Interestingly, getting the stock to $65.29 (which is around my price target) is in his incentive comp:
New CEO Silvernail received an $8.5MM inducement award with specific stock price hurdles. The rumored $42 offer International Paper received from Suzano today would not hit the first of three price hurdles for Silvernail, which kicks in for him at a stock price of $45 or above for him to get a 100% payout for on his Inducement PSU Award.
Inducement Award $8,500,000 Closing Price (5/1/2024, "Effective Date"/"Grant Closing Price") $35.28 Performance Hurdles Hurdle I - Grant Date Closing Price + $10 $45.28 Hurdle II - Grant Date Closing Price + $20 $55.28 Hurdle III - Grant Date Closing Price + $30 $65.28 Ending Average Stock Price Closing Price Percentage of Inducement PSU Award Vested Less than the Grant Date Closing Price plus $10 0% of Target Shares Equal to the Grant Date Closing Price plus $10 (“Performance Hurdle I”) $45.28 100% of Target Shares Equal to Grant Date Closing Price plus $20 (“Performance Hurdle II”) $55.28 150% of Target Shares Equal to or greater than the Grant Date Closing Price plus $30 (“Performance Hurdle III”) $65.28 200% of Target Shares
International Paper IP
May 21, 2024 - 5:27pm EST by
Shoe
| 2024 | 2025 | ||||||
| Price: | 41.00 | EPS | 1.96 | 4.22 | |||
| Shares Out. (in M): | 347 | P/E | 20.9 | 9.1 | |||
| Market Cap (in $M): | 14,550 | P/FCF | 16.8 | 9.2 | |||
| Net Debt (in $M): | 4,828 | EBIT | 1,152 | 2,178 | |||
| TEV (in $M): | 19,055 | TEV/EBIT | 16.6 | 8.8 | |||
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Description
Summary
Buy International Paper with 70%+ total return upside ($67 stock price + ~5% div vs. the stock at $41 now) over ~2 years (from operational turnaround and cardboard box market coming back to normal - which I think are quite likely, plus DS Smith deal accretion of ~20%).
Or 20-30% upside from a near term takeout by Suzano (low probability).
I think it’s pretty asymmetric as well - the stock isn’t far above where it bottomed over the last year ($35 ish) when things were pretty bad for the box industry.
International Paper basically makes cardboard boxes. It’s a pretty boring / commodity business .
There are many ways to win short term and long term with plenty of catalysts.
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New rockstar CEO (Andrew Silvernail) replacing the horrible prior CEO who destroyed value. IP stock went no where over his 10 year tenure (the stock hasn’t gone anywhere for 30 years). He has a lot of low hanging fruit since IP was run poorly for a long time and did bad deals. Coincidentally, he is incentivized to get the stock to $65.28+
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The containerboard market has recently (over the last 2 quarters) started inflecting positively with prices firming & going up and de-stocking ending. Pulp prices are picking up too. There’s plenty of room for EBITDA to go from depressed levels of $2.2bn back to $2.9bn more normalized levels (or higher) over the next few years
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IP currently doing an all-stock deal to buy DS Smith (European boxes), while initially panned by Wall Street, appears actually to be a good idea, looks pretty likely to be ~20%+ accretive
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Potential takeout by Suzano (Brazilian pulp company), who is also trying to get them to drop their latest acquisition of DS Smith. They put in a low ball bid, but just increased it. At the very least, it sort of puts a floor on the stock and illustrates the value at IP.
I think it’s rare to find a situation with so many ways to win.
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Company Overview
International Paper doesn’t make paper anymore (they sold the rest of the paper operations in 2021). They make containerboard, i.e. cardboard boxes. Boxes are made up of linerboard (the flat sides of the box), with corrugated medium in between (the wavy stuff inside).
IP is 90% packaging, 10% pulp (pro forma)
62% America, 37% EMEA, 1% Asia
In packaging, it's pretty much all just standard cardboard boxes (liner board, medium, etc.). It's pretty commoditized / diversified. Nothing particularly special about it.
