In its first set of results since merging with DS Smith, International Paper reported first quarter revenue of $5.9bn ($6.3bn expected) and underlying operating profit of $198mn. Volumes in the key US market were weaker than expected.
There was a free cash outflow of $618mn (2024: $144mn inflow), heavily impacted by around $670mn worth of costs associated with the DS Smith transaction.
Management called out softer demand than expected but gave no details on tariff impacts. Second-quarter guidance points to improvements in revenue and profit.
The shares fell 1.6% shortly after the release.
Our view
International Paper’s (IP) first-quarter results are its first since merging with DS Smith, so the year-on-year comparisons are a little muddied. Performance was broadly worse than analysts were expecting, with volumes in the key US market coming under some pressure.
The DS Smith merger unlocked the European market for IP, which had previously been focused on corrugated packaging in North America. This packaging is used in a variety of end markets; think of the boxes your Amazon orders come in.
The industrial packaging market went through a bit of a boom in the not-too-distant past, with companies like IP leaning hard into containerboard production (used to create packaging), thanks to a big e-commerce boom, especially during the pandemic days. But, with more supply coming online and rising costs for raw materials and logistics, containerboard prices haven’t kept up, which has put a bit of a pinch on operating margins in recent years.
There’s also a small but not insignificant (c.10% of revenue) cellulose fibres business that produces fluff pulp used in products like nappies. This has been an underperformer compared to the core business, struggling with losses in recent years. With the expanded packaging operation, we wouldn’t be surprised to see this part of the business on the chopping block.
IP’s end markets should be relatively resilient, but there was a lack of detail from management on potential tariff impacts in recent results, and any secondary economic impacts will be difficult to offset. That said, we think the containerboard producers should be isolated from direct impacts due to local sourcing.
The balance sheet’s in decent shape. Debt is higher following the DS Smith merger, but relative to profits, things are still in line with recent trends. There are no immediate plans to push debt down, and with a history of decent cash generation, we don’t think there needs to be. It’s worth noting free cash flow for this year will be lower than usual, given the costs associated with the DS Smith merger.
We think the combination of IP and DS Smith has made a strong business look even stronger. We’d like to see some strategic trimming of non-core operations to help unlock more of the combined value in the highest growth areas.
The valuation is ahead of the longer-term average but isn’t demanding, all things considered. In the near term, though, while direct tariff impacts look limited, economic conditions could have a material impact on packing demand.
International Paper key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is not advice or a recommendation to buy, sell or hold any investment.No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.Non - independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place(including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.Please see our full non - independent research disclosure for more information.