International Paper Co. (IP) afflicted by the loss of five big customers as well as a declining Mid-South economy, has decided to shut down a corrugated container plant in Jonesboro, Arkansas resulting in a layoff of 86 workers.
International Paper intends to close down the plant in the next several weeks and consolidate the plant’s operations with its Olive Branch, Mississippi plant. The production relocation will add a third shift in Olive Branch.
The Jonesboro workers will get a chance to apply for the extra 20 jobs created from the consolidation. The laid off workers will be eligible for severance and outplacement assistance, and will receive 60 days of pay.
The Jonesboro plant produces corrugated boxes for poultry and industrial companies. It began operation in 1982 as Tate Container and was acquired by International Paper in 1999.
During the first quarter, International Paper witnessed the first year-over-year increase (2.5% to $5.8 billion) in quarterly sales since the recession. However, the company continued to be plagued by higher raw material costs, which ended up affecting its bottom line. Wood fiber (used for making its paper and packaging products) costs were particularly high due to extremely wet weather and wood shortages. Consequently, earnings per share of 4 cents was down from 8 cents in the year-ago quarter.
The economic downturn has proven to be a severe headwind for the company. However, the company has been taking proactive measures to combat the tough environment by curtailing and closing capacity, further reducing costs and preserving cash.
During 2009, the company closed or announced the closure of five mills globally, closed 24 converting or distribution locations, and reduced the overhead headcount by 6,000. These actions helped the company reduce its fixed costs, bring down payroll costs and should result in higher operating rates in 2010 and beyond. The annual savings from these actions are expected to be around $650 million.
International Paper has prudently used its cash to pay down debt. The company’s debt-to-capitalization as of March 31, 2010 was 61%, down from 74% as of March 31, 2009. Given its accelerated debt pay back and strong cash position, International Paper has recently hiked its quarterly dividend in April 2010 from 2.5 cents to 12.5 cents. Earlier, in March 2009, the company had slashed its quarterly dividend by 90% to 2.5 cents in an effort to preserve cash in light of the economic downturn.
We believe the International Paper’s acquisition of Sweden-based SCA’s Asian packaging business in April 2010 provides the company the scope to expand in the growing Chinese packaging market. However, weak volumes, input cost pressures and the company’s inability to offset the same with increased prices remain points of concern. We thus maintain a Neutral rating on the stock.
Completion of Joint Venture with Natural Resource Partners
In a separate development, International Paper and Houston-based Natural Resource Partners L.P. (NRP) announced the completion of its previously announced joint venture on May 27, 2010 to own and manage the current leases as well as further develop more than 7 million mineral acres previously held by International Paper. As agreed, International Paper received a payment of $42.5 million from Natural Resources.
Natural Resource Partners will be the managing and controlling partner with a 51% interest, including a $4.25 million annual cumulative preferred distribution from the joint venture before profit sharing commences. (For further details of the joint venture, see International Paper’s Win-Win Deals.)
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