The Capital Cycle Podcast - Boxing Day Gift

Episode Date: December 23, 2025

The capital cycle in the cardboard box industry. Edward Chancellor talks to Rob Anstey, a North American Portfolio Manager. For more information, or to access select articles from Marathon’s Global Investment Review publications which accompany this podcast series, please visit www.thecapitalcycle.co.uk Hosted on Acast. See acast.com/privacy for more information.

Hello, this is Edward Chancellor with another episode of the Capital Cycle podcast. I have with me, Robert Anstey, who is a portfolio manager for Marathon on the US portfolio. Welcome, Robert. Nice to see you again. Nice to see you, Eddie. Very good. Always good to catch up. So, Robert, we're going to talk about your recent contribution to the Global Investment Review. And embedded in that review are two themes that I notice we've talked about, in other podcasts I've done with you and other global investment reviews you've written. Namely, you're finding quite a lot of companies whose sales and profitability have been disturbed by the pandemic and its aftermath.

So that is something that we will be touched upon this. But first, you've entitled your new piece, a Boxing Day gift. So before we get into your investment thesis, can you tell your non-British listeners what you're exactly referring to? Absolutely. Well, I couldn't resist the seasonal. reference here. So for our non-British listeners, Boxing Day is what they would call just the day after Christmas. But here in Britain, we call it Boxing Day. And there's a couple of sources of the origin of that name. One is that around about from the 17th century onwards, wealthy landowners

on the day after Christmas would often give the servants in their household presence in boxes. So some people think it comes from that tradition. So think down to an abbey kind of folk. The other tradition, which I prefer, to be honest, as an explanation, is that in churches across the country, during the season of Advent, there would be arms boxes where people would put monetary donations. And then on the day after Christmas,

which is also the Feast of St Stephen in the church calendar, those boxes would be opened and the money would be distributed to the poor, which I think is a lovely to have that's the source of this day. So the Boxing Day gift is a sort of Christmas gift. But the gift you're writing about is an investment gift that's not contained in the boxes, but is the actual manufacturer of cardboard boxes, namely the US cardboard box manufacturers. Can you tell us something about the industry? So hopefully our listeners won't have had too much port or sherry to drink as they're listening to this, as I described to you, the makings of a cardboard box.

But essentially what we're going to talk about is the container board industry. And if you think about a cardboard box, next time you receive one, you might want to inspect it. They're made up of essentially two outer layers, which is called linerboard. And in between those two outer layers, you have a sort of corrugated flute, also known as corrugating medium. and that's what makes up your cardboard box. Now, when it comes to the outer layers, there's actually a couple of different types. So there's something called Kraftliner,

and that is made from virgin pulp fibers. And because of that, it's a stronger material and tends to trade at a premium. And then the other form of liner board is called test liner, and that is made from recycled boxes. And as a result, it's a bit cheaper and slightly weaker. So sometimes you'll find boxes that are made of craft line because you need the strength and durability to transport whatever it is you've got in there. And other times the test liner is fine.

And sometimes you'll have a box which might have craft line on the outside and test liner on the inside. So there's a lot more to boxes than meets the eye. And you think the US car box makers have reached an attractive point in the capital cycle? You know, this is a commodity industry right over time. But I think what caught our attention was the fact that if you look at the US container board industry, it has become highly consolidated. So you now have five players that account for 75% of the market. And that's a big change over the last four decades. But a lot of that consolidation has really happened in the last few years.

And I think it's also interesting you have, there's a new C.E. CEO at International Paper, who came from a different industry altogether, and he's been closing capacity. And then Smurfit Kappa, the European player, acquired Westrock. And so between them, International Paper and Smurfit Westrock have almost half the market now. And the industry consolidation you think is going to lead to greater capital efficiency in the industry? I do. And I think that's partly down to these management teams, you know, both at IP and Smurfit. The third company, packaging corp in the US has always been very well run. But I think these management teams are now pursuing a value over volume strategy. They've taken out about 10% of industry capacity this

