International Paper Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
January 27, 2022

There are 12 speakers on the call.

Operator

Good morning and thank you for standing by. Welcome to today's International Paper 4th Quarter and Full Year 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be the opportunity to ask questions. I'd now like to turn today's conference over to Guillermo Gutierrez, Vice President of Investor Relations.

Operator

Sir, you may begin.

Speaker 1

Thank you, Angie. Good morning and thank you for joining International Paper's 4th quarter and full year 2021 earnings call. Our speakers this morning are Mark Sutton, Chairman and Chief Executive Officer and Tim Nichols, Senior Vice President and Chief Financial Officer. There is important information at the beginning of our presentation on Slide 2, including certain legal disclaimers. For example, During this call, we will make forward looking statements that are subject to risks and uncertainties.

Speaker 1

We will also present certain non U. S. GAAP financial information. I would note that the Printing Papers business segment is now reflected as discontinued operations from 2019 to 2021. Lastly, relative to the Ilim joint venture, Slide 2 provides context around the joint venture's financial information and statistical measures.

Speaker 1

I will now turn the call over to Mark Sutton.

Speaker 2

Thank you, Guillermo and good morning everyone and thank you for joining our call. We will begin our discussion on Slide 3. In 2021, we serve a strong customer demand in a really Highly challenging operating environment due to the continued uncertainties associated with COVID-nineteen. I am really proud and appreciative of the commitment of our employees We continue to take care of each other and to take care of our customers. Our employees' health and safety is our most important responsibility.

Speaker 2

Looking at our performance, International Paper grew earnings and revenue while managing through significant operational and supply chain constraints. For much of 2021, we operated with a sub optimized system, which limited our ability to capture the full opportunity that comes with a strong demand backdrop. We made strong progress on price realization from prior increases to mitigate the impact of substantial cost pressure from inputs and distribution. While we anticipate the near term operating environment to remain fluid, we expect to grow earnings meaningfully into 2022. We are building a better IP.

Speaker 2

We're a corrugated packaging focused company with less complexity and more focus. We have initiated meaningful actions to materially lower our cost structure and accelerate profitable growth. We have a strong balance sheet. We reduced debt by $2,500,000,000 in 2021. Our pension plan is fully funded and we will invest to grow earnings and cash generation by building our capabilities and capacity in our U.

Speaker 2

S. Fox system over the next few years. We are also well positioned to return meaningful cash to Shareowners. In 2021, we returned $1,600,000,000 to shareowners, including about $800,000,000 in share repurchases. Turning to the full year results on Slide 4, revenue for International Paper increased by 10%, driven by strong price realization in our 2 business segments and operating earnings improved by 50%.

Speaker 2

Operation margins were impacted by input, operating and distribution costs, which outpaced price realization. Looking at segment performance, Earnings in our Packaging segment decreased by about $100,000,000 year over year with significant cost headwinds from fiber, energy and distribution, while our earnings in our Cellulose Fibers business improved by about $200,000,000 driven by commercial improvements and price recovery. Equity earnings were $313,000,000 driven by very strong performance from our Ilim joint venture, which delivered EBITDA of $1,100,000,000 in 2021. Free cash flow was 1,500,000,000 I would note that free cash flow included about $500,000,000 in tax payments related to the various monetization actions that we took in 2021 as well as payroll tax payments related to the CARES Act. Turning now to Slide 5, revenue in the 4th quarter increased by about $650,000,000 or 15% compared to last year.

Speaker 2

We delivered EBITDA of $645,000,000 Margins decreased primarily due to higher operating maintenance and input cost. This was partially offset by price realization. And I would note that input costs were higher than anticipated. Free cash flow in the 4th quarter was impacted by about $300,000,000 in tax payments, again, related to the various monetization actions that we took throughout 2021 and the impact of the CARES Act. I'll now turn it over to Tim, who will cover business performance and our outlook.

Speaker 2

Tim?

Speaker 3

Thank you, Mark. Good morning, everyone. I'm on Slide 6, which shows our year over year earnings bridge. Price and mix improved with strong price realization across all of our channels. Mix was also favorable driven by growth in higher margin U.

Speaker 3

S. Packaging channels and lower export containerboard volume. Volume was essentially flat versus last year. Significant operational and supply chain constraints limited our ability to capture the full benefits of a really solid demand backdrop. Our North American Packaging business operated with depleted inventories throughout much of 2021, which increased our costs across the system.

Speaker 3

Across the company supply chain operating costs increased $170,000,000 or about $0.35 per share representing more than half of the increase Operations and cost in 2021. The second half of twenty twenty one was especially challenging due to the slow supply chain velocity and very poor Maintenance outages increased as planned following deferrals we chose to make in 2020. Input costs rose sharply across just about every category. Costs increased throughout the year with $370,000,000 of higher input costs just in the second half of twenty twenty one, resulting in Tax expense was lower by $0.17 per share with an effective tax rate of 19% as compared to 25% in 2020. These benefits were partially offset by higher corporate costs following the recent spin off as expected.

Speaker 3

And lastly, equity earnings improved by $0.57 per share. Ilim equity earnings increased by $0.66 while equity earnings from Graphic Packaging decreased by $0.09 Moving to the quarter over quarter earnings bridge on Slide 7. 4th quarter operating earnings per share were $0.78 as compared to $1.10 in the 3rd quarter. Price and mix improved by $0.22 per share with strong price realization in our North American Packaging business, partially offset by mix associated with labor challenges in our U. S.

