Operator:

Good morning, and thank you for standing by. Welcome to today's International Paper's Second Quarter 2024 Earnings Call. [Operator Instructions] It’s now my pleasure to turn the call over to Mark Nellessen, Vice President, Investor Relations. Sir, the floor is yours.

Andy Silvernail:

Thanks, Mark. Hey, good morning to everybody in the Americas and good afternoon to all of our friends in Europe. I'm excited to have joined the IP team with our rich history, important mission, and dedicated, talented people. Prior to joining IP, I spent a decade as CEO of IDEX Corporation, where we delivered strong, consistent results through great teams, customer obsession, and embracing an 80/20 operating system. I also spent several years working with private equity, where speed and impact are at a premium. I've been asked many times since my announcement, why IP? The bottom line is that through my deep diligence, very similar to how I approach acquisitions, I found a company that matters in terms of its mission, a company with solid underpinnings, and a company with a lot of opportunity for improvement and significant upside potential. It is absolutely a diamond in the rough. I spent my first 90 days on a learning journey with the goal of getting fact-based insights, aligning the team, dimensionalizing the opportunity, and launching the improvement plan. It's been a powerful experience, an opportunity to speak with employees, customers, suppliers, and investors. All of this has reinforced my initial beliefs and opened new insights. Let's turn to slide five. So before we go through the quarter, I'm going to talk about the case for change International Paper. And later in the presentation, I'm also going to talk about what we're planning to do differently to drive significant change at IP and significantly improve performance. So I'm going to spend a few minutes walking you through some of the data that highlights the challenges we faced as a company in a very candid, fact-based way. The data and feedback have told me that most of our performance issues are self-induced. And as a result, these can be fixed with intense focus on the right strategy and courage to do what must be done. I'm going to start on slide six. You can see 10 years of data here. These are the facts that I know as owners of IP you appreciate. We have underperformed on every meaningful metric. You can see the realities of sales, margin, and profitability decline. And although it's not on this chart, our return on invested capital has followed the same trend and is underwater today. I want you, as our share owners, to know I understand this is totally unacceptable and we are going to fix it. But to fix it, we need to understand the root cause, we must face the brutal facts and do something very different. Let's go to slide seven. IP's performance deterioration has been exacerbated by some very important choices in capital allocation and resource allocation. You can see over the past decade, we've spent more than $35 billion, including returning cash to share owners, making investments, and improving the balance sheet. Let me start with the efforts around the balance sheet. We made excellent choices here, deleveraging and funding our pension. A strong balance sheet is foundational and gives us great degrees of freedom for value creation. But we've also spent more than $12 billion on dividends and share repurchases. Both of these tools can create substantial value if used well, but are value destructive if used poorly. IP will pay an attractive dividend. We can support our dividend at the current level and we will grow into it as performance improves. But as I think about share repurchases, when and how you do it really matters. As with most companies, IP purchased shares when cash was generated, but not in the mind of maximizing the opportunity based on market factors and intrinsic value. The remaining spend, $2 billion on acquisitions and $12 billion on CapEx have not generated the returns we expect. I'm now turning to slide eight. Importantly, our spending since 2018 on investments that drive performance for customers and productivity have lagged. I'm not saying that we can't be more efficient with capital than our competition, but we pushed the envelope too far. While our mills are well capitalized and advantaged, we spent too much on unproductive capacity and haven't stayed ahead of the curve. We have under-invested in our box system. On the right-hand side is where you can see this show up. We've underspent on maintenance and repair, and this is the heartbeat of our operations and what drives reliability for our customers and productivity. These numbers are supported by the conversations I'm having with our folks across our system, particularly in maintenance. We've got an incredibly long list of great opportunities that need capital to drive performance for our customers and expand profitability. When we're driving excellent reliability internally, we get excellent reliability externally, and we will excel for our customers and get paid for value. That means we've got to spend some money. And I believe we can do that with capital playing in the range of $1 billion to $1.1 billion per year. If opportunities exist and drive results, by expanding those investments, we will do so. I'm turning to Slide nine. This is probably the most important slide that we're going to go through here today, that and capital allocation. The lack of investment back into the businesses has directly contributed to a cost problem. Operating costs have ballooned on modest sales growth. The good part here is that it's in our control. We can attack this and control our own destiny. What doesn't show up on this page is the impact of the slippage of reliability for our customers. Reliability, defined as quality, delivery, and service, is the most important factor for the vast majority of our customers. We made our own bed here under investing in cost that has lost its market share over the past decade. The share loss will continue over the near term, but again, we know how to reverse this and control our own destiny. We've done a lot of work commercially to position ourselves correctly in the market. We've made sensible value over volume trade-offs recently, and we're ramping up our commercial talent, capability, and incentives. We have lost other share where we let customers down. We will change this by being the leader in reliability. We've made some solid progress in on-time delivery, and our corrugator and converter capacity is up. But we have more to do to arrest the share slide. I'm now turning to slide 10. I'll talk about this of where to build from and things to improve. IP has a strong culture of ethics. We work with integrity. This is a really hard thing to change within an organization, and we have a great foundation here. We have talented, experienced people up and down the organization. I'm finding them willing to face the reality and embrace significant change. My team wants to win. They are tired of getting their butts kicked. My job is to focus and align them on the critical few and away from the trivial many. The strongest thing we have to build from is our North American Packaging franchise. Our packaging franchise is incredibly valuable and has tremendous upside potential with the right strategy. And as I mentioned earlier, we have a strong financial foundation. Turning to the opportunities for improvement, we are embracing an 80/20 operating system to do four things. First, an outside-in customer-driven strategy that differentiates through reliability and leverages our reach. Second, optimize our cost structure. Third, align our team and resources toward differentiation and profitable growth. Finally, we will instill a high-performance culture that achieves superior results. In a little bit, I'm going to talk about how we are embracing 80/20 to drive results. So now let me turn to the second quarter about performance and the outlook. I'll share some highlights and then turn it over to Tim to walk through the details. I'm now on slide 12. Our second quarter earnings were higher than the first quarter, but relatively unchanged year-over-year. We saw a sequential improvement driven by higher sales across our sales prices across the portfolio, and we got benefit from seasonally higher box volumes. Regarding the market environment, they were stable to moderately better demand. However, IP's packaging volumes came in below our expectations and continued to lag the overall market, and that will continue for some time. We've seen expected volumes decline from repositioning and optimizing value and volume. We do have residual effect from a history of underinvesting in certain regions and markets where we have ongoing reliability and capacity issues that we are addressing and have seen improvement in already. We need to make sure that we are close to the market, pricing appropriately, and investing to be the leader in reliability. As I mentioned earlier, we're focused on investing and differentiation, and we are seeing specific results that are leading indicators to positive change. It will, however, be messy over the next three to four quarters. We expect near-term performance to be challenged by seasonally lower volumes and higher mill outage expense. With that, I'll turn it over to Tim to provide more details about our second quarter performance and our outlook.

Andy Silvernail:

Thanks, Tim. I'll pick back up on slide 17. For over a decade, I've embraced an 80/20 operating system that has consistently produced superior results for customers and shareholders. At Ixtac, 80/20 became part of our DNA, and we delivered over 500% TSR over my tenure. One of the reasons I joined IP is that through my diligence, I found a very compelling case where 80/20 can produce significant results. 80/20 is a data-driven methodology that creates laser-like focus on customers, products, and resources that drive dramatic profitable growth. It's about simplifying so we can say yes to the critical few and no to the trivial many that create value-destroying complexity. Using this approach, we are reviewing the entire portfolio and sub segments as well as our enterprise functions. I'm now turning to slide 18 to talk about our 80/20 methodology. There are four steps to 80/20 that we're taking our entire business through and then sub segments of our business and the enterprise. Step one is about simplifying customers and products quickly to focus on attractive markets. We should never become good at something we shouldn't have done in the first place. Step two, we want to segment unlike businesses so we can focus on winning for the customer and driving results. Step three, we're going to align minimum resources. Different businesses have different resource intensity. We need to give them uniquely what they need to win. Step four is accelerating profitable growth through customer obsession that shows itself in great quality, delivery, service, value-based pricing, and innovation. Now let's turn to slide 19. The most important insight of 80/20 is the misalignment of what drives a business and how resources are typically applied. I've deployed 80/20 dozens of times and found this to be universally true. We had 40 businesses at Ixtac, and I brought the approach to private equity also. The bottom line is that unaffected, complexity grows out of control and each resources. IP is a very complex business, but we're complex by choice, not by necessity. We will simplify and focus IP. We will improve profitability while at the same time liberating resources to invest in differentiated capabilities for the most attractive customers, products, productivity, and capital allocation. My experience is that 80/20 is a highly differentiated approach that demands facing the brutal facts and by making courageous choices that dramatically improve results. Now let's turn to slide 20. So what will you, our customers, and our team experience? First, we will simplify to focus on the businesses, customers, and products where we will invest long-term and differentiate. Second, we'll segment the businesses to stand on their own. Third, we will zero up each business. You're going to hear that term zero up often, but we're going to zero up each business. This means we will rigorously understand what resources are needed to win for customers and deliver attractive profitability. Fourth, we will commit and align our people and our investment. Finally, we'll place authority and accountability close to the customer and decision-making to drive outstanding results. We'll take the same approach to the corporate center. Through the zero up, we are determining the minimum resources required to be a public company and then being very strategic about a small handful of things we will invest in to differentiate across the company. Turning to slide 21. We will be relentless in applying 80/20 across IP. We launched 80/20 shortly after I joined. We actually started the data process before I joined. We've completed much of the analytics that point us towards opportunity. IP has attractive and substantial upside. I believe that the current portfolio of IP has the potential to deliver $4 billion of EBITDA in a mid-cycle environment. The key drivers will be optimizing our cost structure to improve profitability, and very importantly, liberate resources. Investing in box plants for reliability and productivity. Investing in our mills for long-term performance and cost advantage. And investing in our commercial capabilities for innovation and sales talent. Ultimately, these will allow us to win for our customers and be rewarded for the value that we create for our customers. I'm turning to my final slide on 22. We're going to be laser focused, working with the teams to accelerate 80/20 and begin implementation. I commit to continue to engage with you and share updates. We're planning a roadshow in September, and we're also attending conferences. We'll update you on our progress at our next earnings call in October. We expect that required disclosure documents related to DS Smith acquisition will be published in late summer, and related meetings held in the early fall. And we will offer an 80/20 101 webinar on August 14th to give you an opportunity to learn more about 80/20 and how it drives change and results. So you'll get an invitation to attend that. Finally, we're going to have an Investor Day in March. This will give us an opportunity to share our progress at that time. The last thing that I want to say is I want to say thank you to the IP team. I have pushed them very hard in a very short period of time. I found people to be willing and able to tackle this important mission. People are bought into what we're trying to do, they understand the stakes at hand, and we're going after it. With that, let me turn it over to the operator for questions.

Michael Roxland:

Thanks very much, Andy, Tim, and Mark for taking my questions, and congrats on a good quarter.

Michael Roxland:

Morning. Wanted to get a little more color for you, Andy, on the 80/20 and also the box strategy. Obviously, you're pooling the portfolio for unprofitable business. How much of the business you intend to walk away from, or that you have walked away from, is truly unprofitable, where IP is actually losing money, rather than maybe it's just lower EBITDA or lower EBITDA margin business relative to other businesses?

Michael Roxland:

Got you. Very, very clear. My follow-up then is how do you tend to deploy 80/20 with DS Smith because doesn't that add some complexity to the system I mean you mentioned trying to keep things simple and so with DS Smith being -- if when it closes I just walk us through how you're thinking about deploying 80/20 here standalone and then ultimately try to do that approach with DS Smith as well. Thank you.

Operator:

Our next question will come from Charlie Muir-Sands with BNP Paribas. Go ahead.

Andy Silvernail:

Hi, Charlie.

Timothy Nicholls:

Yes. Hey good morning Charlie. It's Tim. So I would say there's a significant portion of it that's directly tied to reliability. We do have there's a little bit of timing between quarters and we did underspend the estimate that we thought for the second quarter. So some of that is bleeding [ph] into the third. But in terms of ongoing reliability spending, I think you can think of it over the next three, four, five quarters where we are getting the system to the point that it can sustainably be reliable and open up capacity.

Charlie Muir-Sands:

Thank you. My follow-up question just relates back to the go-to-market strategy. It's obviously been another 13 weeks since you effectively implemented it. It appears so far that the pace of market share losses has probably been stable. We haven't obviously seen every competitor report or the industry data yet. But are you confident that there is a NPV positive payoff going on, and there's no risk that customers aren't still shopping around, and maybe three, six months down the line you're going to see another wave of departures?

Operator:

Our next question will come from Mark Weintraub with Seaport Research Partners.

Andy Silvernail:

Yes, if you actually look at the balance of go-to market and I'll call it other stuff, right, let's just call it other. The total is about 50-50, right? So if I look at now through really the second quarter and we believe that that would be investments in reliability, that other part shrinks and we feel like we're dialed in on the go-to market piece of that. So that's kind of how it plays out. No, reliability hasn't gotten worse, but I think what it's doing is the timing of how it moves through the system. And look, overall, the pricing environment has gotten more robust, right? So people are shopping more in the overall environment. And so our ability to make sure we're the leaders in reliability consistently on an ongoing basis is the game. And so look Mark, there's no doubt in my mind that this is going to be bumpy, right, as we work through this and the investments are going to take some time. It's not three years away, that's not what I mean, but I think the next three or four quarters, we're going to see some chopping there and it's going to be a little bit hard to call. And that's a conversation I know I've had with a lot of people who are on the call today. That is my expectation and that is what's playing out.

Timothy Nicholls:

For the quarter or for the year, Mark?

Timothy Nicholls:

For the year, it's really hard and we can't forecast the fourth quarter because of issues with the transaction. Look, I think Andy said it, there's chop and we're going to have some up and down, but we're working with the market, 1% to 2%, and we've got to see how all of these negotiations play out and the follow through on getting the price to a competitive level and then what that means for volume.

Operator:

Your next question will come from Gaurav Jain with Barclays.

Andy Silvernail:

No, it does not. No, that does not include it. No, that is for the current IP portfolio.

Timothy Nicholls:

So I think the question was around capital spending to support the value growth.

Timothy Nicholls:

Yes, so what we're looking at is somewhere between a $1 billion and $1.2 billion one on a normalized basis. There could be periods where because of the opportunity, we might want to invest a little bit above that level to support the strategy. But it's really largely around the same level of capital that we normally target. We think we can do it within that.

Operator:

Your next question will come from the line of Gabe Hajde from Wells Fargo Securities.

Gabe Hajde:

Good morning. I appreciate the candor and transparency and also [Indiscernible] pumpkins and peanut butter and getting me ready for lunch. I wanted to go to Slide eight, the prior question sort of asked what I was thinking on the 1.5 points to differential and CapEx relative to your peers. You addressed that -- the fees for the 7 per million square feet the $0.40 differential. Should I interpret that as, okay, maintenance costs have come up to, I think, this year, now you're talking about $530 million is that there's another $40 million to $50 million in there, all else equal. Or does that piece of it get reflected in ops and costs? How should we think about that?

Gabe Hajde:

Okay. And then you talked about wanting to be self-funded free up resources and one of the implications here is seemingly free up some capacity, which in today's environment isn't necessarily what IP or the industry needs. And you're also saying, hey, 80/20, we need to focus on what's important. Should we take away from that, that there could be some additional capacity coming out of the system as you work through this process over the next medium term, if you will?

Operator:

Your next question will come from the line of Philip Ng with Jefferies.

Andy Silvernail:

I think, look, one of the major positive surprises when you come into a situation like this, right, long-term poor performance and not kind of dealing with some of the major issues that need to be dealt with. You worry about what you're going to find, right? You worry about what you're going to find. And I will tell you, I have been extremely positively surprised by the capability and the willingness. So the team is willing and they are able. The pent-up frustration and the pent-up excitement about running this company the way it should be run is palatable. And what I have seen is just people grabbing on to a desire to get better and very specifically, grabbing on to 80/20, right? We are moving at a pace. Again, I've done this an awful lot. And the pace at which this group has been willing to engage and their ability to engage has been frankly inspiring. They've done a great job with that. And so we've got great people at IP. I'll put this group against any group of people. And I mean up and down the organization, I've spent a lot of time in box plants and mills. We've got great people. My father in law was a 37-year IP employee. When IP bought Champion back a long time ago, my father in law went with that. He retired as an IP employee. So right after he asked me whether or not his pension was safe, we talked a lot about maintenance. And so I have a real affinity for those folks within our business. And when I go and I talk to them, these people are fantastic, right? They're absolutely fantastic. I came in this morning, I was given a hat from our Riegelwood facility, and it's a precision maintenance hat. I went there and I had a chance to sit in on some bearings training and listening to these folks, these are incredibly capable folks who they need the focus and they need the resources to win. They know how to do with the list of high-return projects by facility, by location is awesome. And the need for us to allow them to win we need for us to -- they need us to allow them to win. So I feel really good about the team and about the engagement. Look, we're going into the next phase of this, right? In the next phase, there are kind of tough phases here. One is the buy-in, which you had talked about, and we've got it, we have got buy-in. And frankly, our overall performance and other events that have happened recently, those are things that really solidify people into where they are, right? They understand what the stakes are. And that sense of urgency is very high within this group. They're very capable people. So we've passed that first test. The second test is now the doing of the hard things. Right now, we've got to go do them. And that will be -- we're going to move very quickly, but you also have to move intentionally, right? You've got to be very smart about that. You've got to think about those strategies of how you win with customers, where you win with customers, and you need to invest very intentionally and ahead of the curve, so you make sure you're winning not hurting them, and we've got to do that and do that well. But I think this team is ready to do that.

Andy Silvernail:

That's a great question. So I call it the scorecard, right? So one of the things that we've got to get better at here across the company is really having clarity of the metrics that drive results for our customers and drive results for our owners. And those things -- obviously, we've got tons of data. You can imagine our process environment, there's tons of data. But the data that really matters has got to stick out. So the basic stuff around safety, quality, on-time in full productivity and profitable growth. Those are the basic ones. I was in Cedar Rapids, Iowa last week, and the team does a great job there. It's an OCC mill that just does a phenomenal job. And they're probably a leader in terms of the linkage between what happens upstream in terms of our reliability capability, our production capabilities. You name it, you name the metric. And so they understand the levers. There also are probably first or second in the fleet and cost per ton, right? They're outstanding from that perspective. And so they really demonstrate they're kind of a great forerunner, so to speak, of what happens when you really measure cause and effect. So we are seeing that. Specifically commercially, right, as you think about the commercial side, moving incentives they're more tied to profitable growth versus volume is very important. -- Understanding, however, that you got to be competitive in the market, right? You've got to be competitive, you got to price to value, and that is very important, right? You've got to price where customers see your value. And we're getting better at understanding that. We've got room to go. We are significantly improving our sales talent across the business in terms of the number of people that we have and their capabilities. And we're seeing that pipeline grow because of that but you got to have clarity of metrics and incentives have to be tied to those metrics from the customer all the way through your production capability all the way through the supply chain. And that's something we've got work to do, and we're going to get better.

Matthew McKellar:

Hi, good morning. Thanks for taking my questions. Are you able to give any more specificity around the approximate time line to achieve that $4 billion EBITDA target maybe give us a sense of contribution from the Global Cellulose Fibers business that may be embedded in that target. And maybe with that, is there an updated view on whether that business is core to IP going forward? Thanks.

Matthew McKellar:

Great. Thanks very much for the help. I'll turn it back.

Operator:

Once again, we'd like to thank you for your participating in today's International Paper's second quarter 2024 earnings call.

Operator:

Good morning, and thank you for standing by. Welcome to today's International Paper's First Quarter 2024 Earnings Call. [Operator Instructions]

Mark Nellessen:

Thank you, Greg. Good morning, and thank you for joining International Paper's First Quarter Earnings Call. Our speakers this morning are Mark Sutton, Chairman and Chief Executive Officer; and Tim Nicholls, Senior Vice President and Chief Financial Officer.

Matthew McKellar:

I was wondering if you could start with just reconciling the benefits from the changes in your go-to-market strategy in the box business versus what you're expecting to start the year. And then it sounds like you're expecting some incremental benefits will flow through in Q2 and beyond. I was wondering if you could help us just quantify that.

William Hamic:

Sure. Thanks, Mark, and Matthew. I would say we exceeded the price component for 2 reasons. First of all, at the local level, we had better-than-expected improvement as we were starting Q4. So these are customers that are really the decisions are made in the field. Most of our forecast thinking about the improvement was focused on very large customers that are across the country. We exceeded the expectations there, but the big move was our investment in teams in the field, training, execution, driving benefit for our customers and frankly, getting a fair price that maybe we didn't in the past. I can say that the volume gap to market was almost exactly where we expected it. So these trade-offs are playing out the way we expected, but the margin improvement is more significant.

