Panelist Jonathan Mishkin at the FastMarkets International Containerboard Conference

Last week, Jonathan Mishkin, Managing Director at TM Capital, attended and served as a panelist at the FastMarkets International Containerboard Conference in Miami, FL. The tone of the conference was decidedly mixed as many of the speakers addressed concerns about oversupply of containerboard, especially in the European and Asian markets and the challenged economic environment many US producers are facing.

Our conclusion following the conference and after speaking with many participants was that the current macro-economic challenges facing the packaging industry (and the industrial sector, generally) combined with its cyclical financial profile have made investors hyper focused on identifying companies with business models leveraged to the fastest growing retail trends, packaging substrates, and most attractive geographies.

During the panel discussion “Managing Growth and Financial Performance in Unstable Times,” Jonathan Mishkin from TM Capital made the following observations:

1. Investments in the packaging industry are challenged by macroeconomic factors as well as its commodity-based, cyclical, and capital-intensive financial profile.
2. Successful investors look for opportunities to invest at the right point in the cycle but also require distinguishing features in a target, such as superior margins, fast-growing market segments, or potential for improved operating efficiencies.
3. Many of the most successful packaging businesses we have observed over the years are small or medium-sized entrepreneurial companies that emphasize superior customer service or consistent quality as a way to compete effectively with larger producers.
4. Among the categories where we are seeing investor interest are:
   1. Packaging distributors, especially those catering to fast-growing consumer product companies in food, health and beauty, or fashion. These firms have successfully capitalized on the “democratization of retail” driven by e-commerce.
   2. Cold chain packaging, often driven by growth in healthcare and pharmaceutical consumption.
   3. Developers of compostable or recyclable barrier films. Several emerging companies report they can profitably produce quality films at scale.

Other speakers at the conference raised additional concerns, including:

1. Customer uncertainty, particularly regarding discretionary purchases, negatively impacting demand for packaging.
2. Shortage of blue-collar labor limiting the ability of converters to expand production or reduce costs.
3. Those labor shortages are driving some investment in automation.
4. Andrew Silvernail, the CEO of International Paper, addressed IP’s reaction to the current market softness and longer-term concerns about the Company’s business model by highlighting a greater focus on its most profitable customers and the reshuffling of its asset portfolio, including the closure of two virgin fiber mills in need of significant maintenance capital. He also lauded the merger with DS Smith as a way to expand its European operation.
5. The significant drop in containerboard capacity at the mill level is more severe than during the 2008–2010 Great Recession and is expected to lead to a recovery in operating rates to the 97–98% level within a few years.
6. The packaging markets are still adjusting to the impact of COVID and its aftermath, including the oversupply of containerboard that followed the recovery from the pandemic, the subsequent inflation, and the bifurcation in the consumer experience between the top 20% whose incomes have continued to grow and the remainder that are still struggling.
7. While the European markets are oversupplied, their ability to export some of that surplus into the US is challenged by the strong Euro and tariffs. China is similarly oversupplied, faces many of the same challenges as European producers, and will likely be forced to shut inefficient capacity.

The current macro-economic challenges facing the packaging industry (and the industrial sector, generally) combined with its cyclical financial profile has made investors hyper focused on identifying companies with business model leveraged to the fastest growing retail trends and packaging substrates.