Speaker 3

Box system. Volume improved less than we anticipated, primarily due to the significant Omicron related labor and supply chain constraints late in the Q4, especially in the U. S. Box system. Many of our suppliers, customers and logistics providers have also reported labor impacts due to the ongoing COVID resurgence.

Speaker 3

In our Global Cellulose Fibers business, fluff demand is solid. However, vessel delays worsened in the 4th quarter and limited our volume potential. Operations and costs were a headwind in the quarter. The cost impact in the 4th quarter from the tank failure at Prattville Mill was less than we anticipated due to timing. Additionally, we received $40,000,000 of insurance proceeds for Prattville.

Speaker 3

Operating and distribution costs were impacted by poor reliability from logistics providers across every mode of transportation. Maintenance cost increased sequentially as planned. Input cost increased by $0.22 Per share were about $110,000,000 with energy, fiber and chemicals rising in the 4th quarter. Corporate expenses and taxes increased sequentially and interest expense decreased. Element Equity earnings were lower sequentially, partly due to supply chain limitations resulting from increased health measures on rail shipments to China.

Speaker 3

Turning to the segments and starting with Industrial Packaging on Slide 8. In North America, demand in the 4th quarter was solid across all our channels, Including boxes, sheets and containerboard. However, Omicron intensified supply chain and labor constraints Almost on a daily basis to deliver for our customers. We're experiencing very stretched supply chains and poor Carrier reliability across just about every mode of transportation, which puts significant strain on our shipments and cost pressure on our mills and box plants. Our mill to box plant velocity for containerboard is running 3 to 4 days longer than our normalized flow and in some lanes even longer.

Speaker 3

The lost production of Prabgo in the 4th quarter further stressed our network and operating costs. Production at the other mills in our system was 100%. Looking at the 4th quarter performance, price and mix was strong with very good progress on price realization of our August increase. This was partly offset by weaker mix related to higher export shipments in the 4th quarter as expected. Volume improved by $20,000,000 sequentially on strong seasonal demand in North America and EMEA despite 3 fewer shipping days.

Speaker 3

As mentioned earlier, box shipments in North America were impacted by supply chain and labor constraints, especially in the latter part of the quarter due to the COVID Omicron variant. Operations and costs were a headwind. Operating and distribution costs in our mills and box plants increased. We operated with very lean containerboard inventories and higher distribution costs throughout most of the 4th quarter to compensate for lost production That's Praful Mill. The cost impact of Praful in the 4th quarter was about $40,000,000 and we did receive $40,000,000 in insurance We are currently in the process of restarting the second Prattville machine and expect additional cost in the Q1.

Speaker 3

Input costs increased by $90,000,000 in the quarter. Energy accounted for $40,000,000 of that total, including $15,000,000 in Europe where energy prices rose to historically high levels. Wood and OCC accounted for another $35,000,000 despite modest relief in OCC costs in the latter part of the 4th quarter. Wood fiber costs rose sharply in the 3rd and 4th quarters due to the challenging operating conditions, especially in southern regions as well as inbound transportation constraints. We expect difficult operating conditions and elevated costs in the Let me turn to Slide 9.

Speaker 3

Earlier in the month, we announced plans to build a new corrugated box plant in Eastern Pennsylvania. The new box plant will complement our Northeast box plant network and support customers growth across multiple customer settings. We expect the new plant to start early 2023 and deliver returns of about 20%. We plan to further invest in our UX BOSS system to build out needed capabilities and capacity. Investing in our UX BOSS system is One of the elements of building a better IT to accelerate profitable growth in our most attractive business.

Speaker 3

We have some regions where we are limited on box capacity. We have plans to increase capital investments at existing plants as well as invest in new box plants in the next few years. We will ensure we have the right capabilities and capacity to grow earnings and cash. Moving to Cellulose Fibers on Slide 10, I'll start with a few comments on our performance in 2021. We made progress on our commercial initiatives with price mix and volume contributing about $450,000,000 of improvement.

Speaker 3

Demand for flood pulp was solid throughout the year. However, the operating and supply chain environment was extremely challenging, which affected shipments and costs. We also experienced distribution and input cost pressure of more than $200,000,000 with inputs rising in just about every category. For the full year 2021, our earnings improved about $230,000,000 versus 2020 and we expect further improvement in 2022. Taking a look at the 4th quarter, demand for fluff pulp is strong globally and our backlogs are healthy.

Speaker 3

Looking at our sequential earnings, product mix impacted earnings by about $5,000,000 volume decreased by $10,000,000 due to shipment delays. Our shipments continue to be negatively impacted by port congestion and vessel delays, which worsened in the 4th quarter. Keep in mind that we export about 90% of our volume in this business. Operations and costs decreased earnings by about $10,000,000 driven by higher distribution costs, lower energy sales and the non repeat of nitrogen credit sales in the 3rd quarter. These headwinds were partially offset by a favorable planned maintenance outage cost increased sequentially and input cost increased primarily due to higher chemicals and energy costs.

