Q1 2024 Earnings Summary
- International Paper's Box Go-to-Market strategy has exceeded initial expectations, delivering approximately $110 million in earnings benefit from improved margins and mix in Q1. This success is attributed to better-than-expected improvements at the local level and investments in teams, training, and execution, which are sustainable and can be annualized.
- The company is investing significantly in commercial capabilities and expanding successful strategies across the entire business, focusing on enhancing capabilities in segments where they are already successful. This approach is expected to drive market growth and improve margin structure as they expand their go-to-market strategy to other segments.
- International Paper anticipates a steady improvement in margins over the next several quarters, potentially reaching target margins by 2025, dependent on demand recovery. They expect a step change in margin improvement quarter by quarter, which would be indicative of a healthy economy and a strong box market.
- The company's ability to reach its target EBITDA margins is highly dependent on a demand recovery that may not happen until 2025, introducing uncertainty in achieving margin improvements.
- The shift back to higher-margin customers may lead to loss of volume if the company cannot improve economics with large national customers, posing a risk to revenue during the transition.
- The company's margin improvement efforts could be constrained due to limited ability to increase prices further unless recognized by industry price indexes, potentially affecting profitability.
-
Margin Improvement Targets
Q: What EBITDA margin are you targeting and timeline?
A: We aim for EBITDA margins in the high teens, around 18%, on our way to 20%, which would generate strong ROIC in our packaging business. Achieving these margins depends on demand improvements, and we expect step changes in margin over the next several quarters, potentially reaching these levels by 2025, but it's dependent on demand. -
Maintenance Costs and ROI
Q: Why are maintenance costs increasing and what's the ROI?
A: Maintenance costs are increasing due to around 40% inflation in materials and labor. We're investing proactively to prepare for higher demand and improve reliability and productivity. This targeted spending should have a short payback period and support our margins going forward. -
Customer Mix Changes
Q: How is your customer mix changing post-COVID, and impact on margins?
A: During COVID, large national accounts grew rapidly, shifting our mix away from more profitable regional and local customers. We're now improving economics with large accounts and reallocating capacity to regain more profitable regional customers. We expect the local business to grow over the next couple of years, improving our margins. -
Box Demand Outlook
Q: Why revise North American box shipment growth to 2%-3%?
A: Second quarter industry growth is expected to be about 2%, an improvement from prior quarters. We're cautious due to potential tough economic conditions in the second half but anticipate eventual inventory restocking by customers as the economy improves. Growth could be closer to 3%, possibly up to 4%. -
Pricing Recognition
Q: Will further price increases be recognized beyond the $40 per ton?
A: We don't comment on forward pricing. We've recognized $40 of the announced $70 increase, which will flow through the next few quarters. We don't forecast pricing beyond what's published in indices. -
Corporate Expenses Guidance
Q: Will corporate expenses be at upper end of guidance after large Q1 spend?
A: We still expect corporate expenses to be $60–$80 million for the year. Q1 had volatility, but expenses can bounce around quarter by quarter. We feel good about the full-year guidance.
Research analysts covering INTERNATIONAL PAPER CO /NEW/.