By the numbers: Q2 2024
Net sales: $4.73B
Up 1.1 % year over year
Industrial packaging net sales: $3.93B
Up 1.2% year over year
Net loss: $498M
Compared with a $235M net loss in Q2 2023
- New approach: On Wednesday morning, CEO Andrew Silvernail hosted his first earnings call since taking the helm at International Paper on May 1, following Mark Sutton’s retirement. He came into the ring punching and spent the majority of the call detailing significant strategy changes to turn around IP’s performance deterioration over the last 10 years. “My team wants to win. They are tired of getting their butt kicked,” Silvernail said.
- Q2 overview: International Paper’s sales increased sequentially in the second quarter of 2024, reflecting improvements in price and volumes. By segment, e-commerce showed strong growth in what executives described as a post-destocking environment; sales to food and beverage customers were stable, with further improvement expected. However, IP’s total packaging volumes came in below expectations and lagged the overall market, “and that will continue for some time,” Silvernail said.
- Case for change: Silvernail said executives would make “the case for change” at IP going forward. “We have underperformed on every meaningful metric,” he said. “This is totally unacceptable, and we’re going to fix it.” IP needs to get better at “having clarity of the metrics that drive results for our customers and drive results for our owners,” Silvernail said, adding that the company underinvested in capital expenditures and maintenance relative to competitors.
- 80/20 plan: Silvernail detailed the so-called 80/20 operating approach, a “data-driven methodology” he hopes will differentiate IP. The plan to drive profitable growth includes simplification to focus on attractive markets while also segmenting discrete businesses and investing appropriate resources into each one. While capacity reductions eventually could occur, Silvernail said that his previous experience with 80/20 shows that business exits typically don’t happen for “an intermediate period” of about a year or two. During the call, Philip Ng, analyst at Jefferies, called Silvernail’s presentation “inspirational” and noted that this represents a “hard reset of the IP culture.”
- Box business blues: Executives described how IP lags competitors specifically in its box go-to-market strategy, in large part due to a history of underinvestment in the box business. “One of the sins of the past” was IP “chasing bad investments or assets that are deteriorating” rather than making “the right investments” in box plants or mills, Silvernail said. During the company’s Q4 2023 earnings call in February, Sutton admitted he should have focused more heavily on plant equipment prior to the COVID-19 pandemic and the subsequent box boom. “If I had to do it over, I wish I would have spent much more in physical plant equipment in ‘18, ‘19 and ‘20,” Sutton said at the time. “We hadn't made all of those physical investments in the past.”
- DS Smith acquisition: IP’s transformation via 80/20 will not affect operations at DS Smith, the U.K.-based company IP is set to acquire, because there are significant differences between the European and North American markets, Silvernail said. He also noted the companies’ footprints have little overlap. The proxy statement for the pending acquisition will be filed in August, and executives expect to release additional details about the deal prior to the next earnings call in the fall. IP is focused on integrating with DS Smith quickly and efficiently. “What I don't want to do is overburden them with unnecessary administrative B.S. and things that destroy value,” Silvernail said.
- “Messy” short-term results: While IP expects the outlined business overhaul to produce positive change in the long term, “it will, however, be messy over the next three to four quarters,” Silvernail said. But he emphasized that IP has control of the vast majority of the factors influencing its business. “We can control our own destiny,” he said.
- Outlook: IP will host a “road show” in September and an investor day in March to share details about the company’s new direction and progress. The company expects box demand growth of 1% to 2% for the year. Executives said they can’t forecast IP’s specific financial outlook for coming quarters due to the pending acquisition and regulatory requirements. They anticipate near-term challenges, including mill outage expenses and seasonally lower volumes.
