International Paper CEO Warns 2027 Will Be a ‘Slog’ as DS Smith Separation Advances

Key Points

• CEO Andy Silvernail expects 2027 to be a “slog” because of weak demand and persistent inflation, though he expects recent EBITDA margin improvement to continue into the fourth quarter.
• International Paper is pursuing either a spinoff or sale of DS Smith on a dual-track basis, maintaining its 12- to 15-month timeline; separation could happen by the first quarter of next year at the latest.
• The company plans another $250 million to $350 million in cost reductions and expects $900 million to $1.1 billion in incremental pricing next year, while continuing elevated capital investment in North American operations.

International Paper NYSE: IP expects demand to remain difficult in 2027 as inflation continues to pressure costs, even as the packaging company advances its planned separation from DS Smith and invests in its North American operations, Chairman and CEO Andy Silvernail said at a Baird conference.

“I think we should expect 2027 to be a slog,” Silvernail said, citing both demand and inflation. He added that the company was positioned to overcome those challenges and expected an improvement in its third-quarter EBITDA margin to continue into the fourth quarter.

Silvernail said the company had completed most of the major restructuring decisions needed for its turnaround, including asset closures and changes to its business portfolio. International Paper has removed about 20% of its total capacity and doubled capital investment in its North American business over the past couple of years, he said.

DS Smith separation

Silvernail said International Paper was pursuing either a spinoff or sale of DS Smith. He agreed with Baird packaging and materials analyst Goncalo Panjabi’s characterization of the process as a dual-track approach.

The CEO said the company had not changed its original 12- to 15-month separation timeline. When Panjabi described the timeframe as around the first quarter of next year, Silvernail said that would be “at the very latest.”

Silvernail said his review of DS Smith’s operations showed less customer and cost overlap than initially appeared possible. Packaging purchasing relationships tend to be built between individual plants, he said, limiting the practical benefit of potential global contracts.

He also described differences between the European and U.S. packaging markets. Europe has more demand for lightweight, recycled and shelf-ready packaging, while the U.S. market is more focused on logistics and virgin fiber, he said. Energy sourcing also differs: Silvernail said International Paper generates about 70% of its own energy in the U.S., while European operations buy more energy on the market.

“Let capital allocation move to where it should move. Let human resource allocation move to where it should move, and let the businesses thrive on their own,” Silvernail said of the planned separation.

Costs, pricing and investment

For next year, Silvernail expects International Paper to remove an additional $250 million to $350 million in costs and realize $900 million to $1.1 billion in incremental pricing. He also expects approximately $600 million in cost headwinds, more than double the roughly $250 million in annual inflation the company would typically anticipate.

Pricing since he joined the company has largely covered inflation rather than adding meaningfully to the bottom line, Silvernail said. He expects inflation to moderate over time, although he cautioned that cost pressures would persist.

The company expects to eliminate most stranded costs associated with the separation. Silvernail estimated that roughly $30 million would remain initially, including systems-related expenses, and said those costs should be removed by 2028.

Asked about this year’s free cash flow guidance of $100 million to $200 million, Silvernail attributed the relatively low conversion to heavy investment and some working-capital catch-up. He expects capital expenditures to remain in a range of $1.25 billion to $1.4 billion for the next couple of years before eventually normalizing to about 7.5% of sales.

Capital allocation priorities

Silvernail said consistent investment in existing facilities would remain a priority, arguing that underinvestment in prior years contributed to higher operating costs and weaker customer satisfaction. He said the company has returned to the top position in customer satisfaction after ranking last among major competitors in 2022.

Following the separation, International Paper has discussed a dividend representing 40% to 50% of free cash flow, with the final decision to be made when the transaction occurs, Silvernail said. He also said the company would consider smaller acquisitions, particularly converting facilities, and share repurchases when appropriate.

On agricultural volumes, Silvernail said a decline in bagged lettuce consumption had affected demand. Consumer demand was returning, he said, but a return to trend would depend on the next planting season.

About International Paper (NYSE:IP)

International Paper is a global producer of fiber-based packaging and pulp products. Its packaging offerings include containerboard and corrugated packaging used to protect and transport goods, while its pulp products serve a range of consumer and industrial applications. The company traces its origins to 1898, when several U.S. paper manufacturers combined to form International Paper. Over time, it has evolved through acquisitions and changes to its business, with a focus on renewable, fiber-based materials and packaging solutions.

This instant news alert was generated by narrative science technology and financial data from MarketBeat in order to provide readers with the fastest reporting and unbiased coverage. Please send any questions or comments about this story to contact@marketbeat.com.