IP navigates rapidly changing business environment in Q1

International Paper (IP), headquartered in Memphis, Tennessee, has reported its first-quarter 2020 financial results, which include a loss of $141 million, or 36 cents per diluted share, compared with $165 million, or 42 cents per diluted share, in earnings, in the previous quarter and $424 million ($1.05 per diluted share) in the first quarter of 2019. The company’s first-quarter 2020 net earnings included an after-tax charge of $337 million (85 cents per diluted share) for the impairment of the net assets and write-off of foreign currency translation adjustment following the announcement of the sale of its Brazil Packaging business.

First-quarter adjusted operating earnings of $226 million (57 cents per diluted share) compared with $430 million ($1.09 per diluted share) in the fourth quarter of 2019 and $447 million ($1.11 per diluted share) in the first quarter of 2019.

The company’s earnings before interest, taxes, depreciation and amortization (EBITDA) were $802 million and its free cash flow was $363 million.

"International Paper had a solid first quarter in a rapidly changing environment as the impact of the COVID-19 pandemic and containment measures accelerated," says Mark Sutton, chairman and chief executive officer, in a news release on the company’s quarterly results. "International Paper entered this crisis in a position of strength due to our committed employees, our diverse customer base, our world-class manufacturing and supply chain capabilities and solid financial footing. Given the unprecedented uncertainty regarding the ultimate economic impact of COVID-19, we are taking prudent steps to further strengthen the company's liquidity."

Sutton says, "I am especially grateful to our manufacturing, converting and supply chain frontline teams around the world—their health and safety is our most important responsibility as we provide essential products to our customers."

During the conference call on its Q1 earnings April 30 (Slides of which are available here.), IP’s Sutton added, “We've taken significant steps to protect our employees and contractors. We also implemented contact tracing protocols in all of our facilities. Our COVID-19 measures are proving to be effective, and we have not had any material disruptions to our operations.”

He also pointed to “the collaboration, ingenuity and commitment of our employees to take care of our customers during this pandemic,” adding that IP added product and service innovations and streamlined operations. “A few examples, our packaging business developed corrugated separators to allow citrus customers to run their packing operations with appropriate social distancing protection at the height of the harvest season. Our Global Cellulose Fibers business is ensuring customers have real-time visibility of their orders, which is especially critical when ocean supply chains have stretched out."

Sutton also mentioned IP’s introduction of new packaging sizes that allow home delivery of uncoated freesheet products.

During the call, the company’s Senior Vice President and Chief Financial Officer Tim Nicholls said, “Recovered fiber costs increased rapidly in the latter part of March as generation decreased, but it did not impact the first quarter materially.”

He added, “We expect recovered fiber to be a significant cost headwind in the second quarter.”

Nicholls said IP will und fund “only mission-critical needs, including the completion of the Riverdale Conversion” as a result of the COVID-19 pandemic and the disruption it has wrought. “We will not compromise the health and safety of our employees nor take any environmental or regulatory shortcuts. We're taking a deliberate approach to funding decisions to ensure we continue to have the right capabilities to provide the best solutions for our customers and are well-positioned for the eventual economic recovery.”

Segment performance

IP’s Industrial Packaging operating profits in the first quarter of 2020 were $470 million compared with $605 million in the fourth quarter of 2019. In North America, earnings decreased as a result of lower sales prices for boxes and export containerboard, higher planned maintenance outage expenses and higher operating costs driven by the Riverdale mill conversion in Selma, Alabama. Demand for export containerboard improved and input costs were lower, primarily for energy. Earnings were negatively affected by the nonrepeat of a favorable inventory valuation adjustment in the fourth quarter of 2019. 

In Europe, earnings improved, driven by seasonally higher volumes, primarily in Morocco and Turkey, and continued performance improvements at the Madrid, Spain mill, slightly offset by unfavorable foreign currency impacts, primarily in Morocco, the company says.

Global Cellulose Fibers operating losses in the first quarter of 2020 were $54 million compared with losses of $45 million in the fourth quarter of 2019. IP says its earnings decreased, driven by lower average sales prices and higher planned maintenance outage expenses partially offset by a favorable inventory valuation adjustment in the first quarter of 2020.

Printing Papers operating profits in the first quarter of 2020 were $96 million compared with $109 million in the fourth quarter of 2019. In North America, earnings decreased because of lower export and domestic sales volumes, seasonally higher operating costs and higher planned maintenance outage expenses, the company says. Earnings benefited from the nonrepeat of an unfavorable inventory valuation adjustment in the fourth quarter of 2019.

In Brazil, earnings decreased as a result of seasonally lower sales volumes and lower margins driven by geographic mix slightly offset by lower input costs and favorable foreign currency impacts.

In Europe and Russia, earnings increased primarily because of lower operating costs in both regions, lower planned maintenance outage expenses and input costs in Europe, slightly offset by lower sales prices in both regions and lower sales volumes in Russia.

Ilim joint venture equity losses were $35 million in the first quarter of 2020 compared with earnings of $21 million in the fourth quarter of 2019. Operationally, earnings decreased slightly driven by lower sales prices for hardwood pulp, softwood pulp and containerboard to China and Russia. The company says it also recognized a noncash after-tax foreign exchange loss of $51 million in the first quarter of 2020 compared with a gain of $8 million in the fourth quarter of 2019 primarily because of Ilim's U.S. dollar-denominated net debt.

Graphic Packaging equity earnings on IP’s 18.7 percent ownership position were $7 million in the first quarter of 2020 compared with $9 million in the fourth quarter of 2019.

Corporate expenses totaled $32 million for the first quarter of 2020 compared with $9 million in the fourth quarter of 2019.

IP has manufacturing operations in North America, Latin America, Europe, North Africa and Russia and produces corrugated packaging products; pulp for diapers, tissue and other personal hygiene products; and papers that facilitate education and communication.