End markets:
45% food and beverage,
30% other non-durables (e.g. chems, paper towels/tissues),
25% e-comm / shipping
Box demand is broadly driven by the overall economy. You’d think that box volumes would be up massively with all this e-commerce and Amazon boxes everywhere. But that hasn’t been the case. Box demand is actually pretty slow growing over the long term (or even not at all), since it’s so widely used (in food shipping, and goods, etc.) that there’s no major driver.. Industries have tried to use fewer boxes over time, e.g. by switching to reusable plastic containers, or pallets / plastic wrap, or reusing boxes, or being more efficient, etc.
The pulp business is a mix of fluff pulp and market pulp (i.e. turning wood into fibers). e.g. which is used in tissues, diapers, boxes, etc. This is more of a growth industry (as people use more tissues and diapers and population grows), but it’s cyclical
They have tried to be a global box company, despite there being not too many synergies or benefits to being a global operator.
Assuming they buy DS Smith, here is their breakdown:
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History
The company started in 1898 through the merger of a bunch of pulp and paper mills.
More recently, they’ve done a lot of acquisitions/deals, which were mostly bad or didn’t really create any discernible value. They’ve tried to live up to their name International Paper.
In 2007, they formed a joint venture with Ilim (an Russian paper/pulp company). They put in $650mm and sold it for $500mm in 2013. This was a bad deal.
In 2008, they bought Wyerhauser’s containerboard division for $6bn. They hit synergies, but hasn’t created noticeable value.
In 2012 they bought another box company Temple-Inland for $4.5bn. Also hit synergies, but this hasn’t created value.
In 2016, they bought Weyerhauser’s cellulose fiber (pulp) division for $2.2bn. It was supposed to generate ~$500mm in mid-cycle EBITDA, and have $175mm in synergies, but since then it has averaged $290mm of EBITDA with a range of $34mm-$525mm due to a generally weak pulp market. The LatAm pulp companies are much lower cost because their trees grow so much faster. This has been a bad deal.
They got rid of the secularly declining paper segments over the early 2000s and fully exited in 2021.
Now they’re in the process of buying DS Smith in an all stock $9.9bn, which I think will end up looking a lot better than what Wall Street initially thought. Expectations here are low given their checkered acquisition / capital allocation history, but this one could surprise to the upside.
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New CEO
The main excitement recently is that there’s a new CEO who just started, Andrew Silvernail, who is very good at operations and working for shareholders (which is what IP desperately needs). https://www.linkedin.com/in/andrew-silvernail-6951214/
He’s been very good at his prior roles (e.g. IDEX, Rexnord, KKR, Stryker, Danaher). He started his career at Fidelity as an equity analyst. He has improved margins and ROIC, got out of underperforming business/segments, and did things that shareholders like and created value. I don't know the Idex situation well, but industrial analysts absolutely love this guy. I do know Stryker and Danaher.
IP’s prior CEO / management team were empire builders and catered to customers and did not create any value over that time.. The prior CEO, Mark Sutton, has been at IP his whole career since 1984, and has been CEO for the last 10 years. So he’s a good company person, but not good at creating value.
The stock jumped from $34 to $39 on the announcement on 3/19 that Silvernail would be the new CEO and reached $41
The stock subsequently went down back to $34 right after IP announced their deal to buy D.S. Smith, a European box operator. They outbid a prior bidder Mondi. Basically, this reminded investors of all the other bad deals that IP has done over time
He’s been at a lot a lot of very well run companies that have also done well for shareholders. And he was an equity analyst at Fidelity and worked at KKR. So he gets what buyside is looking for.
In terms of what he can do to run it better, I think easiest would be not doing as many bad acquisitions (in containerboard and fiber). And just beat and raise. Both of which IP did not do.
Most people look at Packaging Corp of America’s massive outperformance of what a well run box company can do. PKG did a great job just running higher ROIC plants and cutting the bad ones, which IP could do. PKG’s also focuses on higher margin, smaller customers, while IP has more a focus on larger / very large customers, where they earn a lower margin. Part of the reason IP underperformed last few years and had lower EBITDA was because they had bad contracts with their larger customers in pulp and paper. So for instance they had to send more volume to their bigger customers when there were box shortages, and hence had less volume going to higher margin customers. They had similar bad contracts in pulp, which they are also renegotiating. Both should be tailwinds.