William Hamic:

Sure, Matthew. This is Tom again. I would say that second quarter is going to be close to plus 2% for the industry. So that's an improvement from 4% to 1% to 2%. We expect that improvement to continue. But I would say 2% is probably in line with a fairly tough economic second half. And obviously, when you're forecasting the toughest things to predict or when you have a turn. And we are going to have a turn. Our customers do not have enough inventory. And at some point, they're going to have to reinvest in that base as the economy improves. And so our forecast, if you go down to 2%, that suggests no improvement at all and probably a fairly tough retail sales environment. I think it'd be closer to 3%, and I would not take 4% off the table. So a moderate adjustment to be conservative is what I would say.

Operator:

Your next question comes from the line of Mark Weintraub from Seaport Research Partners.

Mark Sutton:

Mark, this is Mark. That's a great question. I think it's 2 parts. It's the value chain, starting with containerboard and all the way through Box. Our prepared remarks talked about generically preparing for what we believe will be higher utilization as well as some of the spending is maintenance costs, but it really is in the box business to improve productivity and throughput. It's just not at the capital cost level. What I would like to do is ask Jay Royalty to talk a little bit about the containerboard part of the value chain, and then Tom can add some comments on the converting and box side. So Jay?

Mark Weintraub:

Okay. So are we -- would you say that what we're going to see in the second quarter is cut back to what you think to be your normal type of -- given where the world is today, your normal levels of maintenance type spending, et cetera, et cetera? Or are we spending even a bit extra now to make up for maybe having spent a little bit before? Or is there even further increases that we might -- it didn't sound like there'd be further increases going forward. But maybe just clarify, are we just kind of at normalized spend levels in the second quarter and we were just a bit below previously? Is that the way to think about it?

Mark Sutton:

So Mark, I think what Jay described on the mill side is true in packaging. It's also true in Cellulose Fibers, modulating our spending over the last, let's say, 4 to 5 quarters as we were running both businesses at less than target output, which would be somewhere in the 94% to 95% output. It's been much lower than that, as you know, based on the demand environment. And so we stretched those dollars over a longer period of time because we didn't need our plants to run at maximum output. So now we're preparing to be running more toward our target output.

Mark Weintraub:

Got it. Thanks, guys, and thank you, Mark, for your clear explanation there and for your clarity last years you've been working and congrats on the retirement.

Charlie Muir-Sands:

Yes. I just want to stay with 2, please. Firstly, just in terms of the market prices and the recognition of the $40 per ton increase that [indiscernible] put through in March, followed by no further change in April. Is it your expectation that relative to the higher numbers that you and others announced at the start of the year that we won't see any further recognition unless there's further price increases made? And then the second question, just related to the corporate expenses, $24 million in the first quarter compared with $60 million to $80 million guided for the year. Have you got any view on how Q2 might shape up specifically and whether for the full year, you might now be perhaps looking towards the upper end of that range given the large number in Q1?

Timothy Nicholls:

Yes. Great. Charlie. So we don't break it out quarter by quarter. There's a lot of -- normally we keep at corporate. There's a lot of things that have some volatility to them. We still feel good about the $60 million to $80 million for the year. But we capture things like FX movements and there's some unallocated subs and things like that. So there's a lot of moving parts running through. And generally, you can estimate it for a full year, it can bounce around quarter by quarter.

Michael Roxland:

You Mark, Andy, Tim and Mark for taking my questions, and Mark I just want to echo what everybody else says, congrats on the retirement and all the years following through.

Michael Roxland:

Just wanted to get a sense, going through this commercially or margin improvement in industrial packaging. What type of EBITDA margin are you looking to achieve and over what time frame? And can you help us frame how this should play out within [ the next few years ] itself?

Michael Roxland:

And based on where you stand today, Mark, where do you -- that 18% margin, when do you see that occurring? Is there something that occurs next year next 2 years? And how do you see that unfolding in the near term?

Michael Roxland:

Got it. And just one follow-up. I think you had a recent conference, you mentioned a change in the customer mix, pre-COVID versus post-COVID and the different margin profiles you have [indiscernible] pending with. So can you provide more color about changing your customer mix, pre-COVID versus post-COVID, any regional impacts that mix would have as well?

Operator:

And your final question for today comes from the line of Gabe Hajde from Wells Fargo.

Mark Sutton:

Gabe, let me start just at a high level. So the $250 million you talked about, you could probably put a 40% inflation number across that spend. Typically, maintenance is half materials and half labor. Some labor is in annual outages and it's labor that we don't provide in specialty works. So we hired that labor during those 2-week outages. And so that $250 million automatically jumps up in the neighborhood of 40% more.

Gabe Hajde:

Okay. You guys did outperform, if I go back to the bridge on a sequential basis, you talked about flattish pricing. It was plus 57%. So it's clearly showing up. We didn't build a better IP in this presentation formally talked about. Is it incorrect to annualize that $110 million number? Is there a reason why it's more pronounced here in the first quarter? Or just, again, any way to think about that? Because it I mean that in and other health was, I think, a big part of a better IP and it's shown up in the numbers now here.

Gabe Hajde:

The sequential price rate you guys outperformed, I think, by $57 million. So it was just...

Operator:

You have one last question. That question comes from the line of Phil Ng from Jefferies.

William Hamic:

Sure. That's a great question. I'll take a couple of pieces of it. I think in terms of the investments, if you look at the first quarter, we still have a bit of a weight of new employees, and that's why we're very on retention. But new employees are not as productive as experienced employees. However, when we look at the productivity across our machines, even though we have a few extra people in place, it's not significant to the financials but a few extra people, we are seeing productivity improvement for the first time in a long time. And so I feel like those investments are at a very good payback rate. And we're -- it's not insignificant, these are 2%, 3% improvements in throughput.

Mark Sutton:

Thank you, Greg. And I'd like to wrap up today's call by sharing my conviction that International Paper is well positioned for the future. Andy Silvernail steps in the CEO role next week on May 1. I'm very confident his leadership experience and proven track record, combined with the industry expertise of our senior leadership team will amplify the company's success going forward. When I provided updates along the way about the CEO succession process, I said the Board was looking for the right leader for the company's next chapter, and I am confident that Andy is that leader. Andy and his team will look forward to sharing updates with you starting on next quarter's call. Thank you for your time today and for your continued interest in International Paper.

Operator:

Good morning, and thank you for standing by. Welcome to today's International Paper's Fourth Quarter 2023 Earnings Call. [Operator Instructions]. It is now my pleasure to turn the call over to Mark Nellessen, Vice President, Investor Relations. Sir, the floor is yours.

Mark Sutton:

Thank you, Mark, and good morning, everyone. We will begin our discussion on Slide 3, where I will touch on our full year 2023 results. As I reflect on this past year, I'm very appreciative of all the hard work our employees have performed and for our strong customer relationships as we managed through a challenging market environment. Our teams across International Paper executed well, both commercially and operationally. They work closely with our customers to create value and serve their needs, while navigating an uncertain and changing demand environment. Our teams were also focused on driving our cost in all categories of spend across our large network of mills, box plants and supply chain operations. In addition, we took strategic actions to structurally reduce fixed costs in our mill system, in our Industrial Packaging business and our Global Cellulose Fibers business. We also made significant progress in Building a Better IP, by delivering $260 million of earnings benefits in 2023, driven by commercial and process improvement initiatives. I'm pleased to say that we've exceeded our target each year since we began this initiative, which demonstrates how Building a Better IP is now a mindset embedded in our culture, with intense focus on maximizing value through commercial and operational excellence. We also advanced our strategies to improve profitability across our portfolio. In our box business, our go-to-market strategy is focused on improving margins and mix by investing in capabilities to enhance our value proposition to align with customer needs. In Global Cellulose Fibers, our strategy is focused on optimizing the business, by reducing exposure to commodity pulp and aligning our mill footprint. We will be sharing more about these strategies later in the presentation. And in addition to reinvesting in our businesses, we also preserved our solid balance sheet and returned approximately $840 million to our shareholders. As we go through the rest of the presentation, we'll share our perspective on the market and the trends across our portfolio. We thought this would be helpful as you reflect on industry dynamics entering the new year. I will now turn it over to Tim who will provide more details. Tim?

Mark Sutton:

Thanks, Tim. I'm going to turn to Slide 14, and I'll talk about our go-to-market strategy in our North American box business. During our last earnings call, I highlighted strategic investments we were making across our box system to create value, by improving our capabilities to serve customer needs and improve productivity. This includes adding new converting lines in existing plants, upgrading older equipment with newer, more advanced technology and new plants like the one we opened in Eastern Pennsylvania. These investments are helping us address capacity constraints in certain regions, and also address productivity related to the tight labor markets and a less experienced workforce on average. Our box go-to-market strategy is about leveraging our capabilities and strong segment-based value propositions to improve margins and mix. It's about making choices that create value for our customers while maximizing the profitability of our packaging business. Earlier, Tim called out approximately $68 million of earnings benefits expected in the first quarter as a result of this strategy in action. So we're making the changes that will progress through 2024, as we continue to reset the business and strengthen our position for the future. We are focusing on value over volume. Therefore, we may trail the industry for the next few quarters when measuring unit volume growth, but we expect to grow at or above market thereafter, and we expect our earnings to improve through this process. In summary, we have significant opportunities to leverage our strong value proposition to serve customer needs, improve our mix and capture additional value. Turning to Slide 15, I'll update you on our strategy for Global Cellulose Fibers. First, let me say that I'm not satisfied with the absolute level of earnings that the business has produced. But as I've said before, I believe there is a good business within this business. And I also believe we can improve earnings and cash flows over the cycle by aligning with those customers and segments who value our differentiated product and service offerings. We believe fluff is a value-added product that will grow over time, because of the essential role that absorbent personal care products play in meeting consumer needs. At International Paper, we have talented teams with significant market expertise and a mill system with a broad set of capabilities. This allows us to create value for our customers, by delivering innovation and products that meet their most stringent performance and product safety standards. To improve the financial performance of this business, our commercial teams have been focused on getting paid for value that we provide and being more selective in the segments that we actually serve. As a result, we have earned a higher premium for fluff grades relative to commodity pulp grades by capturing more value. We're also improving our mix by reducing our exposure to commodity grades and by serving the most attractive customers that allow us to maximize the value of this business. Our exposure to commodity grades will mostly consist of our bleached softwood, northern bleached softwood kraft mill that goes really into tissue products and is produced at our low-cost Grand Prairie mill that is strategically located near that fiber source in Canada. Aligned with this optimization strategy, we took actions to rightsize our footprint and reduce fixed costs across our mill system which we estimate will improve EBITDA for Global Cellulose Fibers by approximately $90 million per year. Our teams are also focused on driving out costs across our supply chain by leveraging new tools and data analytics. So in summary, we're pulling a lot of levers in this business and expect to make meaningful progress towards our strategy in 2024. Turning to Slide 16. I'll share some examples of how we are deploying technologies across the company in our manufacturing, converting and supply chain operations. Over the past couple of years, we've developed and piloted new tools and capabilities to reduce costs, increase productivity and improve efficiencies. All of this will result in a better experience in terms of reliably providing products and services for our customers. By leveraging these new tools, we're seeing benefits in areas such as improved reliability and lower maintenance cost higher yields on fiber, energy and chemical usage, more optimized machine scheduling at our mills and box plants, better logistics planning across our supply chain and more sourcing opportunities for operating and repair materials due to better visibility and consolidated purchases. These new technologies also enable more collaboration by connecting teams at our facilities to enterprise specialists, allowing us to maximize the opportunities. We believe there are more opportunities going forward, and this is a great example of how Building a Better IP is embedded into our culture. On Slide 17, I want to take a moment to update you on our capital allocation actions. As I said in the past, we have a solid balance sheet, which we will preserve because we believe it is core to our capital allocation framework. Our 2023 year-end leverage was at 2.5x on a Moody's basis, which is at the low end of our target range of 2.5 to 2.8x. Looking ahead, we have limited short and medium-term debt maturities due to the risk mitigation strategies we've taken over the past several years, and we expect our qualified pension plan to remain fully funded. Returning cash to shareholders is a meaningful part of our capital allocation framework. And last year, we returned approximately $840 million to our shareholders, and we remain committed to our dividend. We understand investment excellence is essential to growing earnings and cash generation. And as I shared with you previously, we have opportunities to invest in our box system to build out capabilities and position us for future profitable growth. We also have cost reduction projects across the company with attractive returns. So turning to Slide 18. I'd like to wrap up by sharing my view that International Paper is well positioned for the future. I shared that conviction before, but after navigating another year of challenging market conditions, it bears repeating. Our financial foundation is strong, as are the principles and core values that guide our actions and decisions about how we operate, I'm confident that the winning mindset of our leadership team and our employees, and the agility of our employees will drive our success as we tackle our improvement efforts and execute the go-to-market strategy we talked about in today's call. As we move through 2024, we anticipate continued demand recovery across the markets we serve, along with margin and mix improvement from our commercial strategies. There's no question in my mind that we are on the right path. Given our strategic customer relationships, talented teams, world-class assets and market expertise, we are committed to maximizing long-term value for all of our stakeholders, and we intend to deliver. With that, we're happy to take your questions. And similar to the last quarter, our senior business leaders are joining me today to provide their perspectives in the Q&A section. So operator, we are ready to go to a question-and-answer session.

Philip Ng:

I appreciate all the great color on some of these commercial initiatives on getting value over volumes, Mark. That's great. Is much of this pretty much locked up contractually, so that's it's just flowing through. And then can you just expand a little bit on what you're exactly doing? You effectively just walk away from lower margin business and mixing up? And then just lastly, I think you guys guided to like a $68 million tailwind for 1Q. Do we just kind of annualize that impact for the full year?

William Hamic:

This is Tom Hamic. I would agree with what Mark said, this is really a holistic strategy for the business. So this includes everything from where we invest capital to the metrics we use to really run the business. So customers pay for value, but value in the box business starts with reliability, with quality and with shipping on time. And so we have refocused our efforts in that space. Obviously, going through the pandemic that can make that more difficult. But as we come out, we feel very positive about the metrics we're seeing in terms of improving the customer experience. We improved the customer experience, we deliver more value, and then we charge for that value. And you're right, there will be times when customers have a disagreement about what their price is. There are -- most times, the vast majority of times, that's really not been the case. They've seen the value of IP. And in some cases, customers have left and then come back very quickly because box making is difficult and their service model is often very challenging. So that's really the equation, provide more value, make customers know that you are important to their business and then get paid fairly for it. And that really sums up the strategy.

William Hamic:

Yes. I think annualizing it would be -- that's fair. There's -- every customer has a different relationship. There's different timing of contracts. I am completely confident that, that number is solid and that we'll maintain that margin structure going forward, and I expect to improve it going forward in 2024.

Timothy Nicholls:

Yes. Phil, it's Tim. So as I said in my prepared remarks, we're choosing not to give an outlook. It's just -- there are a lot of moving pieces. We feel good about the year. We feel like we're in a good place in terms of earnings and cash flow but we're not quantifying it or putting something out. We can look at it next quarter and maybe we'll make an adjustment. But for the moment, we're focused on the first quarter outlook, and we'll go from there.

Timothy Nicholls:

Phil, I believe it's 1Q and we're done.

Michael Roxland:

I just wanted to follow up on the focus on value over volume. Can you talk about some of the issues you noticed in your customer contracts to sort of encourage you to revisit how you price? And could this focus on value over volume involve some -- maybe some additional portfolio rightsizing or maybe even distancing yourself on the publication if that publication does not actually properly reflect pricing that you're seeing in the market?

William Hamic:

Sure. Mike, I would say that we see everything in contracts. There are contracts that don't tie the index, there are contracts that do. So it's really hard to draw out a specific, this is what we're seeing that's an issue. The biggest issue is that when the contract comes up, are we clear in articulating value? Is that fair proposal because we don't expect contracts to go our way. We don't expect them to go to the customer's way. We expect a middle and fair ground, and part of that is just getting the economics of the contract within range and making sure that the customer expectation for pricing is very similar to what you have, so there are no surprises. So I would say it's not one tie sets at all. But the really core component of this, and Mark mentioned growing with market is, a very clear local understanding of what's happening in the box business because unlike linerboard and pulp, the box business is very local, and those decisions have to be very targeted around value propositions and around customer growth in that market. And I think that's what's going to have us turn the corner in a few quarters to get back to growing market. And the last thing I would say is that we're not seeing customers leave. We've certainly picked up some business, but you're really talking about some marginal volume in local places where maybe the match isn't perfect long term. Maybe it's better for both parties to readjust and get to the right value equation.

Clay Ellis:

Yes, Mike, this is Clay Ellis. Yes, I think as you mentioned, the mitigating the exposure that we have to commodity or paper-grade pulp at the Riegelwood mill. If you look at 2024, post the closure of Riegelwood 20, we still have some exposure. We're not at our optimized mix, although we're much further along the way toward that. But we believe fluff will grow, and that will -- obviously, we'll move SBSK or paper grade to fluff. So we think exiting '24 and to '25, we'll be getting pretty close to our optimized mix. There will always be a small amount of the paper-grade pulp in the mix. And we -- but we think we'll be getting to really our optimized mix here exiting '24 and to '25. So we'll have an improvement through, all through '24. Of course, we have levers if fluff pulp did not grow and such, there are things that we have as options. But that's not really what we believe or what -- we think absorbent hygiene products will grow. And therefore, we think that fluff will grow. We're excited about the trend.

Mark Weintraub:

Maybe first of all, I'm going to follow up on Phil's question, and I realize you may or may not say anything on this, but it's probably the question investors are thinking about most. So I'll give it a shot. And that is understanding there's a lot of variability on how pricing can play out, and that can have a very large impact on where numbers ultimately end up in '24. You did provide us with an assessment on your volume. You've talked about a lot of the different internal initiatives, et cetera. Is it possible that, as you did last year, you could give us a range if we exclude impact from any price changes not yet reflected in the trade publications?

Mark Weintraub:

Okay. Fair enough. And then just maybe on this -- the shipping businesses getting paid for value, a process you've been doing for a long time. Where are you would you say with your customers? Is the vast majority now where you think it should be? How much more of these negotiations is there yet to go? And just for context, if we go back several years, there's been a relatively continual decline in your market share on the box volume business. So what's -- is there anything added you can provide to us to feel like, okay, yes, we do have visibility on when this can turn the corner?

Mark Weintraub:

So maybe just to follow on that. So basically, you have now the investments whereas before maybe they hadn't been made, in terms of being able to deliver what it needs to be in the last couple of years, you've made those investments so now are in a different place. Is that why the outcome should be expected to be different? And then maybe if you could just following up on the -- what percentage of contracts or volume? Do you think it's now been repositioned versus is still in process?

Mark Sutton:

And Mark, just to add to the area you were probing on market position and share. Part of the way we addressed some of the demand environment in the past was in different regions, and Tom mentioned it, it really matters in the region, not on average. In different regions, we had the assets. We just didn't have the plants running more than 5 days a week. So we asked employees to run a 6-day, and in most cases, they really enjoyed that. They didn't mind doing it and it was increased income and all that. And then if you get enough to where it's sustainable, maybe you add an entire shift, and then you invest in new plant equipment because if there -- you already have the capacity, you just need people to run it. And we did that for quite a while. What changed a bit, though, during the 2021, '22 period, and the workforce started to turn over, that's not a great assumption anymore that you can tackle that incremental growth with your assets by adding people or asking the people you have to work a little more hours. And so that's just the reality of the manufacturing workforce out there for us. So if I had to do over, I wish I would have spent much more in physical plant equipment in '18, '19 and '20, we were finishing some mill investments with an eye toward getting into plant equipment investments in a big way in the box business, and we got caught a bit there with a change in the workforce. So we're working both on getting our new labor up to speed and putting physically new equipment and upgrading the old equipment, some of the legacy IP box plants that were pre -- the big acquisitions we made are really old and some of the equipment is still running, but it may be running at 80% of its design capacity. So all of that is part of being able to address the market by region, by kind of metropolitan market. And so that's why I feel good about our ability to do this. We hadn't made all of those physical investments in the past. We did it with our employee teams working different schedules, and it worked for a while. It's not the sustainable way to do it now.

Matthew McKellar:

First, to follow up on one of Mike Roxland's questions. Is your NBSK mill and Grand Prairie core for IP over the longer term, given your greater focus on fluff?

Matthew McKellar:

Great. Just one more for me. I was wondering if you could provide an update on your process to identify a successor for the CEO position and what we should be expecting in terms of a time line there?

Operator:

Your next question comes from the line of Gabe Hajde from Wells Fargo.

Mark Sutton:

So Gabe, it's a valiant try. Let me just see if this helps you and the other analysts and our investors. So our pricing, as always, the prices we charge and the mechanisms we use are really between IP and our customers. And we're not going to comment on those specifics or provide forecasting on pricing for the future. As you know, we never do that. But I will refer you to the Citibank conference that I spoke at publicly in November. I -- in response to a question about a $20 publication down at that time, I stated that we didn't feel that it was reflective of our experience with our customers. And in terms of the experience over the last 2 months, with our containerboard customers. The fact that the index stayed flat in January, again, is not reflective of the pricing we have been invoicing. So if you get to your question about the relevancy of the index, it's true. The index is serving what is increasingly a very small open market. And because of that, it feels like there's a movement of some subjectivity in that process in addition to what's actually happening. So based on what we've been charging our customers as well as other public data, we don't feel the index over the last few quarters, a couple of quarters has been reflective of what's really happening in the industry. And as I said at Citi, we use this index. It's not perfect, but it works for the supplier, IT and it works for our customers, because corrugated packaging is not something our customers want to work on weekly or monthly with pricing. It's really important to their business, but it's not their core product. It's running on high-speed finishing lines, and it needs to work, and they don't want to deal with economics. This index through history has worked as a starting point for discussions up or down. It doesn't set the price, as you know. So we will continue to evaluate, and we are evaluating with our customers, is it's still working for us or not, as 2 parties in a business relationship. And if we conclude it's not, we will work on doing it a different way. And that's probably all I can say about that at this point.

