International Paper Co Earnings - Q1 2025 Analysis
Positives
- Operations and costs were favorable by $0.05 per share sequentially due to improved performance and favorable nonrecurring items, which includes insurance proceeds and lower costs associated with employee benefits along with lower incentive compensation expense.
- Price and mix was higher by $0.02 per share in Q1, driven by the flow through of prior price index movements in North American Packaging Business and energy credit sales and Global Cellulose Fibers business.
- Corporate items were favorable by $0.17 per share due to a lower tax rate as a result of favorable discrete items in Q1, primarily related to stock-based compensation.
- The company saw positive market share in the first quarter, winning locally in a nichey local business.
- The company expects to close the volume gap to market by Q4.
Q&A Highlights - Q1 2025
Analyst asked about the impact of demand assumptions on International Paper's EBITDA guidance for the full year.
The company expects to land between $3.5 billion and $4 billion in EBITDA for the full year, assuming that demand stays where it is currently. The company has seen a stabilization in demand in April, but is closely monitoring consumer and business sentiment, as well as the downside recession scenario. The company has a U-shaped curve in terms of gap to market, and has made progress in closing that gap. The company is prepared to pull several levers if demand weakens, including accelerating its cost-out strategy and focusing on winning market share in local markets.
Analyst asked about the impact of tariffs on International Paper's GCF business.
The company expects a mid-single-digit risk to the top line from tariffs, with potential relief from Asia as people find alternatives to constrained markets. The company is not Pollyannas and is aware of the potential impact of tariffs, but is confident in the value of its business and is not willing to give it away.
Analyst asked about the impact of tariffs on International Paper's other businesses.
The company does not have a lot of direct tariff effect, but is concerned about the potential impact of weakening demand and price inflation. The company has a natural hedge against weakening demand, but is prepared to leverage its capabilities and take advantage of opportunities presented by the current situation.
Analyst asked about International Paper's market position gaining share in the North American market and wanted more color on the share gains.
Andy Silvernail, the company's CEO, explained that the company's business is divided into two segments: national or super regional accounts and local accounts. The company has made a series of choices to allocate capacity to national or super regional accounts, which resulted in disappointing local customers due to service level issues and weak reliability. The company has taken steps to improve service and reliability, including investing in the business and hiring more people. The company has also focused on segmentation, with dedicated people serving the right customer segment, leading to improved service and reliability. The company has seen consistent progress in regaining market share in the local market, but it is not spiking the football yet.
Analyst asked about the company's operating rate in North America in Q1 and how it has stabilized after the slowdown in February and March. The analyst also asked about the opportunity to further assess the portfolio and see which mills or box plants are performing and where there is potential for further rightsizing or consolidation.
Andy Silvernail explained that the company has seen stability in April after the step down in February and March. The company is assuming that this stability will continue and is offering guidance based on that assumption. The company is also assessing its portfolio and considering footprint optimization efforts to address changing demand patterns. However, the company does not expect a radical change in the demand picture and therefore does not see the need for significant changes to its assets. The company is playing a negative bias in terms of demand and is focusing on dealing with that.
Analyst asked about the company's performance and future plans.
The company's performance in the first quarter was relatively low quality, but the second quarter number was exceptionally high quality. The run rate that the company is at right now, which includes the first quarter and second quarter numbers, is about where they are as they look at the first half of the year. The second half of the year will see a few things happening, such as the cost out that started in the fall of last year, which will accelerate as the company winds down the closure of assets. The benefits of the Red River mill, which was tackled in the first quarter, will also accelerate as the year goes on. The elimination of the matrix organization, which the company tackled late last year, will fully realize itself in the second half. The price side will also see a lot more realization as the company moves through the year, and the timing of those things is mechanical.
Analyst asked about the tailwinds expected in Europe from price changes, considering the recent price increases and the lag time between price changes and box price changes in the European market.
Andrew K. Silvernail, CEO of International Paper Co., explained that while the company has seen price increases, they have not yet been realized in the market. He stated that at a static level, the price increases are a positive tailwind for the second half of the year, but the company is not building them into their numbers due to the weakness in the marketplace. He also noted that the European market has a longer lag time between price changes and box price changes, and that there is more flux in that market due to the amount of contracts and the small versus large customers. He stated that the company believes they are entering an expansion territory as they get into the second half of the year, and that there is some good news out there, but they must be mindful that it is connected to demand.
Analyst asked about the assumptions for what happens in the second half in Europe and how the company's time is being spent driving improvements in EMEA versus North America.
Andrew K. Silvernail explained that the company expects Europe to be a little softer than expected in the second half of the year, based on the current environment. He stated that the first price increase was out of necessity, while the second price increase was from a modest improvement better than expected. He also noted that the company's focus is on building the team and deploying 80/20 at the point of impact, and that he has been spending a lot of time on DS Smith in Europe. He stated that the team in North America is fully staffed and focused on cost out and commercial benefits, while the team in Europe is focused on 80/20 deployment and has a full ramp-up of initial launches by the middle of the summer. He emphasized that the company is focused on improvement and better, not on accounting and ownership of synergies.
Analyst asked about the sequential downtick in the company's performance and how it relates to the expected pricing step-up in the second half.
The company clarified that the downtick is due to the bridge, where two months are in the first column, and only one month is in the second column, as it is a sequential analysis.
Analyst asked about the company's focus on commercial and margin, and how it might affect volume expectations and closing the gap.
The company clarified that they are not disproportionately deployed to the smaller customer and that they are managing their priorities, including focusing on commercial and margin, without sacrificing volume expectations or closing the gap.