Speaker 3

Turning to Ilim results On Slide 11, the joint venture delivered equity earnings of $66,000,000 with an EBITDA margin of 39% in the 4th quarter. Volume and costs were impacted by distribution constraints related to COVID health measures on rail shipments to China. Ilim expects these conditions to continue into early February. For the full year, Ilim delivered outstanding earnings performance with adjusted EBITDA of 1,100,000,000 Average margin of 40%. Ilim's strong operational performance and low cost system make it a powerful cash generator.

Speaker 3

We received dividends of $154,000,000 in 2021 and expect to receive about $200,000,000 of dividends in 2022. I'm going to take a moment to update you on our capital Thank you, everyone, and welcome everyone to provide clarity on what you can expect from International Paper in 2022. Let's start with the balance sheet. We will maintain a strong balance sheet and have a great credit rating. As we As we've said previously, we're comfortable taking our leverage below our target of 1.8 times debt to EBITDA on a movies basis.

Speaker 3

We reduced debt by $2,500,000,000 in 2021 and more than $4,000,000,000 over the last 2 years, with about $900,000,000 to do over the next 5 years. Taking a look at pension, we're very pleased with the performance of our plan. Our qualified pension plan is fully funded with a surplus of about $600,000,000 at year end. We feel really good about the actions that we've taken to improve performance and we closed 2021 with a leverage of 2.5 times on a Moody's basis. Returning cash to shareholders is a meaningful part of our capital allocation framework.

Speaker 3

In 20 $600,000,000 to shareholders through dividends and share repurchases. And over the past 5 years, we've returned $6,000,000,000 to shareholders or about 63% of free cash flow. Looking ahead, we're committed to a competitive and sustainable dividend with Payout of 40% to 50% of free cash flow, which we will continue to review annually. Of available authorizations. We will continue to execute on these authorizations in a manner that balances the investment needs of the business and maximizes value for our shareholders.

Speaker 3

Investment excellence is essential to growing earnings and cash. CapEx in 2021 was $550,000,000 which was less than we planned due to the timing on equipment delivery and a challenging contract labor environment. Turning to 2022, we are targeting capital spending of $1,100,000,000 The planned increase is primarily for strategic projects in Packaging business to build out capabilities and capacity in our box system to drive profitable growth. We also plan to increase funding for cost reduction projects with expected returns in excess of 25%. We will continue to assess disciplined and selective M and A opportunities to supplement our goal of accelerating profitable growth.

Speaker 3

You can expect M and A to focus primarily on bolt on opportunities in our packaging businesses in North America and Europe. Any potential opportunity we pursue must create compelling value for our shareholders. If we turn to Slide 13, before we get into the details of our outlook, let me frame up how we're thinking about this year. 1st and foremost, we're confident in our ability to grow earnings in 2022 and we project our full year EBITDA to be in the range of $3,100,000,000 to 3 point $4,000,000,000 Having said that, we expect 1st quarter earnings to be impacted by a very challenging operating condition and related to the Omicron variant and our highest maintenance outage quarter. As we said earlier, Omicron intensified supply chain and labor constraints in December, which impacted volume and cost.

Speaker 3

That impact intensified in January as cases increased, impacting our workforce, suppliers, customers and logistics providers. Our assumption is that Conditions will begin to improve late in the Q1 as Omicron cases begin to subside. Looking at the full year, we expect a solid demand environment for corrugated packaging in pulp with demand growth normalizing as we recover from the near term Omicron constraints. We're also making good progress on our Building A Better IP set of initiatives, which ramp up as the year progresses. Lastly, we are positioned to optimize our mill and box plant from the various disruptions of 2021, which will further improve our operating and distribution costs.

Speaker 3

We understand the challenges of the Q1 and how we will navigate these near term headwinds to ensure the company delivers on our full year outlook. So if we turn to Slide 14, we'll take a look at the Q1. Given the heightened level of near term noise, the Q1 outlook we provide A range of those items where the timing of Omicron recovery presents greater uncertainty. So we'll start with industrial packaging. We expect price and mix to improve by $65,000,000 on the realization of our August 2021 price increase.

Speaker 3

Volume is expected to decrease by $15,000,000 to $35,000,000 with a gradual recovery in the Q1. Operations and costs are expected to decrease by $60,000,000 to $75,000,000 which includes additional costs related to PRATCO. Staying with industrial packaging, maintenance outage expense is expected to increase by $118,000,000 The first quarter will be our highest outage quarter this year, representing about 40% of total planned outage cost in 2022. 1st quarter maintenance expense includes the Riverdale printing papers machine. This cost will be fully recovered as part of the Transfer price to Sivana over the course of the year.

Speaker 3

Lastly, input costs are expected to decrease by $30,000,000 to $40,000,000 In cellulose fibers, we expect price and mix to be stable. We expect volume to decrease by $5,000,000 due to ongoing vessel Ladies, operations and costs are expected to decrease earnings by $45,000,000 related to the higher seasonal Cost and non repeat of LIFO benefits in the 4th quarter. Maintenance outage expense is expected to increase by $11,000,000 The first quarter will be our highest maintenance outage quarter this year, also representing about 40% of total planned outages in 2022. 1st quarter maintenance expense includes Georgetown credit figures. This cost will be fully recovered as part of the transfer price to Sildama over the course of the year.

