International Paper Ups Synergy Target
JUNE-2012 – International Paper Company recently held its investor day highlighting its performance, its strategies, and its future growth drivers. The main takeaways from the presentation are elaborated below. The company has raised its synergy expectation from the Temple-Inland acquisition to $400 million (from $300 million) over the first two years and projects earnings before interest, taxes, depreciation and amortization (EBITDA) at $5.1 billion annually over the next three to four years, up from $3.7 billion in 2011. North America is expected to generate $3.75 billion in EBITDA, with a major contribution of $2.4 billion from Industrial Packaging followed by Printing Papers, Consumer Packaging and Xpedx, each of which contributing $0.66 billion, $0.47 billion and $0.22 billion, respectively. Emerging markets are expected to earn an EBITDA of $1.35 billion, with Latin America and EMEA contributing $0.55 billion and Asia $0.25 billion. The company believes that free cash flow will go up to $2.2 billion from $1.7 billion in 2011. International Paper’s acquisition of Texas-based Temple-Inland is its largest since the August 2008 acquisition of Weyerhaeuser Co.’s corrugated-packaging business for $6 billion. The company generated $10 million in synergies in the first partial quarter of ownership. The combination will fortify the North American packaging business by increasing its share in the corrugated packaging market to 34% from the current 27%. The company also completed the acquisition of a majority stake in a leading Indian paper company, Andhra Pradesh Paper Mills Limited. This transaction made International Paper the first global paper and packaging company to have a significant presence in India’s growing paper and packaging industries. Furthermore, the International Paper Ilim joint venture in Russia has been growing rapidly. It is currently working on two major projects which should be complete by 2012 end. A pulp mill is being modernized, upgraded and expanded in Bratsk, which will be the closest and lowest-delivered-cost softwood pulp mill to China. A new paper machine at Koriatza mill in Russia will be added as the Russian market is growing at about 6% a year. These represent a combined $1 billion of investment and International Paper is expecting over 20% in returns. In China, the International Paper-Sun joint venture is building a new consumer paperboard line that should come online late in 2012. These initiatives will contribute to both earnings and cash flow substantially, going forward. The Franklin Fluff Pulp mill, Sun Joint Venture, Ilim Joint Venture, and Temple–Inland and Andhra Pradesh Paper Mills acquisitions are all expected to be the drivers for 2013-2015. Besides, International Paper is working towards transforming and improving the profitability of its distribution business, xpedx. Improvements are expected in procurement, replenishment of orders, reduced stock keeping units (SKU), and the supply chain (including fewer/larger warehouses). We believe that these initiatives will boost results and be accretive to EPS going forward. We maintain our Neutral recommendation on International Paper. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term Memphis, Tennessee-based International Paper is a global paper and packaging company with operations in North America, Europe, Latin America, Russia, Asia and North Africa. International Paper conducts its businesses through five segments: Printing Papers, Industrial Packaging, Consumer Packaging, Distribution (Xpedx) and Forest Products. International Paper competes with MeadWestvaco Corporation (MWV – Analyst Report) and Weyerhaeuser Co. (WY – Analyst Report).