International Paper outlines $600M incremental EBITDA for 2026 as transformation accelerates

Earnings Call Insights: International Paper (IP) Q3 2025

MANAGEMENT VIEW

* CEO Andrew Silvernail opened the call emphasizing measurable progress in the company's transformation plan, stating, "We're making significant measurable progress on our transformation. Our strategy is getting traction." He highlighted the company's shift to a pure-play sustainable packaging business following the sale of GCF and exits from specialty and low-margin export businesses. Silvernail noted, "Post the GCF sale and the exit of some specialty businesses and low-margin export we will be exclusively a sustainable packaging business. This is a major milestone in our transformation."
* The CEO described aggressive cost initiatives, including further facility closures and overhead reductions, and reiterated confidence in the strategy, stating, "Our underlying earnings are growing significantly, and we are confident in our strategy to deliver profitable growth over the long term."
* In North America, Silvernail reported a "40% increase in adjusted EBITDA year-to-date compared to the same period in 2024, while expanding adjusted EBITDA margin to 370 basis points," attributing this to cost improvements, commercial wins, and the 80/20 Lighthouse model rollout.
* Silvernail also announced September marked a key milestone with market share growth in North American box shipments, and expects this trend to continue in Q4 and 2026.
* Lance Loeffler, Senior VP & CFO, stated, "Third quarter revenue was slightly higher sequentially, driven by continued strong price realization and stable volumes. Importantly, we delivered our expectation of significant sequential EBITDA improvement in the quarter. As a result, our EBITDA improved by 28% and our margin expanded by approximately 300 basis points."
* Loeffler explained the impact of the GCF transaction, including the write-down and plans to reinvest proceeds into Packaging Solutions and debt reduction.

OUTLOOK

* The company expects Q4 North American EBITDA of approximately $600 million. Silvernail indicated, "As we look to the balance of 2025 for North America, we expect continued EBITDA improvement building on our strong first half momentum."
* For EMEA, Q4 EBITDA is projected at approximately $230 million, with improvements expected from price realization and seasonal volume, partially offset by higher operational costs.
* Silvernail provided a projection for 2026, stating, "The numbers on this slide show a clear line of sight to the additional benefit of actions we have announced in 2025, which equates to $600 million of incremental adjusted EBITDA in 2026."
* Adjusted 2025 targets are net sales of $24 billion, adjusted EBITDA of $3 billion, and free cash flow of negative $100 million to $300 million.

FINANCIAL RESULTS

* North American Packaging Solutions adjusted EBITDA reached $655 million, with sequential growth driven by strong price realization, operational improvements, and cost-out measures.
* The third quarter saw a $190 million sequential improvement in EBITDA from continuing operations.
* The quarter included an accelerated depreciation expense of $675 million related to facility closures, impacting EPS by $0.81.
* Free cash flow increased to $150 million in Q3, even after $60 million of direct transformation costs.
* EMEA Packaging Solutions posted Q3 adjusted EBITDA of $209 million, with sequential margin expansion but lower-than-expected price and volume due to market softness.

Q&A

* Mark Weintraub, Seaport Research Partners, asked about differences in EMEA versus North American transformation opportunities. Silvernail responded that EMEA's cost opportunity is as large or larger but differs in structure, noting, "In Europe, we definitely have excess box capacity as we look at the European footprint."
* Weintraub also inquired about the $1.4 billion bridge to 2027 targets. Silvernail explained it's about "50-50" cost versus commercial, with some price improvements expected.
* Matthew McKellar, RBC Capital Markets, asked about volume growth assumptions for 2027 targets. Silvernail stated, "Our expectation would be 1% to 1.5% in North America and 1% to 2% in Europe over time."
* George Staphos, BofA Securities, questioned the change in free cash flow guidance. Silvernail attributed the shift to market slowdown and reiterated commitment to the transformation plan, emphasizing, "We need to move at full speed."
* Michael Roxland, Truist Securities, inquired about the EBITDA impact of Savannah and Riceboro closures. Silvernail said the Savannah closure is "effectively a push" on EBITDA but a win on return on capital, while Riceboro is "modestly positive."
* Anthony Pettinari, Citigroup, asked about integration rates and exports. Silvernail stated, "It's about 90% that will be consumed in our box system, plus or minus," and "the export piece is, it's like 6%, 7%."
* Philip Ng, Jefferies, questioned the profitability of EMEA's open market sales. Silvernail acknowledged, "Europe in total is, from a cash flow basis, right, is using cash and because of the restructuring that we're going to entail on it."

SENTIMENT ANALYSIS

* Analysts were generally constructive but probed on transformation timing, EMEA execution, and cash flow, with a slightly cautious tone evident in questions about Europe and restructuring impacts.
* Management maintained a confident and proactive tone throughout, especially in prepared remarks. Silvernail repeatedly expressed conviction, using phrases like, "We are confident in our strategy" and "We are moving aggressively."
* Compared to last quarter, management's tone remained focused and optimistic on North America, while acknowledging increased challenges and delays in EMEA.
* Analyst skepticism on EMEA's profitability and timeline increased quarter-over-quarter, but management sustained a message of long-term opportunity.

QUARTER-OVER-QUARTER COMPARISON

* Guidance language shifted to reflect adjusted EBITDA as the key forward metric, replacing adjusted EBIT.
* Management revised 2025 targets downward due to market softness, extending the timeline for achieving prior goals by about a year.
* There is greater emphasis on cost-out actions and structural changes, particularly in EMEA, while North America is presented as a transformation proof point with significant margin improvement.
* Analysts in the current quarter focused more on EMEA challenges and the sustainability of North American gains, compared to prior questions about mill reliability and transformation pace.
* Management's confidence in the North American turnaround increased, while caution and acknowledgment of EMEA complexity became more pronounced.

RISKS AND CONCERNS

* Ongoing macroeconomic headwinds in North America and EMEA, including trade uncertainty and soft consumer sentiment.
* EMEA faces market softness, negative price movements, and complexity in executing structural changes due to regulatory and consultative processes.
* Facility closures and restructuring entail short-term financial offsets and transitional costs.
* Management noted stranded overhead costs from GCF divestiture and the need to eliminate residual costs after the transition.
* Analysts raised concerns about the pace and efficacy of European restructuring, the impact of mill closures, and the ability to sustain recent margin gains.

FINAL TAKEAWAY

International Paper's management underscored meaningful progress in their transformation, highlighted by a sharpened focus on sustainable packaging and significant margin expansion in North America. Despite persistent macroeconomic challenges and a more complex restructuring landscape in EMEA, the company remains committed to aggressive cost actions and strategic reinvestment. Management reiterated targets for $3 billion adjusted EBITDA in 2025 and outlined a clear path to $600 million incremental adjusted EBITDA in 2026, with plans to capture the full profit opportunity by 2028. The leadership team expressed continued confidence in their strategy and signaled ongoing discipline in capital allocation and market positioning.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/ip/earnings/transcripts]

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