, while seemingly durable, are actually short or medium-term contracts with large companies, and there is always a risk of these being reassessed
  • Their competitive advantage is not completely differentiated since their products are also made by other companies, just with slightly different specs.
  • Their financial results are dependent on the strength of the global economy, since a lot of customers are large global corporations
  • The lack of full ownership of their assets, which can lead to increased operating expenses.
  • Raw material prices are highly variable and influence the profitability of the company.

Risks to the Moat & Business Resilience

  • Economic Downturn: A global economic slowdown could potentially curtail consumer spending and affect the demand for high-end consumer goods, where Shorewood specializes, which would lead to lower revenues, profitability, and shareholder returns.
  • Raw Material Costs: Fluctuations in paperboard costs will affect their pricing power and margins.
  • Loss of Key Customers: Since a lot of revenue depends on relationships with a relatively small number of large corporations, the loss of one or two of these customers will severely impact the business and the moat.
  • Technological Disruption: While they do offer customized design and high-end manufacturing, they are also susceptible to new technologies entering the packaging industry, which might give competitors an advantage. They need to continue to innovate to keep their position as a leader.
  • Competitive Pricing Pressures: The industry is very competitive, and competitors may decide to cut prices in order to acquire customers, which will likely negatively affect margins for Shorewood, or it has to follow suit and diminish its pricing power.
  • Increased Supply Chain Risks: Shorewood is susceptible to supply chain and logistical issues, as evidenced in recent earnings calls. This can affect both costs and on-time delivery capabilities.

Understandability Rating: 2 / 5 While the company engages in a relatively straightforward business of packaging, it is quite complex to understand all the underlying dynamics of their specific markets, what is driving costs, profitability, etc. For that reason, a rating of “2” is more appropriate.

Balance Sheet Health: 4 / 5 Shorewood Packaging shows relatively sound financial stability. They have manageable levels of debt that they are focusing on reducing, and their focus on cash flow generation indicates financial prudence. Overall, I would give a rating of “4”, indicating it is a healthy company.