International Paper Company — 2024 Q1

So Matthew, I think you're asking, we had outlooked closer to maybe $70 million and we overachieved that. Tom Hamic, I think, can walk you through a lot of moving parts on that. But I think he can walk you through how we basically overachieved our outlook.

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.

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.

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?

Thanks, Mark, and Mark, thanks for the question. I think speaking to the containerboard side of the equation, there's a couple of things going on to keep in mind. One is the inflationary situation. So if you step back and think about what's happened in the last couple of years and how to think about that in the context of where we are, the cost to deliver the same value to customers has really increased dramatically over the last couple of years, and we see that again as we step into 2024, and we saw a meaningful impact in our 1Q numbers. We'll see -- and this is related to all of this inflation. And we'll see another step in 2Q. And then you can really think about that kind of leveling out from there.

Mark, this is Tom Hamic. I think, Jay and Mark laid it out very well. I would say the one difference with the box business because we are increasing maintenance spending is that it's very targeted to places where either we've struggled with reliability or we have an opportunity to grow. So if you look across the country, it's not that we're spreading the maintenance dollars. We're really reacting to the marketplace and the strength of demand. And then we're targeting maintenance spending to improve reliability for those customers. While at the same time, we're improving our margins. So this real focus on reliability and delivering on time, it's going to pay off.

Mark, this is Tom Hamic again. I think there is a large part of it that is adjusting. But I think the key is what I talked about earlier is we've got to respond to the market, and we can't wait for the market then respond. And so there's a bit of this that is getting ready, as Jay talked about, for what we see as an expansion in box demand going forward. And one of the really positive things about maintenance expense in the box plants is what we've seen is a very short payback. So we're seeing the results. We're tracking the results and I feel very good. It really is our fastest way to react to customer needs. And so I feel very confident what we're spending is going to pay off.

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.

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?

Charlie, this is Mark Sutton. Thank you for your questions. I'll take the first one and our CFO, Tim Nicholls, will take the second one on the corporate expenses. On the pricing, we don't comment on forward-looking pricing. We obviously -- IP had an announcement of $70, $40 was recognized. There's lots of reasons for that in the way that the index discovers price through the analytics. So, I think we would just stop there and say that's what we had. That will flow through the next few quarters, but we really don't -- we don't forecast or talk about forward pricing that hasn't kind of published in an index. Tim, do you want to take the corporate expense question?

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.

Thanks, Mike.

I think the number we've always thrown out there was an EBITDA margin that led us to a really strong ROIC, several hundred basis points above our cost of capital. At yesterday's revenue line, that used to be in the 20s. But I think for us, that's an aspirational target to get back into that area. But even at today's revenue and 18% margin generates very strong ROIC similar to what a 21% margin used to generate. So I think that's the sort of milepost we're working toward now is getting up into those high teens, 18-ish percent on our way to 20%. And if you kind of take that to an ROIC, you've got a really strong kind of mid-teens ROIC in the packaging business. And then you put some growth on top of that, and I think the value creation can be pretty powerful.

I think the answer to that question is going to depend a lot on what Tom Hamic talked about, and that is this steady improvement in demand and the consumer and when this turn occurs, obviously, those margins would be indicative of a healthy economy, which leads to a healthy box market. So we would think several quarters before we're sitting at that point. But we should see a step change in improvement in the margins as we go through quarter by quarter by quarter. I'd like to say a point in time in '25, but it's really going to depend on the demand environment but it's not that far in the future.

Yes. That's a good question, Mike. At that conference, what I was discussing during COVID on some of our large contractual type customers that are in certain types of end-use segments, their growth rate was so astounding, and we had an obligation, if you will, to support their demand either as a percentage of their buy or some other metrics inside our contracts. And they grew at an outsized rate the other segments and some of the smaller customers. And as it absorbed basically all of our capacity, we had to leave certain customers in certain segments where we didn't have those contractual obligations because we just had no more room in our converting system.

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.

Yes. I think the inflation comments are right on. It's a very extraordinary period that we're in versus the last decade or a couple of decades, and so certainly a step change in that regard.

Sure. And I think Mark, Gabe, summed it up well. I would say the increase if you're -- there is an increase in the box spending that is focused on reliability. If there's any change in our focus, I would say that in the past, we were comfortable running over time. So say, 2 Saturdays a month in a box plant. But that doesn't -- that might you get the orders made, but it doesn't satisfy the reliability. So we've become very focused on on-time delivery and quality. And there is significant amount of maintenance spending that we're targeting towards that shift. And frankly, it supports our margin structure going forward.

Gabe, this is Mark. I think you broke up on the first part of your question, but I think we got the gist of it. On the $110 million, yes, it's a fair assessment to say you can annualize that number. And that is definitely inside of the build better IP. But I didn't hear the very first -- we didn't hear the very first part of your question when you were referencing the bridge, one of the bridges.

Yes, that's the part we didn't hear Yes, that's correct. And that's the right way to think about it.

Well, I'm glad I got to get on this call because I wanted to thank you, Mark, for all the help over the years, really appreciate it.

Yes, this is Tom Hamic. I think we can comfortably separate the 2. So the improvement you saw in Q1, as Mark said, it's sustainable. The $40, I expect to be like it always is. I mean if you think back to previous price increases, you should feel confident that it's going to flow through the same way. But I would see those a bit separate. In terms of continuing the margin expansion there's a lot that gives me confidence. Piece 1 is we're investing significantly in our commercial capability. And that's a shift. We've always focused on commercial, but not as much as we are going forward.

Got you. Okay. That's helpful color. I guess my question -- my next question is just really on the operations front. I know there in the COVID years, you had some operational headwinds that perhaps limited your ability to kind of grow the market, you're obviously going through a stretch here with the Go-to-Market strategy. But when we kind of think going forward, are you set up properly now to kind of growth of market on the operations front in terms of production. And then some of the investments you've made on the box side, give us an update there. Are you starting to see that take hold and be well received in the marketplace? And as you kind of pivot to maybe a better mix in customers, give us a little perspective on, is there a target percentage in terms of regional customers versus national in some medium- to longer-term time frame?

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.

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.