International Paper Company

Good morning and thank you for standing by. Welcome to today's International Papers first quarter 2021 Investor Earnings Day conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, you will have an opportunity to ask questions. To ask a question, press star one on your telephone keypad. To withdraw your question, press the pound key. I'd now like to turn today's conference call over to Guillermo Gutierrez, Vice President, Investor Relations.

Thank you, Maria. Good morning, and thank you for joining International Paper's first 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's important information at the beginning of our presentation on slide two, including certain legal disclaimers. For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties, including the impact of COVID-19. We will also present certain non-US GAAP financial information. A reconciliation of those figures to US GAAP financial measures is available on our website. Our website also contains copies of our first quarter 2021 earnings press release, and today's presentation slides. Relative to the YILM joint venture and graphic packaging investment, slide two provides context around the financial information and measures presented on those entities. I will now turn the call over to Mark Sutton.

Thank you, Guillermo, and good morning, everyone. We will begin our discussion on slide three. The international paper delivered solid earnings and strong cash generation in the first quarter. our milling converting system performed well to mitigate the significant impact of the winter storm and support a strong customer demand across all of our packaging channels. Input costs and transportation were a headwind in the first quarter, especially for energy, which was impacted by the duration of the severe cold temperatures in the southern U.S. We see momentum building continuing to build across our three businesses with very strong demand for corrugated packaging and container board and solid demand for absorbent pulp. And in papers, we're seeing an improved supply-demand backdrop in all of our key geographies. On capital allocation, in the first quarter, we repaid $108 million of debt, and we returned $331 million to shareholders, including $129 million of share repurchases. Our performance, again, demonstrates the agility and resilience of international paper to perform well across many different circumstances. We're passing the one-year mark of the global pandemic, and I could not be any prouder of the commitment of our employees to take care of each other and to take care of our customers. The vast majority of our 48,000 team members work in our mills and converting plants each and every day, and their health and safety remains our most important responsibility. We also made solid progress on the spinoff of our printing papers business, which we expect to complete late in the third quarter this year. Our team is also making strong progress to develop and deliver multiple streams of earnings initiatives to achieve the $350 to $400 million in incremental earnings and accelerated growth by the end of 2023. As we work to build a better IP, we remain laser focused on delivering superior solutions to our customers, executing well, and meeting our commitments to our shareholders and our other stakeholders. Turning now to slide four, which shows our first quarter results. We delivered EBITDA of $730 million and free cash flow of $423 million, despite the $80 million pre-tax earnings impact from the winter storm in the southern U.S. Revenue increased by more than $100 million sequentially, primarily driven by price realization in our packaging and global cellulose fibers businesses. And again, free cash flow was strong with a continued focus on running our business as well controlling our cost, and actively managing our working capital. Now I'll turn it over to Tim, who will cover our business performance and our second quarter outlook. Tim?