Timothy Nicholls:

Yes. No, good question. This is Tim. I mean if you just look at the major items that I called out in my prepared remarks around the go-to-market strategy, and how that's playing out. And then the mill closure is to fixed cost savings. I think you get pretty close to the $400 million. There's obviously other initiatives. That's why we say more than $400 million. We've got any number of initiatives across all of our businesses and at the center. But we thought it was a good reference point given the significant items that are happening and happened late last year.

Anthony Pettinari:

I'm wondering if you could talk a little bit more about January box shipment trends and specifically on the freeze, did that delay shipments or destroy shipments? And if there's any kind of quantification there either way? And just anything you'd say about sort of customer inventories and your inventories as we start out February?

Anthony Pettinari:

No, no, go ahead, please.

Anthony Pettinari:

Okay. That's very helpful. And then I'm just curious, on the go-to-market initiatives, have you changed anything around incentive structures, how the sales force is compensated or how box plant managers are compensated. It sounds like there's sort of an asset under investment problem that maybe you'll turn the corner on this year. I'm just wondering if there's been a real change in incentives and understanding it's maybe difficult to talk about that in too much detail on the call. But just wondering if that's a significant component of the go-to-market initiative?

Operator:

[Operator Instructions]. Next, we'll go to the line of George Staphos from Bank of America.

William Hamic:

Good question. I'll see if I can address it. So I would start with a number of salespeople. You're absolutely correct. We need a significant number of new salespeople. We're making progress in that space. And I can tell you the compensation plan has made our positions much more attractive than it has been in the past. So we feel pretty good about that. In terms of the local versus national, I think it would be -- it kind of gets back to my local versus national company in terms of box plants that it really depends on the customer. We're going to have some customers that are professional buyers and they're going to look at these metrics one way and local customers. I would say this, that we expect to grow higher-margin local customers. And we expect to keep and grow our national customers. Our leaning is more of a balance and not to run too hard in one direction, but to really evaluate the profit equation as we make those decisions. So you'll see some rebalancing.

Mark Sutton:

This is Mark Sutton. Thank you, operator. I'll go ahead and wrap up. I want to thank everyone for your time today, for your continued interest in International Paper, and we look forward to updating you on our progress our next call at the end of the first quarter, we're already in the second quarter -- for the end of the first quarter call. So thanks, everyone, for joining us today.

Operator:

Good morning and thank you for standing by. Welcome to today’s International Paper’s Third Quarter 2023 Earnings Call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, you will have an opportunity to ask questions. [Operator Instructions] I’d now like to turn today’s conference over to Mark Nellessen, Vice President, Investor Relations.

Mark Sutton:

Thank you Mark and good morning, everyone. We will begin our discussion on slide 3 where I will highlight our results. In the third quarter, our teams across International Paper executed well with intense focus on optimizing our cost structure while taking care of our customers. Looking at our performance, we delivered on the earnings outlook we provided last quarter and we continued our efforts to drive out the highest marginal cost across our system. In addition, International Paper for delivered $75 million of year-over-year incremental earnings benefits from our building a better IP initiative. Year-to-date this program has contributed $195 million in benefits, exceeding our full year target for the second year in a row. Our performance was driven by commercial and process improvement initiatives which I will highlight later during the call. We're also encouraged to see that the demand environment continued to recover across our portfolio in the third quarter and we expect this trend to continue going forward. Despite these improvements, I'm not satisfied with our absolute level of earnings. Therefore, we are taking additional actions to further strengthen our businesses and improve profitability. I will share more details regarding these initiatives later in the presentation. However, before we move off this topic, I'd like to share my perspective on the series of strategic actions we announced last week to optimize our mill system and reduce fixed costs. These actions include the permanent closure of our container board mill in Orange, Texas and two pulp machines, including one at our Riegelwood, North Carolina Mill and the other at our Pensacola, Florida Mill. While these actions will help us achieve our objectives, they are incredibly difficult to make because of the impact on our team members, their families and the surrounding communities. We are truly grateful to our team members at Orange, Riegelwood and Pensacola for their contributions to IP over the years and we are committed to supporting them through this transition while continuing to serve our customers. I'd also like to update you on another strategic action completed in the quarter. We completed our sale, the sale of our ownership interest in the Ilim Joint Venture in Russia. Proceeds from the sale total $508 million as expected. With the completion of this sale, International Paper no longer has any investment in Russia. I will now turn it over to Tim who will provide more details about our third quarter performance and our outlook. Tim?

Mark Sutton:

Thank you, Tim. I’ll start on slide 9, as I mentioned at the beginning of the call, we are making solid progress with our Building a Better IP program, which has delivered a total benefit of $195 million a year-to-date, exceeding our original target for the second year in a row. This year, most of the benefits are coming from our strategy acceleration initiatives. Our business teams are focused on creating value for our customers while improving the profitability of our product and service offerings again paid for what value we provide to our customers, and by also growing in the most attractive segments with the most attractive customers and in the most attractive geographic regions. We have also seen meaningful benefits from our process optimization initiatives. By leveraging advanced technologies and big data across our large system, our teams are identifying new ways to improve productivity and lower costs. I'm excited about our progress and in the next couple of slides I'll share some examples of the actions our business teams are taking to drive profitable growth. So turning to slide 10, I'll start with Industrial Packaging. Beginning with commercial excellence. International Paper has a broad range of capabilities and segment tailored packaging solutions to serve our customers. Our commercial teams are leveraging these advantages to improve mix by strategically aligning with the most attractive regions, segments and customers. Our teams are also using more advanced data analytics to manage product pricing across our sales territories. This allows them to capture more value for customer tailored product and service offerings. Under operational excellence we are leveraging advanced technology and data analytics to improve efficiencies and lower costs across our large system of mills and box plants. We are seeing benefits in areas such as maintenance and reliability, raw material consumption, distribution and logistics and sourcing. And as I mentioned earlier, we're also taking actions to optimize our bill system and reduce fixed costs. The mill closures will improve annual EBITDA for industrial packaging by about $140 million. Turning to slide 11, I'll highlight some of the things we're doing in the area of investment excellence. Due to the attractive long-term fundamentals of our industrial packaging business, we believe we have investment opportunities to drive profitable growth and create significant value. Strategic capital investments in our mill system have targeted productivity improvements and product capability enhancements that align with customer needs and market trends. Added capabilities for lightweight and ultra lightweight liners and high quality version whitetop products are examples of these investments. More recently our strategic investments are focused on our box business. These investments allow us to grow with customers and increase profitability by strengthening our capabilities, improving productivity, and leveraging automation. We believe we can create the most value through organic investments across our large network of box plants. Examples of this include adding converting lines in existing plants and upgrading older equipment with newer and more advanced technology. For some context, the investments we have made over the past two years in existing plants is the equivalent of adding almost three average size box plants to our system. We will supplement this strategy with additional investments in greenfield box plants and occasionally with bolt-on M&A where we can create additional value by addressing regional needs and enhancing our business. I'd also like to recognize that in September we celebrate the grand opening of our new greenfield box plant in Atglen, Pennsylvania, which has a great team and world class capabilities. Our investment will allow us to optimize our network of plants in the northeast while providing additional capacity for future growth. In summary, we have significant opportunity to leverage these new investments as well as our market expertise to grow with customers, improve our mix, and capture additional value. Turning to slide 12, I'll share some key opportunities in our Global Cellulose Fibers business. Over the past year, we have captured meaningful benefits from commercial actions which contributed to our Building a Better IP results. Our commercial teams renegotiated large contracts to ensure we get paid for value that we provide. In addition, we have earned a higher premium for fluff grades relative to commodity pulps by capturing more value and aligning with those customer segments and regions who value our differentiated product and service offerings. However, the benefits of our commercial strategy are currently being masked by a very challenging and unprecedented business cycle, as well as our exposure to commodity grades. On a positive note, the market environment began recovering in the third quarter as demand for fluff pulp improved, and we expect this trend to continue in the fourth quarter. Going forward, we believe there are more strategic levers to pull to increase the earnings potential of this business. Through our go-to-market strategy, we have an opportunity to improve our mix by reducing our exposure to commodity grades and by serving the most attractive fluff customers and markets that allow us to maximize the value of this business. Aligning with this strategy, we are taking actions to right-size our footprint and reduce fixed costs across the system. As I mentioned at the beginning of the call, we announced the closure of two pulp machines, which will improve EBITDA for the global cellulose fibers business by approximately $90 million. I believe there is a good business within this business. And that we can continue to grow earnings and cash flows over the cycle. We have talented teams with significant market expertise and a mill system with a broad set of capabilities. This allows us to create value for our customers by delivering innovation and products that meet their stringent performance and product safety standards. Now I'll turn to slide 13. We continue to see demand recovery across the markets we serve and we strongly believe in the attractive long-term fundamentals of our businesses. At International Paper, we are taking actions to improve earnings and drive profitable growth. Given our strategic customer relationships, talented teams, world-class assets, market expertise and strong financial foundation, I'm confident in our value-creating opportunities and IP’s continued success. And with that we're happy to take questions. And similar to last quarter, our senior business leaders are joining Tim and I to provide their perspectives as well. So operator, we're ready to move to the Q &A section of the call.

Gabe Hajde:

Mark, Tim, good morning. Thank you for all the detail. Wanted to ask a little bit about the Orange closure and I guess as we look into 2024, I guess the first one would be as the market begins to recover, would you expect than and even with this closure to kind of grow with the market and again taking into account a lot of your own commercial initiatives or is that something that might be on a little bit of a delayed timetable?

Jay Royalty:

Sure. Good morning, Gabe. Thanks, Mark. First of all, our long-term view of demand has not changed. So this was more about kind of how we see the near term and options we have. If you think about where we are, we've been matching our supply to our customer's demand and running the system as effectively as we can for quite a while now. And all along that way, we've been evaluating our options and trying to develop an informed point of view on a couple of things. One is demand and the shape of the recovery. And secondly would be where do we think the market is headed and what capabilities do we need for the future? And both of those factors influenced our decision to reset the mill system, as Mark said. We have a large low-cost fleet with tremendous flexibility and capability. And so when you think about that, we're able to close Orange without compromising our ability to serve customers and we have what we need for the short term and midterm. When you think about the amount of EDT we were taking and even with this closure, we still have room to grow. And then when we think about the future, we do have options to grow in the right product ranges at the right time. And as you heard, this move in the near term allows us to run the system in a more optimized way. And all in lowers our cost structure by about $140 million.

Tim Nicholls:

Yes, Hey, Gabe. Yes. Good morning, Gabe. It's Tim. So I think as you said, right around D&A and on a normalized basis, I think that's where we are for the foreseeable future. Some years higher, some years lower. We haven't finished our planning work for next year yet to have a specific thought about what the level will be there. So we'll complete that over the next month or so. And then in January, when we release, we'll have more to say about 2024 and how we're thinking about capital at that point.

Anthony Pettinari:

Good morning. I was just wondering if you had a sort of updated view on the full year adjusted EBITDA, CapEx and free cash flow guide. You provided that, I think in previous slides, if there's updated view for ‘23.

Anthony Pettinari:

Okay, that's helpful. And then in terms of box shipments, can you talk about the cadence of North American box volumes, maybe during the quarter and then touch on the trends in October? And then I think seasonally, there's usually like a little bit of an uptick in September. Did you see demand that you think was stronger than normal seasonality or how would you sort of describe that dynamic?

Operator:

Your next question comes from the line of George Staphos from Bank of America.

Tim Nicholls:

Yes, hey, George, it's Tim. So yes, I think generally speaking, you're in the zip code of how we're thinking about the fourth quarter. Of course, the IR team will talk you through all of the essentials and everything. But I think ballpark, it sounds like you're close. And with your –

George Staphos:

Understood. My follow on question just for the fluff pulp business, the machine closures that you announced, how quickly will that benefit the results within GCF? And in your longer-term outlook and your view that it's still got opportunities to create value. What effect, if any, how have you thought about perhaps some of the, I mean, it's come up in the past and calls the potential from eucalyptus based fluff, which there seems to be a bit more interesting again. How much does that take from the market as a market grow sufficiently so that you can keep growing and take advantage of all the commercial opportunities you have. Thank you, gentlemen.

Operator:

Your next question comes from the line of Mark Weiintraub from Seaport Research.

Tim Nicholls:

Yes, that's fair, Mark.

Jay Royalty:

Hey Mark, good morning, this is Jay. So we're working through the early stages of the transition and obviously there's a winddown that is underway as we speak. It's not down at this point. We do have to transition business and transition customers and work through all of the dynamics, but it did all of that will be complete in the fourth quarter. So we would expect to see that type of EBITDA impact fully recognized in 2024.

Jay Royalty:

Sure, Mark. This is Jay again. And if you go back to the last call, we spoke about starting to see some improvement in the export markets. And that definitely continued in the third quarter. So when you think about the major markets, we serve Latin America, Europe, Asia. We've seen inventories normalize in all of those markets at this point and we see demand continue to improve. Latin America continues to be very solid as we sell in the second quarter and that's being driven by bananas and pineapples, melons, these types of products. So very resilient. Europe, we saw a shift in a positive direction in the third quarter, rebounding. And that's been a fruit and vegetable driven as well, really in anticipation of a much better agricultural season beginning in early ‘24, late ‘23, early ‘24 versus last year. Asia is the market that continues to lag a bit but we're seeing recovery there as well. And so when you look at all of that and look through the fourth quarter, we see strong quarter bucks all the way through the end of the year. So we believe we've seen demand bottom and the outlook is certainly more encouraging.

Jay Royalty:

Yes, I mean you have to see demand improvement to see the market turn. We're seeing that. There still is a supply demand imbalance, but that's shifting both because of actions that are being taken on the supply side as you know about and also this demand improvement. So at this point, we're as I said, we think we've seen demand bottom, the outlook's more encouraging. We'll see where it goes from here.

Mike Roxland:

Thank you, Mark, Tim. And Mark for taking my questions. Just have one quick follow up on the Orange Texas closure. I do appreciate Jay's comments around that mill. But I do believe you mentioned a few quarters ago that a permanent capacity adjustment was not on the horizon. So I'm wondering what's transpired and what's happened in the last few quarters that has changed your approach? And then to think about your portfolio more broadly, to the extent you can comment and realizing that it may be difficult on this type of forum, but are there additional similar opportunities to further rationalize your portfolio?

Mike Roxland:

Got it. And then, Mark, I appreciate the color. Just on my second part of that question, in terms of additional opportunities you may have or similar opportunities in the portfolio, similar Orange that you can rationalize, where does that stand?

Mike Roxland:

Got it. Okay. And just one quick follow-up. Mark, can you help us understand the company's approach just going forward with respect to cost takeout and driving efficiencies? Obviously, kudos to you and the entire team for doing a terrific job with building a better IP initiative. But how do you ensure that you and the team were making laser focused on cost removal and improving efficiency, particularly as the cycle starts to inflect and demand gets to more notably improved?

Operator:

Your next question comes from the line of Phil Ng from Jefferies.

Mark Sutton:

It's a great question, Phil. When we put out the announcement to notify publicly that we were moving to the kind of last phase, we have a multi-phase process like most public companies do, and it's a multiyear process for leadership succession, and CEO, but also senior leader succession. The board is working very hard, obviously, on the board and working with them to make the best possible selection for the next leader of IP from both our internal talent, as you said, we have tremendous talent in the company. But again, good governance and a best practice is also to look at exhaustively at outside talent. And one thing just to remember on it, we're making progress, but the board is not looking to replace me. They're looking to find the next leader for IP for the future. And we think about what the future holds with respect to technology, with respect to what's happening in markets, the changing workforce. We built a specification about the future, the leader we think we need for the future of the company, and that's what the board is laser focused on. They're working hard on it. They're doing a great job with it. And we will get to a point where when we have something to report, we will, but I think the process we're using, high likelihood we come out with a great choice for the next leader for IP. But that's really the focus and how we're approaching it from the process standpoint.

Jay Royalty:

Hey, Phil. This is Jay Royalty. Your math is good that's how the math works but we are in a transitional situation and I think you've heard both Tom and I talk about the improving demand trajectory so obviously with this move it still leaves us some flexibility, it still leaves us some room. We won't change anything about how we're operating to make the cost of that flexibility to minimize the cost of that flexibility but as we get our commercial analysis and we work very closely together on this in terms of the outlook. We're very comfortable that our commercial plans and our commercial execution of what we're doing, what Tom's doing in the box business and what we're doing in the containerboard business, that we need that flexibility and we need that capacity for how we see the future. So, that's where we are.

Jay Royalty:

The $140 million is the number that we've put out there in terms of the EBITDA impact, but yes, there would be further benefit from taking up that economic downtime or eliminating that economic downtime.

Matthew McKellar:

Hi, good morning. Thanks for taking my questions. It sounds like you're looking at opportunities to further optimize your cost structure in global cellulose fibers. Are you able to provide a bit more detail on what opportunities still exist there and whether you're maybe looking to either further capacity actions or capital investments that could drive stronger cost performance? And then when you think about what can drive you from your current run rate in that business to achieving above cost of capital returns, how do you think about the relative importance of optimizing that cost structure versus other factors like achieving more favorable production mix or driving stronger pricing? Thanks.

Matthew McKellar:

Great, that's helpful, thanks very much. If you're sticking with Pensacola, I think you also produce containerboard at that site. How does taking capacity down in the pulp side affect the cost profile of that mill, if at all? Thanks.

Matthew McKellar:

Great. Thanks for that detail. And then last one for me, and you touched on this as part of your response to Anthony's question, but last quarter you showed a slide that indicated where your customer inventories were versus target levels broken down by customer segment. And it sounds like destocking is generally run its course, but if you're to run that same analysis today, do you think all customer segments would show inventories at or below target levels? Are there any segments, particularly within North America here, where destocking could still be a factor in the fourth quarter? Thanks.

Operator:

Thank you. I'll now turn the call back over to Mark Sutton for closing comments.

Operator:

Once again, we'd like to thank you for participating in today's International Paper’s Third quarter, 2023 Earnings Call. You may now disconnect.

Operator:

Good morning and thank you for standing by. Welcome to today's International Paper Second Quarter 2023 Earnings Call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, you will have an opportunity to ask questions. [Operator Instructions] It is now my pleasure to turn the call over to Mark Nellessen, Vice President, Investor Relations. Sir, the floor is yours.

Mark Sutton:

Thank you, Mark, and good morning, everyone. We will begin our discussion on Slide 3 where I will highlight our results. In the second quarter, our operations ran very well and managed our businesses effectively in a challenging demand environment while taking care of our customers. Looking at our performance, International Paper delivered $55 million of year-over-year incremental earnings benefit from our Building a Better IP initiatives. This program contributed $120 million of benefits through the first half of the year, and we are on track to exceed our full year target for the second year in a row. Underlying demand for our products improved throughout the quarter, but remain constrained by inventory destocking as our customers and broader supply chain work through elevated inventories of their products. Based on discussions with our customers and trends observed across the various end-use segments for packaging and pulp products, we believe consumer priority in the second quarter remain focused on services as well as non-discretionary goods. This trend has been influenced by a pull forward of goods during the pandemic as well as inflationary pressures and rising interest rates. However, based on feedback from our customers, we also believe that destocking is finally coming to the close. Margins remained under pressure due to the resulting weak volumes and lower prices across our portfolio. However, this was partially offset by lower input and distribution expenses as our team worked to reduce our marginal cost. On capital allocation, we returned $200 million to shareholders in the quarter. And with respect to the sale of our Ilim investment, I reported last quarter that the Russian buyers received an important required approval from the Russian sub-commissioned overseeing exits by foreign companies. They are still awaiting the approval from the Russian Competition Authority. Buyers continue to pursue this approval, and we expect to close as soon as all regulatory approvals are secured. I will now turn it over to Tim, who will provide more details about our second quarter performance and our third quarter outlook. Tim?

