INTERNATIONAL PAPER CO quarterly report, Q1 FY2024

International Paper Company — Q1 2024 Form 10-Q

Reporting period: Three months ended March 31, 2024. International Paper operates through Industrial Packaging and Global Cellulose Fibers. Results are unaudited and may not indicate full-year performance.

Financial performance and metrics

Metric	Q1 2024	Q1 2023	Change
Net sales	$4.619 billion	$5.020 billion	Down 8%
Net earnings	$56 million	$172 million	Down 67%
Diluted EPS	$0.16	$0.49	Down $0.33
Adjusted operating earnings	$61 million	$185 million	Down 67%
Adjusted operating EPS	$0.17	$0.53	Down $0.36
Cash provided by operations	$395 million	$345 million	Up $50 million
Free cash flow	$144 million	$4 million	Up $140 million

Net margin was approximately 1.2%, compared with approximately 3.4% in Q1 2023. Earnings from continuing operations before income taxes and equity earnings were $85 million, versus $221 million. The effective income tax rate was 32%, compared with 22% in the prior-year quarter; the operational effective tax rate was 31%.

Industrial Packaging: Sales of $3.808 billion and operating profit of $216 million, down 7% and 33%, respectively, year over year.
Global Cellulose Fibers: Sales of $704 million and an operating loss of $47 million, compared with sales of $811 million and an operating loss of $16 million.
Total business segment operating profit was $169 million, compared with $306 million.
Cash and temporary investments were $1.070 billion at March 31, 2024, versus $1.113 billion at December 31, 2023.
Total debt, including current maturities, was approximately $5.6 billion; long-term debt was $5.453 billion. Nonrecourse financial liabilities of variable interest entities were an additional $2.115 billion.
Capital expenditures were $251 million. Full-year 2024 capital spending is expected to be approximately $800 million to $1.0 billion.
The quarterly common dividend was $0.4625 per share, totaling $161 million in cash payments.

Material changes versus comparable periods

Year-over-year sales and profitability declined primarily because of lower average sales prices and unfavorable mix, which reduced earnings by approximately $240 million, and lower volumes.
Lower operating, raw-material, freight and maintenance costs partially offset the pricing pressure.
Management identified approximately $52 million of Q1 impacts from a January freeze, affecting both businesses, along with initial effects from the Ixtac, Mexico box plant fire.
Volumes were affected by seasonality and the Box Go-to-Market strategy, which prioritizes value and margins over near-term volume. Global Cellulose Fibers emphasized absorbent and specialty pulp and reduced exposure to commodity grades.
Restructuring and other charges were $3 million, primarily related to the permanent closure of the Orange, Texas containerboard mill and pulp-machine shutdowns in Riegelwood, North Carolina, and Pensacola, Florida.
Net special items were a $14 million after-tax charge in Q1 2024, compared with a $2 million charge in Q1 2023 and a $411 million after-tax charge in Q4 2023. Q1 2024 included transaction costs related to the proposed DS Smith combination, legal reserve adjustments and losses on miscellaneous land sales.
Net operating cash flow improved despite lower earnings, primarily because of favorable working-capital timing and lower capital spending.

Liquidity, debt and capital resources

The company had no borrowings under its $1.4 billion committed bank facility, $500 million receivables securitization program or $1.0 billion commercial paper program at March 31, 2024.
Total credit agreements were $1.9 billion. The committed bank facility matures in June 2028, and the receivables securitization program expires in June 2025.
Debt maturities, including finance leases and excluding the timber monetization structure, include $138 million in 2024, $189 million in 2025, $142 million in 2026, $332 million in 2027, $670 million in 2028 and $4.1 billion thereafter.
The company was in compliance with its debt covenants. Management stated that current cash, operating cash flow and available credit facilities are expected to fund capital expenditures, debt service, working capital and dividends for the next 12 months.
Long-term credit ratings were BBB with a stable outlook from S&P and Baa2 with a stable outlook from Moody’s.

Guidance, outlook and management commentary

Management characterized Q1 2024 as an earnings trough, citing seasonally low volumes, the remaining effect of 2023 price-index declines and higher recovered-fiber costs.
For Q2 2024, Industrial Packaging is expected to benefit from prior price-index movements, higher export prices, continued Box Go-to-Market execution, seasonally higher North American volumes and one additional shipping day. Operating and maintenance costs are expected to increase.
Global Cellulose Fibers is expected to see improved price and mix, stable volumes, lower operating costs and lower maintenance outage costs, although energy and chemical costs are expected to rise.
The company expects to complete an internal legal-entity restructuring in Q2 2024, currently estimated to produce a tax benefit of approximately $350 million.
The company expects approximately $800 million to $1.0 billion of 2024 capital expenditures and anticipates no required pension contributions during the next 12 months.

DS Smith transaction and other unusual items

On April 16, 2024, International Paper announced a recommended all-stock offer to acquire DS Smith Plc at an implied enterprise value of approximately $9.9 billion. The proposed exchange would result in approximately 180 million new International Paper shares, with projected ownership of 66.3% for existing International Paper shareholders and 33.7% for DS Smith shareholders. Closing is expected in Q4 2024, subject to shareholder, court and regulatory approvals and other conditions. The company incurred $5 million of related costs in Q1 2024 and expects total costs to achieve anticipated synergies of approximately $370 million. The transaction could increase dilution, integration costs, currency exposure and execution risk.

Risks and contingencies

Environmental remediation liabilities were approximately $249 million at March 31, 2024. Additional losses could be material, particularly for the Kalamazoo River and Harris County matters.
The company recorded $110 million for pending and future asbestos-related claims, net of estimated insurance recoveries, and stated that additional losses are reasonably possible but not currently believed probable.
A Brazilian goodwill tax matter involving a former Sylvamo business has assessments of approximately $397 million, including tax, interest, penalties and fees. International Paper’s recorded liability under the tax matters agreement was $48 million.
International Paper is appealing a district-court judgment concerning potential joint and several liability for future Kalamazoo River response costs.
Key operating risks include cyclicality, product pricing, demand, inflation, recovered fiber and energy costs, severe weather, mill or plant disruptions, environmental regulation, litigation, cybersecurity, interest rates, foreign exchange and credit ratings.
The DS Smith transaction may not close, may be delayed, or may fail to produce expected synergies. Integration could disrupt operations, internal controls, customer and employee relationships, and financial reporting.

Important facts for investors to verify

Whether the anticipated Q2 price, mix and volume improvements offset higher maintenance, labor, commercial and input costs.
The timing and amount of the expected approximately $350 million tax benefit from the legal-entity restructuring.
Required shareholder, court and regulatory approvals, final consideration and financing or dilution implications of the DS Smith transaction.
Progress toward the expected DS Smith synergies and the approximately $370 million estimated integration cost.
Developments in the Kalamazoo River, Harris County, Brazilian tax and other environmental and litigation contingencies.
Actual 2024 capital spending, free cash flow, debt maturities and continued compliance with financial covenants.