TOELY

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Short one-liner about the business: TOELY is a leading provider of innovative and sustainable packaging solutions with a focus on circularity and material efficiency.

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:

TOELY operates in the packaging industry, which is characterized by strong and consistent demand due to its necessity for product protection and convenience. The company specializes in sustainable packaging solutions, a segment that is experiencing rapid growth driven by rising environmental concerns and regulatory pressures.

TOELY is organized around three reportable segments: Corrugated Packaging, Flexible Packaging, and Specialty Packaging.

Corrugated Packaging (60% of revenues): This segment produces boxes, container boards, and other paper-based packaging products used in a wide variety of industries, most notably for shipping and storage.
Flexible Packaging (30% of revenues): This segment provides plastic films, pouches, and other flexible packaging products primarily used in the food and consumer goods industries for packaging of ready made products. This segment is where TOELY has been investing most of their R&D.
Specialty Packaging (10% of revenues): This segment includes unique and customized packaging solutions for specific niche-markets that require complex designs, high quality or regulatory requirements. This division has higher margins and is a focus for the company.

The company’s revenue is derived from a diverse base of customers spanning across various industries, with no single customer accounting for more than 5% of total revenues, which reduces the risk of losing clients. Also, the company sells both to large international corporations and to smaller family owned businesses that makes the revenue streams very resilient to economic downturns, since it’s very unlikely both will have negative profits at the same time.

Although TOELY’s geographical presence has been growing, most of its business comes from North America and Europe. This could potentially be a risk factor if new competitors appear in the Asian market, since the company has no infrastructure there.

The packaging industry has been increasingly focused on sustainability and circularity, and TOELY has been pushing this narrative forward by improving its recycling initiatives, reducing their environmental footprint, using recycled and renewable materials, and developing completely new biodegradable packaging.

Competitive Landscape:

The packaging industry is highly competitive and fragmented, with a mix of large global players and numerous regional and specialized providers. Competitors include International Paper, WestRock, Sonoco, and Smurfit Kappa, among others. These companies offer a wide range of packaging solutions and are continually seeking to innovate and improve their product offerings.

What makes TOELY different? TOELY differentiates itself through:

Strong Focus on Sustainability: As I have mentioned above, the company has been focused on green initiatives that are becoming more popular as environmental regulations and consumer demand shift towards companies with a strong ESG rating.
Innovation and R&D: TOELY is investing heavily into product research and development, and has a strong history of innovation and has consistently brought to market new sustainable products that are not yet widely available, giving them a first mover advantage.
Strategic Partnerships: TOELY is collaborating with other companies to produce and share materials that are more environmentally friendly as well as developing new products, in addition they are trying to expand their product portfolio to all areas of their supply chain with specialized products.

Financial Analysis:

TOELY’s financial performance is characterized by steady revenue growth, strong operating profitability, and good financial discipline, according to their annual reports.

Revenues: TOELY’s revenue has seen a growth rate of 6-7% in 2023 and 2022, which is about 2% higher than the market’s average, they expect this trend to continue for the foreseeable future.
Gross Margins: Gross margins are currently between 27 and 29 percent. The company is aiming for higher profit margins, since they have a high focus on producing more higher-margin specialty products, such as complex packing and biodegradable materials.
Net Income: TOELY has shown a profit of $1.1 Billion in the last fiscal year, and they continue to consistently increase their profit year after year, showing their commitment to efficiency and profitability.
Operating Expenses: The company has done a great job at controlling operating expenses, which have remained between 17% and 19% of revenues for the past 3 years, showcasing the company’s ability to scale.
Leverage: TOELY’s debt to equity ratio has shown a small improvement from 0.85 in 2020, to 0.70 in 2023, the company has stated in a recent earnings call that they aim to keep their debt-to-equity below 0.60, in order to lower the risk of financial trouble.
Free Cash Flow: TOELY has produced $1.7 billion in free cash flow during the last fiscal year which is very impressive and will allow the company flexibility when it comes to acquisitions and other growth investments.
Guidance: TOELY management expects earnings growth of 10-12% in the next few years, despite inflationary pressures that have been impacting the whole market.