Mark Sutton:

Thanks, Tim. I’m going to turn to Slide 13 now, and I’d like to provide our quarterly update on our building a better IP initiatives. You can see the targets and the appropriate metrics on the slide. But as I mentioned earlier on the call, we’re making solid progress and delivered $55 million in year-over-year incremental earnings improvement in the second quarter for a total befit of $120 million year-to-date. Given this strong momentum, we expect to exceed our original target again this year. And these are issues and opportunities that are unique to IP that will shine through as we see the economic conditions improve. Our lean effectiveness initiative contributed $116 million of the cost savings since we began our building a better IP program in 2020. Early on, by streamlining our corporate and staff functions to realign with our more simplified portfolio after the spin-off of our papers business, we more than offset 100% of those dis-synergies resulting from spinoff. Majority of the benefits going forward will come and are coming from our strategy acceleration and process optimization initiatives, where our business teams have intense focus on creating significant value through commercial strategies and by leveraging advanced technologies and big data across our large system to improve productivity and lower costs. I’m excited about these opportunities. And in the next couple of slides, I’d like to share more examples of what our teams are working on in some of the early results. So turning to Slide 14. Let’s start with our Industrial Packaging business. As you can see on the slide, our teams across the business are pursuing multiple opportunities to improve margins and drive profitable growth. First, I’ll mention that we’re making good progress on reducing high marginal costs. Tim has previously referenced that input and distribution costs increased by more than $2 billion for IP over the period of pandemic. Coming into the year, clawing back these high marginal costs was an area of intense focus for us. We are accomplishing this by doing things like optimizing mix and usage of fiber and energy, reducing labor costs and over time, shifting to lower-cost suppliers, driving lower distribution costs and reducing discretionary spending and overhead expenses. As I’ve mentioned before, we’re also invest in our box business to expand our capabilities and improve productivity for future growth. On the commercial front, we have opportunities to leverage these new investments as well as our market expertise to further improve our mix and capture additional value. As we look across our system of mills and box plants, we are seeing real potential to leverage advanced technology and data analytics. In fact, some of that work is helping us get to levels of marginal cost reduction in high economic downtime periods that we’ve never reached before. Over the past year, we’ve developed and piloted new tools and capabilities to increase efficiency and reduce cost across a broad number of categories. We’re starting to see benefits in areas such as maintenance and reliability, distribution and logistics as well as sourcing and we anticipate significant benefits as we continue to deploy these new technologies across our manufacturing system. All of this gives me confidence in our ability to drive profitable growth over the long term. Turning to Slide 15, I’ll share some key opportunities in our Global Cellulose Fibers business. Over the past year, we have captured meaningful benefits from our commercial initiatives, and believe that there are more opportunities to capture significant value in this business as we continue to execute our revised go-to-market strategy. For example, our commercial teams finalized our fluff pulp contract negotiations which is contributing meaningful commercial benefit this year. In addition, we have earned a higher premium for fluff grades relative to commodity grades by capturing more value and aligning with those customers and segments and regions of the world who value our differentiated product and service offerings. However, the benefits of our commercial strategy are currently being masked by a very challenging and unprecedented business cycle as well as our exposure to the commodity grades that are not our core focus. As Tim mentioned earlier, it began with major supply chain disruptions during the pandemic, followed by significant inventory destocking actions that continue to constrain demand today. This combination of elevated supply chain costs and lower volumes have had a substantial impact on business earnings. But we do not believe that these issues are structural. And as I said, we have more opportunities to capture significant value going forward and we will continue to test this strategy over the business cycle. Fundamentally, I believe there’s a good business within this business and that we can continue to grow earnings and cash flows over the cycle. We are focused on creating value for our customers by delivering products that meet their stringent performance and product safety standards while delivering innovation. Over time, we have an opportunity to improve our mix by reducing our exposure to commodity grades. We can further align with customers in end-use markets that allow us to maximize the value of this business, while optimizing our overall cost structure. I will now turn to Slide 16. As you can see, there are several key areas of opportunity we’re working on to navigate the current economic environment while driving profitable growth over the long term. Combined with our strong financial foundation, International Paper is well positioned for success, and none of this would be accomplished or possible without our team of talented and engaged employees. I will close by expressing my appreciation for all of our work of our International Paper employees and for our strong customer relationships. And with that, we’re happy to move to the question-and-answer section. And similar to last quarter, our senior business leaders are joining me to provide you with their perspectives. So, operator, we’ll lead you now to the question-and-answer portion of the call.

Mike Roxland:

Thank you. Thank you, Mark, Time and Mark for taking my questions. Congrats on a good quarter. Just can you walk us through some of the moving parts regarding the updated EBITDA outlook versus your prior target any way to kind of size how much of that reduction is driven by Industrial Packaging versus Global Cellulose Fibers? How much is driven by a change in pricing versus maybe a weaker demand environment? Or just trying to gauge how much that type of break through.

Mike Roxland:

Got it. Thank you Tim. And then just quickly, just in terms of some of the initiatives that you’ve pursued in Global Cellulose Fibers, I believe looking at your prior forecast, I don’t think we anticipated that an additional 100-plus ton decline and fluff pulp pricing, obviously, get better than we expected in that segment. So, I’m wondering – I know Mark highlighted some of the things that you’re working on, but was there anything in particular that occurred in GCF during the quarter that allowed you to achieve that level of EBITDA despite the fact that prices relatively declined?

Clay Ellis:

Great question, Mike. Thank you. This is Clay Ellis. Yes, I think, you mentioned coming into the second quarter, what we thought about demand or net price and the amount of EDT that we took, we came into the – exited the first quarter, believing that we would see most of the inventory destocking issues subside through the quarter. We did not see that as we expected. We’ve begun to see some improvement June being better than May, July being better than June. And August is also looking better. So it’s improving, but it’s certainly what we’re seeing now, we hope to see earlier in the second quarter the things that we’re focused on maximizing cash generation, managing our machine downtime, you may have seen we’ve idled our Pensacola Mill to consolidate some EDT there, allow the other mills to run a little bit more of a normal ray [ph] that’s overall better for our cost. Supply chain, aggressive supply chain cost and driving out costs there as Tim mentioned, minimizing our fiber costs, maximizing green energy sales and carbon credit sales. And then also increasing our pull byproduct sales and production. So pulling all of the levers to manage our cash costs and our marginal costs in the business as – but we see improving through the third quarter destocking, we certainly in the second half we see of the year to get out of that in the meantime, we’re doing everything that we can on cost and then also looking as Tim and Mark mentioned around our business, our mix and mitigating some of our exposure to commodity grades.

Operator:

Your next question will come from the line of Mark Weiintraub with Seaport Research. Go ahead.

Mark Sutton:

Mark, this is Mark. That’s a great question. There is a qualitative piece to that slide and there’s a quantitative piece that’s internal and some other metrics we use. I’ll ask Tom to kind of give you a perspective on what that slide kind of represents in terms of how we feel demand has been evolving and different spots in the supply chain that have been a hard for anybody and everybody to call in terms of where inventory actually resides along the value chain. So Tom, if you could share a bit on that.

Mark Weiintraub:

Super. And so that, that’s sequential and so the comps are getting easier too, I believe so. So is it fair to say that on a year-over-year basis it’s even better than the mid-single digits?

Mark Weiintraub:

Right. Thank you that, that I misstated, thank you for getting that. And then just in terms of, in pulp, you idle to consolidate downtime and obviously you took huge amounts of downtime in containerboard during the second quarter. And even with things ramping up, it does seem like there’s a big gap between your capacity to produce and the demand. Are you looking at idling to consolidate downtime in the containerboard business or have you done anything there yet?

Mark Weiintraub:

Very clear and helpful. Thank you.

George Staphos:

Thanks very much. Hi everybody. Thanks for the details and great operating performance in the quarter. Mark and Tom, a question for you. So to the extent that we have data and it’s certainly not a perfect analog for what you’d be seeing in the box market, nonetheless, scanner data, retail takeaway remains relatively weak. And obviously a lot of what drives the box market is consumer non-durables. It’s the center of the store. So what are your customers telling you in terms of what is happening at retail and sell through and takeaway relative to hopefully what’s an uptick now in their purchase patterns from you and through the supply chain loading the center of the store?

George Staphos:

Okay. That’s very interesting. So there the fact that you’ve got such large shelf life, and I also I guess for that matter, the supply chain opening up that allows customers to really take down their inventories on the stuff that can stay the lumps on the shelf because they probably have the most of that and they’re saying consumer isn’t going into a shell from what you’re seeing on the retail side. Would that be a fair summary of what you’re saying?

George Staphos:

Understood. My other question recognizing this is a bit tricky and you’re not guiding on 2024, but here comes the question. So we know building a better IP, which you’re doing very well on, congratulations we will add, I think you said from the slide another 150 to 125 next year. If we look at what the price index change that have occurred to date, making no further assumptions one way or another going forward, what would the impact of that be into 2024 in terms of EBITDA? We know what your guidance is. We know what building a better IP does. What is the effect of prior price changes on EBITDA for next year, and what is the – what do you have in the back pocket in terms of all the operating efficiencies, all the optimization that you’ve done as well as you look out to 2024? Thank you guys and good luck in the quarter.

George Staphos:

But who better interest than you, Tim, so?

George Staphos:

Okay. We appreciate it. We’ll turn over. Thank you, guys.

Cleve Rueckert:

Great, thanks very much for taking the questions and good morning everybody. I just want to follow-up on George’s question, it was kind of asked a little bit differently earlier as well, but just sort of thinking about bigger picture the next couple of years. What really needs to happen to drive the earnings recovery that you’ve been looking for? I mean, I think the last couple of quarters we’ve talked about this cyclicality and you’ve said a couple of times you feel like you’ve got the capacity in the system that you need versus volume expectations. I mean, it sounds like that’s still the case, but are we talking about a pricing recovery? Is volume kind of enough to get you there? I mean, what are kind of the drivers that you’re going to be evaluating in the second half year?

Cleve Rueckert:

Okay. That’s – yes, that’s pretty clear, sort of a little bit of a vague question for me to ask, but thanks for the clarity and well – and just the insight into your thought process. And then maybe just one quick follow-up, just sort of sticking with the volumes in the packaging business, I think you said sequentially on the bridge, it’s sort of a $5 million tailwind into the third quarter. And we’re sort of starting to be able to figure out what’s implied for the fourth quarter. But are we just – am I correct in assuming that your expectations on volume growth in the second half are relatively low, I mean, in this flat to up slightly kind of environment that we’re talking about for July?

Cleve Rueckert:

Yes. One in the packaging -- in the packaging business.

Tom Hamic:

Yes, I think we’re going to see through the third quarter and into the fourth quarter, getting back to normal. I think this destocking is a big effect. And so we expect the demand to normalize and you’ll see a much better second half of the year, substantially better second half of the year than the first half relative to year-over-year. And I think somebody pointed out that the year-over-year comps get easier, but even with that, we see continued strengthening through the balance of the year.

Cleve Rueckert:

That’s very clear. Thank you so much for all the color. Appreciate it.

Anthony Pettinari:

Good morning. I just had a question on the updated free cash flow guidance and specifically, with regards to the dividend. You’ve talked about, the commitment to maintain the dividend and targeting 40% to 50% of, I think, free cash flow over time. With the dividend payment, I think coming in above the midpoint of the free cash flow guide, just how do we think about levers that you can pull or sort of capital allocation priorities or ways that you can kind of balance that this year and going forward and how that maybe changes the approach a little bit.

Tim Nicholls:

Sure. Hey, Anthony. Just a couple of points that I think are important. First of all, as we referenced the $500 million to $600 million includes the settlement payment for timber monetization, which was almost $200 million in the first quarter. And so that’s a one-time item and not to repeat. The other item is we’re going to invest more capital this year than we have since before the pandemic. And at the beginning of the year, we put out a range of 1 to 1.2 really with the – normally, we’re tighter than that, but just given supply chain delays and difficulties, we had struggled to invest as much as we wanted the past couple of years. And so anticipating that it could be that way, again, it was kind of the 1 billion and things freed up, it could be as high as 1.2. Well, things have freed up and so we tighten the range, we’re later in the year of course, but we tighten the range and the way projects are being deployed, it could push that upper limit on 1.2. So I think that’s important relative to the free cash flow. On the go forward basis, it’s back to what we were talking about earlier in terms of initiatives, a big portion of the initiatives we’re working on are cost. And so we think we’re getting traction on that and we think there’s a lot more to call back. Working capital is something we focus on pretty intently. And then capital if we need to we have – and I think we’ve demonstrated this over the years, we have an ability to flex our capital spend in moments. And certainly, that would be a consideration as well. So hopefully that helps.

Anthony Pettinari:

Okay. That's very helpful. That's very helpful color. I appreciate that. And then I guess, just a question maybe somewhat related, but in terms of the competitive landscape in containerboard and corrugated. We've obviously seen a number of capacity additions this year, which I think most of which are up and running. And I guess without speaking about any specific competitor or a company. Is it possible to talk about sort of the impact of this capacity maybe relative to your expectations? I mean, has it been more disruptive, less disruptive sort of as expected is the impact sort of already maybe absorbed in the market? Is it something that is going to be felt more in the second half? I'm just wondering if you could just generally talk how this new capacity has been absorbed in the market and how you kind of see the overall competitive landscape here?

Anthony Pettinari:

Okay. That's helpful. I'll turn it over.

Gabe Hajde:

Mark, Tim, good morning. I apologize in advance for the long windy question here. But I'm looking back at 2021, 2022, where there was a cumulative, I think in the Industrial Packaging business, $2.8 billion of price realized. And if I take the $24 million year-over-year in the second quarter plus the $95 million, I think that you talked about on a sequential basis, I know it doesn't work exactly this way, but on a year-over-year, we're sort of implying down $125 million-ish. Has something changed, like when I think about the 80% of the business is vertically integrated of your corrugated converted, maybe 80% of that is [indiscernible] linked. You guys have talked about commercial initiatives. Has anything changed with respect to that lag in the pass-through and maybe it's shorter or longer than it used to be? And I guess, relatedly will we be at sort of – based on what [indiscernible] have transpired at run rate negative price in Q3? And I'll take one stab at it. And if I were to summarize what you guys have said thus far, if we make an assumption about what the negative price roll through for next year might look like based on what you see in terms of maybe an improvement in volumes and improvement in operating rates and cost out, that Industrial Packaging segment EBIT to be flattish with 2023?

Gabe Hajde:

Okay. Thank you. And appreciating that it's tough to talk about it live like this; but I saw an article yesterday talking about some of the differences or vagaries of how paper businesses are performing in Russia? Again, the thing you can comment, could anything change with respect to the process there? And if things go sort of as planned, can you give us an update in terms of timing as to when the cash might come in?

Tim Nicholls:

Just, I think Mark is right, the timing on the approval is impossible in the gauge. Once approval were to be obtained, the flow-through on closing the transaction or preceding cash is very clear.

Matthew McKellar:

Hi. Thanks, good morning. I'd like to ask about your Global Cellulose Fibers business. So recognizing you talked about your focus on customers who value the attributes of your fluff pulp. Maybe thinking about the market more broadly, can you talk about any impact you've seen over the past few quarters from certain consumers substituting lower-cost grades? And then maybe whether you're seeing any changes in that substitution date with fluff pulp pricing coming off peak? Thanks.

Clay Ellis:

Yes. Sure. Hello, Matt. This is Clay Ellis. Yes, I think it's a good question. There's always been some level of substitution in local markets and areas of China tick in the supply chain disruption in 2022 really drove more of that. I mean, these are customers in some geographies and segments. And these were customers that were very tailend of the supply chain couldn't actually get the product. And so I think that drove a higher rate of substitution. These are segments and some geographies where brands and high-quality product performance are not this critical. I think about an example that might would be like pet pads in parts of China. These are not our core customer base. And in this part of the market, we think we'll ebb and flow with substitution over time as their economics allow a little less regard to quality and product performance technical specs as the broader fluff market. So again, we think it's a – it's a very small segment of the fluff market. Clearly, it went up in the first half of the year. We saw that increase, but also nearing the end of the second quarter, as you mentioned as price has changed and spot market prices change, we also saw a lot of that come back out. So again, we think it's there. We understand it. We know where it is and how it's done. We don't think it's likely to grow very broadly. But it's not a new phenomenon, but clearly it – it increased due to the supply chain and it's been stickier due to the price differential in their economics.

Operator:

Thank you. And I'll now turn the call back over to Mark Sutton for closing remarks.

Operator:

And once again, we'd like to thank you for your participating in today's International Paper Second Quarter 2023 Earnings Call. You may now disconnect.

Company Representatives:

Mark Sutton - Chairman, Chief Executive Officer Tim Nicholls - Senior Vice President, Chief Financial Officer Tom Hamic - Senior Vice President, North American Container and Chief Commercial Officer Jay Royalty - Senior Vice President, Containerboard and Recycling Clay Ellis - Senior Vice President, Global Cellulose Fibers Mark Nellessen - Vice President, Investor Relations

Mark Nellessen :

Thank you, Leah. Good morning and thank you for joining International Paper's first quarter 2023 earnings call. Our speakers this morning are Mark Sutton, Chairman and Chief Executive Officer; and Tim Nicholls, Senior Vice President and Chief Financial Officer. There is important information at the beginning of our presentation on slide two, including certain legal disclaimers. For example, during this call we will make forward-looking statements that are subject to risks and uncertainties. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP financial measures is available on our website. Our website also contains copies of the first quarter earnings press release and today's presentation slides. I will now turn the call over to Mark Sutton.

Tim Nicholls :