Speaker 3

Lastly, The input costs are expected to increase by $5,000,000 mostly due to higher energy costs. Moving to our full year outlook on Slide 15, We are projecting full year 2022 EBITDA for the company of $3,100,000,000 to $3,400,000,000 I would note that our outlook only includes the impact from previously published price increases. Free cash flow is expected to be $1,300,000,000 to $1,500,000,000 And as a reminder, our 2021 free cash included about $300,000,000 generated by the printing papers business, which was part of International Paper through the Q3. We are targeting CapEx of $1,100,000,000 with increased investments in our U. S.

Speaker 3

Box system. Our free cash flow projection also includes about $100,000,000 of cash used for the execution of our Build A Better IP set of initiatives, as well as $60,000,000 of payroll taxes related to the CARES Act. Lastly, this slide includes our outlook for corporate items and our expected tax rate of 25%. With that, I'll turn it back over to Mark.

Speaker 2

Thank you, Tim, for all the details and for walking us through the key earnings drivers. As we look ahead, I'm very confident in our ability to grow our earnings in As we exit the Q1 and our team is laser focused on delivering $200,000,000 to $225,000,000 from our Build A Better IP initiatives. We have a clear plan

Operator

Your first question comes from the line of Gabe Hajde with Wells Fargo. Please state your question.

Speaker 4

Good morning, Mark and Tim. I hope you and your family are well.

Speaker 3

Good morning, Tim.

Speaker 4

I had a question. I know it's probably an oversimplification, But when I think about your North American corrugated business, we don't yet know obviously industry data, but U. S. Box shipments down 3.3%. Can you talk about how much of that is missed opportunity and perhaps the market itself is still growing Versus maybe some customers that are having to go to competing suppliers.

Speaker 4

And relatedly, to the extent, I guess, you can comment and that's true, What you may have to do to kind of re earn that business? I suspect it's better on time delivery service, etcetera, but just If you could expand on that a little bit.

Speaker 2

Yes. I think it's a great question, Gabe. The results we posted in the Q4, so I don't know what the market will be, But half of our sort of gap to what we think the market was like just given Our participation rate in all the segments was really due to our inability to service demand that was there related to The gyrations caused by the lack of containerboard from Prattville. And so just practically speaking, what that means is we've got to source that board from another mill, and it just so happens some of those other mills are in the most rail congested shipping line. So getting it to the box plant in time to meet the order expectation by the customer was compromised.

Speaker 2

It's a different version of the same thing we struggled with after The winter storm and freeze earlier in the year, which took a number of took 150,000 tons off line for us Just based on the geography of our plants. And the other half of what we think we missed relative to where the market might be Is really just our own impact in our company and in our supply chain partners with labor around Omicron. Now the good news, if there is good news in all of that is as we look at our key targeted Customers and the customers we have large positions with, it doesn't appear that we're losing any share. What we have not been able to do and And consistent really since the Q2, when we were coming out of these production disruptions, We have not been able to enjoy some of the incremental growth. Everybody in the industry has been running relatively So finding replacement packaging, if you don't have incremental capacity coming online, I think has been a challenge for a lot of customers.

Speaker 2

So lack of ability to take advantage of incremental growth so far has been where the quote damage has been limited to and we're ready to Be able to be in a position post the Q1 when Pratt Mills fully back online, big chunk of these outages are behind us and our system can be optimized again where we're shipping from the correct mill to the correct set of box plants, our costs will go down as well and We should be in very good shape to take advantage of what the market has.

Speaker 4

All right. Thank you for that, Mark. So I guess it's fair to say that Q1 is kind of a trough for the company overall and then obviously second half will be much stronger. And then I guess my other question was where will we see benefits from Build Better IP, is that going to show up in operations as you present it, I guess, in your earnings bridges? That's sort of where I'm curious.

Speaker 4

And then The cadence of that over the course of this year and again, I don't take this the wrong way, but it doesn't feel like there's a whole lot showing up in Q1.

Speaker 3

Yes. And we'll report out in Q1 when we get to the end of the quarter. So it'll show up mostly in cost. Now we do have As we go into next year, we do have growth initiatives that we believe will begin ramping up. But Early on, it's going to be in a couple of places.

Speaker 3

1, just rebalancing for the stranded costs that we have from Silvamo. We shared a slide I believe last quarter that showed that we have just under $100,000,000 of costs that we will overcome As we go through this year and then the other place where there's significant opportunity that we'll See ramp up as we go through the year and these are things that we've been working on for 12 plus months is around process optimization. And a lot of that has to do with how we source inputs in our global sourcing organization, there's some supply chain impacts. And in our industrial packaging business, there's actually a lot of Advanced technology projects that are being deployed for allowing us to operate Slightly differently and make better operating decisions real time in the moment. And so we had targeted the $200,000,000 to $225,000,000 for this year gross, which will overcome And then some of the $100,000,000 that we have in stranded cost.

Speaker 3

And we'll be as we go to the Q1, we'll start sharing Quarterly updates and we'll do that throughout the year.

Speaker 4

Thank you, gentlemen. Good luck.

Operator

Your next question comes from the line of Mark Weintraub with Seaport Research. Please state your question.

