International Paper Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2021

There are 13 speakers on the call.

Operator

Thank you, Sean. Good morning and thank you for joining International Paper's 2nd quarter 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.

Operator

We will also present certain non U. S. GAAP financial information. Submission. A reconciliation of those figures to U.

Operator

S. GAAP financial measures is also available on our website. Our website contains copies of our Q2 2021 earnings press release and today's presentation slides. Lastly, relative to the Olin Joint Venture, Slide 2 provides context based around the joint venture's financial information and statistical measures. I will now turn the call over to Mark Sutton.

Operator

Thank you, Guillermo, and good morning, everyone. And we'll begin our discussion on Slide 3. International Paper delivered solid earnings growth and strong cash generation in the 2nd quarter. We continue to see very strong demand for corrugated packaging and containerboard and solid demand for flood pulp. And in our papers business, demand recovery accelerated in the Q2 across our key geographies.

Operator

We grew revenue by 15% as compared to the Q2 of last year, with price realization accelerating in all of our business segments. Our mills and converting system performed well. However, we operated with extremely low containerboard inventory across our packaging network due to two facts, the lingering effects of the winter storm in the Q1 and then our planned maintenance outages in the Q2. These operating conditions severely stressed along with severely stressed transportation environments adversely affected volume and operating cost in the Q2. Input costs and freight were significant headwind in just about every category.

Operator

I would call out the sharp rise in recovered fiber cost impact. It is another indication of the strong demand environment. Our Elm joint venture delivered outstanding performance with equity earnings of $101,000,000 in the 2nd quarter and a strong outlook as we move into the 3rd quarter. On capital allocation, we're making significant progress, strengthening our balance sheet. In the Q2, we reduced debt by $796,000,000 We also returned $258,000,000 to our shareholders, including $57,000,000 of share repurchases.

Operator

During the 2nd quarter, We monetized our remaining stake in Graphic Packaging. I'm really pleased with the return on our investment. The structure of the transaction 2018 maximize the value of the consumer packaging business for our shareholders. Looking ahead, We're making excellent progress on the spin off of our printing papers business, which we expect to complete on October 1. Across our IP, the team is doing an outstanding job managing complexity.

Operator

We remain diligent in applying COVID-nineteen layers of protection for our employees and contractors. And I really appreciate our team's commitment to execute well, take care of each other and take care of our customers as we work together to build a better IT for our shareholders and really all of our stakeholders. I'm going to turn to Slide 4 now, which shows our 2nd quarter results. We delivered EBITDA of $793,000,000 and free cash flow of 6 $33,000,000 which brings our free cash flow generation to more than $1,000,000,000 for the first half of twenty twenty one. Revenue increased by $750,000,000 or 15% as compared to last year driven by higher average prices in our 3 businesses as well as volume growth in our Packaging and Papers businesses.

Operator

Margins improved sequentially with price realization outpacing higher input and transportation costs. We expect margins to expand meaningfully in the second half of the year as price realization outpaces rising input and transportation costs and importantly as we step down from our highest maintenance quarter of the year. Now I'll turn it over to Kim, who will cover our business performance as well as our Q3 outlook.

Speaker 1

Kim? Thank you, Mark. Moving to the quarter over quarter earnings bridge on Slide 5, second quarter operating earnings per share were $1.06 as compared to $0.76 in the 1st quarter. Price and mix improved by nearly $0.50 per share sequentially driven by very strong price realization across all of our business segments. Volume was essentially flat versus last quarter.

Speaker 1

Demand for corrugated packaging is very strong and demand for fluff pulp is solid, while demand for papers continues to recover in all key regions. 2nd quarter volume in our North American Packaging business was constrained by severely low containerboard inventory and flood pulp shipments were hampered by significant port congestion. Our mills and converting system performed well. Operating costs were adversely impacted by a highly stressed supply chain environment for both inbound materials and outbound shipments as well as the exceptionally low containerboard inventory conditions in our North America packaging system. Maintenance outage cost increased by $0.18 sequentially as we completed our highest maintenance outage quarter of the year.

Speaker 1

On an absolute level, maintenance calls for $250,000,000 in the 2nd quarter. Info calls were a significant headwind for most materials and energy costs remained elevated, providing little relief following the winter storm. OCC represented about half of the sequential increase in input costs. Although some of the pressure and input costs could be transitory, such as the impact of heavy rainfall on our wood cost in the Gulf region. The extremely tight transportation environment will continue to put pressure on all inbound materials.

Speaker 1

Every mode of transportation is tight and we expect them to remain tight as we move

Speaker 2

to the second half of the year.

Speaker 1

Corporate expenses benefited from favorable reserve adjustments. Our tax rate of 24% in the second sequentially lower primarily due to discrete period tax benefit and equity earnings improved substantially on very strong performance from Ilim. Turning to the segments and starting with Industrial Packaging on Slide 6. We continue to see strong demand across all channels, including boxes, sheets and containerboard. As Mark indicated, we operated with extremely low containerboard inquiry in the U.

Speaker 1

S. System. These conditions impacted volume and operating costs in the quarter. We are working to replenish inventory following winter storm and maintenance outages as we manage through a tight transportation environment. Taking a look at our 2nd quarter performance, volume was sequentially flat.

Speaker 1

Strong demand in our North American box and containerboard channels offset lower seasonal demand in our EMEA business. Volume across our U. S. Channels grew by 10% as compared to last year, which includes our U. S.

