Executive Summary / Key Takeaways

• International Paper is undergoing a profound transformation, divesting non-core assets like Global Cellulose Fibers and acquiring DS Smith to become a pure-play leader in sustainable packaging solutions across North America and EMEA.
• The company's "80/20 mindset" and strategic initiatives are driving significant cost reductions and commercial excellence, with North American Packaging Solutions demonstrating a 40% adjusted EBITDA increase year-to-date in 2025 and reversing market share losses.
• Despite challenging macroeconomic conditions and a $500 million profit impact in 2025 from softer demand, IP is accelerating cost-out actions and investing aggressively in its core packaging business, including new state-of-the-art facilities and mill conversions.
• Revised guidance targets $3 billion in adjusted EBITDA for 2025 and $5 billion by 2027 (now expected by 2028), reflecting market headwinds but reaffirming the long-term profit opportunity and commitment to the transformation plan.
• IP's robust balance sheet and strategic capital allocation are crucial for funding its ambitious investment program, maintaining an investment-grade credit rating, and supporting shareholder returns amidst operational challenges like mill reliability issues.

A New Chapter: Forging a Pure-Play Packaging Powerhouse

International Paper Company (NYSE:IP), a venerable institution founded in 1898, is in the midst of a strategic metamorphosis, shedding its legacy as a diversified paper and pulp producer to emerge as a focused global leader in sustainable packaging solutions. This profound transformation, anchored by the strategic "80/20 mindset," aims to simplify operations, segment markets, optimize resources, and drive profitable growth. The company's journey has been marked by significant portfolio shifts, including the spin-off of its Printing Papers business in 2021 and the monumental acquisition of DS Smith in January 2025, valued at approximately $9.90 billion. This acquisition significantly expanded IP's footprint in Europe, the Middle East, and Africa (EMEA), creating a formidable presence in both North American and EMEA packaging markets.

The strategic rationale behind this pivot is clear: to concentrate investments and resources on fiber-based packaging, a sector characterized by resilient demand and a strong secular trend towards sustainable alternatives. This focus is designed to establish an advantaged cost position, deliver a superior customer experience, and maintain a high relative supply position in the most attractive geographies. The company's commitment to this vision is evident in its recent actions, including the definitive agreement to sell its Global Cellulose Fibers (GCF) business for $1.50 billion in August 2025, a move that will solidify IP as an exclusively sustainable packaging enterprise.

Competitive Dynamics and Technological Edge

International Paper operates in a highly competitive landscape, vying with industry giants such as WestRock Company (WRK), Packaging Corporation of America (PKG), and Graphic Packaging Holding Company (GPK). IP's competitive positioning is primarily defined by its extensive global reach and diversified product portfolio within the packaging sector. While competitors like PKG often boast strong domestic cost leadership and WRK emphasizes integrated supply chains and sustainability, IP's strategic advantage lies in its ability to serve a broad spectrum of customers across multiple continents, offering a comprehensive suite of industrial packaging products.

IP's technological differentiation is not rooted in a single, proprietary material, but rather in its advanced manufacturing processes, asset optimization, and innovative plant designs aimed at enhancing efficiency and product quality. The company's "80/20 Lighthouse model" is a prime example of this operational technology, driving productivity gains by isolating and optimizing complex product configurations in specialized box plants, while streamlining operations in others. This methodology has already yielded over 20% productivity gains in pilot programs and is being scaled to more than 75 box plants across North America by year-end 2025, with initial deployments now underway in EMEA. These improvements are not solely capital-intensive but also stem from optimizing the volume mix matrix, leading to tangible cost reductions and improved service levels.

A cornerstone of IP's technological roadmap is the investment in state-of-the-art facilities. The planned greenfield corrugated box facility in Waterloo, Iowa, exemplifies this, designed to achieve 20% lower costs, superior product quality, and just-in-time service. This facility will be strategically located to serve key customers in the protein segment, leveraging its proximity to IP's mills for freight advantages. Furthermore, the $250 million conversion of the Riverdale Mill in Selma, Alabama, to produce lightweight containerboard by the third quarter of 2026, is expected to generate near 20% returns. This investment represents a product technology shift, enabling IP to cater to growing market segments with high-performance, sustainable materials. These initiatives collectively enhance IP's competitive moat by driving down manufacturing costs, improving product offerings, and strengthening customer relationships through enhanced service and reliability.

Financial Performance and Operational Momentum

International Paper's recent financial performance reflects both the challenges of a dynamic macroeconomic environment and the early successes of its transformative strategy. For the nine months ended September 30, 2025, the company reported net sales of $17.63 billion, a significant increase from $11.91 billion in the prior-year period, primarily driven by the DS Smith acquisition. However, net earnings for the same period were $1.13 billion, compared to $704 million in 2024, impacted by substantial restructuring charges and impairment losses.

