By the numbers
Industrial packaging segment net sales: $4.08B
Down 7.3% year over year
Q1 net earnings: $172M
Down from $360M in Q1 2022
Box sales: 2.38M tons
Down 9.1% year over year
- Lingering demand and destocking issues: “We continue to navigate a challenging demand environment,” said International Paper CEO Mark Sutton on Thursday’s Q1 earnings call. In addition, consumers continued their post-pandemic purchasing shift from goods to services, which affected goods inventories and resulted in a longer period of destocking. Lower-than-expected demand weakened further as the quarter progressed, especially in segments that rely on discretionary spending as consumers dealt with high inflation and interest rates, said CFO Tim Nicholls. “March was — I think there's no other way to say it — it was a surprise to us in terms of demand drop off and the resulting economic downtime that we took to balance out our system,” he said.
- Reacting to pressures: IP currently is running at full capacity and identified opportunities to further optimize systems and reduce costs this year, including through actions outlined in its Building a Better IP streamlining initiative, Nicholls said. Lower prices across the portfolio have also pressured margins. Significantly lower input costs — primarily energy and OCC but also freight — offered some relief compared with last year. Executives repeatedly cited IP’s diverse portfolio of products and regions for providing resilience in the face of “dynamic” economic environments.
- Foreign markets: Exports remain particularly weak due to factors including inflation, elevated inventory levels, inclement weather and geopolitical events. Signs of improvement abroad are “few and far between,” said Jay Royalty, senior vice president of containerboard and recycling, but Latin America shows some potential for improvement. Regarding divesting from Russia in light of the war in Ukraine, Sutton said IP has “made good progress” on closing the sale of its 50% interest for its Ilim joint venture; it is currently pending approval from Russian authorities.
- Increasingly crowded containerboard market: When asked on the earnings call about IP’s impression of the additional containerboard supply coming into the market as competitors, and in particular new entrants to the market, have added capacity in recent months, Royalty noted that the open market is relatively small. He emphasized that “it's about having an integrated system, which is what we have,” to meet diverse customer needs and build long-term relationships. “The new entrants are going to be trying to compete with that.”
- Economic outlook: IP anticipates that customer destocking will near its end in the first half of this year and demand will improve in H2, resulting in more normalized volumes. Already, box shipments have been up 5% to 6% so far in April compared with March. “There really isn't a near-term substitute for a box ... so we’re confident about that rebound,” Sutton said. Execs anticipate further reductions in input costs throughout the year. In Q1, IP invested $341 million into its businesses, including to build out capabilities within its box system, Nicholls said, adding that more box investments are planned to support profitable growth.