PKG has also done a better job investing in their plants and picking higher ROIC investments (e.g. more converting lines). IP has lagged on these investments, but is starting to make up for it. In the past, instead of investing in plant efficiency and automation, they just hired more people to work overtime to meet higher demand. Recently, they haven’t been able to find as much willing labor, so they’ve had to spend more on automation and efficiencies now. This had also depressed margins lately. This is the kind of myopic operations that have mired IP.
PKG has 21% EBITDA margins, and mid teens % ROIC
IP has 12% EBITDA margins and HSD % ROIC
PKG stock has gone up 18% annually for 12 years, IP stock has been rangebound for decades
IP could sell underperforming assets like the pulp biz and underperforming mills. I think Suzano would be a good buyer for IP's pulp assets and can pay up since they'd have a lot of synergies.
IP can negotiate bad contracts (which they’ve been doing)
IP is also going through a bit of an investment cycle to modernize operations, which should bear fruit in coming years
Just look at the relative stock performance of these 2:
IP stock since 1980
PKG stock since 2000
Old management also frequently overpromised and under deliver. In 2022 and 2023 they came out with wildly optimistic initial guidance, which they quickly took down over the years. They stopped giving full year guidance
So there’s a lot of low hanging fruit in just better basic blocking and tackling, getting out of lower margin contracts and focusing on higher ROI capex / uses of cash.
From Paragon Intel: who tracks CEO performance: “Silvernail, the former CEO of IDEX from 2011-2020 and CEO of Madison Industries in 2021, appears to be a significant upgrade to the CEO seat, having a ManagementTrack Rating of 6.1 compared to former CEO (and now Chairman) Mark Sutton's 1.2. During his C-Suite career, Silvernail has created 267% alpha, a significant outperformance to former IP CEO Sutton's (97%) alpha destruction.
We interviewed four former colleagues who worked with Silvernail at Madison Industries and IDEX. Sources provided mostly positive initial feedback: three positive and one neutral. Silvernail has strong operating rigor and focuses on implementing 80/20 across organizations and value pricing tools. He often hires 80/20 expert consulting firm Strategex early in his tenure to assist in his strategy formulation and implementation. Regarding M&A, sources described Silvernail as a "M&A guy" but believed that he would likely be a buyer as CEO at International Paper. In our CEO Survey, our first 4 sources gave Silvernail an average rating of 4.4 out of 5 (1= Lets his ego get in the way, 5= Very disciplined).
Silvernail Elected International Paper Chief Executive Officer
Sutton to continue as Chairman of the Board
MEMPHIS, Tenn., March 19, 2024 /PRNewswire/ -- International Paper (NYSE: IP) today announced that its board of directors has elected Andrew Silvernail as Chief Executive Officer (CEO), following an extensive evaluation process. Effective May 1, 2024, Silvernail will succeed Mark Sutton, who previously announced the final phase of the CEO succession process. Sutton will continue in his role as Chairman of the International Paper Board of Directors to ensure a smooth and successful transition.
Silvernail has two decades of experience leading global companies in the manufacturing and technology sectors. He joins IP from KKR & Co., Inc., a global investment firm, where he served as an executive advisor. Silvernail served as the Chairman and CEO of Madison Industries, one of the world's largest privately held companies. Prior to that, Silvernail served as Chairman and CEO of IDEX Corporation from 2011 to 2020. Employee engagement reached best-in-class performance and total shareholder return grew by more than 500% during his tenure at IDEX. Silvernail previously held executive positions at Rexnord Industries, Newell Rubbermaid and Danaher Corporation. He currently serves on the Board of Directors of Stryker Corporation.
International Paper Lead Director Chris Connor said, "Andy is an experienced CEO with an extensive track record for creating value. His strategic agility, core values and drive for results align with and will enhance IP's outstanding leadership team. We are confident that he is the right person to build on the success achieved under Mark Sutton's leadership."
"On behalf of the Board, I want to thank Mark for his outstanding contributions to IP over the past decade. He successfully led the company through the pandemic and a period of significant economic challenges, and the company achieved record-level market capitalization during his tenure. Mark's legacy is a safer, more focused and financially strong company with an incredible culture and a bright future," said Connor.