Speaker 1

Box system, open market containerboard customers as well as our recent equity partnerships with strategic sheet feeders. Price and mix increased by about $110,000,000 in the quarter. We're making excellent progress on the realization of our barge increase. Our mills and converting system performed well. However, operating costs were impacted by severely low containerboard inventories and a stressed transportation environment with congestion across all nodes.

Speaker 1

Maintenance outage costs increased sequentially as we completed the highest maintenance outage quarter of the year. In our Industrial Packaging business, We've completed about 75% of our planned maintenance outages in the first half of the year. Input costs were a significant headwind in the quarter, primarily driven by higher costs for OCC, chemicals and distribution. About $10,000,000 of the sequential increase in input costs occurred in our EMEA Packaging business, primarily for OCC and Entergy. Taking a closer look at OCC, we consume about 5,000,000 tons annually across our U.

Speaker 1

S. Mill system and Spain. We see the rise in OCC cost as a reflection of the underlying strength in global demand for corrugated packaging. We expect OCC costs to rise further in the Q3 even as seasonal generation improves. We expect continued U.

Speaker 1

S. And export demand, especially from India and Southeast Asia, which are largely offsetting pre restriction OCC exports to China. Turning to Slide 7. We're well positioned for strong earnings growth and margin expansion in our Packaging business in the 3rd Q4. Demand is strong across all of our channels.

Speaker 1

We expect continued robust volume growth across our U. S. Channels and we are making excellent progress on the price realization of our large increase. Our mills and box plants are positioned for strong second half performance following the impact of the winter storms and the significant maintenance outages in the Q2. Replenishing our containerboard inventories will enable operational and supply chain efficiencies as we move through the second half of the year.

Speaker 1

We do expect further input cost inflation in the Q3 with substantial pressure on OCC and transportation costs. Our teams are doing an admirable job managing cost in a tough environment. We expect further opportunities to be more efficient as inventories positions our outpacing cost pressure and positions us for strong margin expansion in

Speaker 2

the second half of the year.

Speaker 1

Turning to Global Cellulose Fibers on Slide 8. Demand for Fluff pulp is solid and the end use demand signal for absorbent hygiene products is healthy. Looking at our sequential earnings price and mix improved by

Operator

$104,000,000 in

Speaker 1

the 2nd quarter with price realization accelerating across all regions and segments as expected. Volume was moderately lower due to significant U. S. Port congestion and frequent vessel schedule changes, which delayed our shipments. Mill performance was strong.

Speaker 1

However, operating costs were impacted by the tight supply chain environment. We We expect these conditions to continue in the Q3. Maintenance outage costs decreased as expected and input costs were moderately higher with lower wood costs in the Mid Atlantic region offset by higher chemical and energy costs. Turning to Printing Papers on Slide 9. Our Papers business delivered earnings of $76,000,000 in the 2nd quarter with continued strong cash generation.

Speaker 1

Our Printing Papers business carries strong momentum as we approach the spin off on October 1. And again continues to recover in all of our key regions. Additionally, our volume recovery is outpacing the industry through the strength of our global brands and commercial excellence. Looking at the 2nd quarter performance, price and mix improved by nearly $30,000,000 with price realization across all regions. Fixed cost absorption improved with no economic downtime in our North American mill system.

Speaker 1

However, operating costs were impacted by the tight transportation environment. We executed the heaviest maintenance outage quarter of the year as well. And on input costs we experienced pressure on wood, chemicals and drift. As I said earlier, we're on track to spin off the paper business on October 1. Separation planning is progressing well, and we expect to file the Form 10 with details of the spin off in the first half of August.

Speaker 1

As you would expect, there is significant complexity. Our teams are doing an outstanding job managing the business as we prepare for successful separation. Looking at the Elm results on Slide 10, The joint venture delivered equity earnings of $101,000,000 in the 2nd quarter with an EBITDA margin of 47% driven by strong price realization for pulp and containerboard. Volume improved sequentially on strong demand for pulp and containerboard as well as more shipping days in the 2nd quarter following the impact of the Chinese New Year in the prior quarter. Underlying demand is stable following inventory restructuring during the half of twenty twenty one.

Speaker 1

Shipping capacity is tight and supply chains to China are stretched. 3rd quarter volume is expected to decrease moderately as Ilim executes the majority of its annual maintenance program. So now we'll turn to the outlook for the Q3 on Slide 12. As Mark said earlier, we expect meaningful earnings and margin expansion as we move to the 3rd quarter. Looking at industrial packaging, we expect price and mix to improve by $110,000,000 on the continued realization of our March 2021 price increase.

Speaker 1

Volume in North America is expected to improve by $10,000,000 while volume in Europe is expected to decrease

Operator

by

Speaker 1

$10,000,000 Operations and costs are expected to improve by $5,000,000 with the North American system benefiting from a gradual recovery in containerboard inventory remodels. Staying with Industrial Packaging, maintenance outage expenses are expected to be down by $122,000,000 Input costs are expected to increase by $85,000,000 with OCC representing about 60% of the expected increase. In Global Cellulose Fibers, we expect price and mix to increase by $60,000,000 on realization of prior price movements. Volume is expected to increase by $10,000,000 operations and costs are expected to decrease earnings by $5,000,000 on continued supply chain stress due to port congestion. Maintenance outage expense is expected to decrease by $15,000,000 and input costs are expected to increase by $10,000,000 on higher wood and chemical costs.

