International Paper (IP) to Divest Printing Papers Segment
International Paper Company IP announced its plan to spin-off the company’s Printing Papers segment into a standalone, publicly-traded company ("SpinCo"). This move will enable International Paper to focus on its Industrial Packaging segment, and capitalize on the growing demand for corrugated packaging, cut costs and improve earnings. Increased digitization and lower paper consumption in schools, offices and businesses amid the COVID-19 pandemic have been weighing on the Printing Paper segment, lately.
Financials of the Deal
The transaction will be implemented through the distribution of SpinCo shares to shareholders of International Paper. International Paper will retain up to 19.99% of the shares of SpinCo at the time of the separation. The company intends to monetize these shares in the future.
Consistent with International Paper's capital-allocation policy of paying a competitive and sustainable dividend at 40-50% of free cash flow, International Paper expects to reduce its current dividend by 15-20% in proportion to the cash generated by SpinCo upon completion of the spin-off. SpinCo will pay a dividend to International Paper, which will be used to pay down the latter’s debt.
A Revamped International Paper
The transaction, which is expected to close in the third quarter of 2021, will result in two streamlined, leading companies — SpinCo and International Paper. SpinCo will have approximately $4 billion in sales and operate 8 mills with 2.9 million metric tons of annual capacity and 0.4 million metric tons of coated paperboard capacity.
International Paper will have 20 containerboard mills, with 14.5 million tons of annual capacity, 8 pulp mills with 3.2 million metric tons of annual capacity, and 220 converting facilities. The company expects to generate approximately $17 billion in sales, of which 85% will flow in from Industrial Packaging and the balance 15% from Global Cellulose Fibers. In 2019, the company generated $22.4 billion sales, with the Industrial Packaging segment contributing 69%, and the Global Cellulose Fibers and Printing Papers segment accounting for 12% and 19% of sales, respectively.
A Wise Move to Divest the Ailing Printing Paper Segment
The Printing Paper segment produces a variety of papers for business and home use, and its primary product is uncoated papers. End-use applications include advertising and promotional materials such as brochures, pamphlets, greeting cards, books, annual reports and direct mail. In 2019, the segment’s net sales decreased 2% to $4.3 billion. Operating profits dipped 3% year on year, as benefits from higher average sales price realizations were negated by lower sales volumes, higher operating and input costs as well as higher planned maintenance downtime costs. In the first nine-month period of 2020, the segment’s sales plunged 31% to $2.2 billion, while operating profit slumped 65% to $148 million.
The transition to digital media and paperless communication has substantially impacted paper demand. The company has been witnessing decline in commercial printing due to the significant pullback in print advertising. On top of this, the coronavirus pandemic has affected paper consumption in schools, offices and businesses due to the stay-at-home measures. Even though demand for printing papers has picked up of late as offices and schools have restarted, it has been below the prior-year levels. Hence, the latest divestment is a prudent move for the company.
International Paper is banking on the surging demand for corrugated packaging. With rising e-commerce activities over the past few years, packaging has gained importance as it has to maintain the integrity and durability of a product to withstand the complex product-delivery process. The pandemic has added fuel to e-commerce growth as online demand for grocery, beverage and pharmaceuticals delivery services have increased. Moreover, the Global cellulose fibers segment is riding on robust consumer demand for absorbent hygiene products and tissue products as a result of the pandemic.
With a more concerted focus, International Paper intends to boost profitability of the Industrial Packaging segment and improve returns of its Global Cellulose Fibers business. International Paper expects to generate an additional $350-$400 million of annual earnings by the end of 2023. This includes $50-$100 million in annual incremental earnings growth and $300 million in structural cost reductions.
Price Performance
International Paper’s shares have gained 3.7% over the past year compared with the industry’s growth of 7.1%.
Zacks Rank & Other Stocks to Consider
International Paper currently flaunts a Zacks Rank #1 (Strong Buy).
Some other top-ranked stocks in the basic materials space are Bunge Limited BG, Silvercorp Metals Inc. SVM, and Pretium Resources Inc. PVG. While Bunge sports a Zacks Rank #1, Silvercorp Metals and Pretium Resources carry a Zacks Rank #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Bunge has a projected earnings growth rate of 43% for the current year. The company’s shares have gained around 14% over the past year.
Silvercorp has an expected earnings growth rate of 40% for the ongoing year. In a year’s time, shares of the company shares have rallied roughly 12%.
Pretium Resources has an estimated earnings growth rate of 25.5% for 2020. The stock has appreciated nearly 10% in the past year.
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