International Paper's Q3 2025: Contradictions Emerge in Strategic Asset Investment, Market Conditions, and European Strategy

Guidance:

• Q4 2025 Packaging Solutions North America EBITDA expected to be approximately $600 million.
• Q4 2025 Packaging Solutions EMEA EBITDA expected to be approximately $230 million.
• Revised full‑year 2025 targets: $24 billion net sales; $3 billion adjusted EBITDA; free cash flow of negative $100 million to $300 million.
• Actions announced in 2025 provide a line of sight to ~$600 million incremental adjusted EBITDA in 2026 (with ~$500 million cost carryover into 2026).
• Full‑year 2026 guidance to be provided on the next call at end of January.

Business Commentary:

• Transformation Progress and Market Conditions:
• International Paper reported a significant improvement in adjusted EBITDA, with a 40% increase in North America year-to-date compared to the same period in 2024, alongside a 370 basis points expansion in adjusted EBITDA margin.

• Despite challenging macro conditions and a market decline, the company's transformation strategy is yielding results, with notable progress in North America.

• Cost Optimization and Footprint Reduction:

• International Paper plans to achieve $600 million of incremental adjusted EBITDA in 2026, with $500 million of this attributed to cost carryover from 2025 actions.

• The company has executed footprint optimization through mill and box plant closures, spending approximately $60 million on stranded overhead costs, and written off $1 billion related to the GCF business.

• Commercial Strategy and Market Share:

• The company reported a market share gain in September, achieving above-market performance, and expects to continue this trend through 2026.

• Strategic customer wins and effective commercial initiatives, particularly in North America, have been key drivers of this market share improvement.

• Outlook and Market Adjustments:

• Despite managing softer-than-expected market conditions, International Paper maintains a long-term profit opportunity, now aiming to achieve $5 billion in EBITDA by 2027.
• The company is adjusting market expectations due to prolonged softness, affecting targets for 2025 and 2027, but remains confident in its strategic repositioning and transformation plan.

Sentiment Analysis:

Overall Tone: Positive

• Management emphasized measurable progress on the transformation: North America YTD adjusted EBITDA up 40% vs. 2024 and adjusted EBITDA margin expansion of ~300 basis points; Q3 EBITDA improved ~28% sequentially. CEO: "We're making significant measurable progress on our transformation."

Q&A:

• Question from Mark Weintraub (Seaport Research Partners): One, how is the opportunity in EMEA different than North America — are there similar excess-capacity opportunities or is it more gradual improvement and tough decisions? Two, on bridging to 2027, of the remaining ~$1.4 billion, how much is cost takeout vs commercial (including price) and how should we think about that mix?
  Response: Net gap to reach targets is roughly 50% cost and 50% commercial on a net basis; EMEA's opportunity differs from NA — it has excess box capacity and above‑country structural complexity to rightsize and needs focused commercial resources rather than the large contract repricing seen in North America.

• Question from Matthew McKellar (RBC Capital Markets): What volume growth assumptions versus market were assumed to get to 2027 targets (and for 2026)? Also, what's the strategic rationale and target returns for the Riverdale conversion?
  Response: Assumptions are ~1%–1.5% annual growth in North America and ~1%–2% in Europe over time; Riverdale conversion is ~ $250 million capex targeting roughly 20% returns (retooling to lightweight containerboard to redeploy capital to higher‑return uses).

• Question from George Staphos (BofA Securities): What drove the swing in free cash flow guidance (now a comparable deficit) — purely market slowdown or incremental costs? And have the commercial and cost targets changed versus March?
  Response: The primary driver is market slowdown — roughly a ~$500 million profit shortfall versus prior expectations; incremental timing of actions added ~$50–$100 million of costs, and commercial and cost targets remain unchanged.

• Question from Michael Roxland (Truist Securities): What is the EBITDA impact of Riceboro and Savannah closures (they weren't specifically detailed), can you reallocate tons within the U.S. mill system or do you need investments like Riverdale, and are savings from bag sale and IT outsourcing quantified?
  Response: Savannah was low‑return export capacity whose exit yields a ROIC improvement though is effectively a push on near‑term EBITDA; Riceboro is modestly positive; there are no imminent additional capacity removals planned — some mills require investment (e.g., Riverdale) to capture productivity; savings from disposals and IT actions are included in the 2026 bridge (with ~20–25% tail into 2027).

• Question from Anthony Pettinari (Citigroup): After Savannah and Riceboro closures and Riverdale conversion, what percent of containerboard will be consumed in IP box plants vs exported (normalized)? Are operating rates where you want them and can Riverdale timing be flexed?
  Response: About ~90% of containerboard will be consumed in IP's box system (export ~6–7%); operating rates are acceptable today; Riverdale is targeted to be online late next year and timing is appropriate but monitored against demand.