Speaker 5

Thank you. Just on the Global Fiber side, wanted to clarify, I think you indicated You expected earnings to be higher in 2022 than in 2021. And you've also indicated when you're providing your Outlook for 2022 that you weren't including any price increases that haven't been published. So I just want to confirm that, that Statement also didn't include the latest round of increases that you've announced on Fluff Pulp. And then to fill it in, given obviously based on the guidance, Q1 is starting pretty deep in the hole.

Speaker 5

What is it that's going to drive this superior or this improved earnings in 20 'twenty two over 'twenty one because it would seem to be something beyond at least the types of published prices that we tend to see.

Speaker 2

So Mark, you're correct on the first two points. Those price increases are not in the commentary, are not Considered in the full year outlook, there is a lot of that was done in the Q2. So what we got is a strong demand environment. We got the full year benefit Of the prior published price increases, which I'm sure you're modeling correctly, We have the $200,000,000 to $225,000,000 of initiatives that are part of our reimagine building a better IP. And very, very importantly, which we haven't had really since the Q2 of last year, we should enter the Q2 of this year With our mill our containerboard mill system and our containerboard box system back in balance.

Speaker 2

So that means Not paying premium freight because we're shipping off of our contractual rates, we're shipping from the wrong geography, all of the things we've been struggling with that Fortunately, probably added cost to our company beyond just the market goes away. So a well organized back to our Normal supply chain configuration for 3 quarters of the year, we feel really good about being able to Put the Q1 in perspective and again what Tim walked you through was a range because we are trying our best to be realistic about how long The disruptions related to Omicron last for us and our supply chain goes back to full staffing and all that sooner. We're just trying to be as transparent as we can, but we believe we're going to be set up, especially because the company will be optimized

Speaker 5

Thank you. And so that would be true on the cellulose because I guess The question was really just to make sure I heard right that you expected Global Cellulose to be higher and so it's also a better positioning. I guess I was trying to understand whether some of the commercial initiatives that you've talked about are also an important part of the global

Speaker 2

And so, Mark, almost all of the improvement in Global Cellulose Fibers in 'twenty one and into 2 has been the commercial changes we're making and continue to make to the business. Without going into a lot of detail, the business is Mostly absorbent pulp and of the absorbent pulp there are 3 types of channels sort of what might be called Spot are month to month, there is long term volume based contractual and then there are some other Configurations, each of those has a different pace of changing commercial terms, how fast prices go through. We'll have the full year Of this pricing environment, we're making changes. You can see it in some of the data around fluff pulp versus others. And when we get to the second half of the year, I mean typically we've had 1 quarter, which is a low maintenance outage quarter where the business produces 20% plus margins and cost of capital returns, we should see that in the entire second half of the year.

Speaker 2

And then as we go into 'twenty three, we start to see that for 3 out of 4 quarters and then we're going to have a business where I said we would get it, which is value creating Throughout a full year and a big portion of that is driven by the commercial changes. After or not after, but As we get through the commercial changes, we'll begin to make some of the investments necessary to structurally reduce the cost to make the product primarily in the legacy IP mills where our cost structure is reflective of those mills being converted mills and not built for So it's moving in the right direction. The commercial changes we're making are working and the business will be profitable this year. It will be better than last year and it will be around the cost of capital for the final

Operator

Your next question comes from the line of George Staphos with Bank of America. Please state your question.

Speaker 6

Thanks very much. Hi, everyone. Good morning. Thanks for the details. Congratulations on all the efforts and progress this year.

Speaker 6

I guess my first Questions kind of joined at the hip around the box business. Mark, can you talk a little bit about what kind of shipments or bookings you're seeing Early in the quarter or at least from a market standpoint, if not for IP. And then when we look at Pennsylvania and the investments that you're There, you talked about 20% returns when you're done with the project. Do you have similar abilities with other box Plant projects to get that kind of return. And then

Speaker 2

I had a quick follow on. Yes. So the January It's very difficult to get any visibility to because what we've got is a fair amount of demand in orders, but the inability to get it made or to get it Shipped or for our customers to accept it. So I don't know how to give you a real focus on January. What we are hearing though is that our end customer Demand is not dissipating at all.

Speaker 2

So I think what's going to happen is demand will be shipments will be choppy in January and probably most of February. If this virus curve tracks like it looks like it's tracking, I think there'll be a tremendous amount of inventory replenishment activity starting in March And the quarter will it will come out in the quarter, but January is very choppy just because of the hit and miss ability for us to get Most of it's labor related for us to get boxes made. If we have them made, getting them shipped and for our customers, especially some of the large customers to be able to accept the shipments because they're running at a reduced rate. The second part of your question, can you repeat it, Yes,

Speaker 6

Mark, just on yes, no worries at all. The Pennsylvania box plant and the returns that you're targeting there, can you replicate that kind of return with other Box plant investments that you have in your investment horizon over the next couple of years. And sort of my follow on question and I'll hand it over here. There does seem to be a fair amount of box plant capacity coming into the Pennsylvania Delaware region. Does that give you any pause relative to your And when we think about the European business where the returns have been probably below expectations last couple of years, How do you see that improving and fitting strategically with an IP?

Speaker 6

Thanks and good luck in the quarter.

