International Paper Co. (IP) reported third-quarter EPS of 37 cents, above the Zacks Consensus Estimate of 23 cents. The better-than-expected quarterly results were driven by the company’s overhead cost reduction efforts as well as integration synergies in its industrial packing business. However, quarterly EPS declined 56.0% from 84 cents in the prior year quarter.

Quarterly sales of $5.9 billion were 13.1% lower than the year-ago sales of $6.8 billion. The company’s packaging business has been adversely impacted by declining consumer spending, while the paper business is affected by lower commercial printing and advertising activity, and deteriorating white-collar employment levels, which impact the usage of copy and laser printer paper.

To offset the impact of lower sales, the company continues to focus on managing its overhead costs. The company is confident of cutting down its workforce to less than 58,000 employees by the end of the year. The company recently announced plans to close three of its mills, which will reduce its work force by 1,600 employees. Apart from headcount reduction, the company has cut its executive compensation by about 50% and has frozen salary hikes.

Through its strong focus on margin improvement and working capital management, International Paper generated strong free cash flow of approximately $1.3 billion in the quarter.

The company therefore was able to reduce its debt by $1.3 billion during the quarter. International Paper has been witnessing declining unit volumes in most of its markets since the second half of 2008. The company is adjusting its capacity to match demand levels as it believes that the accumulative cost of down time is far less than the negative impact of chasing volumes and building excess inventories. We do not expect any significant recovery in the company’s end-markets for the next couple of quarters.

International Paper’s competitor, MeadWestvaco Corp. (MWV), posted third-quarter earnings of 50 cents, almost two times the Zacks Consensus Estimate of 27 cents, driven by stringent cost reduction measures and productivity improvements.
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