Executive Summary / Key Takeaways

• Under new leadership and guided by an 80/20 operating system, International Paper is undergoing a significant transformation to address historical underperformance and drive profitable growth by focusing on core packaging and pulp segments.
• The recent acquisition of DS Smith (SMDS.L) substantially expands IP's presence in the attractive EMEA packaging market and is expected to generate $600 million to $700 million in synergies, reshaping the company's competitive footprint despite required divestitures.
• IP is aggressively optimizing its cost structure through facility closures, corporate reorganization, and operational efficiency initiatives targeting $1.9 billion in cost reduction net of inflation by 2027, alongside commercial improvements aiming for $1.1 billion by 2027.
• First quarter 2025 results reflect the initial impact of the DS Smith acquisition and benefits from transformation efforts, though demand remains soft and the near-term outlook incorporates higher costs from planned maintenance and non-recurring items.
• Management projects full-year 2025 adjusted EBITDA between $3.5 billion and $4 billion, contingent on stable demand, while acknowledging macroeconomic uncertainty and preparing countermeasures for potential deterioration.

A New Chapter: Reshaping International Paper for a Competitive Future

International Paper, a long-standing player in fiber-based packaging and pulp products, is currently navigating a period of profound transformation. For over a decade, the company experienced underperformance across key financial metrics, including sales, margin, profitability, and return on invested capital. This decline stemmed, in part, from past capital and resource allocation choices, including underinvestment in its box system and maintenance, which contributed to cost challenges and impacted customer reliability. The company's strategic response has been decisive, marked by portfolio reshaping and a fundamental shift in operating philosophy under new leadership.

A significant step in this evolution was the 2021 spin-off of the Printing Papers business into Sylvamo Corporation (SLVM), sharpening IP's focus on packaging and pulp. More recently, a strategic review identified further optimization opportunities, leading to targeted facility closures in the fourth quarter of 2024 and early 2025, including the Georgetown mill and several box plants, aimed at reducing complexity and earnings volatility by exiting certain commodity grades. The company is also exploring strategic options for the Global Cellulose Fibers business, with a potential sale being the most likely outcome, to better position this segment for long-term success.

The most impactful recent event is the completion of the DS Smith acquisition on January 31, 2025. This transaction is designed to create a global leader in sustainable packaging, significantly bolstering IP's presence in the attractive European, Middle Eastern, and African (EMEA) markets. The combined entity operates under a new segment structure: Packaging Solutions North America, Packaging Solutions EMEA, and Global Cellulose Fibers. While the acquisition enhances IP's scale and market reach, it necessitated the divestiture of five European box plants to satisfy regulatory requirements, a process currently underway with exclusive negotiations announced in April 2025.

IP's strategic pivot is centered on adopting an 80/20 operating system, a data-driven methodology focused on identifying and prioritizing the most impactful customers, products, and resources. This approach aims to simplify operations, reduce complexity, and drive profitable growth by building an advantaged cost position, creating a superior customer experience, and winning profitable market share. This transformation is a direct response to past challenges and lays the groundwork for improving IP's competitive standing in the global fiber-based products market.

Competitive Landscape and Strategic Positioning

International Paper operates within a dynamic and competitive landscape, facing rivals across its core segments. In North American packaging, key competitors include Packaging Corporation of America (PKG) and WestRock Company (WRK). PKG, a significant player in containerboard, often holds an edge in production efficiency, translating to potentially lower operating costs per unit. WRK, with its global reach and M&A-driven growth, competes across corrugated and folding cartons, boasting extensive distribution networks. In paperboard packaging, Graphic Packaging Holding Company (GPK) focuses on consumer goods with expertise in lightweight materials. In the cellulose fibers market, Kimberly-Clark Corporation (KMB) is a major competitor, particularly in personal care applications, known for strong branding and R&D in product performance like absorbency.

IP's competitive positioning is being actively reshaped by its strategic transformation. Historically, IP faced disadvantages from underinvestment, leading to operational inefficiencies and reliability issues that impacted market share. Its gross margins (TTM 28.59%) and operating margins (TTM 2.09%) currently trail those of more efficient competitors like PKG (TTM Gross Margin 21%, Operating Margin 13%) and KMB (TTM Gross Margin 36%, Operating Margin 16%), indicating a lag in operational and financial performance. The company's TTM ROIC is estimated around 8-10%, lower than PKG's 10-12% and KMB's 15-18%, reflecting less efficient capital utilization.