Thank you, Mark. Turning to our first quarter key financials on slide five, revenue was down slightly versus prior periods while operating earnings per share came in above prior year, and better than the outlook we provided last quarter. Operating margins in the quarter were impacted by weaker demand and seasonally high-planned maintenance outages. Free cash flow for the first quarter included a use of cash totaling $193 million for the final settlement with the IRS related to our timber monetization actions; we highlighted it during our last earnings call. This settlement allowed us to further de-risk our balance sheet. Also, about 31% of our annual capital expenditures occurred in the first quarter. Moving to the first quarter's sequential earnings bridge on slide six, first quarter operating earnings per share were $0.53 as compared to $0.87 in the fourth quarter. Price and mix was lower by $0.10 per share due to the index movements across our portfolio. Lower export sales prices and unfavorable product mix at our Global Cellulose Fibers business as a result of lower absorbent pulp shipment. Buying was flat sequentially as weaker demand and customer inventory destocking across both businesses was offset by four additional shipping days in our North American and Industrial Packaging business. In our Global Cellulose Fibers business, the first quarter was also lower due to the Chinese New Year. In operations and costs, our mills ran very well. However, quarter-over-quarter was unfavorable, because the fourth quarter benefited from favorable one-time items totaling $71 million or $0.15 per share related to lower employee benefit cost, workers comp expenses, and medical claims. In addition, our Cellulose Fibers business was impacted by higher economic downtime due to the lower demand environment I mentioned earlier. Maintenance outages were higher in the first quarter as planned and we saw significant relief from input costs, which were $134 million or $0.28 per share lower in the first quarter, primarily driven by lower energy and OCC costs. Corporate and other items was impacted by FX and timing of spend, partially offset by lower tax expense. Turning to the segments and starting with Industrial Packaging on slide seven, pricing mix was lower due to index movements and lower export prices. This was partially offset by benefits from commercial mix initiatives focused on margin improvement. Sequentially, volume benefited from four additional shipping days. However, demand for packaging weakened in March across most channels and segments for lower consumer demand and ongoing destocking across the supply chain. Even in this dynamic demand environment, International Paper is well-positioned due to our diverse portfolio of products and services and our strategic relationships with a large number of national and local customers across a broad range of attractive end segments. Sequentially, Ops and costs were impacted by the non-repeat of approximately $57 million of favorable one-time items I mentioned earlier, as well as timing of spend. Overall, our mill system ran very well. The lower demand environment impacted operations and costs in the quarter, as we adjusted our system to align our production with customer demand. These actions resulted in approximately 421,000 tons of economic downtime across the system. Input costs were significantly lower and improved earnings by $105 million sequentially. Almost two-thirds of the benefit was from lower energy costs in North America and Europe, and the remainder was primarily from lower OCC and freight cost. Overall we continue to face very elevated supply chain costs, as well as the impact from high inflation on materials and services during the past couple of years, and a lower demand environment we are running at full capacity. We believe there is a large opportunity to further optimize our system and take out high marginal costs. This remains a key lever in 2023. Turning to slide eight, we thought it'd be helpful to share some additional perspective on underlying segment trends for our corrugated packaging business. As shown on the previous slide, our U.S. box shipments were down 8.5% year-over-year in the first quarter, and down almost 12% year-over-year in the month of March. We saw a demand decline across all end-use segments on a year-over-year basis, and experienced another demand shift in March that impacted all segments except for e-commerce. Furthermore, demand declines were more pronounced in segments that generally are more discretionary in nature, as consumers had to make choices while dealing with high inflation and rising interest rates. The yellow indicators represent segments where the demand decline was less than our overall average of 8.5%, and the red indicators represent declines that were greater than the average decline. For example, processed food and protein were more resilient, down low to mid-single digits as consumers focus on essentials and value, and poultry serves as a low-cost consumer staple. Fresh produce was impacted by poor weather conditions on the West Coast and also in Florida. On the other side of the spectrum, segments like durables and other non-durable consumer goods are more discretionary in nature. Along with shipping and distribution, these segments came under the most pressure with declines in the mid-teens. These segments also tend to be more affected by the inventory destocking efforts across the longer supply chains. E-commerce was down mid-single digits versus last year, but showed more resilience through the quarter and is still up 50% from pre-pandemic levels. Based on feedback from our customers, we believe the majority of retailer inventory destocking has been completed through the first quarter. However, manufacturers are still reducing inventories as a result of lower demand levels, improved supply chain velocity, and focus on working capital given higher interest rates. We also believe the majority of destocking will be completed in the first half of the year, and considering our performance in April and looking at order backlogs, we expect sequentially higher volume in the second quarter. Despite these near-term headwinds, we understand the critical role corrugated packaging plays in bringing essential products to consumers and believe that IP is well-positioned to grow with our customers over the long term. Moving to Cellulose Fibers, on slide nine. Taking a look at our first quarter performance, price and mix was relatively flat sequentially. Our strategic initiative related to contract restructuring generated significant earnings improvement in the first quarter. However, this was offset by a less favorable mix due to lower fluff volumes in the quarter and a higher percentage of commodity grades, as well as the unfavorable impact from index movements. Volume was lower due to customer inventory destocking in response to improvements in the supply chain velocity from less port congestion and improved vessel reliability, and also impacted by the Chinese New Year. Feedback from our customers suggests the majority of destocking will be completed in the second quarter. With that said, we believe fluff demand will continue to grow over the long term. This is due to the essential role that absorbent personal care products play in meeting consumer needs. The lower demand environment significantly impacted operations and costs in the first quarter as we adjusted our system to align our production with our customer demand. These actions resulted in approximately 130,000 tons of economic downtime across the system, and accounted for approximately two-thirds of the ops and cost variance. Sequentially, ops and costs were also impacted by inflationary pressures, as well as the non-repeat of approximately $14 million of favorable one-time items in the fourth quarter that I mentioned earlier. Planned maintenance outages were higher by $11 million sequentially and represents one of the highest outage quarters of the year. In addition, input costs were lowered by $29 million due to lower energy and fiber costs. Turning to slide 10, our Global Cellulose Fibers business continues to make progress executing our strategy to deliver value creating returns over the business cycle. The business increased earnings by approximately $100 million in 2022 and is focused on driving incremental earnings growth this year despite operating in a more challenging macro environment. Our team successfully deployed a commercial strategy focused on building strategic relationships with key global and regional customers and aligning the most attractive regions and segments. In the fourth quarter, we finalized our fluff pulp contract negotiations, which is contributing meaningful commercial benefits this year. Going forward, we believe there are significant opportunities to improve our cost to serve by reducing supply chain costs, which have increased significantly during the past couple of years. We expect to see these benefits will start to show up in our second quarter outlook. We are focused on creating value for our customers by delivering products that meet their stringent performance and product safety standards and deliver innovative value. In addition, we are driving structural margin improvement by ensuring we get paid for the value we provide. We believe this is reflected in the premium we earn for fluff pulp over commodity grades, which has expanded over time. We are committed to building on this momentum and expect to drive additional earnings growth going forward. Turning to slide 11, I'd like to update you on the building of better IP initiatives. We're making solid progress and delivered $65 million of year-over-year incremental earnings improvement in the first quarter. Our lean effectiveness initiative was mostly completed early in the program generating $110 million of cost savings since we began our building of better IP program. By streamlining our corporate and staff functions to realign with a more simplified portfolio, we more than offset 100% of the dis-synergies from the Printing Paper spinoff. The most significant driver of the year-over-year results was strategy acceleration, as we deliver profitable growth through commercial and investment excellence. As I mentioned earlier, we generated solid earnings growth in our Global Cellulose Fibers business on a path to deliver value creating returns. We're also focused on profitably growing our industrial packaging business by improving margins and investing for the long term. Process optimization initiative has the potential to reduce costs across areas such as maintenance and reliability, distribution and logistics, and sourcing, as we leverage advanced technology and data analytics. We believe these initiatives will deliver meaningful benefits going forward as we finish implementing new capabilities across our business. Turning to slide 12, I want to take a moment to update you on our capital allocation actions. As Mark highlighted earlier, we have a very strong balance sheet which we will preserve, because we believe it is core to our capital allocation framework. Our 2022 year-end leverage was 2.1x on a Moody's basis which is below our target range of 2.5x to 2.8x. Looking ahead we have limited medium-term debt maturities, and finally even in this environment the risk mitigation strategies we've taken help ensure our pension plan remains fully funded. Turning cash to shareholders is a meaningful part of our capital allocation framework. In the first quarter we returned $319 million to shareholders, including $157 million through share repurchases, which represents 4.3 million shares or about 1.2% of shares outstanding. At the end of the quarter our total authorization was approximately $3 billion. Going forward, we're committed to returning cash through maintaining our dividend and through opportunistic share repurchases. Investment excellence is essential to growing earnings and cash generation. We invested $341 million in our businesses in the first quarter, which includes funding for cost-reduction projects with attractive returns and for strategic projects to build out capabilities in our box system. Going forward, we plan to make additional investments across our box system to support long-term profitable growth and we will remain disciplined and selective when assessing M&A opportunities. Turning to slide 13, and our second quarter outlook. I'll start with Industrial Packaging. We expect price in mix to decrease earnings by $110 million, mainly as a result of prior index movement in North America and lower average export prices based on declines in the first quarter. Volume is expected to increase earnings by $30 million due to normal seasonal increase and daily shipments in North America, offsetting one-less shipping day. Operations and costs are expected to decrease earnings by $35 million due to the timing of spending. Maintenance outage expense is expected to decrease by $10 million, second quarter should represent approximately 30% of the total planned outage cost in 2023, and through the first half of the year we will have completed about 70% of expected annual outages. The second quarter includes approximately $19 million of spend associated with the Riverdale Mill printing papers outage. This cost will be fully recovered as part of the charges to Sylvamo over the course of the year. And lastly, input costs are expected to decrease by $30 million from lower average cost for energy and freight. Switching to Global Cellulose Fibers, we expect price and mix to decrease earnings by $45 million as a result of prior index movement. The volume is expected to increase earnings by $5 million, primarily based on seasonally higher demand. Operations and costs are expected to increase earnings by $40 million due to lower supply chain costs and lower unabsorbed fixed costs from higher volume. Maintenance outage expense is expected to decrease by $33 million and lastly, input costs are expected to decrease by $15 million, mostly due to lower energy and fiber cost. Moving to our full year outlook on slide 14, as Mark discussed earlier, as we entered the year, we recognized there were macroeconomic uncertainty ahead of us, and that our businesses are not immune to these risks. The macro trends have shifted resulting in weaker than expected demand for our products and price reductions across our portfolio through the first quarter, including prior index changes that will be implemented over the remainder of the year. As a reminder, our previous outlook represented price indexes at that time. We are now projecting fully year 2023 EBITDA for the company to be in the range of $2.3 million to $2.5 million. We continue to optimize our system by reducing high marginal cost, driving additional benefits from our building of better IP initiatives. This includes delivering continued earnings growth in our Global Cellulose Fibers business despite cycle headwinds. I would also note that our outlook includes only the impact from published price changes today. Free cash flow is expected to be $800 million to $900 million, which includes a one-time tax payment of $193 million in the first quarter related to our timber monetization settlement. In addition to free cash flow, we also expect to receive approximately $500 million of cash proceeds from the Ilim sale. For 2023, we are targeting CapEx of $1 billion to $1.2 billion with increased investments in our U.S. box system to build additional capabilities and position us for long-term profitable growth with our customers. We will also focus on high-return cost reduction projects across our systems. With that, I'll turn it back over to Mark.

Operator:

[Operator Instructions] Our first question comes from the line of Anthony Pettinari with Citi. Please go ahead.

Mark Sutton :

Hi Anthony.

Mark Sutton :

Okay, great question, Anthony. I'm going to take the first part of that, and then I'm going to ask Clay Ellis, who leads our Global Cellulose Fibers business to give you a little perspective on some of the changes we've made. I mean, the source of our confidence is we've really changed the way we go to market. And as we've explained many times, there's this contract portion which is generating significant earnings uplift in the contract large global multinational customer base. There is a portion of our business that's open market, that's traded more monthly or shorter term, less contractual, that's also absorbance. We have a specialty business that's not tracking exactly those markets. And then the last piece, which is the most volatile, we still have exposure to market pulp, which is where a lot of the pricing issues have hit the business and will likely hit the business. So if we focus on the core, that's where our confidence is, around the absorbent, strategic customers and the profit improvement, and the changes we made really in the last 18 months that are coming to fruition. As far as the flow through and a little bit more about how we see the year happening, there's a story similar to what I described in my prepared remarks and what Tim described with destocking and where we think demand, the real demand from the end-use customer is going to go. And Clay, I'd ask you to maybe add some color to that.

Anthony Pettinari:

Okay, that's very helpful. And then, switching to Industrial Packaging, you talked about confidence that destocking could run its course in the second quarter or by the end of the second quarter. I guess that's a comment on the domestic market. I'm wondering, when you think about the export channel, which I think you indicated remains weak, is it possible to think about sort of where customer inventories are there? Is there any sort of light at the end of the tunnel or regions that are maybe improving or maybe getting worse? I don't know if there's any general comments there.

Jay Royalty:

Sure, Mark. Hi Anthony. So yeah, I think when you look at the export channel; it's been and remains particularly weak. We've seen very low demand for the last several months due to a lot of different factors, whether it's geopolitical, high inventory levels, low consumer activity as it relates to inflation. And then also, weather for fruit and vegetable goods has been not cooperating really around the globe, the U.S., Europe, even into places like Morocco. We are seeing inventory levels improving and we can start to see some stabilization there in terms of any signs of improvement. I think those are few and far between, maybe a little bit in Latin America, which is one of the markets we serve. But these markets will rebound at some point. Our positions across Europe, Latin America, Asia, these are with customers who really value kraft linerboard heavily oriented to fruit and vegetable segments and those are going to grow with consumer activity and consumption over time. So we feel good about the future, but certainly in this moment it's particularly weak, and that's putting pressure on both demand as well as pricing.

Operator:

And our next question is from Matthew McKellar with RBC Capital Markets. Please go ahead.

Mark Sutton :

That's a great question, Matthew. This is Mark. I mean, we look at demand in two components. There's the final end-use consumer. I think we term that, our marketers term that organic demand. And then there's the demand ahead of that in the manufacturers and the supply chain ahead of the consumer. Those manufacturers are really our customers. And then when you break it down by segment, Tim had that colorful chart where he looked at the broad segments. But Tom Hamic, who leads our North American box business is here, and I'd ask him to give some insight on your question about how we see it going forward, what gives us confidence on our comments about the de-stocking piece, and then maybe some segment comments. Tom.

Matthew McKellar:

Great! Thanks, that's helpful. And then shifting over, can you give us a sense of how you're thinking about share purchases here? Should we continue to expect them to sort of trend in line with Q4 and Q1 levels or do you maybe see more limited room for repurchases given the downward revision to free cash flow look or do you even accelerate repurchases given where the shares are trading? Thanks.

Matthew McKellar:

Okay, thanks. I'll turn it back.

Gabrial Hajde:

Mark, Tim, good morning. Thanks for taking the question.

Gabrial Hajde:

I wanted to revisit I think Tim's prepared remarks on slide seven. I want to make sure I heard what you wanted us to hear, which was I think you talked about facing higher supply chain costs, and in sort of the current low environment there was – I think Tim, your words were ‘further opportunity to optimize the system.’ I'm assuming that means take out, continue to take out variable costs of the system or has there been sort of a change in philosophy in thinking about your mill system or maybe the box system overall, where you can make some permanent adjustments?

Mark Sutton:

Yeah. Gabe, you know sometimes – this is Mark. Sometimes we get, and we may get it later in the call, we get a question about, would we consider changing the way we operate in lower demand environments versus the current approach to running most of our system at different levels of output instead of running part and not running part. And we evaluate that, I mean really almost on a continuous basis. And depending on what's happening, as Tim described, the supply chain environment we're in and then the cost gradient we have at most of the mills on fiber and OCC and other inputs, there is huge savings for eliminating the high marginal cost across 17 different mills. And you can imagine if you decided to temporarily close one or two of them, then you have to add back all that marginal cost at the others, because in theory they're going to run full, and then depending on geography and logistics you end up with no net savings. So we are continuing to look at that. We have gotten – I didn't think we could get a lot better, but our teams have gotten better at marginal cost takeout across systems running much lower than full capacity. But we don't take anything off the table in terms of figuring out the best way to operate for the quarter ahead or the two quarters ahead with the best information we have about the demand signal. But it's really an optimization of the total cost and the value in that marginal cost reduction is really powerful.

Tim Nicholls:

Yeah, so hi, its Tim again. I think the headline is we're not – the second quarter is going to be better. It depends on which category of the cost that you're talking about. On natural gas, we pretty much follow the strip. There are some distribution charges and things like that that impact it, but the movement is very similar and so you can see how that plays out. On OCC, we have a modest – we believe there could be a modest increase over time, but the whole environment is so fluid and dynamic, it's going to depend on how it plays out over this quarter and as we go into the third quarter. Chemicals for us are getting a little bit better and transportation, I don't know the reference you mentioned on the contract. These times are at different points in time and it's a mixture across all the modes of transportation that we're seeing. But I'd say on balance, we get another benefit on input costs in the second quarter and depending on the scenario, it's kind of flattish as you go out with the second half of the year. There is this small pick-up, but again, it's going to depend on the backdrop.

Operator:

And our next question is from a Kyle White with Deutsche Bank. Please go ahead.

Tim Nicholls:

Yeah, so you're talking about the 2.8 versus the new range of 2.3 to 2.5 Kyle?

Tim Nicholls:

Yeah. So March was, I think there’s no other way to say it. That was a surprise to us in terms of demand drop-off and the resulting economic downtime that we took to balance out our system. But when you look at it, we had further price, published price decreases. For pulp export prices came down. We had lower volume and we had more EBT, which means more cost. And then you look at how that evolves as we go through the second quarter in the second half of the year, those things are going to be present, but we also get as I mentioned, a little bit better on input costs. We have a significant drop-off in maintenance outages, because we're really front-end loaded, front half loaded on our maintenance outages. And then there's some additional costs that come out. So when we looked at all of it, there was some pretty significant moves in the month of March, that even though it's getting better, you know it still impacts the first part of the second quarter.

Tom Hamic:

Sure, this is Tom Hamic again. You know our view on boxes, and we say this a lot, is that economic activity drops box demand. And so as we see the economy, we not only expect box demand to tie directly to it. There really is no near-term substitute for a box when you're thinking about delivering to a retail channel or really any channel in the U.S. So we're confident about that rebound. I would say in terms of the full year, most of the difference we have, what we thought for the full year and what we think now is happening in the first half due to this destocking. So it's really hard to forecast the full year exactly. I think it's going to depend on us being correct about the second quarter and the de-stocking playing out, because the economy is also going to be an open question. But in general, we see this improving.

Operator:

And next we go to Mark Weintraub with Seaport Research Partners. Please go ahead.

Jay Royalty :

Yeah Mark, this is Jay Royalty. Good to talk to you. I think that a few things to keep in mind relative to this new capacity that's coming in. First of all, the open market is relatively small as you know. Our position in that market is really made up of long-term strategic relationships and including in some cases some equity positions. So we've got very little spot business and it's important to remember that at the end of the day people buy boxes and you all – they don't buy container board. Producers may buy some container board, but at the end of the day it's about having an integrated system which is what we have and customer needs are complex. And so you think about what customers value and what they are looking for and what IP brings to customers, you know it's about comprehensive offerings, there's a wide rate mix there, geographic reach, redundant capabilities, having the ability to search and flex with their needs, all of these things are important. So you know it's really about more than a single mill. It's about having a system in those capabilities and that's what customers value and so when you think about our relationships, our customers are looking for those things, that's what allows us to have these long-term strong relationships and so the new entrants are going to be trying to compete with that in some form of fashion.

Tom Hamic :

Sure Mark. This is Tom again. Just for some clarity that you had it right, the shipment common I had was about 6% and that's sequential from March and obviously as Tim talked about earlier, March was weaker than the second quarter, but it's still as strong sign of momentum. Backlogs tend to be more volatile, because as the market gets better you get more and more orders because customers see that lean times in all of that. So it's a good indicator more of the future than it is in the moment, but I think you combine the shipment outlook we have with the backlogs improving, it points you to where probably for any close on the second quarter play out that Mark and Tim talked about, because if we're not seeing it in this month you probably have a bit of a delay. So it feels like to me it all fits together and that's what we're hearing from customers.

Tom Hamic :

I think this is the first time we've seen a significant shift from what you would think about seasonally. You certainly can have a segment that changes and it might affect if it's big enough, it might affect your total mix. But I would say we have – thinking about it, don’t have the numbers in front of me. I don't think we've had a falser start.

Operator:

Next we go to the line of George Staphos with Bank of America. Please go ahead.

Mark Sutton :

Okay George, thanks. Great question. Let me just hit the headline and then I’ll ask Clay to comment on what's embedded in our outlook. And really ask him to remind and separate the absorbent and specialty core part of the business and then the rest of the business, which tends to be more volatile and commodity. The $200 million had certain assumptions aligned with it. Some of those assumptions have changed. We still see line of sites somewhere in the neighborhood of $50 million plus improvement in the business and so there's still going to be earnings improvement in business and we just have to adjust what the timing of those improvements are given the change in some of the pricing assumptions and the we were operating. So Clay, you might want to talk a little bit about the puts and takes that make up that full year outlook.

Mark Sutton :

George, I’ll just wrap the question you asked, the last part about why we still believe it's a good business and a good thing for IP shareholders. I mean when you look at the business that we're in now, corrugated packaging, Cellulose Fibers for absorbent products, we've got two natural resource based businesses, both facing growing end-used markets. Both directly in our wheelhouse from a manufacturing and process standpoint, and when you then layer out – forget about the product and look at the customer and the supply chain. You layer out the types of customers and what they value. Solutions, technical design, the same kinds of things they value in the box business they value in the Cellulose Fibers business. It's a more global customer base in Cellulose Fibers than it is in our box business, but we believe that starting with that softwood fiber renewable, a very, very good well positioned manufacturing base, turning that into products that are facing growing markets, is giving IP a higher quality of value creation, single product line type of company and we believe that that's valuable in the long term. And we don't think about just single moments like one year or a couple of quarters. We look at this down the road over the next decade, where things head, where the types of products that both businesses are making are headed and we think that's exciting for investors as they sort out where sustainable natural resource type companies did in their portfolios.

Tom Hamic :

Yeah, sure George. This is Tom.

Tom Hamic :

You talked about – Hey, how are you? You talked a little bit about the different substrates and I think as a customer of the container board system, that's a huge advantage for us, because we've got this huge base of manufacturing different products, different grades. And so since we have direct access to those, we can design the box and the box plant mix directly around that. In terms of the destocking and how we feel about these different segments, I think we're going to see different levels of destocking by segment like we talked about. But I think we should expect a normalization of demand, because the U.S. economy is going to recover. That may take a little longer given the economic conditions, but certainly it's coming. And then maybe a little bit of a specific piece to your question is, one of the biggest improvements we've seen coming into April is [inaudible]. So that has been a really tough business because of weather over the last couple of years and we're starting to see that pop back up, which I think is a very good sign.

George Staphos :

Thank you very much.

Phil Ng:

Hey guys, thanks for fitting me in. Despite a pretty challenging backdrop Tim, the free cash flow is still showing to be pretty resilient here and you should be getting I believe $500 million cash proceeds from Ilim. What's the game plan in deploying that excess cash hopefully coming very soon?

Phil Ng:

Got you. Okay, that's helpful. And from a pulp side of things, market pulp prices certainly seeing some pressure. Curious in your confidence and maintain that large premium versus fluff. And supply chain logistics certainly was very choked up last year. So being mindful of how hard it was to kind of see through the destocking container board, your level of confidence that the destock will be done in 2Q? And I'm just curious, how you started seeing any lift in China starting to reopen here?

Phil Ng:

Mark, my question on the supply chain was really more on fluff. I just made the point on container board, because it was pretty hard to see through that. Just your confidence just kind of see through just what’s out there.

Clay Ellis :

So, hey Phil. This is Clay Ellis. It's good to talk to you. Your first point on market pulp, yeah pricing on market pulp, paper grade pulps, they were down in the first quarter, somewhat resilient in Q1 and then in April we've seen a huge decline and you can see that in the publications through the month of April. And so over time you can see the fluff pricing being resilient, keeping a pretty good high premium over market pulp, we expect that to continue. I think when you look at the whole ecosystem of the fibers and the pulp, clearly going down through the first quarter, and then paper grade as we said on through April. Fluff isn't immune to that. Of course fluff prices have moved down some as well, but I think that fluff prices will continue to be less volatile. They'll continue to maintain a premium, but to be realistic in the whole ecosphere of the fibers, when they go down, there's a gravity on fluff too. So, it's why it's more important for us to be higher integrated into fluff, to have the capacity to grow with our customers, future growth in that space and remove or mitigate some of our susceptibility to the more paper grader to the market commodity pulps.

