It might not be reflected in the stock's recent performance, but International Paper (IP -2.82%) continues to reap the rewards of operational improvements enabled by years of capital investments and restructuring efforts. A strong start to 2019 puts the business on solid footing for the remainder of the year. That's no minor detail considering the pulp and paper leader faces a brutal maintenance schedule in the second quarter as it invests capital to upgrade its manufacturing fleet.
To be fair, there are headwinds on the horizon. European demand remains weak due to inventory management decisions, which is weighing on international export prices. International Paper also reduced its full-year 2019 adjusted EBITDA guidance. But overall the business remains on a promising trajectory.
Image source: Getty Images.
By the numbers
International Paper reported a $22 million increase in revenue year over year, representing growth of just 0.4%. That doesn't quite move the needle, but it went along with a $19 million decrease in the cost of products sold as well as decreases in selling and administrative expenses and depreciation, amortization, and timber harvesting expenses. Small changes can have a significant impact on the low-margin business.
The total savings lifted operating income before income taxes and equity earnings to $418 million, or a 17% jump from the $356 million reported in the year-ago period. Even after accounting for one-time expenses incurred in the first quarter of 2018, adjusted operating income rose 13% year over year.
The company's Russian joint venture, Ilim, continued to deliver strong operations. Sales volume grew 2% year over year, and although revenue slipped 8.5% in that span due to currency fluctuations, foreign currency differences also helped to lessen the burden of U.S. dollar-denominated debt. International Paper reported quarterly equity earnings of $101 million from Ilim as a result.
|
Metric |
Q1 2019 |
Q1 2018 |
YoY Change |
|---|---|---|---|
|
Revenue |
$5.64 billion |
$5.62 billion |
0.4% |
|
Total operating expenses |
$5.22 billion |
$5.26 billion |
(0.8%) |
|
Operating income before income taxes and equity earnings |
$418 million |
$356 million |
17% |
|
Equity earnings |
$114 million |
$95 million |
20% |
|
Net income from continuing operations |
$426 million |
$362 million |
18% |
|
EPS from continuing operations |
$1.05 |
$0.86 |
22% |
|
Operating cash flow |
$733 million |
$663 million |
10% |
Data source: International Paper press release. YoY = year-over-year.
The industrial packaging segment, the company's largest and most important, was the only one to see a year-over-year decline in operating profit before special items. That said, all three segments -- industrial packaging, global cellulose fibers, and printing papers -- performed relatively well given each was affected by scheduled downtime. It might be more difficult to repeat that performance in the current quarter.
Looking ahead
Management said total maintenance outage expenses will increase $113 million in the second quarter of 2019 compared to the first quarter of the year. Each segment is expected to see volume improvements, but lower prices (a headwind) and lower fixed input costs (a tailwind) make it difficult to predict how the business will fare when the first half of 2019 is in the books.
Management also reduced its full-year 2019 adjusted EBITDA guidance to a range of $4.2 billion to $4.3 billion, marking a $100 million decrease to both the low end and the high end of the previous range. By comparison, adjusted EBITDA settled at $4.3 billion in 2018. Despite the small change in guidance, International Paper didn't alter its full-year 2019 expectations for capital expenditures ($1.4 billion), free cash flow ($2.0 billion), dividend payments ($800 million), or share repurchases and debt reduction expenses ($1.2 billion combined).
Image source: Getty Images.
The important thing for investors is that International Paper expects to deliver $2 billion in free cash flow and to continue driving down its adjusted EBITDA-to-debt ratio in 2019. The long-term debt balance fell to under $10 billion in the first quarter -- the first time that's happened since 2016 -- and should fall another $400 million or so before the end of the year. That's more important in the long run than a small decrease or flat year-over-year adjusted EBITDA.
This blue chip remains on solid financial footing
International Paper made intelligent decisions in recent years to shore up its operations while market fundamentals were favorable. That's allowing it to better navigate the headwinds beginning to emerge in 2019. While shareholders might feel better if management prioritized closing its pension obligation deficit over share repurchases, there's not much to complain about after seeing Q1 2019 earnings.