However, IP is leveraging its foundational strengths and strategic initiatives to build a more defensible competitive position. Its extensive reach and depth geographically provide a significant asset. The adoption of the 80/20 system is intended to directly address operational inefficiencies and cost structure, aiming for a 10-15% lower operating cost per unit in targeted areas. The focus on reliability, driven by increased maintenance spending and strategic capital allocation, is crucial for improving customer service, a key differentiator where IP saw on-time delivery improve significantly over the past two years.

The DS Smith acquisition fundamentally alters IP's competitive footprint, particularly in EMEA, creating a larger, more integrated player capable of leveraging increased scale. While direct quantitative comparisons with the newly combined entity's metrics are still emerging, the targeted synergies of $600 million to $700 million highlight the potential for significant cost and operational improvements to narrow the gap with more efficient peers. IP's strategic investments, such as the Waterloo greenfield box plant designed for 20% lower costs and enhanced service, are aimed at creating industry-leading assets that can compete effectively on both cost and performance.

IP's technological differentiation lies in its expertise in fiber-based materials, particularly in sustainable and recycled content packaging and high-quality cellulose fibers like fluff pulp. While specific quantitative performance metrics for all technologies were not detailed, the company emphasizes its capability in producing absorbent products and developing sustainable packaging solutions. R&D efforts are focused on enhancing these capabilities, although its R&D investment may lag behind consumer-focused competitors like KMB. The strategic intent is to leverage these technological strengths to offer differentiated value to customers, justifying value-based pricing and contributing to improved margins and market share in targeted segments.

The competitive landscape is also influenced by broader industry trends like the increasing demand for sustainable packaging and the potential impact of tariffs, which can shift demand patterns and input costs. IP's focus on sustainability aligns with customer preferences, potentially providing an edge. However, macroeconomic uncertainty and negative consumer/business sentiment pose risks, potentially impacting demand across the industry. IP's strategy of controlling internal factors through cost reduction and operational excellence is a direct response to these external volatilities, aiming to improve resilience and profitability regardless of market fluctuations.

Financial Performance and Operational Transformation

International Paper's recent financial performance reflects a company in transition, impacted by strategic actions, market dynamics, and the initial effects of the DS Smith acquisition. In the first quarter of 2025, the company reported net sales of $5,901 million, a significant increase from $4,619 million in the first quarter of 2024, primarily driven by the inclusion of DS Smith results for two months. Net earnings were $105 million ($0.24 per diluted share) in Q1 2025, compared to $56 million ($0.16 per diluted share) in Q1 2024. Adjusted operating earnings, which exclude special items and non-operating pension expense, were $101 million ($0.23 per diluted share) in Q1 2025, a notable improvement from $61 million ($0.17 per diluted share) in Q1 2024 and $7 million ($0.02 per diluted share) in Q4 2024.

The sequential improvement from Q4 2024 to Q1 2025 for the legacy IP business was driven by slightly higher price and mix in North America Packaging due to prior index movements and lower cost of goods sold from improved operations and cost reduction initiatives. Q1 2025 results included significant special items, such as $221 million for DS Smith combination costs and $83 million for restructuring charges related to the Red River mill closure, partially offset by a $67 million net gain on the sale of fixed assets. Depreciation and amortization was also higher, including $197 million in accelerated depreciation related to strategic actions and $107 million for DS Smith assets.

Segment performance in Q1 2025 showed varied results. Packaging Solutions North America reported sales of $3,702 million and operating profit of $142 million. While sales increased year-over-year, operating profit declined, partly due to the inclusion of a $9 million operating loss from the DS Smith North America business for two months and higher depreciation. The segment saw higher price and mix from index movements and open market sales, and operations and costs benefited from cost out initiatives and favorable non-recurring items like $30 million in insurance recoveries related to the Ixtac fire. Packaging Solutions EMEA saw a dramatic increase in sales to $1,550 million and operating profit to $46 million, primarily reflecting the inclusion of $1.2 billion in sales and $13 million in operating profit from the DS Smith EMEA business for two months. Legacy IP EMEA experienced sequentially lower sales due to prior price decreases. Global Cellulose Fibers reported sales of $643 million and operating profit of $17 million, down year-over-year. The segment benefited sequentially from improved fluff mix and energy credit sales, as well as lower operations and costs due to improved mill performance and lower incentive compensation, and lower depreciation following the Georgetown mill closure.