Speaker 1

In printing papers, we expect price and mix to increase by $25,000,000 Volume is expected to increase by $5,000,000 Operations and costs are expected to be unchanged. Maintenance outage expense is expected to decrease by $23,000,000 and input costs are expected to increase by $10,000,000 primarily due to higher wood costs. And under the equity earnings, you'll see the outlook for our Elementorite Ventures. I want to take a moment to update you on our capital allocation actions in the quarter. We're committed to maintaining a strong balance sheet.

Speaker 1

We're comfortable taking our leverage below target range of 2.5x to 2.8x debt to EBITDA on a Moody's basis. In the Q1, we reduced debt by $796,000,000 bringing our debt reduction to $904,000,000 in the first half of twenty twenty. Returning cash to shareholders is a meaningful part of our capital allocation framework. In the Q2, we returned $258,000,000 to shareholders through dividends and share repurchases. Share repurchases were $57,000,000 which represented 1,000,000 shares at an average price of $60.80 We have about $1,500,000,000 available under the company's share repurchase authorization at the end of the second quarter.

Speaker 1

Lastly, in the Q2, we monetized our remaining stake in Graphic Packaging for about $400,000,000 This brings our total cash proceeds on the investment to $1,300,000,000 before expected cash taxes of about $300,000,000 in and the second half of twenty twenty one. As a reminder, we also have a tax receivable agreement with Graphic Packaging, under which we expect to receive about $100,000,000 in cash proceeds during the second half of twenty twenty one. With that, I'll turn it back over

Speaker 2

to Mark.

Operator

Tim, thank you very much for all the detail. As we look forward, we are positioned for strong earnings and margin expansion in the second half of twenty twenty one. My confidence in making a statement is based on the following: our Our commercial initiatives are driving revenue growth and our milling converting systems will regain meaningful operational and supply chain efficiencies as we replenish inventories. Although rising input costs will likely linger, I'm certain we can successfully navigate the environment given the strong demand backdrop. Our papers business carries strong momentum as we approach the October 1 spin off.

Operator

Our team is doing an outstanding job managing the business and taking care of customers. I want to take this opportunity to thank our employees for their tireless efforts as we plan for a successful separation. As we move through 2021, we have significant operating and non operating cash catalyst and we are laser focused on on the capital allocation framework that Tim just described. All of our cash will flow through our framework with one objective, maximizing value creation for our shareholders. I'm excited about the actions we're taking to build a better E.

Operator

We're accelerating earnings growth and building a foundation for long term success. We're looking forward to sharing more about that with you in the months ahead. With that, we're ready to take your questions.

Speaker 3

Thank you. 21. Your first question comes from the line of George Stechels from Bank of America.

Speaker 4

Hi, everyone. Good morning. Thanks for the details. Thanks for taking my question. I guess my first question, Mark, and you and Tim have talked about this in the past about running the cash flow generation that the company has both from an operating standpoint and non operating since you have so many transactions that have been occurring this year and will continue to occur this year through your framework.

Speaker 4

What should we take away from that in terms of what Tools that you have in your quiver may be more applicable now versus what might have been the case 3 6 months ago. And Tim, what gives you comfort and why you think it's appropriate in your view for leverage to drop below your target range. What are the things that you think make that a prudent strategy? Can you give us a couple of thoughts there? And then I had a follow on.

Speaker 1

Sure. Good morning, George. Good morning, Kathy. The way we're thinking about it is we are trying to maximize value. We have a lot of cash coming in, in a moment.

Speaker 1

We do everything looks positive as we go forward, but we recognize this is a cyclical business to some extent. And so in relation to the balance sheet where we are trying to build strength, reduce risk, of also the flexibility and optionality. And so taking it down below the target range, which is really a target range through a cycle. Sometimes we'll be below it, sometimes we might be a little bit above, but we just view it that coupled with our pension performance as derisking the company share repurchases and dividend is very important. And so That is over time as we not necessarily quarter by quarter, but over year by year.

Speaker 1

We look to be returning substantial amounts of cash to shareholders. And then everything else gets tested, whether it's organic or small bolt on types of acquisitions gets tested against that.

Speaker 4

As a Follow on, would the accelerating performance that you are seeing into the second half be any way A guide, a compass point for you in terms of how you may further allocate capital, especially to value return over the rest of the year into 'twenty two? Or is it really not so much because you look at this on a longer term basis? And What are the whys and why not on that? And then my related question, I'll turn it over for everyone. Do you have any kind of view that you could Share with how much cash Silvamo will need to operate on an ongoing basis.

Speaker 4

Thank you very much.

Speaker 1

Yes. Just one last we do and that will be the Form 10 is going to be coming out here in short order and I think that To your first part of your question, I think we try to look at both. We try to look at circumstances in the moment, but we We have a long term view and we're thinking about how to create value and what our value is over time. So I hope we try to take those into account over time.

Operator

Tim, if I could and George just wrap up, there was a lot of ground covered in the capital allocation questions that you asked. And we do take a long term view. And as I said last quarter, one of the things we're really excited about is that we've got IP positioned for the first time and really almost forever or definitely recent memory where our entire capital allocation lever set, strong balance sheet, the ability to pay a strong dividend, share repurchases at the right times and very importantly, smart investments in our business, as Tim said, organic or inorganic. We have all of those levers available at the same time. And our past history, as all of you know, is we've had 2 or 3 or maybe 2 out of 4, sometimes only 1 out of 4.

Operator

And that's what we really are excited about as going forward. As we separate into 2 companies, the new IP is going to have a capital allocation posture that we haven't had in a long time. And that's very exciting for our shareholders. It's very exciting for the company because we have options to grow the businesses that are growing, to manage our return of cash, all generating hopefully outstanding shareholder return.

