Executive Summary / Key Takeaways

• International Paper is undergoing a significant transformation, leveraging an 80/20 operating system and strategic portfolio optimization to address historical underperformance and drive profitable growth.
• The recent acquisition of DS Smith (SMDS.L) creates a global leader in sustainable packaging across North America and EMEA, enhancing scale, customer offerings, and providing substantial synergy opportunities ($600M-$700M target).
• The company is aggressively targeting structural cost reduction ($1.9B by 2027) and commercial excellence ($1.1B by 2027), with specific actions like footprint optimization, productivity initiatives, and improved customer reliability already showing early momentum.
• First quarter 2025 results reflect the initial impact of the DS Smith acquisition and progress on strategic initiatives, contributing to higher sales and adjusted operating earnings despite a challenging demand environment and significant one-time cash impacts from transformation costs.
• Management forecasts sequential improvement in Q2 2025 adjusted EBITDA and EPS, driven by integration benefits and ongoing self-help, and anticipates landing in the mid-to-lower end of its $3.5B-$4B full-year adjusted EBITDA range based on current demand levels, with a path to a $5.5B-$6B core Packaging run rate by 2H 2025.

A New Chapter for a Paper Giant

International Paper, a company with roots stretching back to 1898, stands at a pivotal juncture in its long history. For years, the company faced headwinds, marked by underperformance across key financial metrics like sales, margin, and profitability. This period, characterized by what management has candidly termed "self-induced" issues stemming from capital and resource allocation choices, including underinvestment in critical assets, set the stage for a necessary transformation.

Under new leadership, International Paper has embarked on an ambitious strategic pivot. The core of this strategy is the adoption of an 80/20 operating system, a data-driven methodology designed to simplify the business, focus resources on the most attractive customers and products, and drive dramatic profitable growth. This approach aims to build an advantaged cost position, deliver a superior customer experience, and ultimately win profitable market share.

The company operates primarily in fiber-based packaging and cellulose fibers. Its packaging solutions, including containerboard and corrugated products, serve diverse end markets across North America and EMEA. The Global Cellulose Fibers segment produces pulp used in absorbent hygiene products and specialty applications. The broader industry landscape is currently navigating shifts in demand, influenced by macroeconomic uncertainty and potential tariff implications, alongside a growing global emphasis on sustainable packaging solutions.

A key differentiator for International Paper lies in its technological capabilities, particularly within its pulp and packaging operations. While specific quantitative metrics for all technologies are not detailed, the company emphasizes its expertise in producing high-quality cellulose fibers, including fluff pulp, which is a critical component in absorbent products. These specialized pulps are designed to offer performance advantages in applications like diapers and personal care items. In packaging, the focus is on developing sustainable, fiber-based solutions that meet evolving customer demands for environmentally conscious materials. The company's strategic investments in new facilities, such as the planned state-of-the-art box plants in Waterloo, Iowa, and potentially Salt Lake City, Utah, are intended to incorporate cutting-edge technology to enhance product quality, service reliability, and cost efficiency, aiming for industry-leading performance. R&D initiatives are focused on areas like improving mill reliability through advanced technology and developing innovative packaging designs that reduce complexity and improve customer service. These technological advancements are seen as crucial for building a competitive moat, supporting value-based pricing, and driving long-term growth.

Strategic Transformation and Operational Momentum

The transformation journey is actively underway, marked by concrete actions aimed at reshaping the company's operational footprint and commercial approach. A significant pillar is structural cost reduction, with a target of $1.9 billion in cost out after inflation by the end of 2027. Approximately $400 million in annual savings have already been realized, with line of sight to an additional $200 million by the end of 2025, complemented by synergies from the DS Smith acquisition. This involves optimizing the manufacturing footprint through targeted facility closures, such as the Red River containerboard mill (reducing capacity by ~800k tons annually) and several box plants, while investing in remaining and new facilities to enhance productivity and lower costs. Early regional optimization pilots in the North American box system have demonstrated promising 20-30% productivity improvements, a methodology the company plans to roll out more broadly.

Simultaneously, International Paper is focused on commercial excellence, targeting $1.1 billion in benefits by 2027. This involves improving customer experience through investments in people and operations, leading to significant gains in service and on-time delivery and achieving a best-in-class Net Promoter Score. These efforts are translating into tangible results, with the North America Packaging business closing its volume gap to market by approximately 500 basis points in the first quarter of 2025, exceeding expectations. The company anticipates closing this gap entirely and growing at or above market rates by the fourth quarter of 2025.

The DS Smith Acquisition: Reshaping the Global Footprint

A defining moment in International Paper's transformation was the completion of the acquisition of DS Smith Plc on January 31, 2025. This transaction, valued at approximately $9.9 billion, significantly expanded IP's presence in Europe and created a global leader in sustainable packaging solutions focused on the attractive North America and EMEA regions. The combination is expected to strengthen IP's customer value proposition through enhanced offerings, innovation, and expanded geographic reach.

The integration process is actively leveraging the 80/20 approach to accelerate synergy realization, with targets set between $600 million and $700 million. The combined entity operates under a new segment structure: Packaging Solutions North America, Packaging Solutions EMEA, and Global Cellulose Fibers. As a condition of regulatory approval for the DS Smith acquisition, International Paper is divesting five European corrugated box plants, a process currently in exclusive negotiations and expected to conclude by the end of the second quarter of 2025.

Performance Reflecting Transition and Integration

International Paper's first quarter 2025 results provide an initial glimpse into the impact of the DS Smith acquisition and the ongoing transformation. Net Sales for the quarter were $5.901 billion, a significant increase from $4.619 billion in the prior-year period, primarily driven by the inclusion of DS Smith results. The company reported a Net Loss of $105 million, or $(0.24) per diluted share, but Adjusted Operating Earnings, which exclude special items and non-operating pension expense, were $101 million, or $0.23 per diluted share. This compares to Adjusted Operating Earnings of $61 million, or $0.17 per diluted share, in Q1 2024.