Clay Ellis :

Yes, very good confidence. Again, I mentioned on the call earlier last week with a lot of customers the Geneva Conference. Even our customers did not see the level of stocks, and when I talk about stocks, it's not just fluff. It's further through the entire absorbent hygiene supply chain. So all the way from retailers, converters, hour customers, and then all the way back into the raw materials like fluff. It was higher, more than anyone saw. But – so we see our customers are there seeing the retailers order more, getting more normal. So they are seeing that slack has come out of the road. We're seeing our inventories of fluff getting really down to historically lower than historical. So we see also part of this I think has been lowering the inventories across the supply chain, the targets from where they were in the past. So I think that's caused even prolonging this a bit more. But everybody sees more of the slack out of the system now and they see it coming out and everyone's seeing their orders, no matter where they are in the supply chain, begin to pick up and moving into the second half.

Clay Ellis :

Yes, it gives us more confidence that one, it's not a consumer demand issue. That it is destocking and that we can see the end. So yes, that gives us confidence.

Operator:

Thank you. I will now turn the call back over to Mark Sutton, Chairman and CEO for closing comments.

Operator:

And once again, we'd like to thank you for your participating in today's International Paper’s first quarter 2023 earnings call. You may now disconnect.

Operator:

Good morning and thank you for standing by. Welcome to today's International Paper's Fourth Quarter 2022 Earnings Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I'd now like to turn today's conference over to Mark Nellessen, Vice President, Investor Relations.

Mark Sutton:

Thank you, Mark and good morning, everyone. We'll begin our discussion on Slide 3, where I will touch on our full year 2022 results. First of all, as I think about 2022, I'm very proud and appreciative of all the hard work our employees have done during the year. And for our strong customer relationships as we've managed through a very dynamic and uncertain market environment. Looking at our performance. International Paper grew revenue and earnings driven by solid commercial and operational execution, while facing significant inflation and lower demand in the second half of the year. We also made solid progress in building a better IP. We delivered $250 million of earnings benefits from our initiatives, focused on lowering our cost structure and accelerating profitable growth. And as a result, we exceeded our full-year target and have strong momentum going forward. We're also confident in the profitable growth opportunities across our Industrial Packaging business and have made strategic investments to support this growth. We will continue to invest to grow earnings and cash generation by building additional capabilities and capacity in our U.S. box system during the next few years. I'm also pleased with the significant progress we made towards achieving value creating returns in our Global Cellulose Fibers business. We delivered $100 million of earnings growth in 2022 and we expect significant earnings improvement this year. This past year, we also returned $1.9 billion of cash to shareowners and our balance sheet is very strong. This allows International Paper to navigate the uncertain macroeconomic environment from a position of strength. And we believe it will give us opportunity to continue to invest through the cycle to grow earnings and cash generation while also returning cash to our shareowners by maintaining our dividend and through opportunistic share repurchases. Turning to our full year key financials on Slide 4. Revenue increased by 9% year-over-year, driven by strong price realization in our 2 business segments. Operating earnings per share improved by 32%. Operating margins were impacted by lower volumes from weaker demand for packaging and elevated supply chain and input costs. Overall, EBIT improved by about $300 million year-over-year. In terms of segment performance, both our Industrial Packaging and Global Cellulose Fibers segment contributed to our earnings growth by about $100 million each as our profit improvement initiatives and price realization offset significant inflationary cost headwinds. Our corporate expenses were also lowered by about $100 million, primarily driven by our building of better IP initiatives and some favorable FX. And for the year, we also generated $1.2 billion of free cash flow which was above our prior outlook, driven by higher earnings and improved working capital in the fourth quarter. Turning to Slide 5. I would like to comment on the press release we issued last week regarding the progress we are making related to our Ilim joint venture. We have entered into an agreement to sell our 50% interest in Ilim SA to our JV partners for $484 million. This transaction reflects a total enterprise value for Ilim of approximately $3.5 billion and approximately 3.1x EBITDA and the EBITDA multiple for 2022 full year results. The JV partners have also expressed interest in purchasing all of IP shares in JSC Ilim Group which represents a 2.39% stake for $24 million. We also intend to divest all other residual and nonmaterial interest associated with Ilim to our JV partners. The deal is subject to regulatory approvals in Russia. We are making good progress and will provide you with additional information when it becomes available. Upon finalizing this deal, IP will no longer have any investments in Russia. Turning now to Slide 6 and our fourth quarter results. Earnings and free cash flow for the quarter were above prior periods and came in better than the outlook we provided last quarter. Demand for our products played out as we expected. In Industrial Packaging, our U.S. box shipments were down about 6% year-over-year on a daily basis, similar to what we experienced in the latter part of the third quarter, after consumer priorities shifted towards nondiscretionary goods and services. In addition, our customers and the broader retail channel continue to work through elevated inventories of their products which constrained packaging demand in the quarter. Underlying demand for absorbent pulp was stable. On a positive note, we did see meaningful relief from lower input costs and our fourth quarter earnings also benefited from our building a better IP initiatives and some favorable onetime items in the quarter which Tim will speak to later in the presentation. And finally, we generated solid free cash flow and returned $355 million to shareholders during the quarter. I will now turn the call over to Tim to cover our business segment performance as well as our outlook. Tim?

Mark Sutton:

Thanks, Tim. Now I'll turn to Slide 16. I want to reinforce my confidence in the resiliency of International Paper and our ability to navigate through this dynamic environment from a position of strength. As Tim mentioned earlier, we're well positioned due to our diverse portfolio of products and services and our strategic relationships with a large number of national and local customers across a broad range of attractive end-use segments. Also, our teams at IP know what it takes to successfully manage through a business cycle by leveraging options and capabilities across our large system of mills, plants and supply chain to optimize cost while continuing to take care of our customers. In addition, our building a better IP initiative initiatives are focused on continuing to invest in projects to drive structural cost reduction through efficiency improvements and accelerating profitable growth. We exceeded our target in 2022 and we have solid momentum as we enter 2023. And finally, as I mentioned earlier, we have significantly enhanced our financial strength and flexibility. This strong foundation makes IP well positioned for success across a spectrum of economic environment and to deliver profitable growth over the long term. And turning to Slide 17. As we look to 2023 and all of the dynamic conditions at hand, I draw confidence from an incredible milestone that reflects the resiliency of our company. To be precise, today marks our company's 125-year anniversary. On this date, in 1898, 17 pulp and paper mills in the northeastern part of the United States joined to form International Paper Company. I think our founders would be amazed at how our enterprise has evolved through the years, including the incredible products we make and the expansive list of customers we serve. I would also appreciate our long-standing commitment to the pursuit of excellence in safety and environmental stewardship. While the world has changed, our commitment to providing essential products, people depend on every day and the talent and dedication of our team has not changed as we embark on our next 125 years. Our principles and resilience will continue to serve us well. I'm excited about how we are reengaging our company. We haven't performed to our full potential but that's behind us. We are committed to take our performance to a higher level. We recently made talent and leadership adjustments to match the right skills to the right opportunities we have in front of us. It's the right team to execute our strategy. We continue to make a lot of traction on our build to better IP focus areas. The things we're going after will set us apart and will drive our results. In essence, we are proud and well positioned to build on our 125-year legacy in the days, months and years ahead. I'm confident you'll like what you see. With that, operator, we're ready to take questions.

Gabe Hajde:

I had one specific one on, I guess, energy use. And when I look at kind of the sequential math and what you guys kind of beat by in the quarter, I'd say at least in the corrugated or Industrial Packaging segment, half was from these one-timers and maybe half was from lower natural gas. Has anything changed kind of with your -- so I guess, first question is, can you confirm that? And second, has anything changed with IP's perspective on mediating risk kind of across the organization given geopolitical tensions and potential impact on commodity inputs?

Gabe Hajde:

Okay. And then, I mean, if I take Tim's commentary, I think, directionally, maybe implied EBITDA for the first quarter is somewhere in that $540 range which obviously suggests a pretty significant ramp to get to your full year outlook. I wanted to know if you'd be willing to parse out, I think the term used was significant improvement in Global Cellulose Fibers, if you maybe put a finer point on what's implied there. And then I appreciate, again, some of the maintenance costs are somewhat front-end loaded but -- so we've got visibility there. But then it sounds like a lot of this improvement in the back half maybe or as the year progresses is based on your ability to run more efficiently and take these costs out that seemingly kind of crept into the system and to use your words, Mark and you guys were kind of not pleased with the performance necessarily. So just maybe the building blocks of how you think about maybe magnitude of getting to that full year number?

Operator:

Next we go to Bank of America in the line of George Staphos.

Tim Nicholls:

Sorry about that, plus 1-5.

Tim Nicholls:

I'm sorry, I missed the last part of that, George. I mean I think it's no different than what I was just talking about with Gabe. We got big structural changes in the contract negotiations in GCF in the fourth quarter. So that hits now. That starts as we go through first and second quarter. And then just in terms of most of the initiatives their internal self-help, whether they're structural through a build a-better IP or they're just getting back to more normalized levels of operation across a number of categories including supply chain, usage in the mills on inputs and the like. So we're not immune from the macro environment but there's a lot that we think we have in front of us that we can work on, especially as it relates to the marginal cost that were incurred in a more run full type of environment.

Tim Nicholls:

Order of magnitude, yes, it's close...

George Staphos:

Make sense. Two last ones and I'll turn it over. One related to the GCF and then one to the industrial packaging business. So for GCF, Tim and Mark, you mentioned that inventories are low. You believe at your customers' levels, I thought you said but also that there is a potential for destocking in the first quarter. So can you help us reconcile those 2 points? And then in industrial, as you're bringing on the Pennsylvania box plant and as you have been targeting potential other converting investments. What are the implications? And how are you managing against the -- what the implication for the rest of your box business? And how do you keep retention at high levels as you perhaps adjust your converting footprint in any given region, including in Pennsylvania and New Jersey.

Mark Sutton:

George, the way to think about the example of the Pennsylvania box plant coming on and then with obviously a softer demand environment. I'll take you back to the last maybe 3 quarterly calls where I commented on our running to meet demand required structural over time in a lot of our plants. And so in that particular part of the country, we are -- we don't have enough capacity even with our employees working a fair amount of overtime. So this plant is going to help us not only gain business, we've had to turn away in some places but stabilize the entire region of plants around it by getting onto a more sustainable operating schedule for our employees. So customer retention because we're stretched on our capacity. And it's not an average statement. It's in different parts of the country. This is one of them. This will actually have benefits from the incremental volume of the plant and secondary benefits by stabilizing the nearby operations into a more sustainable schedule. So I think we feel really good. It's a total net add and an improvement in our operating cost and our operating efficiency and our employee resiliency. So we've got several other examples in different parts of the markets where we're going to be doing the same thing.

Mark Weintraub:

So 2 quick questions. One was on the cellulose fibers, with the changes that you're making, do you think that pricing beyond 2023 is going to be less impacted by shifts we see in PPW, for instance, is it kind of -- are these more fixed? Or are we still going to be moving quite a bit with where the open market transactions are going?

Mark Weintraub:

Okay. So I guess I'd read that hopefully, it leads to reduced volatility. Is that a fair -- that's the intent of the contracts?

Mark Sutton:

Mark, I think it's fair to say our commercial objective is to improve profitability, as Tim just described and there's multiple ways to do that depending on the segment and the type of customer. And then secondly, obviously, to reduce volatility in the way that we make When we throw words like strategic customer relationships, that's partly what we mean by the word strategic versus transactional that there is a longer-term view which usually comes with less volatility versus playing a very transactional market by the month or by the quarter. you need probably a mix of all of it but our objective is to improve profitability which we are doing and reduce volatility.

Tim Nicholls:

Yes. I think that's right, Mark. A large portion was taken care of in the fourth quarter. It feels like maybe there's some remnants but that it's getting close to the end. And if you look at where we are just in January, year-over-year, it looks like we don't have numbers yet but just following cut out. It looks like we're down 5% year-over-year but stabilizing from fourth to first.

Mike Roxland:

Tim and Mark, congrats on a very good quarter. Last quarter, you mentioned you had an internal algorithm you used to figure out how and where to take downtime. And then one of the items that you -- as part of the algorithm is natural gas. So with the domestic natural gas down as much as it has been with the decline in OCC? How have you shifted your downtime plans, if at all? And just trying to get a sense of whether you've been able to more efficiently take down time and whether that was a benefit in the quarter as well.

Mike Roxland:

Got it. And then just quickly on China. With the country easing its strict Zero-COVID policies, can you give us a sense of what you're seeing from a demand perspective in GCF? And I know it's early stage and I know that you're also contending with Chinese New Year, so you may not have your line of sight. But any early read on how demand may or may not be impacted from the elimination of those policies?

Operator:

Then next, we go to RBC Capital Markets in the line of Matthew McKellar.

Tim Nicholls:

I mean I don't want to speculate such a fluid environment but I think we look to closing sometime this year at the regulatory approval process, will take what it takes. So as we know more, we'll report it.

Tim Nicholls:

Yes. It usually runs a couple of quarters. It's all over the map. But when you look at it in total, on average, usually see it coming through over a 2-quarter period.

Cleveland Rueckert:

Just a couple of follow-ups for me. I guess, firstly, Tim, in your prepared remarks, you had a comment about taking out high marginal costs. And obviously, you've been pretty dynamic about that over the last couple of quarters. I'm just wondering if there's an opportunity for some more permanent restructuring in the containerboard system, if that's something you're considering or sort of remains dynamic right now?

Cleveland Rueckert:

Yes, that makes a lot of sense. And I was just wondering if there is any -- if you've made any discoveries through the process of being more dynamic over the last couple of quarters but it sounds like that's a work in progress. Maybe just 2 more quick ones. You've laid out full year guidance. I'm just wondering if there's any economic downtime built into the plan that you've laid out or if it's mostly maintenance in Q1?

Cleveland Rueckert:

Okay, that's fair enough. And then just finally for me, thinking a little bit bigger picture. I'm just curious, I'm just sort of wondering conceptually here, how frequently you evaluate through cycle free cash flow. I think it looks like you need about another $200 million to $300 million of free cash flow to support the dividend within that 40% to 50% payout that we've talked about before. I'm just curious how you plan to get there from here just on a conceptual basis.

Cleveland Rueckert:

Would you say that CapEx is running like a little bit above average in '23? I mean is that something we should expect to come down.

Operator:

Then next from Jefferies, we go to the line of Philip Ng.

Tim Nicholls:

Yes. I mean without getting into the numbers, they came down a little bit in the fourth quarter. We're going into heavy maintenance outage season, first quarter for sure but in the second quarter. So we'll look at inventories and make sure that we are at an appropriate level to support our outages. So -- but I don't expect a lot of movement.

Mark Sutton:

John, I think the way we think about it is our containerboard and box system obviously, is an integrated system for the board that we use to make our boxes. And the balance is what we would call our open market position. There's 2 pieces to that

Tim Nicholls:

Yes, that wouldn't be base case. We don't expect it.

Adam Josephson:

Just couple of questions about your -- the assumptions embedded in your full year guidance. One on demand, I think, Tim, you mentioned you're thinking underlying box demand will be flattish sequentially 4Q to 1Q. Could you talk about what your expectations are thereafter? Just given the destocking that you talked about affecting the fourth quarter, one would think that demand would be getting better sequentially at some point over the course of 2023. So just wondering what exactly your expectations are beyond 1Q and for full year shipments '23 versus '22, if you're able to talk about that.

Adam Josephson:

Got it. And on price, Tim, just given the lags you mentioned with respect to when the previously published price changes hit your P&L, is it reasonable to assume that your realized prices in Industrial Packaging will fall sequentially not only from 4Q to 1Q but also from 1Q to 2Q? I would assume so but I just want to confirm that.

Adam Josephson:

Okay. And my last question is just if I think about the implied 1Q guidance, I think, around $530 million, maintenance will be higher by about $120 million compared to the latter 3 quarters. So if I take the $530 million, I'd go up to $650 all else equal, if you assume the last 3 quarters of that, you get to about $2.5 billion for the year. So obviously, there's additional improvement embedded in your guidance, I assume from higher realized pulp prices or otherwise. So you're assuming that even though prices in Industrial Packaging will likely be lower from 1Q to 2Q and thereafter. Is that -- I just want to make sure I'm clear on the moving parts from 1Q onward.

Adam Josephson:

Got it. And just last one for me is what are you -- what is your sense, Tim or Mark, as to how -- the extent to which the customer destocking has played out in terms of box demand? Do you think you're 90% of the way there? 70%? What are you hearing from your customers as to what their inventory levels are and their expectations are?

Operator:

Our last question will come from Citi in line of Anthony Pettinari.

Tim Nicholls:

Anthony, it's Tim. We said approximately $2.8 billion. It could be a little bit higher or a little bit lower is just a dynamic environment and we think it will be around that $2.8 billion level.

Tim Nicholls:

No. I think it's OCC and virgin fiber, we're expecting to be down modestly. You've had a lot of transportation cost impact on -- really on both. But on virgin fiber and our inventories are in good shape. And so we think we have an opportunity to bring virgin wood cost down slightly as well.

Mark Sutton:

Thank you and thanks, everyone, for joining our call today. Just to kind of wrap up with a couple of key points. We're excited about 2023. We believe in our outlook. We've got opportunities to maximize our performance in this uncertain environment. A lot of opportunity to get our cost structure back to something that we would consider more normal on different cost ratios. And then, looking at the commercial improvements we are making throughout 2022 and into 2023, we expect to see dividends on improving our profitability regardless of the demand environment and then the investments we're making are primarily in our box system, we'll continue to make those and we will be ready with a more sustainable operating model when demand returns to a more normal level with the appropriate level of converting capacity and capability in the right geographic locations. So a lot to do. We're excited about it and we look forward to updating you along the way. Thanks for joining our call today.

Operator:

Ladies and gentlemen, good morning and thank you for standing by. Welcome to today's International Paper Third Quarter 2022 Earnings Call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, you'll have an opportunity to ask question [Operator Instructions]. As a reminder today's conference is being recorded. I'd now like to turn the conference over to Mark Nelson, Vice President Investor Relations. Please go ahead.

Mark Sutton:

Thank you, Mark and good morning, everyone. We'll begin our discussion on Slide 3. The third quarter was a very dynamic and challenging environment, which had a significant impact on our earnings. We experienced a sharp decline in demand in our Industrial Packaging segment and significantly higher cost headwinds from higher energy and distribution costs. On a more positive note, I'm very pleased with the progress our Global Cellulose Fibers team is making to improve performance in that business. They are successfully advancing their commercial strategy and achieved cost of capital returns in the third quarter. In both businesses, we also delivered strong price realization. And for the year, we expect to exceed our $225 million target related to our Building a Better IP initiatives. Now back to the demand environment. As we enter the third quarter, we recognized there were macroeconomic uncertainties ahead of us, and that our businesses are not immune to these risks. However, these macro trends shifted drastically midway through the quarter, creating stronger headwinds than expected versus our previous outlook, particularly in our Industrial Packaging business. Based on feedback from our customers and after observing order patterns across our various channels and end user segments, we believe inflationary pressures weighed heavily on the consumer, resulting in lower demand for goods. This had a large impact on demand for Packaging, as consumer priorities shifted towards nondiscretionary goods and services in the quarter. In addition, our customers and the broader retail channel continued to work through elevated inventories of their products, which further reduced Packaging demand in the quarter. In response to these trends, we quickly aligned our production with our customer demand, which resulted in significant economic downtime in the quarter for our Containerboard system. Also our significantly lower export position versus prior years' contributed to a higher level of downtime, all of which suboptimized our system from a cost standpoint in the quarter. I would point out that our mill system continued to operate very well before being constrained by lower demand. The work we did in the last several quarters to improve reliability is paying dividends. As we enter the fourth quarter, Packaging demand appears to be stabilizing at these lower levels. And finally on capital allocation, we returned $434 million to shareholders in the third quarter including $269 million of share repurchases. As a result, we've returned approximately $1.6 billion of cash to shareholders so far this year. If we turn to the third quarter in particular on slide 4, revenue increased by 10% year-over-year driven by strong price realization across our two business segments. Operating earnings and margins were lower than prior periods due to the significant macro headwinds I discussed earlier. However, our free cash flow generation was stable in the quarter. I would also like to take this opportunity to mention that, we are making good progress regarding Ilim. As I've mentioned before, the complexity of the situation and our joint venture structure impact the pace of reaching a resolution, but we feel good about the progress we're making and we'll provide another update when there is more information to share. I'll now turn to slide 5, which is one that we shared with you last quarter as we recognized that there were a lot of macro uncertainties ahead of us. Our outlook for the fourth quarter, which Tim will share with you shortly assumes our earnings will remain under pressure in the near term. However, I want to reinforce my confidence in the resiliency of IP, and our ability to navigate through these dynamic environments. Our teams at International Paper know what it takes to successfully manage through a business cycle. And given the rapid change in demand, it will take some time to realign and optimize our system to the current environment. We have a wide range of options and capabilities across our large system of mills box plants and supply chain. And we know how to leverage them while taking care of our customers. Also, later in the presentation Tim is going to share some specific actions that our teams are taking to shift production to our lowest-cost operations and shed high-margin cost across the system. We're also continuing to invest in projects to drive structural cost reduction through efficiency improvements. And finally, we have built a very strong balance sheet, which we will preserve because we believe it's ensuring our financial stability and optionality and is foundational to our company, especially in softer economic environments. This allows us to continue investing in our businesses, and to return cash to shareowners in a meaningful way by maintaining our dividend and through opportunistic share repurchases. I'm now going to turn it over to Tim who will cover our business performance and outlook. Tim?