Speaker 4

Thank you very much.

Speaker 3

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

Speaker 5

Good morning, Mark and Tim. Thanks for taking the question. I guess not to belabor the point here, but And I appreciate that there is somewhat of a wall of worry out there. But I think, one of your peers kind of talked about potentially a structurally higher level of demand for corrugated for various reasons, whether it's e commerce or potential onshore and manufacturing activity. So I guess, ask the question a little bit differently.

Speaker 5

Your balance sheet and pension probably have not been in this good shape for 2 or 3 decades. Is there something that you see around the quarter that gives you pause in terms of any of your businesses and it sounds like again you have pretty near constructive near term outlook. I'll stop there.

Operator

No, Dave, I think we also view the corrugated packaging market as potentially having a bit of a reset through this last year and a half. We listened to our customers on that, which I'm not sure where it's 8% every quarter year quarter in quarter out like it was in the last quarter, but definitely a step up from the low single digit growth rates. And that's what we want to be positioned for. When we talk about growing at a minimum with the market, we mean over time and a reasonable assumption of growth on the U. S.

Operator

Market. And that's a number that I think is leaning toward the higher end just because of A couple of things, the adoption of e commerce through the pandemic, which has I think proven to be very sticky and the valuable proposition that fiber based packaging presents to people in terms of its circularity, renewable natural resources, Making Energy in Carbon Neutral Biomass Way at a High Recycling Rate is finally, with all the talk about sustainability and climate and a number of other issues, finally getting attention all the way down to the consumer level. So we're very excited about the corrugated packaging outlook and we want to make sure we're there with the right asset base, the right customer list, the right technical capabilities to grow with to share in that growth.

Speaker 5

All right. Thank you, Mark. And I guess, switching gears, are you guys prepared at all? It's been, call it, 8 months or so since you've announced to $350,000,000 to $400,000,000 of cost reduction, to provide maybe a little bit more detail either cadence of that of how we might expected to flow through. I'm assuming maybe we've seen a little bit here in the first half, but and then maybe by segment, what you to see or is that something you maybe prefer to wait to talk about?

Speaker 1

Yes. Again, we plan on starting that as we head towards the Q3 release and then for the end of the year to get an expectation about 2022 performance.

Speaker 5

Thank you.

Speaker 3

Your next question comes from the line of Anthony Pettinari from Citi.

Speaker 6

Good morning.

Speaker 2

On Industrial Packaging, the FBA and AFPA data would suggest that sort of industry inventories are Kind of closer back to a normal or more of a normally historic level for July. I'm just wondering if it's possible to quantify Or put a finer point on how far below you are sort of normal or comfortable levels of inventory and sort of where that was exiting the quarter and maybe as we were here at the end of July.

Speaker 1

Yes. It's I mean, Through the Q2, we saw the lowest inventory levels in our system that we've probably ever experienced. Coming out of the Q2 into July, we're able to start recovering a little bit of that. But look, we're I mean, The winter storm impact hit us hard, 145,000 tons followed by an abnormally high outage quarter in the Q2. So

Speaker 2

it's going to take a little

Speaker 1

bit of time for us to recover that as we go through Q3 and probably into the Q4 to some sir. So, yes, we were at our lowest levels we've ever seen in the Q2.

Operator

Anthony, I think the other perspective on inventories and I've seen a lot written by analysts on normal inventories. And one just thing to remember in the way we look at normal inventories and averages from the past tend to correlate with more normal supply chain environments. So

Speaker 1

normal transportation velocity, so forth

Operator

and so on.

Speaker 1

And we are nowhere

Operator

near any kind of normal today, so forth and so on. And we are nowhere near any kind of normal supply chain performance by third with our partners in the transportation world. So our inventory view in IP for the next quarter and quarter after that is also influenced and adjusted by what's happening in the transportation and supply chain network. So I would bet that normal right now should be higher levels of inventory to perform the same with customers as we had when transportation velocity was much higher.

Speaker 2

Okay. That's very helpful and that point well taken. And then just maybe following up on capital allocation. In terms of you talked about the willingness to potentially go under the 2.5 to point 8 percent range at what is I think a pretty positive

Operator

part of

Speaker 2

the cycle. As you look to the spin, would you look at revisiting that 2.5 to 2.8 target range either up or down? I mean, you're going to have a more Durable, higher quality business with industrial packaging and pulp. At the same time, you have a publicly traded competitor in containerboard that's and operating closer to one turn or certainly below two turns. So just wondering if you could talk about that range and maybe your willingness to revisit it over the long term.

Speaker 1

Yes. That's a great question, Anthony. And certainly, none of this is static, right? So We want it to be understood and we want to be consistent and true to the framework as we talk about it, but that doesn't bar us from reevaluating based on portfolio and other specifics, potential changes that we think are beneficial

Speaker 2

through our investors and stakeholders. So

Speaker 1

nothing now, but something that we will definitely look number, Tom.

Operator

Anthony, I think, the way you should probably think about how we make that decision together, Tim and his team and me as we try to look at the company and its optimal weighted average cost of capital. A portion of that is what credit rating we need to have that delivers and supports that. So you're absolutely right. We're going to be a different company going forward. That analysis is something that we do continuously.

Operator

We've arrived at credit rating target we have based on the company. We will continue to look at that and try to make sure that on our ROIC is constructed in the most effective way to get the best solid high quality return we can for shareholders. And definitely, debt ratios and credit ratings are part of that.