year alone. And that's an extraordinary amount to have done in such a short space of time. So I think it's quite a major change within the industry. And why is that excess capacity being removed now so rapidly. Yeah. So it's partly because you've got these new management teams who I think are looking at things in a different way. We've often invested in industries in the past where there's been this change in management capital allocation towards value over volume. But it's also in response to very weak demand, both in the US and in Europe, in fact. So it's a bit of both. And you write that demand is actually in the US for Carbobachs's back at 2016 levels, which when I'm I told a friend of mine this, he said he couldn't believe it because his corridors were filled

with Amazon boxes. So what's exactly been happening? Well, I think it's fascinating. Absolutely. When I heard that statistic, I couldn't believe it because the economy is kind of 25% larger in the US since that time. So there's a few things that have been happening. One, as you sort of alluded to at the start, Edward, you know, the pandemic has thrown up all sorts of spikes. in demand. And of course that happened with carball boxes because everyone was stuck at home, so there's a lot more e-commerce going on, a lot of carball boxes going around. So now we've come off that spike. So that's one. Two would be housing turnover. So housing turnover has been very low in the US. And that's another common theme when you're picking up value

propositions. You're seeing the weak housing market in the US continuing impact a lot of companies in a large number of different industry. And as a capital cycle investor, that throws up all kind of supply side opportunities. So you've had a weak housing turnover, which, you know, you just think about when you move house, a lot of cardboard boxes involved there. And then I think the third thing is just industrial demand has been incredibly weak now for three years. You know, I read the ISM purchasing managers index has been below 50 for three years. Even in the great financial crisis, It was only below 50 for 18 months. And US housing turnover on some measurements has been below the housing bus lows.

So it's another thing that we're seeing is this bifurcation of the American economy into booming AI tech world and into another economy. I suppose what they call the K-shaped economy, where the other economy is still in pretty rough shape. That's right. So I think you could argue that we've been in a sort of like an industry. It feels like an industrial recession to many companies, to transportation companies and so on. Also, there's been some substitution of cardboard boxes with, I'm sure you've received them from Amazon, these kind of paper mailers. So there's some of that that's gone on as well.

Is that a big issue? Yeah, a relatively big issue, although e-commerce is not as big a part of this industry as one might imagine. If you think about the sort of end markets for cardboard boxes, actually about 45% of the market is for kind of food and beverage, so quite staple-like end markets, then maybe another 30% for other non-durable, such as pharmaceuticals and chemicals, and then maybe a quarter comes from industrials and e-commerce.

So the end markets are not as cyclical as one might perceive at first, I think. And you believe anyhow that demand will eventually recover? Yeah, so I think this is a classic case of demand now. for three years we're undershooting the long-term trend. If you go back prior to the pandemic, box demand was sort of, you know, one to two percent a year. International paper think the long-term outlook is like one, one and a half percent a year volume growth, kind of in line with, you know, population growth. And I think that feels about right, and we've kind of undershot that now. In some ways you could say this was a typical marathon boring investment.

Well, Edward, I tried to get more and more boring each time we meet, so I don't know what the next podcast will be on. This is an old theme that your colleague Charles Carter and I have talked about over the years of how investment should either be boring or repelling. I mean, when I think about my US portfolio, it is chock full of what most people would consider to be quite boring businesses. But actually what they have in common really is their real world businesses that actually AI has no impact on whatsoever. So that you could count as a good thing or a bad thing, but I tend to be happy with it. So let's talk about in more detail your recent stock purchase and sector. Yeah.

So Smurfitt Westrock, as it's now called, it's only been listed, in fact, on the New York Stock Exchange for just over a year. But our European team at Marathon has been very familiar with Smurfit Kappa for many years. And in fact, I talked to them about the management team. What became clear to me is that this is a good management team. They're well known in Europe for running their. their mills very efficiently. They're good operators, basically. And you say it has a very lean operation?

Yeah, I think so. So, I mean, at the headquarters, this is a global business now with $31 billion of revenue, and at headquarters are 98 people. Yeah, that's another common marathon theme. Profound distrust of bloated headquarters and bureaucracy. The European market for cardboard makers, you say, is much more fragmented in the US.

