International Paper Closes Another Mill … Wake-Up Call for the Office and Commercial Printing Industry
Sep 16, 2013
International Paper announced it will permanently close its massive Courtland, Alabama mill by the end of the first quarter of 2014. This is a huge decision for IP and speaks very loudly about the long-term demand for printing and communications paper. Printer and copier manufacturers, inkjet and toner vendors, office products and supplies resellers, and print service providers need to take notice.
International Paper Courtland Alabama Mill
International Paper is the second largest producer in North America of uncoated freesheet accounting for approximately 20% to 25% of industry capacity (Domtar is number 1). Closing the Courtland mill will lower the industry’s capacity by around 8% (765,000 tons), the equivalent of 153 billion sheets of 20 lb. bond paper. The mill also has capacity for 135,000 tons of coated paper which will be eliminated.
This closure is the second, and largest, reduction in uncoated freesheet production that IP has made over the last three years. IP closed its Franklin, Virginia mill in 2010 (600,000 tons uncoated capacity), only to re-open it last year to produce fluff pulp for diapers as I described in my blog last year. (According to IP, there are no plans to re-purpose the Courtland mill.) Between these two closures, International Paper will have reduced its North American uncoated freesheet capacity by over 45%.
Paper companies do not casually make decisions to permanently close mills. There are significant financial implications along with incredible disruption to the employees and surrounding businesses affected by the decision. The Courtland closure will result in 1,100 people losing their job in a rural section of Alabama. IP plans to record pre-tax noncash asset write-off and accelerated depreciation charges of approximately $550 million and pre-tax cash severance and other shutdown charges of approximately $125 million.
Fundamental Market Shifts
International Paper sees a fundamental shift in the demand for uncoated paper in North America. The company stated as part of the Courtland announcement that “the demand for uncoated freesheet in North America has been in decline since 1999 and has recently accelerated as consumers continue to switch to electronic alternatives such as online publications and electronic billing and filing.”
This comment is very similar to the answer Staples management gave a few weeks ago when explaining disappointing 2Q 2013 earnings. “A change in technology is impacting in our core supplies business. Ink, toner, and paper are all slightly negative.” (See Staples Earnings Don’t Bode Well for Office Equipment & Supplies Industry)
We agree. In fact we note that mobile devices, business process automation, and managed print services have accelerated this shift. The following chart from IP shows how dramatic the drop has been in per capita uncoated freesheet paper consumption in North America. It also suggests that growth in per capita paper consumption in emerging countries will be insufficient to fully replace the declines in the developed markets.
At our InfoBriefing at the PRINT ’13 tradeshow last week, I discussed how the value of shipments for the commercial printing industry has been flat for the last four years after declining 20% in 2009. Despite four years of economic expansion in the U.S., the commercial printing industry is now smaller than it was at the depth of the Great Recession in terms of companies, employees, and value of printing.click here for the full presentation.
What Is International Paper Doing About It?
As I described in my blog earlier this summer, I believe International Paper is a well-managed company that has been successfully navigating through a business transformation. (See What Makes a Great Company? Ask Adobe Systems and International Paper) In the face of flat to declining demand in several of its core products and regions, IP has grown revenue, profits, and market capitalization to new or near pre-recession highs. The company has made this transition through a series of actions including:
- Acquisitions (e.g. Temple-Inland)
- Divestitures/closures (e.g. Franklin and Courtland mills)
- Regional joint ventures and partnerships (e.g. ILIM, Grupo Orsa, Sun Paper)
- Organic growth (e.g. fluff pulp, xpedx expansion into technology products)
By no means is IP moving out of the paper industry. The company’s pending acquisition of Unisource will make it by far the largest distributor of paper, packaging, and facilities products and services in North America. (See Correction & Amplification below.)
International Paper – Select Financials (all amounts in millions)
What Are You Doing About It?
Many other companies with business models tied to printing and copying face similar challenges as International Paper does and need to transform. Our view is that print volume is not coming back (in the home, office or production environment) and that companies need to focus on technology and services that enable providing:
- premium applications (e.g. specialty graphics, high quality)
- integrated services (e.g. data, marketing, print, sourcing)
- business process automation (e.g. remove paper & people from processes)
to help customers with their customer communications and operations.
InfoTrends has recently completed or is conducting a variety of in-depth studies in the office and production markets on these issues.
- Office Document Opportunities by Vertical Market and Metropolitan Area
- Business Process Automation Opportunities for Vertical Markets
- The Future of Multi-channel Transactional Communications
- Substrate Opportunities in Production Printing
- Disruptive Supply Chain Strategies
Give us a call to see how we may help you with your strategy and business development initiatives.
Correction & Amplification: On April 19, 2013, International Paper and Unisource entered into a non-binding letter of intent to explore a possible ”Reverse Morris Trust” transaction in which International Paper would contribute the assets of xpedx to a newly-formed corporation, and receive a cash dividend financed with debt in the new corporation’s capital structure. This new corporation would be spun off to International Paper shareholders and immediately thereafter merged with Unisource in a transaction intended to be tax-free to International Paper and its shareholders. Following the spin-off and merger, the new company would be an independent publicly traded corporation with a majority of independent directors. Some combination of current xpedx and Unisource management is expected to lead the new company.
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