Speaker 2

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

Speaker 3

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

Speaker 7

Thank you. I wanted first just to give maybe more color on the targeted volumes. Again, solid up 3.9%. Industry though was up 8.2%. You mentioned supply chain and other challenges you Did that actually suppress where your volumes otherwise would have been?

Speaker 7

And if that was the case, is that business that When your systems operating easily comes back? Or can you kind of give us some color on how to understand the volume situation?

Operator

Well, Mark, I think the way to think about the I was looking at what we sort of put in our outlook in the Q1 call and we actually had stronger performance than we thought we were going to have. We didn't know like a lot of people didn't know the market was going to grow percent. We had the inability during the quarter, in some cases, to pick up incremental business. We didn't lose any business with our core customer list that was coming into the quarter as business. There may be some business that we didn't bid.

Operator

Most of it is short term business. So The answer is yes. We have people still calling us today, can you supply me more boxes? In some cases, we can. We just couldn't do it in the second quarter.

Operator

So I'm not concerned about losing anything permanently. We basically had a classic mismatch between the available capacity in our system and the demand in a 90 day period.

Speaker 7

And the when you say the available capacity, is that Because your capacity during these 9 days were constrained by unusual factors Or basically you're just pretty much running full tier bucket

Speaker 2

list now.

Operator

The two factors I mentioned, Mark, in my opening comments. We have more than 1 quarter of recovery from the winter storm, 140,000 tons that just evaporated from our containerboard supply chain. And on top of that, we had the highest maintenance quarter in IPG in the last 10 years. So if you just normalize what was above normal maintenance plus that winter storm, that's a chunk of containerboard capacity that could not be converted into a box. And that's coming back.

Operator

It's just going to take a little while to get back. So what we had available ran wide open, but we had capacity offline for maintenance and we had the lingering fact that the 140,000 tons from the Q1, none of those are permanent. All of those will be significantly as we navigate through the second half.

Speaker 7

Got it. And then just on pulp, obviously great price mix showing in the quarter. And you pointed to another, I think it was $60,000,000 or so for the Q3. Does that pretty much reflect All of the benefit from the pricing that's already happened, forgetting about what happens from here or the way your contracts setup. Is there meaningful additional lag that might come through based on what's happened previously with posted prices?

Operator

So that's a complicated question because of the nature of some of these contracts by customer type, by region. But let me just kind of state restate what we talked about the last two quarters that, a, you could expect quarter over quarter improvement in this business, steady improvement in this business and we're seeing that. But our strategy is to have the kind of margins in this business that reflect the value that plug pulp provides for the end use customers. So we're taking a very structured, very measured approach to each market segment and to the agreements we currently have in those segments with individual customers. And so as we implement this approach.

Operator

We would expect that there will be some volume shifts and movement between segments and our goal is to have mix improvement, better agreements with better economics that reflect the value of LoveCult. And that is a kind of customer by customer, region of the world by region of the world. And I would expect and we're making progress, good progress on that. Given the length of some of these agreements and the way they're structured, we should expect to continue to see margins improve over the next several quarters. So that's a long complicated answer to will we have any more price flow through.

Operator

It's not just about price flow through, it's about restructuring these commercial agreements and getting the proper value for this product.

Speaker 7

Appreciate the color. Thank you.

Speaker 3

Your next question

Operator

morning.

Speaker 8

I wondered, Mark or Tim, if you can just help us a little bit with kind of cadencing the pass of the spring containerboard hike. And then I don't think you said anything about this prospective early August hike. So maybe if you could just give us Some color around that as well just as we think about the next couple of quarters and into 2022.

Speaker 1

Hey Mark, it's Tim. So I think the increase from the fall, as we talked about last quarter, went through a record amount of time. It was the fastest size I've ever seen. The pace on the second one, We were kind of expecting a normal historical ramp on it. It seems to be going faster, not as fast as the first, but Still faster than what we've seen over time.

Speaker 1

We'll see You know, as August comes, we'll see how that one plays out. But, you know, right now, we see Our fundamentals looking very strong. We see strong demand. And as Mark talked about, all of the complications since the supply chain are really stretching inventory tighter than they would normally be. So far through the first two price increase implementations, we feel really good.

Speaker 8

Well, so can you give us a sense, Tim, of How much benefit from that spring hike you've had in the second quarter? And just order of magnitude, what we might expect in the 3rd and 4th quarters?

Speaker 1

Yes, I think if you look at the 2 of them combined, we'd be about 80% complete on implementation at this

Speaker 8

Okay. And then any thoughts on sort of how August would roll in?

Speaker 1

Yes, I don't want to mean that's forward looking and we feel very confident at

Speaker 2

the moment, but I don't want to

Speaker 1

speak to forecasting price at this point.

Speaker 2

Okay. All right.

Speaker 8

That's fair. Mark, I just want to, as a follow-up, turn to the containerboard business from just kind of a supply and demand standpoint. Does this continued strength in global containerboard demand, does it alter your thinking at all about investing in either debottlenecking projects at the existing mills or potentially the timing on that second conversion at Riverdale? And are you also Doing anything to kind of gear up capacity on the converting side as e commerce continues to grow as a bigger and bigger percentage of the market?

Operator

That's a great question, Mark. And the answer is coming into maybe the middle of 2020, we were saying and I was saying we feel really good about our containerboard capacity. We have what we need, the amount, the type of grades. When everything's running, we have enough capacity. But everything is a run at every day with outages and of course, against that you don't predict like that winter storm issue.