Segment performance in Q1 2025 reflected varied dynamics. Packaging Solutions North America reported Net Sales of $3.702 billion (up from $3.486 billion in Q1 2024) and Business Segment Operating Profit of $142 million (down from $192 million). This segment's results included the initial impact of the DS Smith North America business and saw benefits from price increases and cost-out actions, offset by seasonally lower volumes and accelerated depreciation related to footprint optimization. Packaging Solutions EMEA saw Net Sales surge to $1.550 billion (from $348 million in Q1 2024) and Operating Profit rise to $46 million (from $24 million), largely due to the inclusion of the DS Smith EMEA business. The Global Cellulose Fibers segment reported Net Sales of $643 million (down from $704 million in Q1 2024) and Operating Profit of $17 million (down from $47 million). Despite the year-over-year decline, GCF showed significant sequential improvement in operating profit, benefiting from strategic actions focusing on fluff pulp and cost structure optimization.

Liquidity and capital resources saw notable activity in Q1 2025. Cash provided by operations was $288 million, impacted by significant payments totaling approximately $670 million related to severance, DS Smith transaction costs, and the 2024 incentive compensation payout. Free cash flow was $(618) million. The DS Smith acquisition led to the assumption of approximately $3.60 billion in foreign-denominated debt, and IP guaranteed DS Smith's outstanding notes. Despite these impacts, the company maintains an investment-grade credit rating and was in compliance with its debt covenants as of March 31, 2025. Full-year 2025 capital expenditures are projected to be between $1.80 billion and $1.90 billion, aligning with depreciation and amortization.

Comparing IP's TTM financial ratios to key competitors like PCA (PKG), WRK (WRK), and GPK (GPK) reveals areas of relative strength and weakness. IP's TTM Gross Profit Margin of 28.59% is competitive, though slightly lower than PCA's 30.90% and GPK's 22.30%, and higher than WRK's 18.00%. However, IP's TTM Operating Profit Margin (2.09%) and EBITDA Margin (9.93%) lag significantly behind PCA (13.00% Op Margin, 21.00% EBITDA Margin), WRK (-7.00% Op Margin, 11.00% EBITDA Margin), and GPK (13.00% Op Margin, 20.30% EBITDA Margin). This highlights the impact of IP's historical cost structure and ongoing transformation efforts on current profitability metrics compared to peers who may have achieved greater operational efficiency or benefit from different market mixes. IP's Debt/Equity ratio of 0.56 is lower than WRK (0.85) and GPK (1.74), but higher than PCA (0.63), indicating a moderate leverage position relative to peers. Valuation metrics like P/E (54.16), P/S (1.30), and P/B (1.19) reflect market expectations and are influenced by the current earnings profile and future growth potential compared to competitors.

Outlook and Risks on the Horizon

Looking ahead, International Paper anticipates sequential improvement in the second quarter of 2025, with expectations for flat adjusted EBITDA and higher earnings per share. This outlook is supported by the non-repeat of accelerated depreciation from Q1, the inclusion of a full quarter of Packaging Solutions EMEA results (including DS Smith), additional price realization, the continued ramp-up of cost-out actions, and seasonally higher North America box demand. These tailwinds are expected to be partially offset by higher planned maintenance spending and the non-repeat of favorable non-recurring items from the first quarter.

For the full year 2025, management expects to land in the mid-to-lower end of its previously communicated $3.5 billion to $4 billion adjusted EBITDA range, assuming current demand levels persist with normal seasonal patterns. An upside scenario could see performance reach the upper end of this range if the economic environment improves. The second half of 2025 is projected to show a progressive ramp-up in earnings, driven by the fuller realization of cost actions, accumulating commercial wins, the acceleration of 80/20 implementation across the combined business, and the capture of DS Smith synergies. The core Packaging business is targeted to reach a run rate of approximately $4 billion in annual adjusted EBITDA by the second half of 2025, positioning the company on a path towards a $5.5 billion to $6 billion target. Full-year free cash flow is still expected to be in the range of $100 million to $300 million.

Despite the strategic momentum, International Paper faces significant risks. Macroeconomic uncertainty, particularly related to potential tariff implications and negative consumer and business sentiment, poses a risk to demand recovery. Geopolitical instability and adverse movements in foreign exchange rates could also impact results. The successful integration of DS Smith and the realization of targeted synergies are critical but involve execution risks. The company is also exposed to environmental and legal liabilities, for which reserves are established but could potentially result in future adverse outcomes. Management emphasizes controlling internal factors through accelerated cost-out initiatives and commercial excellence to mitigate external volatility and maintain its strategic trajectory.

Conclusion

International Paper is in the midst of a profound transformation, strategically repositioning itself as a focused, performance-driven global leader in sustainable packaging. The acquisition of DS Smith is a catalyst for this change, significantly expanding its scale and reach in key markets. While recent financial performance reflects the complexities of this transition and a challenging demand environment, the underlying narrative is one of self-help and operational improvement driven by the disciplined application of the 80/20 operating system.

The company's focus on structural cost reduction, commercial excellence, and targeted investments in its operational footprint and technological capabilities provides a clear roadmap for future earnings improvement. Despite near-term market volatility and integration challenges, management's guidance points to a progressive ramp-up in performance throughout 2025, supported by synergy capture and the realization of internal initiatives. The investment thesis hinges on the successful execution of this transformation, leveraging its enhanced competitive position and technological strengths to deliver sustainable profitable growth and create value for shareholders.