In the third quarter of 2025, IP demonstrated a sequential improvement in adjusted EBITDA from continuing operations, which rose 28% to $859 million. This uplift was primarily driven by continued price realization and effective cost management in both the North American and EMEA Packaging Solutions segments, alongside lower fiber costs in EMEA. Notably, the North American Packaging Solutions (PS NA) segment has been a "transformation proof point," achieving a 40% increase in adjusted EBITDA year-to-date through Q3 2025 compared to the same period in 2024, while expanding its adjusted EBITDA margin by 370 basis points. This performance underscores the efficacy of footprint optimization, overhead simplification, and the 80/20 Lighthouse model.

Despite these gains, operational challenges persist. The North American mill system, in particular, has struggled with reliability issues, resulting in approximately $150 million of lost profit year-to-date in Q2 2025. This is attributed to a decade of underinvestment and significant personnel turnover. Management is "hyper-focused" on addressing these issues through consistent investment in maintenance and rapid training. The company's liquidity remains robust, with cash and temporary investments of $995 million as of September 30, 2025.

Capital expenditures totaled $1.20 billion for the first nine months of 2025, a significant increase from $661 million in 2024, reflecting aggressive reinvestment in the core business. Full-year 2025 capital expenditures are projected to be between $1.80 billion and $1.90 billion, or 71% to 75% of depreciation and amortization. The company maintains strong investment-grade credit ratings (BBB stable outlook by S&P and Baa2 stable outlook by Moody's) and is in compliance with its debt covenants, providing the financial flexibility to fund its transformation and dividend payments.

Strategic Initiatives and Forward Outlook

International Paper's strategic initiatives are designed to enhance its competitive standing and drive long-term value. In North America, the company has successfully reversed a trend of market share losses, achieving positive box shipments in September 2025 and anticipating above-market performance in Q4 2025 and 2026. This commercial resurgence is driven by improved service levels (on-time delivery rose from 92% in Q4 2024 to 97% in Q2 2025) and targeted wins with both large national accounts and local customers. The company expects to outpace the North American market by approximately 2% in 2026.

In EMEA, the integration of DS Smith is a critical focus, with synergy goals of $600 million to $700 million. While market conditions in EMEA remain challenging, with box volume growth expected closer to 1% for 2025, IP is accelerating cost-out actions. This includes proposed closures across East Europe, the Nordics, and Italy, and a plan to streamline the regional overhead structure by consolidating 13 subregions into 7, with financial benefits expected in 2026. The company's long-term expectation for EMEA box volume growth is 1% to 2%, driven by secular trends favoring fiber-based packaging.

The company has revised its full-year 2025 targets to $24 billion in net sales, $3 billion in adjusted EBITDA, and negative $100 million to $300 million in free cash flow. This adjustment reflects the impact of market headwinds, which have cost over $500 million in profit in 2025 alone. The long-term adjusted EBITDA target of $5 billion is now anticipated by 2027, with the full opportunity realized by 2028, a year later than initially projected. This revised outlook acknowledges the persistent market softness but underscores management's commitment to the transformation, with $600 million of incremental adjusted EBITDA expected in 2026 from already announced actions.

Risks and Challenges

Despite the clear strategic direction, International Paper faces several risks. Macroeconomic volatility, particularly in EMEA, poses a significant challenge, with subdued market conditions, elevated interest rates, and geopolitical tensions impacting industrial production and consumer sentiment. Rising tariff rates have also contributed to economic uncertainty. The company's mill reliability issues in North America represent an internal operational risk, potentially hindering its ability to fully capitalize on market opportunities and cost efficiencies. Legal proceedings, including antitrust claims in Italy and a class action complaint alleging price fixing in the U.S. containerboard market, could result in material financial liabilities. Furthermore, the successful execution of the GCF divestiture, including the realization of value from preferred stock received, remains subject to closing conditions and market dynamics.

Conclusion

International Paper is executing a bold transformation to become a focused, sustainable packaging leader. The strategic divestiture of its Global Cellulose Fibers business and the integration of DS Smith are foundational to this new identity. While macroeconomic headwinds and internal operational challenges have necessitated a recalibration of near-term financial targets, the underlying investment thesis remains compelling. The company's aggressive pursuit of its "80/20 mindset," coupled with targeted investments in advanced manufacturing technologies and a renewed focus on customer excellence, is driving tangible improvements in cost structure and market positioning.

The North American Packaging Solutions segment serves as a powerful testament to the efficacy of this strategy, demonstrating significant EBITDA growth and market share gains. As IP continues to address mill reliability and streamline its global footprint, its enhanced operational capabilities and technological advancements, such as the Waterloo greenfield plant and Riverdale mill conversion, are expected to fuel long-term profitable growth. Investors should monitor the continued execution of cost-out initiatives, the successful integration of DS Smith (DITHF), and the company's ability to capitalize on market share gains, particularly as global economic conditions stabilize. International Paper's commitment to its transformation, backed by a strong balance sheet and disciplined capital allocation, positions it to emerge as a more resilient and profitable enterprise in the evolving sustainable packaging industry.