Operator

But yes, we are looking continuously at debottlenecking. We've done a bunch of that in the last several years, thankfully, because we need that containerboard now. We are looking at different options for adding containerboard into our system. It looks like this kind of demand level is going to be consistent. Remember, we are structured maybe a little bit uniquely in the sense that we bring containerboard to market through 3 distinct channels, our own box network, open market in North America to companies that provide a certain service in the box market and have been long term partners of ours, but we don't make the box and then our export.

Operator

So what you have seen and will continue to see is movement of CanaBoard within those three channels. And obviously, we have favored the U. S. Box market as much as we can, but trying to continue over time, not just in the Q2 of 2021, but over time get the highest possible margins in our business by participating in all three of those channels. Containerboard, you're right, is a high demand product all over the world, both recycled and virgin.

Operator

We have obviously only exported the virgin version of it. Box capacity. We've been actively investing, luckily with the acquisitions we did with that in the early part of the past period. We've had a lot of opportunities to fill out existing plans by adding single or double lines of box making equipment. We've built a few plants And we've acquired a couple of partnerships, but there's definitely opportunity for us to continue to invest in our converting network.

Operator

The other option with converting, as you well know, Mark, is when you know demand looks like it's going to be solid, you can bring on more employees and actually fill out an extra shift in many plants and you've got latent capacity turned into productive capacity. You obviously want to do that when you're pretty sure And you first do it with overtime and then you do it with permanent employees. That's a challenge right now given the labor market dynamics, but we've got several levers to pull We continue to invest in not only box capacity, but the kinds of capability we have, e commerce specific assets, for example, is something that we're also linked to market.

Speaker 8

Okay. That's helpful. Thanks, Mark. I'll turn it over.

Speaker 3

Your next question comes from the line of Mark Connelly from Stephens.

Speaker 9

Thanks. Tim mentioned that white paper price mix Maybe about $30,000,000 but when I look at overall revenue per ton in this segment, we've got only a couple of bucks, which implies that maybe overseas price mix was flat or even down. Can you talk about price mix across your system, particularly outside the U. S? On the white paper side, yes.

Operator

White papers, Mark? Yes, it's just

Speaker 1

a little bit muffled coming through. So were you talking about looking forward, Mark?

Speaker 9

No, I'm curious what's happening in the system right now. It looks like you got some gains in the U. S, but you didn't really Get much across the entire white paper business.

Speaker 1

Yes. Well, I mean, all of the regions, we're seeing price increases or realization of price increases to some degree. Some of this in other regions started earlier in the year. So Russia was kind of on the forefront earlier in the year implementing a price increase, Brazil as well domestically. So those are sort of they're running their course and playing out.

Speaker 1

Where we still see traction is in North America and in some of the export markets as well.

Speaker 9

Okay. Okay. That's very helpful. And Mark, just to switch gears completely, I'm curious what your Position is on this packaging stewardship legislation that we're starting to see as states try to create incentives to reduce waste. You pointed to the growth in e commerce, which Some of these states are pointing to as part of the problem.

Speaker 9

But how do you we know AFPA PA is against container boards being included. So how do you think about container board industry's responsibility? What should it be if the legislation should not apply to you?

Operator

Well, I think if you look at the legislation in detail, there's a federal view that's kind of in its nascent stage and there's a state by state view. And we are actively working in the state by state legislatures. The big issue and the big goal of this extended producer responsibility type legislation was really targeted non recyclable or hard to recycle, in many cases plastics. In some cases, that has led people to believe all packaging should be included. So the first thing is separating the facts of what corrugated packaging can do and actually corrugated as you can be a solution to the problem because of the high recycling rates.

Operator

But that message has to get to policymakers, and we work very hard on that. I spend a fair amount of my personal time talking to people about that. And in many cases, it's a new learning mark for people at the local level as there is a completely different story on fiber based packaging that's made from the renewable resource and a high recycling rate in the going late in the 90% range versus many of the other substrate choices. So I think that's the case we're making, that it's actually part of the solution, not part of the problem. But as usual, in legislation, sometimes it starts with a blanket.

Operator

All packaging needs to be managed in a different way and people need to be responsible for their packaging that they put out there when we have a system. So for example, We spent a lot of time and it's in there right now on the infrastructure work that Congress is working on. In that bipartisan agreement they made yesterday, a significant amount of investment in recycling networks in the country is part of that. We'll see if it stays in there, but that's the answer is improving recycling rates for easy to recycle and reuse materials. That's the value proposition for corrugated packaging not being included in the intent of some of that page.

Speaker 9

That's super helpful. Thank you.

Speaker 3

Your next question comes from the line of Phil Ng from Jeff

Speaker 10

Hey, good morning, everyone. Appreciating the winter storms was a big hit for you guys. But Tim or Mark, do you expect inventory getting back to more manageable level for containerboard in 3Q where you'll be able to better capitalize on the growth we're seeing and Get operating costs back to more of a normalized level. I think in the past you've always kind of targeted to grow faster than the market, but any color on kind of getting back on track on that goal?

Operator

Philip, we think it will be steady progress. It won't be all solved in the 3rd quarter. We think we'll make steady progress through the and half of the year. We have targeted to grow at or slightly above the market over time. We've really hampered We do that in the last couple of quarters because of the issues you just mentioned.

Operator

But we will definitely have more options available for incremental growth as we go forward just based on the fact that we won't have so much of our system down for maintenance. But it will take slow, steady progress month after month through the second half.

Speaker 10

So we should still expect you to lag the market a little bit in 3Q And obviously, continued progress.

