International Paper Earnings: Softening Box Demand and Lower Prices Cause Near-Term Headwinds

International Paper IP reported lackluster first-quarter results as a decline in volumes was met with lower prices in the company’s packaging business. Revenue decreased 4% year over year as top-line strength in its fiber business was not enough to offset packaging declines. Elevated operating costs continued to weigh on the firm, with consolidated operating margins contracting 140 basis points from a year ago to 5.9%, despite benefits from recent cost management initiatives. Both segments continue to feel the effect of inventory destocking and moderating consumer spending, and we expect similar demand constraints to persist throughout the year. Nevertheless, we are maintaining our $44 fair value estimate.

The industrial packaging segment reported a 7% decrease in revenue year over year as corrugated packaging and containerboard shipments both saw year-over-year declines. Additionally, domestic and export prices fell year over year, increasing pressure on the company’s packaging business. The segment posted an 8% operating margin for the quarter, a 100-basis-point decrease from a year ago due to lower prices and planned outage expenses. While inventory buildup in 2022 led to rapid destocking to start the year, the firm should benefit from some sequential reductions in destocking through the year, but prices are likely to remain pressured in the near term.

The cellulose fibers business posted double-digit revenue growth in the quarter but reported a $16 million operating loss due to increased economic downtime and higher operating costs. This loss was also attributable to an unfavorable mix as volume growth was higher for the less profitable commodity pulp than fluff during the quarter. While cellulose fibers faces near-term headwinds, we expect the segment to post positive operating income for the year as it benefits from a more optimal mix and resilient pricing offsets a decline in volume.