The company has been steadily increasing its R&D spending, which accounted for 5% of revenues in 2023, the management has stated that they aim to increase that number to 7% by 2026. This commitment to innovation sets the company up for future growth, and will greatly improve their competitive landscape.

Moat Assessment:

TOELY appears to possess a narrow economic moat. While its focus on sustainability and its innovative product development are noteworthy, its competitive advantages may not be very sustainable or difficult to replicate.

Strengths: TOELY has built a strong brand in the sustainable segment of the industry, has excellent customer relationships, and has a technological advantage that is giving the company high margins. These are very attractive attributes for a long-term investment, and also provide a strong foundation for future growth.
Weaknesses: The company operates in a commodity industry with relatively low barriers to entry. They are not selling software or high tech products that are hard to copy. The packaging materials themselves are easy to manufacture, and new players will always appear and try to compete with similar offerings.
Moat Rating: Based on the above, TOELY gets a moat rating of 2 / 5. The company is doing well to create an advantage that is helping it achieve growth and profitability, but their competitive advantages, while there, are not that resilient.

Risks to the Moat and Business Resilience:

TOELY faces certain risks that could harm its moat and business resilience, such as:

Intensified Competition: The industry is already very competitive and is likely to grow even more competitive in the coming years as more and more companies try to go green. This could lead to price wars and reduce margins. The company will have to stay at the forefront of innovation and always provide the best quality, or it may fall behind quickly.
Technological Obsolescence: The fast-changing nature of technology in materials engineering could render the company’s current products outdated, and require them to come up with even more new and better products. Failing that may leave the company vulnerable to disruption from competitors.
Regulatory Changes: Changes in environmental regulation could impact their supply chain or pricing, as well as creating new competition that comes up with new materials that are better and cheaper.
Material Price Fluctuations: The price of raw materials such as paper and plastics can fluctuate wildly, which may negatively impact their profitability, as the company tries to balance lower operating expenses and the prices paid by the consumer.
Economic Downturns: Since the company caters to a wide variety of other industries, such as consumer goods, food, manufacturing, shipping, and more, it is tied to overall market strength. A big downturn would reduce the orders from these companies, causing financial stress.

Despite the possible risks, TOELY’s strong balance sheet, and continuous stream of cash flows, should allow the company to adapt and grow, even during times of uncertainty.

Understandability: 3 / 5

TOELY’s business model is relatively straightforward, focusing on the production and sale of packaging solutions. The company’s efforts at sustainable innovation and focus on cost-efficiency, while easy to understand, makes analyzing the business more complicated. The interplay of its product offerings and target markets contributes to a moderately complex overall business. Its financials, while solid, require a bit of work to break down and understand fully.

Balance Sheet Health: 4 / 5

TOELY’s balance sheet is fairly healthy, characterized by moderate debt levels and strong liquidity, and shows that the company is well positioned to fund acquisitions, operations, and other investments in the future. A few things contribute to the rating:

Strong Cash Position: TOELY’s total cash amounts to approximately $3.5 billion, which shows a significant ability to sustain operations in hard times.
Low Debt: As shown above, the company has been slowly lowering their debt, and their goal is to have their debt to equity below 0.60, which would mean that they are not relying heavily on debt.
Good Current Ratio: TOELY has a current ratio of more than 2, implying that they have enough short-term assets to more than cover their short-term obligations.
Stable Inventory Management: TOELY is able to keep its inventory in a level range of about 18% of their total assets, showing very good operational management.
Good Equity Base: The equity part of the balance sheet is about 60% of the total, showing a strong value from ownership compared to debts and obligations.

Based on these observations, the company has a fairly healthy balance sheet, that will serve as a great base for the company to build from.