Operator

Not necessarily. Part of what happens in 90 days, but that's a pretty sharp period of time. Part of what happens in the 90 day period is your segment exposure and what happens in the seasonality if you've got more of this versus that. And so I think you shouldn't I wouldn't automatically assume will lag the market, but I think it will take us the next second half of the year to get to the point where we feel comfortable that our inventories are more sustainable. I think the first thing we'll see is we won't miss any sales.

Operator

The And then we'll see as our costs will come down.

Speaker 10

Super helpful. And then pulp prices appreciates volatile nature, it's commodity. Both softwood and fluff pulp prices really surged this year, but the market appears to have softened up a bit. What's your crystal ball saying in terms of pricing for fluff and softwood pulp globally. And do you have a view in terms of how much inventory levels are in the channel?

Speaker 10

It's tougher to gauge just given some of the logistical bottlenecks you guys are seeing in the market.

Speaker 1

Yes, I mean, I wouldn't want to forecast price looking forward. I talked about how we think about it at the moment, what we believe we're seeing. We're seeing a bit of a pullback in some of the markets, but our view at the moment is that things are more stable than normal. And you have to look at not only the underlying demand models, but patient difficulties, which are really, in effect extending supply chains at this point. You're right, full commodity product, but our view at the moment is this is a bit of a correction, not a complete turn.

Operator

Okay. Super helpful, guys.

Speaker 3

Your next question comes from the line of Adam Josephson Q1.

Speaker 11

Mark and Tim, good morning. Hope you're well. Hi, Howard. Mark, one more on pulp and then I have a containerboard question. Just I appreciate your comments that you expect segment margins to improve over the next several quarters.

Speaker 11

But when I look at the last 10 quarters, it's been A pretty tough slog for the business. And as Phil just said, prices in China have been coming down of late. So I guess What gives you confidence, just given what's happened over the past 2 to 3 years, that this is a business in which you have a meaningful competitive advantage?

Operator

Well, if you think about the remarks I made a couple of questions ago about what we're changing in the business versus the last 10 months or the last 10 quarters. That's what gives me confidence that this is a very value creating material for our end use customers. And we just haven't always extracted that proper value that gives us value creating return, and that's what we're working on. I think the growth rate will stay solid as economies around the world improve. So there's growth component.

Operator

But we're going to run the business in a different way than it's been run before. When we made the decision to invest in the business, It changes the profile of this being a legitimate first rate business for a company versus, In many cases, a smaller sideline type of business. And some of that's reflected in some of the way the commercial agreements have been made. And we're working on changing that for the better.

Speaker 11

I appreciate that, Mark. And just one on boxed in. And I think you mentioned earlier in the call that long term, you think the market could be at the high end of that 1% to 2% range that you were talking about. Just want to make sure I understand it. So let's say the market's up another 4% this year after 3.5 percent last year.

Speaker 11

You're talking about kind of an 8% step change upward post pandemic in a market that had been growing at 1 net per annum. Are you thinking that we're going to keep stay at these higher levels and grow on top of that or that There could be some correction as retail sales normalize and then we'll get back to some kind of growth trend?

Operator

Yes, that's I mean, it's hard to predict that with certainty, obviously, but we believe that part of what's happening is the goal that fiber based packaging is playing in general commerce driven by

Speaker 1

a few

Operator

segments has taken a step change up. And so we think the base will be stronger. It depends on a lot of things. And number 1, the structure of the U. S.

Operator

Economy. So if there is really action on some of the things that are being learned now around supply chains and global issues with supply chains and we do have more manufacturing that actually occurs in the U. S. For certain components. I think that'll bode well for the business and how strong the consumer is going forward coming out of this.

Operator

I think you're looking at maybe what's going to be close 2 years of pent up demand by consumers because of the things that happened during the pandemic and how that plays out in consumption will play a big role in what that growth rate is going to be. I think the data, We have this model we use. I know others have models. There's 3rd parties that have models. A correlation around GDP.

Operator

It has been slightly less, has been what's happened in the box market and we think that will still stand. And it looks We're poised to have a stronger consumption oriented GDP for at least as far as you can see right cap.

Speaker 11

Terrific. Thanks a lot, Mark.

Speaker 3

Your next question comes from the line of Paul Quinn from RBC Capital.

Speaker 12

Yes. Thanks very much. Just a question on pulp. I understand you guys are making some operational improvements, and I'm just trying to Balance that with the Q3 guide here where you've got ops and costs up $5,000,000 So is there something on the cost side that's More than offsetting the operational improvement that you're seeing. And then if you could give us sort of a scope as to what the big bogey is out there for 3 to 5 years out in terms of the things that you guys can control, I.

Speaker 12

E, how much improvement do you expect that segment to have over that period of time?

Operator

On the longer term part, I'll ask Tim to look for that cost offset part of your question. But on the longer term, we believe and a combination of how we operate. So in the manufacturing sector and the cost structure of our mill system and I've said this for especially the part that was the legacy IP Mill system, which is mostly converted mills from other products versus what we acquired with warehouse, which is mostly all built for purpose. So they tend to have a better efficiency and lower cost. We've got opportunities to lower the cost, primarily in the legacy IP manufacturing system, margin structure to have a solidly solid business above the cost of capital with a slight growth potential.

Operator

So That's what we are working on and we see a path to that. It will be a steady path quarter by quarter and that's where we're headed. And the question on the cost of

Speaker 1

that, Cam? It's modest, but it's really transportation.