Speaker 2

Thanks, George. Yes, the box plant question, We do have other opportunities. There could be somewhere between 3 to 5 box plants geographically placed with the same set of economics, A market area where we are low on capacity and a customer list that wants to buy more from us and it's fully integrated with our mill system. That gives you A return in the 17% to 22%. So we think we've got several more 20% opportunities for new box plants And we've got many opportunities, as I mentioned on our last call and at the last conference I spoke at, that we have to put additional equipment inside of existing plants that have the physical room and Inside of existing plants that have the physical room and space and are in the right market geographies.

Speaker 2

So when Tim talked about capital Expenditures moving up, most of that is for converting capability and capacity throughout the U. S. Box system. On the Europe question, the Europe returns are moving up. I think, again, we got to look at the moment of extraordinarily high energy cost.

Speaker 2

Natural gas is at all time highs. We don't think that will stay that way. We've got the normal lag in recovery of When you look at the value of integration from these small acquisitions we've made, the business is at a value creating return level in the not too distant future. So with one large mill and it being 100% on purchased power because it's recycled, that natural gas Phenomena, if you're following it in Europe, is a huge blow to the profitability, but it's a moment in time. It's not a we don't believe it's a permanent issue.

Speaker 2

Thank you very much. Thanks, George.

Operator

Your next question comes from the line of Anthony Pettitinari with Citi.

Speaker 3

Good morning.

Speaker 7

In containerboard, can you talk a little bit more about Your inventory levels, it seems like from industry data, mill inventories are somewhat elevated versus history, but Some of your competitors have flagged box plant inventories as quite lean. Just wondering with all the moving pieces in Prattville, how you think about your inventories and kind of getting back into balance?

Speaker 2

Yes. It's a great question, Anthony. I think the inventories and this is In the IP perspective and it may be what others are saying as well, the absolute number is less important right now versus where It is and how fast or slow the supply chain is moving. So we have struggled with having not enough inventory regardless of what the absolute number Might be to really take advantage of sourcing our box plants with Board through most of 'twenty one. It started back in February, March and we never really were able to catch up because demand kept accelerating.

Speaker 2

So we think we've got inventory as we enter 2 in a much better position. It's not all in the right place. Our experience is also that our box plants Still don't have everything they need. The paper is made. It's sitting at a mill in a warehouse and we're waiting for railcars to get switched To a specific mill, we have several mills below a certain rail line that kind of joins up in Birmingham.

Speaker 2

South and east of that is the biggest choke point in the country right now. So moving our containerboard into our box network has been Just a random occurrence almost every day. So our inventories are better, but I measure it as Can we fund the box plants with the Board they need at the moment that they need it, and we're still not where we want to be on that.

Speaker 7

Okay, that's very helpful. And then maybe just a question for Tim on Ilim. The ruble has plunged, I think, to multiyear Obviously, there's some geopolitical uncertainty there. How does that impact how does the move in the ruble impact what Ilim might report in 1Q? And then is there any operational impact or potential future operational impact if tensions worsen or just any thoughts there?

Speaker 3

Yes, it's really hard to speculate You know that scenario or what might happen or how the U. S. Government might respond. I think the good news is from a currency standpoint, there is very little exposure From currency movement to the debt position, they hold a lot of debt in rubles and so They're somewhat insulated from maybe what we would have seen in prior periods. And we also referenced And the speaker comments about the dividend and that dividend is paid out of The entity in Switzerland, where they manage all of their export sales and currently it's viewed that there is sufficient cash And that entity would be able to pay the dividend unless there's some other type of restriction.

Speaker 3

So we feel pretty good about They're positioned and especially how they're running the business, but from a finance standpoint, they seem to be in pretty good shape.

Speaker 7

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

Operator

Your next question comes from the line of Paul Quinn with RBC Capital Markets. Please state your question.

Speaker 7

Yes, thanks very much. Good morning. Just a question on Global Cellulose Fibers. I see some price increases and your guidance doesn't reflect those recent price increases. But then just overall on pricing, the Spread between fluff and NBSK is at a historical high.

Speaker 7

If I look back at the last 7 years, I mean that spread is less than $40 We're currently at $2.40 What has caused that? And do you think that's going to hold going forward?

Speaker 3

Yes. Hey, Paul, it's Tim. I think there's a lot of moving pieces, but certainly Our approach to how we're interacting with customers is part of the strategy that we've talked about commercially. And so we feel good about the steps commercially that the team has taken up to this point. Supply chain could also be providing a little bit of help just given how much disruption there is and we'll have to see how it plays out As supply chains normalize, but I think the way the team is executing and how they're thinking about their opportunities in the market Relative to segments and geographies is producing the result that we wanted.

Speaker 8

All right. That's all I had. Best of luck.

Speaker 3

Thank you. Thank you.

Operator

Your next question comes from the line of Mark Wilde with BMO. Please state your question.

Speaker 8

Thanks. Good morning, Mark. Good morning, Tim. I wondered if you guys could just help reconcile some numbers. I mean, if we look at the pulp and paper week open market prices for containerboard, they're kind of $800 to $8.75 If we then look at kind of the data that's out there on estimated mill cash costs, I'm trying to get from those numbers to your segment results because it just it seems like there's an enormous gap there.