Mark Sutton:

Thanks, Tim for all the details. Look, this is clearly a very dynamic environment with a lot of moving parts. As I look back across our company, I'm really proud of the improvement we've made in customer service over the last several quarters considering where we were in the middle of last year with Containerboard inventory issues and box plant availability for our customers. The reliability improvements we've made in our mill system both in Global Cellulose Fibers and in Containerboard, I feel really good about because we're running very, very well in some cases at levels – productivity levels that are the best we've ever run. I also feel good about the progress our Global Cellulose Fibers team is making and the trajectory of the profitability earnings and the business model changes we've made that Tim described a bit earlier. At the same time, I'm not at all satisfied with the level of our profitability, which has been impacted by supply chain disruptions, inflation and falling demand in the second half of this year. But I am certain, we will make improvements in this area. I'm also very certain about the resiliency of International Paper. During the past few years, we have significantly enhanced our financial strength and flexibility and taking a lot of risk out of the company. This strong foundation makes IP well positioned for success across a wide spectrum of economic environments. So with that operator, we're ready to take questions.

George Staphos:

Hi. Thanks very much. Hi, everyone. Good morning. Thanks for all the details, Mark and Tim. First question broadly on containerboard and the second one on pulp. So in containerboard, can you talk to us about what benefit you expect to get from the optimization efforts on a run rate basis, what the horizon would be in terms of when you expect to be at a more optimized level that you're targeting? And how do current box shipments and trends play into your optimization? And what are you seeing early in the quarter?

George Staphos:

Thanks Mark. My other question on pulp. So you said I believe demand for GCF was stable yet your customers' inventories are still relatively low. You've seen some improvement, but not a lot I'm paraphrasing there in the supply chain. So with inventories low, did customers pick up their purchases relative to where they otherwise would have been, because they could access more material, because the supply chain has improved? And as we look out over the next couple of quarters presumably the supply chain improves, do you think that will lead customers to purchase more and improve their inventory position, or now that it will be much more hand-to-mouth, because supply chain has improved and so the need to have inventory will diminish somewhat? Thanks guys. Good luck in the quarter.

George Staphos:

Thank you, Mark.

Operator:

Thank you. Our next question comes from Citi and the line of Anthony Pettinari. Please go ahead.

Mark Sutton:

So I think there's – if you go back to the slide Tim showed, Anthony, with the yellow and red segment descriptors. Those that were – the demand declined more than the average demand. Those are the customers in those segments. And we have very big customers national-type accounts and we have very small customers inside of each of those little segment descriptors. Those that were greater than the average a big portion of their commentary to us on their order pattern was too much inventory. And we think they think best they can tell from the consumer, I watched a few of their earnings calls earlier this week. That's a fourth quarter unwinding process, but maybe not terribly much beyond that. If you look at the other part of that chart where our decline in some cases we didn't break it out. But in some cases we had customers inside the segments that the demand didn't decline at all. And they're very big and important customers to us. And they would say, their inventories are a little high, but we'll see what happens with fourth quarter consumer demand. They're predicting a little less of a holiday pickup, but any pickup at all, and they'll feel like they're in great shape. So it's really a tale of those segments on that chart we showed. But even in the worst case we think most of our customers believe that this is working through the fourth quarter process. Obviously, you hate to make a prediction because there's so -- it seems to be so many variables that come up and inflation is still persistent and high. Consumer can be fickle after this holiday period and spending a lot of money on services, what happens to the goods market in the first quarter I think that's what a lot of us are trying to figure out right now.

Tim Nicholls:

Yeah. Great. Thanks, Anthony. It's Tim. So over time longer term, we look to have capital investment around the level of depreciation. It can be a little bit higher in some years. What usually drives that is not so much maintenance and regulatory. We try to keep that fairly consistent. We look over a five year period. We have five year plans about how we're going to do maintenance schedules. What tends to drive it up and down a little bit on the margin tends to be more of the strategic projects whether it's building out capability or more recently adding capacity in our converting operations. So -- but the $900 million to $1 billion is not necessarily us actively pulling back capital. It's just coming to the realization this close to the end of the year that as hard as we've tried all through the year supply chain has been a limiting factor about how much capital you can have installed and have it be productive in a given period of time. So that's the reason for the adjustment. Just acknowledging that we're not going to get as much done as we thought we were earlier in the year. And longer term, we'll try to be around depreciation. But where there's either good cost reduction projects or strategic needs building out capability, it could be a little bit higher than that in given years.

Operator:

Thank you. Our next question comes from Bank of Montreal and the line of Mark Wilde. Please go ahead.

Mark Sutton:

Hi.

Mark Sutton:

It's a great question, Mark. I think the variables we look at of course, we don't know what the demand environment is going to be over the next year or two and we don't know exactly what the ramp of the new capacity you mentioned will be. So there's a lot of variables. The other thing that's a little different and a unique addition to the algorithm we use to figure out how to take downtime is one, we have very high natural gas costs which changed the competitiveness of your recycled mills and we have a few that are 100% recycled. The flip side of that is you've got a very expensive and congested supply chain. So an IP example would be our large recycled mill that's up in the Midwest might be a candidate to scale back for energy costs, but it defeats our ability to save on logistics because it's so close to the market. So one of the reasons you see us doing more of as you described rolling, so not fully shut them down but adjusting the output of multiple plants is to try to make all of that balance, get our integrated mills to be as close to energy independent as possible. And our nonintegrated mills, which tend to be located physically in places -- and they were built for that reason to be close to the end-use market and they're beyond a lot of the real choke points to get those to serve as much. As things change, as supply chain costs change, as energy changes, it will lead us to different conclusions. So that's how we make that decision on how much we run to our order book and where we do it.

Mark Sutton:

Yeah. I think if you look at a couple of indicators, one of the things we've tried to do with our value proposition is to make arrangements with customers. Tim used the word moving to strategic arrangements versus just contractual volume for price. And two, how we participate in the different regions of the world given the nature of the product and what requirements a customer has from the standpoint of substitution and making sure we get paid for that. And so you can see some evidence in certain charts in certain regions where that phenomenon has already started to occur and there's no impact on our absorbent products economics. And the reason for that is our strategy adjustment has been to work with our customers and to basically have the effect of decoupling that as much as we possibly can. But your point is well taken. We will see how that plays out as we go through a normal business cycle. We're very comfortable that we've made structural changes in the way we go to market. And I'm not saying you won't see any cyclicality, but I think you will begin to see a different spread over time than you've seen in the past. But the proof will be in the coming quarters. I'll take you back Mark to what I've said over a year ago. Investors can expect with the changes we're making for Global Cellulose Fibers to improve quarter after quarter after quarter that we will be at the cost of capital returns in the second half of 2022. And that you could expect the business as we enter into 2023 to be a value creating business. And so far that's the track we're on. So let's keep talking about it quarter after quarter. I think your point is a great one, and I think it'll -- we'll learn a lot more about whether or not our strategy adjustments have resiliency and sustainability as we move into 2023. I believe they do.

Operator:

Thank you. Next from Seaport Research Partners, Mark Weintraub. Your line is open.

Mark Sutton:

So Mark it's a multifaceted question. Let me just take you back to a higher level. So the Containerboard system has a certain capacity. It's a little higher than the number you mentioned. And the way we run it is not by quarter. I mean, we have to do what we have to do in a single quarter. The way we think about our system is we have a certain amount of output capability. We strategically target about 3% of that and you can look at our earnings calls from the past and how much volume we take out for planned maintenance ends up being around between 3% and 4%. Then there's another 3% to 4% that we tend to average just in terms of being flexible for customer service for unforeseen problems and so every once in a while to match a change in demand like 2019, we'll adjust our output to match a reduced demand environment. And that again has multiple variables. It depends on how strong the export market is during the same period of time sometimes the markets are connected sometimes they're not. That number as a percentage of our total capacity in 2019 was probably 6%, 7% of our total capacity once in a multiyear period. And I don't know what it's going to be. We don't forecast. We're just trying to match up the principle of we're going to make the Containerboard we need to serve the order book we have and to maintain what is much healthier inventories for our supply chain. And those numbers as you know for almost every industry are a little higher in this, kind of, supply chain environment. But that's the way you should think about it. Think about it big picture not in a 60- or 90-day period. There's a system, there's maintenance, there's flexibility time and occasionally there's an adjustment. And that's the, kind of, way it's going to play out. Roughly the percentages I gave you if you annualize -- what's unique about this and I mentioned it in the prior answer is a the market slowdown in quarters that normally the market is not slowing down and for IP in quarters where we don't have any other maintenance outages that would normally be taking production offline like we had in the first half of the year. So that's the difference is. That's what adds to the cost mitigation challenge.

Mark Sutton:

So again, Mark the way you need to think about the answer to that question is any downtime we take is a product of doing the analysis of our North American order book, our export order book, any maintenance outages that would already take production offline and I think Tim mentioned it, how well we're running in the moment. So we're running really, really well right now i.e. we're making too much containerboard which is where you want to be, that's what we worked on to be reliable. What that means in plain speech is, the lack of reliability interruptions in the quarter which is a good thing, but not in a quarter where you necessarily don't need the production so you end up slowing back. But at least you didn't have a repair cost. So it's impossible to answer the question without knowing the answer to all four of those variables I just gave you.

Mark Sutton:

I think it's fair to think about the way I answered Mark's question is, in the moment where you're considering -- which let's take it right now if you look at the other variables like transportation and logistics costs and like energy costs and you make the decisions for production at the lowest, I think Tim used the word the lowest marginal cost operations and that could change in a month because of a hurricane that wets the Woodlands and now you've got high-cost wood at a mill that [indiscernible]. So my point is not to be invasive, it's a dynamic set of variables and we make those decisions not real time but enough -- a 7- to 10-day period. So if the answer to the question how do we make the production we need at the lowest cost involved some of the examples you and Mark mentioned then that's what we would do. But right now, with the variables we have, with supply chain and energy that's not the most cost-effective way to do it.

Operator:

Thank you. Then our next question comes from Truist Securities and the line of Mike Roxland. Please go ahead.

Tim Nicholls:

Yes. So we were back where we needed to be. Part of the reaction that you saw in the quarter. It happened midway during the quarter as Mark referenced, it was really in response to making sure that inventories don't get away from us. If we're linked to demand we're trying to look --- our S&OP process is trying to look at, not only in the moment but further out in time and what kind of product availability needs we're going to have. So, we were able to keep inventories in line with where we want them through the way we ran the system.

Tim Nicholls:

Yes. The other thing, I would add is, even though we've seen some modest improvement in transit times with ocean vessels here on the ground in North America as well in truck. Our network, the supply chain has not picked up a lot of velocity. So, we're still dealing with the extra time it takes to move product in between mills and converting operations.

Mark Sutton:

We would run the system to match the demand that we have. So, we don't know what the demand is going to be in the first quarter. But as we get closer to that, we'll have a better idea. And if that results -- and the supply chain velocity has improved, then we don't solve for the inventory level number. We solve for making sure, we can take care of our customers. And then we have the business prepared, because what we make today gets used in the future not today. And so we've already made the inventory for it -- for today yesterday. So that's why it's difficult to give you a finite period answer. There's again, a lot of variables. We need less absolute inventory when the supply chain is flowing, than we do when it's not. And it's a long way from flowing and especially in the rail area, a lot of our mills are in the Southeast, deep Southeast where the rail choke points are not getting any better and the labor situation is not getting a lot better. So we're working with what we know right now. And what we know right now, says the inventory levels we have the absolute number, matches the slow velocity of the supply chain. If that changes, we'll adjust our production output to match the fact that the inventory is moving faster. So it's not a matter of where we lower our inventory, it's a matter of all of those variables lead to an inventory number.

Mark Sutton:

Thank you.

Adam Josephson:

Mark and Tim, good morning. Thanks very much for taking my questions. Mark just one more kind of way of asking that capacity question that I think both Marks were getting at is obviously you have to hazard a guess as to what long run demand will be to figure out what the optimal level of capacity is. And obviously, there is this exceptionally unusual surge in demand during the pandemic and now we're starting to see the other side of that. So, when you're thinking about the right amount of capacity to have long term how are you thinking about the right level of demand? Obviously, it's near impossible to forecast it. But are you thinking that 2019 levels were kind of normal or what the long run rate of demand growth will be? Obviously, there's capacity coming that I think Mark Wilde mentioned. So, how are you thinking about all those factors when determining what the right level of long-term capacity is for you?

Tim Nicholls:

No, it's just -- I think part of what you're getting at Adam is the pull forward that maybe some of the industry saw primarily around durable goods but durable goods is a small segment -- small for us a small in total. And a lot of what people are buying are consumable items. So, it's not like -- I don't -- maybe in some cases there's demand pull forward a little bit but I don't feel like that's the bulk of it. It's just I think we have seen the shift that Mark talked about between goods and services and that will normalize at some point too.

Tim Nicholls:

Yes. It's a great question, Adam. I mean, the way we think about it is -- and we say 40% to 50% of free cash flow that in our minds. And I think we've said this before. But that's not in every moment of time. That is through the cycle. And there have been moments when our dividend payout has been higher than that. And it's been right down on the bottom end of that at times too. So I think we're in a moment. But we still believe that the dividend is structured. We have bought back a lot of shares at the same time is still perfectly situated in that 40% to 50% of free cash flow. And we still believe in the resiliency of our cash flow overtime.

Adam Josephson:

Thank you so much, Mark.

Kyle White:

Hi. Good morning. Thanks for taking my question. I was just hoping to get some more details on demand. I know it's been talked about a lot, but I'm just trying to understand the two large dynamics impacting demand here the de-stock impact and no inflationary pressures on consumers. We kind of knew about the de-stock impact heading into the quarter but you mentioned that demand saw a sharper decline midway through. So it seems like inflationary pressures are now taking over and having a larger impact on demand going forward. So should that not carry kind of forward into 2023 such that, we could see mid-single-digit declines in the first half to 2023, or just what are you seeing now and how are you thinking about that for next year?

Kyle White :

Got it. That's very helpful. And then what's the latest on Ilim? Understanding you can't share all the details, but just curious what you can on the call like this regarding the timing of potential sale that you think could happen there? And then also curious do you expect to receive any additional dividends from Ilim next year or in the future?

Mark Sutton:

It's -- I made a couple of comments in the prepared remarks, Kyle, that we're not where we were at the beginning of the quarter. We were much more advanced, but it is a complex process. The fact it is a joint venture and not wholly owned when you look at the process for executing strategic options under these current guidelines by both governments. The joint venture structure makes it a more time consuming and more complex process. But we have advanced along that time -- that process time line quite a bit. So I'm really pleased, but we're not there to be there. So that's why we're not getting out over our skis on where we are on it. But I feel really good about the amount of movement we made through the quarter.

Operator:

Thank you. Then I'd like to turn the call back over to Mark Sutton for closing comments.

Mark Sutton:

Thank you operator. I'd just like to close by really saying thank you to all the International Paper team members employees around the world what they're doing every day for our customers and what they're doing every day for each other. To stay safe and to operate in environments that I don't think any of them ever thought they'd be operating in and they continue to do an outstanding job. I'd just like to close by reiterating a couple of comments I made. We think the second half of this year is clearly transitory. We're taking the actions we need to take, pulling the levers we need to pull to make sure International Paper gets through this period in a very good way. And I'm really pleased with the kind of financial underpinnings we have entering into any type of economic environment. We have a lot of opportunity and flexibility even at lower demand levels. And in some cases, there could be a silver lining and the fact that it allows us to get some of our supply chain dysfunction back into a proper alignment. The strong balance sheet gives us options. So we can continue to make organic investments in structural cost reduction and in strategic capacity and capability. In the past we would have probably had to stop some of that, just to manage the balance sheet. There's no meaningful debt for the foreseeable future that we need to deal with. So we've got a lot of risk off the table. We're built for this type of environment and we're built for a strong environment. And I feel good about our ability to get through it. Look forward to talking to you with our full year call at the end of January. So thank you for your interest in International Paper.

Operator:

Good morning, and thank you for standing by. Welcome to today's International Paper's Second Quarter 2022 Earnings Call. All lines have been placed on mute to background noise. After the speakers' remarks, you'll have an opportunity to ask question. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn today's conference over to Mark Nellessen, Vice President, Investor Relations. Sir, the floor is yours.

Mark Sutton:

Thank you, Mark, and good morning, everyone. We'll begin our discussion on slide three. In the second quarter, International Paper delivered strong revenue growth and earnings growth on both a year-over-year and sequential basis, all while expanding our margins. In addition, our second quarter earnings were better than our prior outlook, driven by strong price realization, solid operating performance, and cost benefits. All of this helped us overcome significantly higher input costs, especially for energy, chemicals, and distribution. Our mills and converting system performed very well as we managed through continued logistics constraints, which negatively impacted our operating costs. We successfully executed our second highest maintenance quarter of the year and have completed about 65% of our planned maintenance in the first half of the year. Demand for our products was impacted by a shift in consumer spending from goods to services in the quarter, while the retail channel managed through elevated inventories. In addition, our businesses continue to focus on serving our customers' needs, while navigating through a challenging supply chain and labor environment. We made good progress on building a better IP initiatives. We achieved $65 million of earnings in the quarter for a total of $105 million during the first half of the year. Given our strong momentum, we expect to achieve the high end of our full year target of $200 million to $225 million. We are excited by the opportunities we have identified to significantly lower our cost structure and accelerate profitable growth. On capital allocation, we returned $565 million to shareholders in the second quarter, including 395 million of share repurchases. As a result, we've returned more than $1.1 million of cash to shareholders so far this year. This highlights the choices that our strong balance sheet and cash generation provide us. On our last call, I mentioned that we were pursuing strategic options for our equity investment in the Ilim Group, which includes possibly selling our 50% stake. We have engaged advisors and are actively working with interested parties. We've made good progress during the second quarter and have identified serious options that we believe could be attractive. As I mentioned before, the complexity of the situation and our JV structure impacts the pace of reaching a resolution. We will provide another update when there is more information to share. Turning to the second quarter results on slide four, revenue increased by 13% year-over-year, driven by strong price realization across our two business segments. Operating earnings per share improved by just over 50% versus last year. And margins improved in the second quarter as strong price realization more than offset higher distribution input cost and we delivered additional benefits from our Building a Better IP initiatives. Free cash flow was lower in the quarter due to higher working capital use as we grew revenues and replenished inventories coming out of our highest maintenance outage season. In addition, both prior periods included a dividend from our equity ownership at Ilim. Looking to the rest of the year, we expect further margin expansion as continued realization of prior price increases outpaces higher input costs. In addition, we stepped down from our highest maintenance outage quarters of the year and also expect additional earnings growth from our Building a Better IP initiatives. As a result, I'm confident we will achieve our full year targets for EBITDA and free cash flow, which remain unchanged. I'll turn the call over to Tim who will cover our business sector performance and outlook. Tim?

Mark Sutton:

Tim, thanks for covering the details on the business outlook and our capital allocation progress. This is a really exciting time for International Paper and I continue to be proud of our team and the work that they do every day in every area of the company. Sitting here midway through the year, I'm confident in our earnings outlook for 2022 and in our ability to deliver strong earnings growth this year. I'm also very pleased with our progress and momentum in Building a Better IP and I'm confident our team is focused on taking our performance to the next level. As Tim pointed out in his remarks earlier, these initiatives are largely within our control and will create structural earnings improvement for IP over the next couple of years. And finally, we're mindful of the uncertainty surrounding the macro environment, I'm very certain about the resiliency of International Paper. During the past few years, we have significantly enhanced our financial strength and flexibility. This strong foundation makes IP well-positioned for success throughout a wide spectrum of economic environments. With that operator, we're ready to take questions.

Mark Weintraub:

Thank you. Good morning. Question on what you're seeing in the corrugated box business. I think you mentioned that retail, they were working through elevated inventories your customers, where do you think you might be in that process? Also at any more color on that that comment you made goods to services? And relatedly you talked about flattish volumes in the third quarter. Was that a sequential relative to second quarter? Was that a year-over-year wrapping? Because I think your second quarter documents were somewhat lower than your third quarter from a year ago?

Mark Weintraub:

Okay, and obviously did great on price and mix, just one clarification, when you had been giving us kind of expectations on cost and operations, had that been including the one-time $80 million in total, or how much of that might have been in your guidance?

Mark Weintraub:

Okay, that was a mix. Some of the you're expecting, but not all of it, is that fair?

Mark Weintraub:

Great. Thank you.

Gabe Hajde:

Hey Mark, Tim, good morning. Thanks for taking the question. One on CapEx, I think it came down about $100 million from what you're previously expecting. And I'm curious, I mean, kind of given inflation that we're seeing, I would expect just maybe a little bit of a natural tendency upwards? Is this a reflection of anything that you're seeing in the business in terms of willingness to put capital to work, being conservative or are there projects that you just kind of push to the right maybe to 2023 until you get better visibility into the business?

Gabe Hajde:

Right, thank you. And then I guess in terms of end markets within corrugated, you mentioned retail as one and I guess e-commerce is sort of moderating. Are you seeing anything on the export markets? I mean, one of the things that they were kind of keeping an eye out for is obviously to the extent they're rolling capacity outages over in Europe because of energy availability and/or costs. Maybe the export lever kind of ticks up for you guys, anything there?

