Morningstar | International Paper Takes Considerable Downtime in 1Q as Box Demand Declines
After an extended run of increasing prices and higher margins, conditions are starting to deteriorate for the major containerboard manufacturers. International Paper reported a 1.4% decline in box shipments in the first quarter versus a year ago, a significant decline from the 2%-3% growth of the past few years. Benchmark prices have also begun to falter, with medium prices falling in the fourth quarter and linerboard prices under pressure in the last few months. In our view, this is a consequence of a steady supply of rising industry capacity and higher prices driving package conversion from boxes to envelopes and flexible solutions. Given that we have already forecast margin compression for IP, our $50 fair value estimate and no-moat rating are intact.Sales were flat versus last year at $3.83 billion in the industrial packaging segment, with prior price increases offset by lower volume. In contrast, adjusted operating income declined to $421 million, with operating and input cost inflation more than offsetting higher prices. As we roll through the year, we think price will become a headwind as contracts reprice lower. With a number of additional capacity expansion projects underway in the industry, we think investors should get used to narrower margins. Consistent with our view that containerboard production is not competitively advantaged, returns on invested capital should gradually decline for this segment amid increased capacity and price competition.
Despite the dreary outlook for printing paper in the long run, the business will have a tailwind in the near term. Adjusted operating income more than doubled versus last year to $144 million, driven by higher prices. As higher-cost competitors gradually shut down or convert capacity, there can be periods of compelling profitability, as we're seeing now. While we think margins will soften in the future, prices are currently holding up and should support a solid 2019.
International Paper is a 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 company's segments are: Industrial Packaging, which manufactures containerboard, such as linerboard, medium, whitetop, recycled linerboard, recycled medium and saturating kraft; Global Cellulose Fibers, which produces fluff pulp for making absorbent hygiene products like baby diapers, feminine care, adult incontinence and other non-woven products; and Printing Papers, which produces printing and writing papers, such as uncoated papers for use in copiers, desktop and laser printers and digital imaging.
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