Speaker 2

Mark, I don't know what numbers you're looking at. I think the issue that we have Because of the way we've operated since essentially March, we have moved off of our most cost effective supply chain approach. So we have 100 of 1,000,000 of dollars of incremental cost related to running a sub optimized system. Suboptimize means making the containerboard and shipping it to the wrong places because we don't have another alternative Because other capacity was down. Given the size of our system, given the fact that we make containerboard in the Southeast and ship it to California and all of those things, We have not been able to realize as much of our price realization to the bottom line as we normally would.

Speaker 2

And so that's been a big And then when you look at the overall full breadth of our Customer and segment mix, we have varying degrees of sizes of customers, timing of realization. So For example, Tim called out we're still getting $65,000,000 of realization in the Q1 of 'twenty two. That's not for every customer. That's for a group of customers That it takes longer. So I think that's really what you're seeing if you're probing on margins, which I know you talk about a lot and We work on a lot.

Speaker 2

That's really the biggest issue. I think when we get to the 2nd quarter And we're back to where we can optimize our network. It really works well like a flywheel for us. And then we get margins north of 20% again and it's in the zone of what we would expect. It's Very hard for us to achieve the margin structure that I think most people would expect us to be in when we have operated with The initial 150,000 tons that came offline with the weather events at the beginning of the year and then coupled with The challenges we had through the rest of trying to make sure we put the customers first in many cases and One way to not have had all of these issues is just to cut off a bunch of business and reset everything, which is the wrong thing to do for the long term.

Speaker 2

But the good news is most of that's behind us. Praful is coming up as we speak and we should be ready to optimize and re gear the company back to the Margin is north of 20% again, which we would expect to have at this point in this business.

Speaker 3

I guess, Mark, I kind

Speaker 8

of 2 just follow ons to this. The first one is, I'm just curious about whether There's maybe the need to rethink some of the bigger volume contracts and how those work for you. And And then I'd also like to give a sense, when you talk about this 20% return on the Philly area box plant, does that assume sort They kind of market level of transfer price and the 20% return is just the return you can generate at the box Or are you assuming some of that as a mill related benefit?

Speaker 3

Hey, Mark, it's Tim. It has a mill related benefit in it. We look at this business, especially here in North America as being an integrated business. So we're Capital in our mill system for the benefit of our converting business and the value proposition is Across the whole supply chain. So we look at integrated returns for the investments that we make.

Speaker 8

Okay. Last one, Tim. I just we went through this whole exercise about 15 or 20 years ago with Box USA, and it just seemed like there were A lot of systems benefits that were priced into that deal and I'm not sure that we ever saw them. Have you gone back And look to some of these other prior transactions and to see what worked and what has not worked?

Speaker 3

We do that on a regular basis And constantly trying to learn and make sure that we are seeing if there were opportunities that we missed in one instance That we correct that going forward. So I think we have a fairly robust process of and we're fairly critical of ourselves as we should be internally to make process improvements about how we do it. Box USA specifically, I haven't looked at in a very long time.

Speaker 8

Okay. All right. I'll turn it over. Thanks.

Operator

Your next question comes from the line of Kyle White with Deutsche Bank. Please state your question.

Speaker 9

Hey, good morning. Thanks for taking the question. On the outlook that you provided, are you able to give a sense of what the mid Point of that guidance range assumes for box shipment growth in 2022. And then what are you assuming from the supply chain and labor challenges in terms of any moderation throughout the year?

Speaker 3

Yes. On the box growth, I think what we said in the speaker notes without quantifying, but we can talk about historical numbers. We see if we get through this variant That we start normalizing on the demand function to pre COVID. So we were consistently experiencing 1.5 2% growth. How that unfolds over the course of the year is a little bit of a question mark, But that's the expectation at the moment.

Speaker 3

And I'm sorry, what was the first part of your question?

Speaker 10

He wants to know

Speaker 2

supply chain and Labor cost issues, what are we assuming for that for the rest of

Speaker 3

the year? Yes, just at a high level, We think we begin normalizing as we get through the Q1 and then we'll have to see how it plays out going into the Q2. I mean, The disruption from Omicron, it came on so suddenly and so severely. I think a lot of people were surprised by how Quickly, it began impacting almost every aspect of the supply chain. And so It started late November, early December accelerated.

Speaker 3

Hopefully, we're peaking here in the next few weeks. But I would say that Geographically, it's not uniform because of the way it's spread. It's going to peak in different places at different times and then fall off.

Speaker 9

Got it. That's helpful. And then on Prattville, it sounds like the paper machine 1 is starting up kind of as Just curious if you could give us an exact timeline of when you expect that machine to restart and what are the additional costs from that disruption included in the 1Q outlook?

Speaker 3

Yes, right. What we're expecting in the Q1 is that there will be roughly $25,000,000 of additional costs related to the Efficiency of the machine coming back up and then we won't have the mill fully restored until we get through the outage in the second quarter and then we would The mill to be back up and fiber balanced and running at its optimum cost structure.

Speaker 9

Got it. Thank you. I'll turn it over.

Operator

Your next question comes from the line of Adam Josephson with KeyBanc. Please state your question.

Speaker 11

Mark and Tim, good morning. Thanks for taking my question. Hope you're well. Tim, one on guidance for you, my obligatory guidance question. So since the pandemic Started, you've refrained from providing annual guidance, understandably so.