Mark Sutton, current International Paper CEO and Chairman of the Board, said, "The Board's succession process was comprehensive, and I'm confident that Andy's experience paired with the industry expertise of our senior leadership team will amplify the company's success going forward. It's been a privilege to work with the IP team for the past 40 years and to lead the company for the past decade – I am incredibly proud to be IP."
Andy Silvernail, CEO-Elect of International Paper, said, "I'm honored and proud to be a part of International Paper, a strong and resilient company and a force for good in communities around the world. Many things impressed me about IP, from the customers who rely on its essential products to the core values that drive its culture and its extraordinary sustainability platform. Thanks to Mark's leadership, the company is well-positioned for growth, and I'm excited to be a part of what's next for IP.
"I want to thank the Board for their confidence in me. I look forward to working closely with the Board, Mark and our more than 39,000 employees worldwide as we continue to fulfill our vision of being among the most successful, sustainable and responsible companies in the world."
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Containerboard Cycle improving
The containerboard cycle is just starting to turn positive / bottom over the last 2 quarters: destocking is over and prices are just starting to tick up again. There was a big boom in box demand during COVID as goods spending was strong and housing activity was healthy. E-comm drove a lot of box demand too. Like many other products / commodities during that time, then there was a shortage of boxes, and customers began to over order. Then in 2022 / 2023 customers started working down that inventory as they had too much and spending shifted back to experience and services instead and housing activity tanked.
Now, customers are re-stocking and demand has improved again / stabilized across end markets.
Supply growth should ease over 2024 and mills are being closed, which will help the modest oversupply. There’s been a lot of consolidation in the industry, and I expect more capacity to be taken out of the market. E.g. WestRock was recently acquired by Smurfit Kappa and they closed 3 mills, with more to come likely. IP and Georgia Pacific have closed some mills too
They’re starting to raise prices again, mostly to offset cost increases though. There’s still a lot of supply coming online though, and operating rates are low, so they still don’t have a lot of pricing power. But it’s better than price weakness / weaker margins. Operating rates and hence margins should improve in coming quarters / years.
Getting to a stronger box market can come from either lower supply (which is happening), and/or higher demand. Demand is harder to forecast, but I think lower rates will stimulate housing activity broadly (which would be a big boost to durable goods consumption which requires a lot of boxes) and overall economic activity, which will help the industry. A more normalized consumer goods environment (for whatever reason) would help.
Linerboard / medium prices ticking back up, which is a good sign.
Recent RISI containerboard & pulp price/ commentary:
“C'board: prices flat domestically while export moves up
Containerboard prices were flat domestically in May for corrugating medium and linerboard. Interestingly, RISI noted that ~20% of those surveyed reported higher prices (vs. April) for linerboard ranging from $20-40/ton, though these were their first price hikes for 2024 (so, a catch-up of sorts). This comes as new increases for June were announced by the major producers ranging from $50-60/ton on linerboard and $80/ton on medium with June 1-3 effective dates. Meantime, some of RISI's contacts noted price reductions for longer duration deals. As for demand, RISI mentioned that two large integrated players mentioned that month-to-date y/y demand was up 2-4%. We view this as positive given the mixed tone on current demand from our recent Boxmaker Roundtable, though our panel did see likelihood of some pricing increases beginning in June (see here for our Roundtable note). Meanwhile, market participants also were generally aligned so that the current price increases are largely cost driven, but buyers appeared to be somewhat resistant mentioning that box demand is somewhat choppy. In export containerboard markets, pricing moved higher by $35/ton for South America and $38/MT (€25/MT) to Europe. Prices to China and South America were flat. This was largely consistent with our expectations. Ultimately, we expect some upward movement on domestic prices in 2Q and 3Q given our research as well as the recently announced hikes for June ranging from $50-60/ton on linerboard and $80/ton on medium.”