• Question from Philip Ng (Jefferies): Given European market weakness and non‑integrated tons running uneconomically, is that traded/non‑integrated business EBITDA/cash positive today and a business you want to keep? Also, what might be the scope/timing of proposed closures in Eastern Europe, Nordics and Italy and when could cost benefits show up?
  Response: Europe as a whole is currently cash‑using due to the need for restructuring and there are pockets (mill and box) losing cash; the company will evaluate and restructure under European consultation processes and act aggressively but timing and execution are constrained by works‑council/regulatory rules — cost benefits largely expected in 2026 and beyond depending on consultation outcomes.

Contradiction Point 1

Mill Reliability and Strategic Asset Investment

It involves International Paper's strategy regarding mill reliability and strategic asset investment, which directly impacts their operational efficiency and long-term growth.

What are the key differences between North America and EMEA opportunities, and are there similar strategic decisions in EMEA? - Mark Weintraub(Seaport Research Partners)

2025Q3: The company is focusing on strategic assets with potential for long-term competitive advantage. 80/20 strategy is being deployed to invest in key assets and exit nonstrategic ones. The company is working consistently to improve reliability and cost performance. - Andrew K. Silvernail(CEO & Chairman)

What percentage of North American containerboard is used by IP box plants versus exported? Will Riverdale's conversion affect operating rates? - Anthony Pettinari(Citigroup Inc., Research Division)

2025Q3: I would say we have some strategic assets that are really competitive assets and we're going to continue to invest there. - Andrew K. Silvernail(CEO & Chairman)

Contradiction Point 2

Market Conditions and Future Growth Expectations

It highlights International Paper's shifting expectations regarding market conditions and future growth, which are crucial for investor confidence.

What percentage of North American containerboard is allocated to IP box plants and exports? Will Riverdale's conversion impact operating rates? - Anthony Pettinari(Citigroup Inc., Research Division)

2025Q2: The mill reliability issues are due to underinvestment over years. The company is focusing on strategic assets with potential for long-term competitive advantage. - Andrew K. Silvernail(CEO & Chairman)

What were July box volumes in North America and Europe? Are there indications of customer restocking in H2? - Anthony James Pettinari(Citigroup Inc., Research Division)

2025Q3: We actually have a nice balance of service and customer segmentation in the U.S. from low to high ends as well as a good mix of retail and industrial. - Andrew Silvernail(CEO & Chairman)

Contradiction Point 3

Demand Projections and Market Conditions

It involves changing expectations regarding market demand and conditions, which significantly impact business strategy and investor expectations.

What are the key differences between North America and EMEA opportunities, and are similar commercial decisions possible in EMEA? - Mark Weintraub (Seaport Research Partners)

2025Q2: The goods economy remains soft, with potential for recovery over the next few years. - Andrew K. Silvernail(CEO & Chairman)

Can you reaffirm your full-year EBITDA guidance based on February and March demand trends? Could you outline the assumptions for North America and Europe? - Phil Ng (Jefferies)

2025Q3: The opportunity in North America is really driven by the excess mill capacity, whereas in Europe, it's more of the excess box capacity. So the structures in the U.S. are a bit more simple than the structures in Europe. - Andrew Silvernail(CEO & Chairman)

Contradiction Point 4

Cost and Commercial Strategy

It highlights shifts in strategic focus, impacting how the company plans to achieve its financial targets and improve profitability.

What volume growth and performance versus market expectations are assumed for 2027 targets? - Matthew McKellar (RBC Capital Markets, Research Division)

2025Q1: Demand stabilized in April, but the economic outlook is uncertain. If demand deteriorates, actions like accelerating cost reductions and focusing on commercial wins will be taken. - Andy Silvernail (Chairman and CEO)

Can you clarify the expected price mix increase in H2 and whether further price increases are planned? - Mark Weintraub (Seaport Research Partners)

2025Q3: It is a 50-50 split between cost and commercial. While there is a focus on cost reductions, there is also an expectation of capturing some price benefit as they reach mid-cycle pricing in North America by 2027. - Andrew Silvernail(CEO & Chairman)

Contradiction Point 5

European Market Strategy

It reflects differing approaches to the European market, which could impact International Paper's competitive positioning and profitability.

What is the profitability of unintegrated businesses in Europe, and how will you address the profitability gap? - Philip Ng (Jefferies LLC, Research Division)

2025Q1: The first price increase is baked into the second-half numbers, but the second one is uncertain due to market conditions. We expect a tailwind from price increases in Europe, but there’s caution due to market softness. - Andy Silvernail (Chairman and CEO)

Can you clarify EMEA pricing assumptions for the second half of the year? - Anthony Pettinari (Citi)

2025Q3: There’s a lot of complexity in the structures and the commercial models in Europe. We’re reviewing them and we're addressing them through actions like delayering the regional overhead structure. - Andrew Silvernail(CEO & Chairman)