Speaker 11

And I know you have a number of portfolio changes, which may Increase your desire to give a full year number, otherwise we may be all over the place. But it seems like the uncertainty is greater than it's ever been in terms of Virus, inflation, the state of the global economy, you just talked about Russia earlier, demand, same thing. I mean, so I guess what How much confidence do you really have in this full year EBITDA range that you've provided? And Did you consider just not doing it because of all of these uncertainties that seem to only be getting more pronounced, not less?

Speaker 3

Yeah, That's a great question, Adam. I mean just a few thoughts for consideration. When we stopped, we stopped because No one knew what the pandemic was going to bring. I would argue there was more uncertainty at that moment in time back in 2020 Than there is currently, but and in 2021 as well. I think if we look at what Omicron has done globally, we see where it started, it ramped Quickly peaked and then fell off.

Speaker 3

And so we use that as a base case for a set of expectations here. There's always going to be things that crop up like you mentioned that is difficult for us to Really calibrate on in the moment, but what we have confidence in is what we've been working on for the past 12 to 18 months And how we believe those initiatives are going to come through this year. So there's the things that we can manage and control and then there's the impacts externally that we'll just have But in terms of how the business we expect to perform, what we're going to see in terms of initiatives falling through to the bottom line, we're very

Speaker 2

Yes. Adam, if I could add to Tim's comments and you mentioned it in the way you phrased the question. One of the reasons we're more confident And we have been is because the portfolio is narrowed and we now know that the packaging business and for that matter The cellulose fibers business both have performed very well in the environment of a pandemic and we know what they perform like if We weren't in a pandemic because so much of our packaging goes into essential materials like food. If there's another difficult With the pandemic, we think the packaging business, because of who it provides packaging for, is going to perform very well. We performed very well in the first part of the pandemic.

Speaker 2

We got our system out of whack in the 2nd year of the pandemic, but still grew our earnings and our revenue. And Whatever 2022 holds pandemic related, we believe because of what we make, we're going to have really good opportunities To perform, we think we have the ability, depending on where costs go, to capture pricing to be able to offset some of that. And what we're not what We're going to have in 'twenty two that we didn't have in 'twenty one is a more balanced operating system. So that's about as confident as we can be without knowing the future.

Speaker 11

No, I understand that, Mark. And One more for you, Mark. On the supply demand, someone asked you this earlier, but all we can see is what the industry data is with Back to inventories, operating rates, shipments and appreciating how messed up the supply chain is, what are your thoughts about what underlying Supply demand is such that we can perhaps seize through whatever distortions you think exist in the industry data that would be supportive of rising prices?

Speaker 2

I just think What I would do if I were you as an analyst, I would try to look at the historical absolutes, weeks of supply, Whatever number you want to choose. And then I would look I would map that against supply chain. There's a few metrics out there around velocity and recognize that operating rates, absolute inventory, supply chain velocity and the pure supply demand balance. So against the backdrop of firm demand and Companies that know in IP's case have cut corners a bit on maintenance because of availability of equipment And just the demand environment last year will be taking facilities down for maintenance, which takes supply off I would look at that holistically and I would shy away from looking at an absolute inventory number and comparing 2 normal times. I just think that leads to the wrong conclusion.

Speaker 11

Got it. I really appreciate it, Mark. Thank you.

Speaker 2

Thank you, Adam.

Operator

Our last question comes from the line of Phil Ng with Jefferies. Please state your question.

Speaker 10

Hey guys, thanks for squeezing me Tim, certainly a big step up in CapEx this year, but should we expect that to stay pretty elevated in 2023 with some of the box What opportunity you referred to and how should we think about normalized CapEx with your slimmed down portfolio now?

Speaker 3

I think normalized, so With the new portfolio, we're at about $1,100,000,000 of depreciation. And so we're in line with that for 22, I think we should be close to that in future years. There may be times when we're slightly above, but it will be Above for very distinguishable strategic opportunities that we can highlight. Okay.

Speaker 10

Got you. And then Tim, you talked about this a little bit about the financial impact on the ruble and how you guys are positioned, but any color on Given some of the political unrest in that region and COVID shutdown in China, have you seen any choppiness in order activity in your operations, whether it's Or any impact on your cellulose fiber segment?

Speaker 3

No, not really. It's mostly supply chain related due to COVID and all of the disruptions that we've seen as we've gone through the past year, yes, we haven't noticed anything outside of that at Okay.

Speaker 10

All right. Thanks a lot guys.

Speaker 3

Yes.

Operator

I would now like to turn the floor back to CEO, Mark setting for any additional or closing remarks.

Speaker 2

Thank you. What I'd like to do is just reiterate that we're confident in our ability To execute for the remainder of 2022, we've got a solid demand environment. We've got the full year benefit of pricing that we've already implemented Going through for the full year, we highlighted the $200 plus 1,000,000 of benefits associated with building a better IP. We will have, very importantly, the biggest part of our company optimized again for the majority of 'twenty two, that being our mail in box And very importantly, our balance sheet is in the best shape that we've been in, in a very long time. All the capital allocation levers are available to us and we plan to invest smartly in our U.

Speaker 2

S. Box system over the next few years to grow profitably. So thank you for your interest in the International Paper. We

Operator

Thank you for participating in International Paper's 4th quarter and full year 2021 earnings conference call. You may now disconnect.

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Earnings Conference Call
International Paper Q4 2021
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