It is. The European market's not as good. So, there, the top four players have around 55% market share. And the demand conditions are as weak as the US, if not weaker. I think in Europe, we've not seen as much capacity come out. In fact, there's still capacity coming on. And utilisation rates in Europe are only 86%. Whereas in the US, as we exit this year, I think we could be at sort of 95% plus.

So the European markets not as good, despite. that, Smurfitt has consistently been able to generate mid-to-high teens profit margins in Europe because they're such good operators. They have about 22% market share in Europe and they're typically number one or two in most countries. But about a quarter of the European market currently is underwater. So I think we should expect to see more capacity coming out there and I think IP will take capacity out. And one thing you particularly emphasise in this piece is that you think that costs can be cut from the West Rock acquisition and the market isn't properly pricing in these potential savings. Yes. West Rock itself was a very large US containerable player that had basically rolled up

five or six acquisitions over the course of more than the decade. And I think it's quite clear that really they hadn't fully integrated those. What I find interesting here is that Smurfitt announced $400 million of synergies on this deal, a little over 1% of revenues, so not that much. And revenues are 30 billion? Yeah, 31 billion, yeah, exactly. So that doesn't sound very much. But what's interesting is that some analysts have argued that actually there's probably $400 or $500 million of synergies within Westrock that hadn't been fully realized at the

time of the acquisition. From this roll-up business. So in fact, Smurfitt bought Westrock with the shares at a 10-year low, at a very low multiple with actually probably quite a lot of synergies already in that system still to realise. They then announced 400 million of their own synergies, and I think that is just the beginning. So there are mills, and then you have a box plant network, and the mills basically produce the container board, and then it will go to a box plant that converts it into the cardboard boxes. But astonishingly, Westrock had a $10 billion box plant network.

work that made no money at all because they were pursuing a volume strategy. So as long as the mills were churning out container board, they were kind of happy. That is a classic example why you want to avoid vertical integration because you have a lot of capital tied up in part of a business that doesn't earn a return on capital. That's right. So now I think with these new management teams, they're viewing it in an entirely different lens. They're thinking, look, there's no point just churning out container board. We need to make sure these box plants make product that the end customer wants and that we can

make money on those. So I think they will cull some contracts. And I think that Smurfit have said that they think over time, it's not going to happen immediately, but over time, the box plant network, they should be able to earn $800 million to $1.2 billion of profit on that $10 billion of revenue. Call it an incremental billion dollars. So if you add up all those synergies, there's a great self-help story here where you could be looking at potentially an extra $2 billion of EBITR, I think, over time. as I say, it's not going to happen instantly. And you think the stock looks relatively cheap?

Yeah, because, you know, the multiple gap between international paper and packaging corp, so, you know, Smurf, it's on sort of six and a half times EBITR, which is the metric that a lot of Wall Street uses, 11 times earnings. IP is on more like eight or nine times UberDA, packaging corp even a bit higher than that, 17 times earnings. So there's quite a multiple gap here between what probably is a less familiar companies and many US investors. But I think one can argue actually as operators, they're very, very good. And over time, I think there's a lot of synergies they can realise. My analogy here is

this investment thesis is a little bit like a cardboard box in itself in that you have the two outer layers. You've got supply shrinking, weak demand, which should recover over time. So you're two outer layers. And then you've got this self-help story, which is the kind of filler in the middle, if you like, and then you've got possible multiple re-rating on top. And it's a boxing day gift that's so boring that the market itself is not overpricing it. Yeah, I don't believe so. Look, this is a cyclical industry. It's not something that's going to set the pulses of growth investors racing, but it's exactly the kind of set up that attracts us at the moment because you've got a nice capital cycle, a good valuation, good management team and so on. Thank you very much, Robert.

Thank you. Pleasure. Thank you for your time today. I hope you will listen to the next edition of the Capital Cycle. This communication is provided for information purposes only. Please refer to Marathon's website and the Global Investment Reviews for further information, including important disclosures.