Gabe Hajde:

Thank you. Good luck.

George Staphos:

Hi, everyone. Good morning. Thanks for all the details and thanks for taking my question, guys. I guess the first question I had, obviously, IP has been spending more, understandably, on the box network and additional converting. You've had mill projects like Riverdale, can you remind us on where in your capital budget? You think you'll need to spend just on fiber lines and recovery boilers? How do you see your fleet there? Will there be any incremental investment that's required there or not? And kind of the related if you will corrugated question. You were answering Dave's question earlier on, on exports. How do you see some of your other domestic markets in particular? What are you hearing right now from your from your ag and protein customers? We're just seeing two key what's the outlook for next year, given what have been some of the drought conditions that have been discussed? And I had one follow-on.

George Staphos:

It's just a box market domestically in particular, we're probing is protein markets. What are you hearing from customers now and into 2023 given drought conditions, and what that can mean for amongst other things, cattle raising, and production as a result?

Mark Sutton:

I think the drought comments, George is primarily in beef issue because they'll have to process some of the cattle early. But it doesn't affect the availability as much on things like poultry. It affects obviously, the price of feed and the cost of those products. But it's the beef issue where they will have to pull forward the slaughter of a certain amount of the herd earlier than they would like.

Timothy Nicholls:

Yes, I'd say you're in the ballpark and the way you're thinking about it, George, on supply chains. I think you had that right too, who knows. One port seems to improve and another port seems to deteriorate and we've seen it both on the East Coast where it's very important for the fluff pulp business. The West Coast ports have knock on effects for sometimes, but it seems to be just moving port forward.

George Staphos:

Thank you, Mark. Thank you, Tim.

Mark Wilde:

Thanks. Good morning, Mark. Good morning, Tim.

Timothy Nicholls:

Good morning.

Mark Sutton:

I think on the unpacking part of your question; the two to three quarter lag is an all-in, part of that is obviously spot by definition goes up immediately on the placement order. And then there's different levels of contracts with customers. And when you put it all together, announced price of x is actually equal to x two to three quarters later. So, we've got a got our business part and contract part and spot and that's why you see a unique realization, scheduled for IP that may not look like anybody else's. So, that's also what provides that dynamic of the contract. These also provides the resilience on any kind of turnover in in pricing, just like it slowed it all the way up and slows way down. So, I think when we have the second half in the books, there'll be two quarters in a row at, you know, above cost of capital performance or right at cost of capital performance. We've made some structural changes in our go to market strategy, regionally on the spot side, and just contractually on the large customer contract side, which will still be in effect in a different pulp market. So, we think through a cycle, the purpose of work we've been doing is to have this business perform at the cost of capital through a normal business cycle. Tim set it in kind of strange language we are working and have made tremendous progress. We're working to get paid for the value of the absorbent pulp that it provides in the end products. And that hasn't always been the case.

Mark Sutton :

Yes, that's not bolt -- that wouldn't be what we would consider bolt-on. Bolt on, think about this -- think about it this way Mark, in Europe, we have a smaller business a $1.5 in revenue roughly. And we've done some single and multiple plant acquisitions to build an integrated network around our new containerboard mill Madrid. So natural synergy to an existing part of our business, but we did enter a new a new market. We entered the Portugal market. We didn't have anything there before, but it's integrated to the Madrid mill. So that would be bolt-on, and in the US a much bigger business. So it could be more synergistic with a containerboard and box system, but not transformational. I think what we've been saying for a while is this is the first time IP has been in a position with a balance sheet like we have with a much more streamlined portfolio, and to businesses that have a right to win in their respective markets. And we're going to run with that strategy. Now there's no need for transformational activity. We went through a lot of that. We undid some of it, and we got a company we really like right now. And now it's about getting it to its full potential.

Mark Sutton :

It's hard to say, a lot of time has passed since the last time we made any meaningful move, but there's no real reason we can't grow our converting and box business. And you've seen how we've chosen. Everyone has seen how we've chosen to grow our containerboard system to match that box. And that's been mostly through organic activity. And so I don't know the answer to your question, because we haven't tested it. It was an issue back in 2012, where we did get pushback on how much we were trying to acquire. But that was a long time ago. But our focus right now, honestly, is we have enough containerboard for the foreseeable future, we did to Riverdale mill. We've gotten more opportunity in our current fleet to make more containerboard. It's really about making sure we have the box business configured both with assets and with people. And we're short on both of those right now to be able to actually grow at a minimum with the market. Some of that's regional, but on average, we don't have enough of either to really grow with a two plus percent market. And that's what we want to do. We have the containerboard to do that.

Operator:

Thank you. Then next from Deutsche Bank, Kyle White. Please go ahead.

Mark Sutton :

And Kyle, it's a great question. We're running very well, right now. The issues we had in the mill system last year with the interruptions at the beginning of the year, and the end of the year, and our low inventories in our box plants, we've largely put all of that behind us, the box plants are running very well for all the efficiency metrics like throughput that the margin would generate per hour of production time, where we are challenged is in certain regions, we just don't have enough people. So we ended up making that up with overtime, which is not a long-term sustainable solution, a certain amount is but not too much. So we need some plants that are not running as many shifts as it is they couldn't be running for the demand. That's where people come in. And then in certain parts of the country, upper Midwest, area in Southwest Texas, we need more physical assets, as well as people. And that's what we're working on the assets through our CapEx investment plan. And on the people side, working very hard to hire and retain new employees so that we can run out the assets we have in a more sustainable way, not just working every weekend, and run to the order book that we have. So efficiency is fine. The total available capacity we have with equipment and people is not where we want to be.

Mark Sutton:

Yes. Not right now. I got confused. I think Georgetown may be a little bit longer. I think Riverdale is a little bit shorter, but yes, there's nothing new to report at this moment.

Operator:

Thank you. The next we go to KeyBanc and line of Adam Josephson. Please go ahead.

Mark Sutton :

Yes, I think, obviously, we thought there were going to be a little bit stronger as we were going through the quarter seem to -- the adjustments seems to take place. And I'd say, the second half of May and a little bit into June, I think it's a reaction to things we talked about earlier. Inflation is real. People are making choices. And there's -- as we've read and heard, heard from our customers, there's a lot of inventory and pipelines that needs to be worked off. So but it seems to stabilize and seems to stay the stable around the same level as we go through July. Our view is sequentially. It should be roughly flat quarter-on-quarter, obviously, down a little bit versus last year, but stable quarter-over-quarter.

Timothy Nicholls:

Well, we look at our mix of business, and we talk to our customers. And then we have the experience of how we ended the quarter. And how’s continued in July. So based on that we have a view that through the third quarter, and there's always some seasonal puts and takes, but we have a view that within a margin of error, it's a roughly flat what we have the second quarter.

Operator:

Thank you. And next Truist Securities, Mike Roxland. Please go ahead.

Mark Sutton :

Faster implementation, I think it's consistent with prior increases that were implemented, it's the security of supply. And people want to get that, for the longest time wanted to make sure they had boxes and just making sure that there's no disruption to their operations. So we -- the first price for several price increases were the fastest we've seen on any historical comparison. And this last one seems to be going at the same pace. By the end of the third quarter, we'll have most of it done. There's a little bit of residue or residual that falls over into the fourth quarter, but so far, it's continuing as the prior increases.

Mark Sutton :

I'm sorry. You broke up just a little bit. Could you just repeat the last part of that, please?

Mark Sutton:

Yeah. Okay. Appreciate that. Yeah. On the durables, it's really a very small part of our mix. And we're always looking -- we manage a very active S&OP process, and we're always looking at how we run our system. I would say that while demand softened a little bit as we went through the second quarter and our view is for it to be stable quarter-to-quarter, the supply chain constraints are real, and it's extending supply chains. And so part of the effort over the past years with those difficulties to get inventories back to a sufficient level, which may be elevated to historical levels. I mean, we're looking at four, five, six days additional time to move product between mills and box plants. So it's very dynamic at the moment. We're just trying to make sure that the inventory levels we have are sufficient for this type of service requirements that we have to our customers.

Operator:

Thank you. And next from Jefferies, we'll go to the line of Phil Ng. Please go ahead.

Timothy Nicholls:

Yeah. Well, we want the dividend to be sustainable. That is first and foremost attractive, but also sustainable. So we take a look at it. We're just starting the process now. We look at it on an ongoing basis, but -- and more depth over the summer. And we usually, if there are any changes or if it remains the same, we communicate that in the third and fourth quarter. I think right now that's work to be done, and the conversation with our Board and our Board is very active in terms of how we how we think through total capital allocation. So there'll be more to come on that later. I think we feel good about share repurchases. We've tried to be very opportunistic. And yes, it's a powerful number that we've returned so far through six months this year.

Timothy Nicholls:

There are -- and I don't know if we're officially in a recession or not or what will come, but there are countercyclical benefits that offset sometimes downdrafts and economic activity, month for earnings and cash, when you think about input costs, so on the earnings side and you think about working capital on the cash side.

Mark Sutton:

I think that's still a reasonably good number. I mean there's obviously some noise in the variable cost side of given all the inflation. But I think that's probably still a good number from a modeling or planning standpoint. It obviously won't be exactly that, but it's in the neighborhood.

Operator:

Thank you. And our last question will come from UBS and the line of Cleve Rueckert. Please go ahead.

Mark Sutton:

Yeah. I think that we had more input cost pressure in the second quarter, and we see that continuing at a slower pace. But continuing in the third we think it does stabilize, level out as we go through the second half of the year. But I think it's just -- it's not anything more than just timing based on swift movement of inputs, and it takes a little bit longer to recover as we continue to implement the price increase.

Mark Sutton:

Not significant amounts of cost release. It seems some things flatten out and moderate just a little bit as we went through the second quarter and now that we're in July. But I think the way that you framed it up is how we're thinking about it. We see some more input cost pressure at a slower rate of increase in the third quarter than we saw in the second. And then I think as we go through late third quarter through the fourth quarter, we see more stabilization at these elevated levels.

Operator:

Thank you. Then I will now turn the call over to Chairman and CEO, Mark Sutton, for closing remarks.

Operator:

Thank you for your participation in International Paper's second quarter earnings call. You may now disconnect.

Operator:

Good morning, and thank you for standing by. Welcome to today's International Paper's First Quarter 2022 Earnings Call. [Operator Instructions] I would now like to turn today's conference over to Guillermo Gutierrez, Vice President, Investor Relations. You go ahead, sir.

Mark Sutton:

Thank you, Guillermo, and good morning, everyone. We'll begin our discussion on Slide 3. International Paper's first quarter earnings were better than we had outlooked, driven by strong price realization and solid operations to overcome significantly higher input costs, especially for energy, chemicals and distribution. We also delivered strong cash from operations. We delivered strong year-over-year and sequential revenue growth in the first quarter, driven by price realization from prior increases in our 2 business segments. Omicron-related constraints impacted volume in our Packaging business in January. Our shipments recovered as expected throughout the quarter with demand normalizing at elevated levels as we enter into the second quarter. Our mills and converting system performed well as we managed through continued logistics constraints, which negatively impacted operating. We executed our highest maintenance outage quarter of the year very well, and we expect to complete about 70% of our planned maintenance in the first half of the year. We achieved $40 million of earnings through our Building a Better IP initiatives, and we are confident in our full year target of $200 million to $225 million of gross incremental earnings in 2022. We are excited by the opportunities we have to materially lower our cost structure and to accelerate profitable growth. Later on in our presentation, Tim will walk you through our first quarter progress. On capital allocation, in the first quarter, we returned $580 million to shareowners, including $406 million of share repurchases. This highlights the choices that our strong balance sheet and cash generation provide for us. Before we continue, I'd like to share some perspective on something that's top of mind. First and foremost, our thoughts and prayers are with the people of Ukraine. The stories, images and reports coming out of the country continue to be both tragic and troubling. Many of our own employees, especially those in Europe, have friends and family who are directly affected. As a way to help all the people impacted, we have continued to donate to support humanitarian relief efforts. With respect to our Ilim joint venture, we announced last month that we were exploring options, including selling our 50% interest. We are pursuing the completion of this work with urgency from engaging external advisers to having discussions with interested parties. The complexity of our JV structure may impact the pace of reaching a resolution, but it will not affect the urgency of our efforts or our commitments to resolve the situation in a responsible way. As we move through this process, we will continue to comply with all regulations and sanctions, and we will update our stakeholders when there is more information to share. Turning to first quarter results on Slide 4. Revenue increased by 14% year-over-year, driven by strong price realization in our 2 business segments. Operating earnings per share improved by just over 50% versus last year and we generated strong cash from operations. Margins in the first quarter were impacted by higher input costs and the execution of our highest maintenance outage quarter of the year. We do expect margins to expand in the second quarter, with further expansion in the second half of the year as price realization outpaces higher input costs and as we step down from higher maintenance outage quarters later in the year. I will now turn it over to Tim, who will cover our business performance and our outlook. Tim?

Mark Sutton:

Thank you, Tim. This is an exciting time for International Paper. Our team is focused on Building a Better IP and accelerating performance. And while I'm mindful that there are real concerns on the macro environment, I'm very optimistic about the path we're charting to accelerate value creation, and let me share a few of the reasons why I'm optimistic. First, I'm confident in our earnings outlook for the year and our ability to deliver strong earnings growth in 2022. Additionally, our focused portfolio and narrower geographic footprint has enabled our teams to focus on building a better IP. This is the first quarter in which we reported the earnings benefits from these initiatives. I'm very pleased with our progress and our momentum. We're on track to deliver $200 million to $225 million of incremental gross earnings this year. And lastly, during the past few years, we have significantly enhanced our financial strength. We view this as foundational because it enables the execution of our capital allocation framework, which has a clear objective to accelerate value creation for our shareowners. We have a clear path and the team to make it happen. Before we move to the question-and-answer segment, let me express my appreciation to Guillermo Gutierrez for his work heading up Investor Relations. Guillermo is moving to a new leadership role as Vice President and General Manager, leading our Latin American Packaging business. Mark Nelson has been named the new Vice President of Investor Relations. Mark has been with International Paper for 30 years and has served in leadership roles in finance and in general management. This transition is underway. So once again, many thanks to you, Guillermo. With that, operator, we are ready to take questions.

George Staphos:

Congratulations on the progress on the operations. My 2 questions are centered around the box business. So Mark, you talked a lot about, understandably, improving the packaging focus of the business and the capabilities on converting and we understand that. What are you doing on the sales and marketing side, the feet on the street to be able to leverage that increased capability both in terms of volume and ultimately in terms of margin? What are you doing in terms of changes in incentives, people you're adding? And then I had a follow-on.

George Staphos:

Okay. And then the follow-on, when we look at your slides this quarter versus last quarter and also reflect back on some of the commentary earlier in the quarter, we seem to recall that you had expected box volumes to be up in the quarter. Now maybe that was a channel comment, maybe it was a box comment, but in either case, volumes were down a bit. And at the same time, your price mix, looking at what you reported versus what your guidance was last quarter, was actually better. I think you got $114 million in the slide as you presented them. I think the commentary last quarter for looking out to 1Q is for positive 65 again, this is all on corrugated. Is there any relationship between the 2? Did you walk from business as you were implementing pricing? Any thoughts on those 2 points would be welcome and good luck in the quarter.

George Staphos:

Big thank you to Guillermo, and congratulations to Mark. We look forward to working with you.

Anthony Pettinari:

Congrats to Guillermo and Mark on the new roles. Since you last gave guidance, you realized the March containerboard hike and I think a number of fluff pulp hikes, and it seems like 1Q went maybe a bit better than expected. I'm just wondering, in terms of reiterating the full year guidance versus maybe moving to the higher end of the range, is it fair to say you see raw material costs and inflation maybe offsetting the positives that you've seen in the last two months? Or are you -- are there concerns about demand or is it maybe just too early in the year? Anything that we should think about as we think about you maybe getting to the higher end or the lower end of the full year guidance range?

Anthony Pettinari:

Okay, that's very helpful. And then George had a question on how you improve commercial performance and capabilities in Industrial Packaging. I guess I had kind of a similar question on Cellulose Fibers. I think Tim made some comments about maybe improving contract terms that can maybe help you next year. Just wondering to the extent you can, can you talk about improving the commercial performance in Cellulose Fibers, just obviously beyond the 6 hikes that you've announced, which are great, but any further thoughts there?

Operator:

Our next question comes from Adam Josephson of KeyBanc.

Timothy Nicholls:

Yes, you have the amount correct and there's no expectation of further dividends being paid this year.

Mark Sutton:

Yes. We've set our internal targets. What I've said externally is businesses got the potential to be at value-creating levels of return. I just mentioned in answering Anthony's question that that's -- we're just about there in the second half of this year, and you'll have to see it to believe it, I understand that. And we're well positioned for the business to be at that level of performance now like in 2022. So it's right upon us.

John Dunigan:

This is John Dunigan on for Phil. I wanted to start off by reiterating prior comments and say thank you, Guillermo, for all the help. We really appreciate it and good luck in your new role. I wanted to go back to the box shipment comment. Could you give any clarity on how the box shipments tracked throughout the quarter? Maybe how much was impacted by inventories in Prattville weighing on results maybe earlier in the quarter and then talk about how box shipments have tracked month-to-date?

Mark Sutton:

So John, Tim mentioned in his remarks when we were going -- when he was going through Industrial Packaging and he talked about the box -- IP box number but he also talked about the U.S. channels to the corrugated market. He explained what those were. On the slide, there's a minus 0.8 year-over-year. But that part, so that's the total U.S. channels minus 0.8 with a box number of minus 4. So what we didn't say is the rest of the channels is open market containerboard and our equity partnerships through sheet feeders. And we were up 14% year-over-year in that part of the channel. So participating in the end-use box market, while we had certain issues and our customers had certain issues, other channels through containerboard and through these sheet feeders were better positioned. Some of that was geographic. Some of that was size of account and size of customer. But our access to the U.S. packaging market, I think, is best viewed through that U.S. channels market. And so we offset some of our issues in our own box-making operations with those other channels such that our overall exposure was down just about 1%.

Timothy Nicholls:

Yes. I think if you look at our outlook slide, you can see that the business, given all the puts and takes, is roughly expecting same level of performance in the second quarter than we had in the first. So there's a number of dynamics, but rather than going through all of those, I think the earnings expectations, what's important is right in line with first quarter.

Mark Weintraub:

And also my thanks to Guillermo for all your help in the last several years. You mentioned that the production system is now better aligned, and that certainly was something that had been an issue last year. Did the benefits from that show up in the first quarter? Or is that something that's going to start showing up more on a go-forward basis? Maybe I'll start there.

Mark Weintraub:

It does. That's super helpful. And so was the issue with the volumes through your box system, so is it -- that was primarily more -- I mean, you mentioned it was customer where they didn't have facilities other and maybe that's a function of your customer mix being more heavily focused on those types of customers? And/or the other -- or was it that you were particularly hard-hit by Omicron in terms of your facilities? And I guess we'll see where the industry data is soon enough. But trying to sort of understand how much of it was specific to you guys versus just more normal across the industry type of events.

Mark Weintraub:

Okay. Because you talked about kind of getting back in line with industry growth in the box business, is there anything that sort of put that on delay from your perspective from what you would have said previously?

Operator:

Our next question comes from the line of Gabe Hajde of Wells Fargo.

Mark Sutton:

First part of your question, Dave, yes, we are seeing, as you expected, increased demand for export. Port congestion is a timing issue for getting it there in a reasonable time but the demand is picking up. Our output is in much better shape. We had a good year of annual outages in '21 after a choppy 2020 because of COVID and construction availability, plus we've got the big issues behind us that affected our containerboard output all the way through our box plants. So we've got more containerboard to sell through all the channels. Still working very hard to manage the part that goes offshore through the ports. Look, we like our North American mill system. We think it's globally competitive for the long term. We don't get too excited about short-term trends of high, high OCC or low, low OCC. The business model we have and the mix we have between virgin mills and recycled mills and the overall fiber makeup, we have renewable natural resources coming into our company. We convert them, making most of our own energy in a carbon-neutral way, and we make corrugated boxes that are recycled. And I think that business model is a strong, strong business model from a profitability standpoint and a sustainability standpoint. All the other discussions about recycled in different parts of the world, I'll start with that. You have to be a renewable natural resource that's virgin fiber to even have a discussion about recycled. And we are well positioned at about 65% wood fiber coming in, 35% recovered paper, making most of our own energy, I really feel very strong and our customers do as well about our sustainable business model.

Timothy Nicholls:

I'm sorry?

Timothy Nicholls:

It's hard to say. We're finalizing last bits of Prattville and whatnot, so I wouldn't predict at this point.

Mark Wilde:

Congratulations on a good quarter and congratulations to Guillermo. Tim, I have a question for you first. And that is, it sounds to me like over the last 18 months, you may have been kind of subcontracting out some more of your box volume, just with kind of a tight labor market and strong demand from some of your customers. I wondered if first, you could confirm that. And secondly, as you bring that back in-house, what might the margin impact of just that element alone be?