International Paper recently reported second-quarter results that topped expectations. Second-quarter adjusted EPS was $0. $1. 2Q19. Second-quarter revenue was $4.9 billion, down from $5.4 billion in 1Q20 and $5.7 billion in 2Q20. The operating margin was 23%, down from 24% in Q219. $1.34 per share.
EARNINGS & GROWTH ANALYSIS
International Paper has three primary operating segments: Industrial Packaging (75% of 2Q20 sales), Global Cellulose Fibers (12%), and Printing Papers (12%). Revenue in the Industrial Packaging segment fell to $3.6 .8 billion in 1Q20 and $3.9 billion in 2Q19. Operating profit fell to $449 million from $515 million in the prior-year period. In the Global Cellulose Fibers segment, revenue for 2Q20 was $605 million, up from $568 million in 1Q20, but down from $661 million in 2Q19. The company posted a 2Q operating loss of $10 $54 million in 1Q20. In the Printing Papers segment, IP posted revenue of $583 million, down from $908 million in 1Q20, and $1.1 billion in 2Q19. In North America, earnings fell substantially significantly on-demand, and lower maintenance outage expenses drove operating costs down. The same is reported for Brazil, Europe, and Russia. All earnings in these regions were heavily impacted volume.
Along with the 2Q earnings release, the company provided a 3Q outlook. Volume is expected to be stable in Industrial Packaging, endure a seasonal decrease in Cellulose Fibers and begin an initial recovery in Printing Papers. Costs are expected to be higher in Industrial Packaging and Cellulose Fibers and lower in Printing Papers. Over the long term, we note that although IP is facing pressure from slower global economic growth, we expect it to benefit over time from its geographically diverse revenue base, cost-reduction efforts, and recent acquisitions.
FINANCIAL STRENGTH & DIVIDEND
Total debt of $9.4 billion accounted for 57% of total capitalization. Management has said that debt repayment is a priority, and during the second quarter, IP reduced long-term debt by $200 million. The company plans to repay another $210 million of long-term debt, which will essentially eliminate all bond maturities through the end of 2021.
MANAGEMENT & RISKS
Mark S. Sutton became IP’s CEO on November 1, 2014, and chairman on January 1, 2015. Mr. Sutton was previously the company’s chief operating officer. In June 2018, Tim Nicholls became the company’s CFO. In February 2020, Sophie Beckman became the chief sustainability officer. Investors owning shares in International Paper face a range of risks. In addition to the industry-wide issues of competition, trade war concerns, operational efficiency, environmental compliance, and potential litigation. Pulp and paper prices can also be highly volatile. The company’s near-term outlook is also uncertain due to the COVID-19 pandemic.
International Paper is a global producer of renewable fiber-based packaging, pulp, and paper products with manufacturing operations in North America, Latin America, Europe, North Africa, India, and Russia. The dividend yield of 6% is above the peer average of 3%, indicating value. We think that valuations are fair and are consistent with a HOLD rating. We may look to raise our rating if the technical patterns reverse or the revenue and earnings outlook improves significantly.