Liquidity remains a focus during this transformative period. Cash provided by operations was $288 million in Q1 2025, lower than $395 million in Q1 2024, impacted by significant payments totaling $670 million related to severance, DS Smith transaction costs, and incentive compensation payouts. Despite higher capital expenditures ($330 million in Q1 2025 vs. $251 million in Q1 2024), cash provided by investment activities was $237 million in Q1 2025, boosted by cash acquired from acquisitions ($415 million), fixed asset sales, and insurance recoveries. Financing activities included a net increase in debt as the company assumed DS Smith debt and issued guarantees for their outstanding notes. As of March 31, 2025, IP maintained an investment-grade credit rating and was in compliance with its debt covenants, with sufficient liquidity expected from cash balances, operations, and credit facilities to meet near-term obligations and investments.

The company's operational transformation is actively addressing past inefficiencies. The 80/20 approach is being rolled out across the organization, including the Packaging Solutions North America box plant network (targeting over 75 plants by end of 2025) and mill system. Early pilot areas have shown 20-30% productivity improvements. Strategic investments like the Waterloo greenfield plant are designed to embed lower costs and higher performance. Management is targeting $1.9 billion in cost reduction net of inflation by 2027, with $400 million in annual run rate savings already actioned, including $120 million from corporate reorganization and $110 million from facility closures. Commercial improvements are expected to contribute $1.1 billion by 2027, with $600 million run rate benefits targeted by the end of 2025, driven by enhanced commercial capabilities, improved customer experience (reflected in better on-time delivery and Net Promoter Score), and a focused go-to-market strategy.

Outlook and Risks

Looking ahead, International Paper's outlook is framed by its ongoing transformation and the integration of DS Smith, set against a backdrop of macroeconomic uncertainty. Management projects full-year 2025 adjusted EBITDA to be in the range of $3.5 billion to $4 billion, contingent on the demand environment remaining stable at current levels (noted as down 2% in North America in Q1 2025). This target is supported by expected sequential improvement throughout the year, driven by the non-repeat of accelerated depreciation, a full quarter contribution from DS Smith EMEA, continued price realization, ramping cost-out actions, and seasonally higher North America box demand. However, these benefits are expected to be partially offset by higher planned maintenance outage spending and the non-repeat of favorable non-recurring items experienced in Q1 2025.

Management acknowledges the potential for meaningful deterioration in the economic environment, which could cause results to fall below the target range. In such a scenario, the company is prepared to accelerate its cost-out strategy and leverage options related to excess capacity while prioritizing competitiveness and the funding of its strategy and dividend. Conversely, an improvement in the economic environment could position the company towards the upper end of the guidance range. The full-year 2025 free cash flow is expected to be in the range of $100 million to $300 million, reflecting the impact of transformation-related costs and increased capital expenditures (projected at $1.8 billion to $1.9 billion).

The strategic option process for the Global Cellulose Fibers business is ongoing, with interested parties in the due diligence phase. Management remains focused on achieving the right value for the business, emphasizing its strong position in the fluff pulp market and the improvements made through strategic actions like the Georgetown mill closure.

Key risks to the investment thesis include the execution risk associated with the ambitious transformation plan and the successful integration of DS Smith, particularly achieving the targeted synergies. Macroeconomic uncertainty, including potential tariff impacts and shifts in consumer/business sentiment, could negatively affect demand and profitability. The company also faces ongoing legal and environmental liabilities, such as the Kalamazoo River remediation, Harris County waste pits, and the Brazil goodwill tax matter, which could result in material charges. Competition remains intense, requiring IP to effectively execute its strategy to improve reliability, cost position, and commercial performance to win market share against established rivals.

Conclusion

International Paper is embarking on a critical phase of its history, aiming to reverse a decade of underperformance through a comprehensive transformation. The acquisition of DS Smith fundamentally reshapes its scale and market presence, particularly in EMEA, while the adoption of the 80/20 operating system provides a clear framework for driving operational excellence and profitable growth. By aggressively pursuing cost reduction targets, investing strategically in reliability and productivity, and enhancing commercial capabilities, IP is taking steps to control its internal destiny amidst a volatile external environment.

While near-term results may reflect the complexities of integration and ongoing strategic actions, the projected ramp in earnings and the full-year guidance signal management's confidence in the trajectory. The success of this transformation hinges on disciplined execution, realizing planned synergies, and effectively navigating macroeconomic headwinds and competitive pressures. For investors, the story of International Paper is one of a legacy company leveraging its scale and renewed strategic focus to unlock value, with the outcome dependent on the successful implementation of its ambitious plan to become a more efficient, customer-centric, and profitable leader in the global fiber-based packaging and pulp markets.