Speaker 2

I mean, we're continuing to battle the transportation channels.

Operator

A big part of the transportation issue in this business, Paul, is the export port congestion, much more exposed to international ocean freight than the other businesses in the company.

Speaker 12

Right. Thanks very much. That's helpful. Your

Speaker 3

next question comes from Neel Kumar from Morgan Stanley.

Speaker 2

Hi, good morning. You mentioned wood costs being higher sequentially, partly because of the wet weather. Can you give us a sense of the magnitude inflation you're seeing there? Could you start to see more of a 3Q issue or could it carry over to the Q4 as well?

Speaker 1

Yes, it's really due to having access to the fiber and being able to get it out of the woods based on the rainfall that we've had. So We looked at a very long lead time in terms of how we manage wood inventories at mills and across basins. And it's It's really been the Gulf States that have been more heavily impacted, by some of the Southeastern mills as well. So It will depend on the weather as we go through the rest of this quarter into 4th, but our inventories are in decent shape, but they're a little on the low side and it's just going

Speaker 2

to cost more to get

Speaker 1

the wood out and get it to the mills. Transportation is not helping either. I mean, we referenced inbound materials and whatnot, and that's seemingly impacting everything.

Speaker 2

All right. That's helpful. And then in terms of your maintenance outage expenses, you're now forecasting 642,000,000 Full year. I know it's early, but I'm just curious how you're thinking about 2022 maintenance. Do you expect it to step down year over year or generally remain near 2021 levels?

Speaker 1

Well, we're still working through that. I mean, I think a good way to look at it, the way I look at it, last year was an abnormally low year. This year is a little bit of out of range high year. When you put the 2 of them together, It looks roughly in line. I mean, our outages can be anywhere from $500,000,000 to $500,000,000 to a little bit less or maybe Some years a little bit more pushing $550,000,000 Last year, given all the uncertainty, we pulled back in curtails.

Speaker 1

This year, we're We're catching up on some of those outages from last year. So we put the 2 together, it looks more normal. Next year, we'll We have to finish our planning. We always provide that as we near the end of the year and look into the coming year.

Speaker 2

All right. Thank you.

Speaker 3

Our last question for today comes from the line of Kyle White from Deutsche Bank.

Speaker 6

Hi, good morning. Thanks for taking the question. I just wanted to talk about some of your end markets in corrugated packaging. How is the e commerce performing relative to your initial Expectations at the start of the quarter, any slowdown there that you see? How is the recovery in foodservice going?

Speaker 6

Just any details on the end markets that you can provide?

Operator

I think on e commerce, no disappointment, still very, very strong. And then we're getting into the period of the year where you start to build for the year end demand increases as you move toward holiday season. So still A very strong story. We're continuing to invest in that segment. Food service continuing to improve.

Operator

I guess there's a question mark about What happens with the delta variant and COVID and whether everything continues to open, I think a big question or a Big potential upside as schools and events start to open food service related to those, which which obviously hasn't been opened during the summer, is another potential upside. If that in any way, shape or form gets delayed and the foodservice growth could I can slow a little bit. The only segment that I think and it's kind of predictable that maybe saw some platinum was processed foods. And I think it's directly related to the general opening of the economy and a little less stocking up of kind of the center of the grocery store, if you will. So good strong performance across the key segments.

Operator

And we believe listening to our customers and looking at order patterns, that's continuing as we go into the Q3.

Speaker 6

That's helpful. And then focusing on transportation, I know it's early, but when you look to next year, do you see any relief for kind of stabilization in transportation costs? Or do you Just based on the continued inflation headwinds. Is there anything internally maybe that you can do to provide some relief against these costs?

Operator

Well, internally, the best thing we can do on the cost side is to have our system optimized with the right inventories. And what that means is make a product in the right factory so that the transportation cost to the customer or in the case of our industrial packaging business, our containerboard mill mix containerboard for box plants that are nearby, not box plants that are all the way across the country. So that's the number one thing on cost that we can do internally. We don't don't have our own trucking company or anything like that. It's about really optimizing our supply chain and any dramatic improvements we can make on cost.

Operator

To your first part of your question, I don't know this for sure, but looking at what the analysts that follow the transportation industry talk about is that there is a belief that labor and some of the impediments to truck capacity and the training that's required to bring on more employees and more assets in the rail industry will get better that people will want to return to those industries. Many of those Companies laid off a lot of people. You can't just bring people back in real. There's required training and other things, same thing contract and the belief is that that will get better. So capacity should get better.

Operator

If the economy stays kind of red hot, It's a good problem to have, but then I think capacity will get absorbed pretty quickly. So the jury is not on that. We think it's really disruptive right Our velocity is really slow for a lot of reasons. We think part of that, at least on the human labor side, will get better. Got it.

Operator

Thank you, Dror,

Speaker 6

for the details.

Operator

Thank you. Let me go ahead and wrap up. Just a couple of takeaways I would I'd like to lead with investors first. You heard today that we are really positive on the strong momentum we're building for the second half in both earnings and margin expansion. We're absolutely laser focused on capital allocation and a balanced approach to that and we are in very good shape on all elements of our capital allocation framework.

Operator

And we're very excited about the prospects we have in front of us as we separate IP into 2 companies and we work on building a better IP going forward. So thank you for your interest in International Paper. We look forward to talking with all of you next quarter.

Speaker 3

Thank you for participating in today's International Paper's quarter 2021 Earnings Conference Call. You may now disconnect.

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Earnings Conference Call
International Paper Q2 2021
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