“Pulp prices move up by $65-90/MT, but fluff flat
As for pulp, prices moved up by $65/MT for southern bleached hardwood kraft (SBHK) and northern bleached hardwood kraft (NBHK) while northern bleached softwood kraft (NBSK) prices were up by $80/MT. Lastly, southern bleached softwood kraft (SBSK) prices moved up by $90/MT while fluff pulp prices remained flat. RISI mentioned that buyers were increasingly anxious about supply given Canfor Pulp's recently announced NBSK line closure as well as weather related challenges in the Brazilian market. Furthermore, Domtar and Resolute Forest Products were said to have announced a $80/MT increase on NBSK and a $100/MT increase on SBSK.
U.S. list prices for pulp increased $80-100/tonne in April. RISI posted final North American pulp prices for April, with NBSK/SBSK prices increasing $100/$80 per tonne, NBHK and SBHK prices increasing $80/ tonne, and BEK prices increasing $100/tonne. RISI reiterated the impacts of unexpected curtailments and unease around future supply in driving higher prices, and we note that several producers have announced further price hikes for May and June.”
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DS Smith Acquisition / ~20% Accretion
IP is in the process of acquiring DS Smith (a European box company). The deal was initially panned by Wall Street, both sell side and buyside. IP has had a checkered history of acquisitions (see above), and getting into a low return, more fragmented European market is not what people wanted, especially after hope that Silvernail would instill more capital discipline.
However, IP has had a history of being able to hit on synergy targets.
Although they’re paying a large premium (48% on the announcement date vs. the undisturbed price) in this all stock deal, this is still quite accretive and I think quite likely ~20%+ accretive even without much in synergies
DS Smith did $1.4bn of LTM EBITDA and they’re hoping for $500mm in synergies (although IP has had a history of overpromising and underdelivering, they’ve usually hit synergy targets - although the benefits seem to disappear in the overall company).
So that’d be 7x LTM EBITDA and 5.2x with synergies, which is quite accretive given IP trades at 8.5x EBITDA. So it looks like a decent deal on paper, but they’ve had a bad track record in the past. It should be immediately accretive so it’s not that bad of a deal, despite the market punishing them for it. But it looks dumb since they out bid Mondi and paid a 48% premium.
IP currently at $19bn EV
Europe containerboard has been more fragmented, oversupplied, and lower return. So people questioned the deal. Efforts to consolidate the region, like in the US has become, will take many years. But on paper, it isn’t that bad and there are legitimate synergy opportunities
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Potential Takeout?
Suzano (a Brazilian pulp company) put in a lowball bid to buy IP, contingent on IP getting out of their recent deal to buy European box maker DS Smith.
On 5/7 Suzano put in a $42 bid (all cash), vs the stock trading at $36 at the time. $42 was where the stock was a month ago post the new CEO hype, and not far above recent low. So that definitely wasn’t going to cut it
On 5/20, Suzano reportedly is looking to raise the bid by a few $. So it shows they’re interested and willing to move higher.
I think it’s quite unlikely that Suzano buys IP. Their bid would put them at ~5x leverage, and the stock trades at 6.2x 2024 EBITDA, vs. IP at 8.5x 2024 EBITDA.
So they don’t have a lot of firepower. But the Suzano family is worth ~$10bn and they have a history of being aggressive on leverage if they want to do a deal. So it’s a possibility.
I think ~$50-55, around 20-30% upside to where it has been recently, would be enough to get IP shareholders on board.
I don't think this Brazilian pulp company will end up buying IP since they don’t have the financial firepower, but I think they will eventually buy IP's pulp business. IP’s pulp biz has constantly done poorly.
IP stock went from $41 to $36 on the DS deal announcement initially (partly from the equity component), but then people warmed up to the deal.
Silvernail was on-board with this acquisition, but I think it was mostly pushed for by former management/board. In the future, I think this is the kind of thing the new CEO would put a stop to - bad acquisitions and seemingly over paying.
IP got into a bidding war to buy this $6bn mkt cap, $9bn EV European containerboard maker DS Smith. At the time, IP was $13bn mkt cap, and $18bn EV. IP hasn't done well in Europe, and now they're doubling down. This is a 48% premium to its undisturbed share price, using all equity. IP hasn't had a good track record with acquisitions either, so people were not pleased
DS Smith already agreed to a takeout for a 33% premium on March 8th from Mondi.
