IP sees boost in Q2 earnings; CEO expects near-term challenges

Despite sequentially higher earnings in the second quarter of this year, International Paper (IP) CEO Andy Silvernail expects the company’s near-term performance to be “challenged” as he reflected on IP’s performance in his first few months as CEO since taking over May 1.

The Memphis, Tennessee-based paper and packaging company reported second-quarter results earlier this week and saw an increase in several metrics.

IP’s net earnings were $498 million in the second quarter of 2024, a major jump from the $56 million in net earnings posted in the first quarter of 2024 and up from $235 million in the second quarter of last year. The company’s net sales came in at $4.7 billion in the second quarter, up from $4.6 billion in the first quarter and essentially flat year over year.

Adjusted operating earnings also increased quarter over quarter. IP reports $193 million in adjusted operating earnings in the most recently completed quarter compared with $61 million in the previous quarter.

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Silvernail attributes the sequential earnings boost to higher sales prices across its portfolio and seasonally higher box volumes.

However, he says IP’s packaging volumes came in below expectations and continue to lag the overall market, a trend he expects to continue “for some time.”

“We’ve seen expected volumes decline from repositioning and optimizing value and volume,” Silvernail says. “We do have residual effects from a history of underinvesting in certain regions and markets where we have ongoing reliability, and capacity issues that we are addressing and have seen improvement in already.

“We need to make sure that we are close to the market, pricing appropriately and investing to be the leader in reliability. … We’re focused on investing and differentiation, and we are seeing specific results that are leading indicators to positive change. It will, however, be messy over the next three to four quarters. We expect near-term performance to be challenged by seasonally lower volumes and higher mill outage expense.”

Silvernail says the company has underinvested in its box system as a whole, particularly maintenance and repair, impacting productivity and reliability.

“This is the heartbeat of our operations,” he says. “These numbers are supported by the conversations I'm having with our folks across our system, particularly in maintenance.

“We've got an incredibly long list of great opportunities that need capital to drive performance for our customers and expand profitability. When we're driving excellent reliability internally, we get excellent reliability externally, and we will excel for our customers and get paid for value. That means we've got to spend some money. I believe we can do that with capital playing in the range of $1 billion to $1.1 billion per year.”

He adds that the lack of investment back into its business has “directly contributed” to a cost problem for IP, noting that since 2018, the company’s spending on investments that drive performance for customers and productivity has lagged.

“I'm not saying that we can't be more efficient with capital than our competition, but we pushed the envelope too far,” Silvernail continues. “While our mills are well capitalized and advantaged, we spent too much on unproductive capacity and haven't stayed ahead of the curve.”

IP’s operating costs have “ballooned” on modest sales growth, he says, but emphasizes that the situation is controllable.

“We can attack this and control our own destiny,” Silvernail says. “What doesn't show up on this page is the impact of the slippage of reliability for our customers. Reliability, defined as quality, delivery and service, is the most important factor for the vast majority of our customers. We made our own bed here underinvesting in cost that has lost its market share over the past decade. The share loss will continue over the near term, but again, we know how to reverse this and control our own destiny.

“We've done a lot of work commercially to position ourselves correctly in the market. We've made sensible value over volume trade-offs recently and we're ramping up our commercial talent, capability and incentives. We have lost other share where we let customers down. We will change this by being the leader in reliability. We've made some solid progress in on-time delivery, and our corrugator and converter capacity is up.”

In terms of economic downtime at its containerboard mills, IP has seen a positive trend since peaking at 622,000 tons worth of economic downtime in the second quarter of last year. The company reported 132,000 tons worth of economic downtime in the first quarter of this year—the lowest since 2022—but saw that number increase by nearly 100,000 tons in the most recently completed quarter, reporting 231,000 tons of economic downtime.

“IP has attractive and substantial upside,” Silvernail says. “I believe the current portfolio of IP has the potential to deliver $4 billion of EBITDA [earnings before interest, taxes, depreciation and amortization] in a midcycle environment. The key drivers will be optimizing our cost structure to improve profitability and, very importantly, liberate resources.

“We can control our own destiny. Yes, things are going to move in the market; we can't control that. But we can control … how we approach understanding our business and where we apply our resources and focusing on the right customers, the right products and the right assets to drive really outstanding results over time.”

IP’s full second quarter 2024 earnings presentation can be found here.