Suzano is trying to get IP to drop the DS Smith bid, but I don't think that's likely since it's already accepted and formally announced (although still needs a shareholder vote). Would be very hard to get out of it I think, especially given UK antitrust law. CNBC's Faber said Suzano is trying to get IP shareholders on board, but they'll need to raise the bid by a lot also.
Suzano is bigger at $4bn of EBITDA, vs. IP at $2.2bn EBITDA
Suzano is $26bn EV, $14.4bn mkt cap,
IP $18bn EV, $13bn mkt cap and
They're both around 3x net levered
So it's not easy for Suzano to make a big cash bid since they trade cheaper and they aren't much bigger. And both Suzano and IP are in CEO transitions right now too.
I don't think Suzano is too serious about this and it seems pretty tough for them to do both financially and hard to get out of the DS Smith deal I think. But at the very least, this sort of puts a floor in IP stock and shows the value at IP.
I always thought Suzano or some Brazilian pulp maker would be a good acquirer of IP's pulp biz though, which would unlock some value for IP, maybe a few $/share
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Valuation / Upside / Downside
Basically, I think EBITDA will eventually get back to normalized historical levels (~$2.9bn, from $2.2bn now) from the market cycle normalizing and from the new CEO's turnaround efforts
But it would be a multi-year turnaround story, maybe 2 years. IP suggested recently it’ll get back to normal sometime in 2025. I think it can get there from supply curtailments (from recent consolidation or just individual decisions), or demand returning from better macro in general / rate cuts. But admittedly, demand is harder to pinpoint
Plus I think the new CEO’s focus on better ROIC, margins, and being shareholder friendly will add a little multiple expansion towards 8.5x (closer to PKG's multiple which usually trades at from 9-11x EBITDA, vs. IP usually trading at 6-8x, IP is trading at 8x now)
So standalone target price of ~$57 for IP is doable, which is coincidentally basically around where it's topped out in the last 3 cycles (in 2015, 2018, and 2021). So it's certainly a doable price target
So that’s 40% upside standalone
IP stock since 1980
Plus a 4.8% div yield
Plus potential some extra value from divestitures ( which can add a ~$2-3 in value), if they sell pulp or underperforming mills
On top of that, they’re doing a deal to buy DS Smith, which I think can be 20% accretive pretty easily too.
So adding that all together:
+ 40% upside from core IP biz normalizing / Silvernail working his magic,
+ 20% upside from DS Smith Accretion
+ 5% div yield
+ 5% from divestitures / other capital return
That takes the upside to around ~70% total return upside.
On cons #s, IP is current trading at 8.5x 2024 EBITDA, 21x 2024 P/E of $1.96 EPS
7x 2025, and 14.85 2025 P/E of $2.83 EPS
But standalone EBITDA can go from $2.2bn to $2.9bn normalized, and EPS goes from $2 to $3.50 (vs. stock at $41)
Maybe they get there in 2025, or maybe 2026, but they should get there at some point over the next few years again, or more.
With the DS Smith deal plus a rebound in containerboard, IP could eventually do $4.00-$4.50 in EPS. $4.5 in EPS x 15 P/E = $67.5, which is 65% upside + the 5% dividend = $70
On the downside, fundamentals are still near the bottom and the stock has found a floor around $35 over the last year, so 15% downside.
So I think it’s decent risk / reward
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Standalone Balance Sheet / Capital structure
$1.1bn cash
$5.9bn debt
$13.5bn mkt cap
Dividend of 4.5%. They try to return 40-50% of FCF in dividends. Plus some share buyback.
Target 2.5-2.8x debt/EBITDA vs. current 2.2x
Pension plan fully funded.
Short interest 3%
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Charts
IP 5 yr
IP since 1980
The industry has been consolidating, but is still commodity and competitive
IP’s pulp segment has underperformed peers for a long time.
Brazilian pulp producers have higher margins because the type of trees they plant and harvest grow a lot faster in South America
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
1) New CEO just running IP better: sell/shut underperforming mills, get out of bad contracts, do better capital allocation / higher ROIC investments, better shareholder communication, etc.
2) Containerboard and pulp cycle turning positive. Getting back to normalized earnings. Rate cut help demand. Capacity shutdowns
3) DS Smith ~20%+ accretion
4) Potential takeout by Suzano
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