Thank you, Mark, and good morning. I'll start with the quarter-over-quarter earnings bridge on slide five. First quarter operating earnings were 76 cents. The winter storm impacted pre-tax earnings by $80 million, or a 15-cent impact to operating EPS. We're still in the very early stages of the insurance process and do not have a recovery estimate at this time. Looking at the bridge, price mix was strong driven by prior period price flow through and packaging and cellulose fibers. Volume was essentially flat with continued strong demand for corrugated packaging and absorbent bulk. Overall papers volume continues to recover, even though we saw the expected seasonal decline for papers in Brazil in the first quarter. Operations and costs were favorable. Mill and box system performance was solid and helped mitigate the impact of the winter storm, which was a cost headwind of $55 million to operations. Maintenance costs increased sequentially, and we expect to complete about 65%. of our maintenance outages in the first half of the year. Input costs were unfavorable, which included a $20 million cost impact from the storm, mostly for energy and raw materials such as starch and adhesives. Overall, we're seeing higher costs for recovered fiber, energy, chemicals, and distribution, which we expect to continue in the second quarter. Transportation conditions are challenging, and we're experiencing significant rail, truck, and ocean transportation congestion. Higher corporate expenses were driven by a non-cash foreign exchange loss on intercompany loans, and lower equity earnings are partly attributed to the reduced ownership position in GPK. Turning to the segments and starting with industrial packaging on slide six, we continue to see strong demand across all of our channels, including box, sheets, and container board. For the quarter, volume was essentially flat. We lost 145,000 tons of container board production due to the winter storm. Although our mills and box plants in the region recovered quickly, the storm did impact sales in the quarter. We had nearly 30 box plants in Texas, Louisiana, and Mississippi affected by the storm, which impacted our box shipments in the quarter. Price and mix was strong. Our November increase is essentially implemented fully with the $131 million first quarter realization. And I would add, this is one of the fastest implementations that we've seen. Operations and costs includes about $55 million impact from the winter storm, about half of which is due to unabsorbed fixed costs, and the balance is related to repairs and higher distribution costs. Overall mill and box plant performance was solid, and we leveraged our system to support strong customer demand across all of our channels. Maintenance outage costs increased sequentially. We did defer about $30 million of maintenance outages from the first to the second quarter due to the significant production loss resulting from the winter storm. We expect to complete about 75% of our planned maintenance outages for packaging in the first half of the year. Input costs were a significant headwind in the quarter, including about $20 million related to the winter storm due to higher energy distribution and raw materials in our mill system and box plants. Higher recovered fiber costs were another significant headwind in the quarter. We expect continued cost pressure for recovered fiber energy distribution in the second quarter, and we're still seeing the lingering effects in certain chemicals produced in Texas and Louisiana as suppliers recover from the winter storm. Turning to slide seven, as we enter the second quarter, we're seeing continued strong demand across all of our channels. U.S. and export container board demand is strong with low inventories in all regions. Our first quarter shipments were impacted by the significant production loss resulting from the storm. We're working with our customers to recover from extensive backlogs. In our U.S. box system, demand remains robust as more states start lifting restrictions. E-commerce again grew at a strong double digit pace in the first quarter, and we believe the majority of the accelerated consumer adoption in this channel is permanent. With states starting to reopen, we're also seeing improved demand in segments with greater exposure to restaurant and food service channels, such as produce and protein, although we're still not back to pre-COVID levels. Non-durables, excluding food and beverage, represents about 30% of U.S. box demand across a wide range of consumer and industrial products. This segment is benefiting from strong consumer demand and the broad manufacturing sector recovery. And lastly, demand for durable goods, which had the immediate pullback due to COVID, is benefiting from a healthy housing market. We're well positioned and have the scale and footprint to serve just about every corrugated segment in a meaningful way. And our packaging team continues to focus on delivering superior packaging solutions to help our customers succeed. Turning to slide eight, I'll provide an update on the progress we're making in our EMEA packaging business. Our objective is to bring this business back to sustainable mid-teen margins and generate returns above our cost of capital. We're well on our way to achieving our goal. In the first quarter, we improved adjusted EBITDA by nearly $20 million compared with last year. The Madrid mill is fully ramped, and we have more integration and cost opportunities available. We're integrating our world-class lightweight recycled container board with our box network in southern Europe to provide customers with a broader array of packaging solutions. We've improved our footprint in the Iberian Peninsula through selective acquisitions, including two box plants in Spain acquired at the end of the first quarter. These acquisitions provide additional integration opportunities with the Madrid Mill. And more importantly, they enhance our commercial capabilities in the regions. We continue to make progress with our box system performance and have more opportunity ahead. All our plants have clear commercial and operational plans, and we're leveraging the skills and resources from across the company to deliver on our commitments. The map on the slide shows our packaging footprint in Europe after the sale of our turkey packaging business, which we expect to close in the second quarter. After the sale, the EMEA packaging business will have two recycled container board mills, 21 box plants, and two sheet plants. And again, our commitment is to bring this business to sustainable returns above our cost of capital. Moving to global cellulose fibers on slide nine, price and mix was favorable, with price realization accelerating across all pulp segments in the first quarter. Volume was moderately lowered due to the shipping delays related to port congestion. Demand for fluff is solid, and we have healthy backlogs. Operations and cost improved sequentially, driven by the non-repeat of a $20 million write-off in the fourth quarter, as well as solid operations and good cost management. These improvements were partially offset by about $10 million of higher seasonal energy consumption and an FX loss at our mill in Canada. Maintenance outage costs decreased as expected, and input costs increased due to higher wood costs in the mid-Atlantic region, as well as higher energy costs. Demand improved as we entered the year, and the end-use demand signals for absorbent hygiene products is healthy. Turning to printing papers on slide 10. Our papers business has demonstrated outstanding resilience throughout the past year. Our performance reflects the talent and commitment of our team, the scaling capabilities of our global footprint, and the strength of our highly valued brands. We continue to see steady recovery and demand across all regions, which we expect will accelerate with broader return to office and return to school activity. I'd also add that we've seen significant improvement in supply-demand dynamics both within the U.S. and outside the U.S., Looking at our first quarter performance, price and mix was stable across the segment. Volume decreased sequentially due to the lower seasonal demand in Brazil and Russia, as expected. I'd also admit that the export supply chains are stretched in most regions. Operations and costs improved on solid operations and good cost management, as well as a favorable FX in Brazil of about $10 million. Fixed cost absorption improved with economic downtime decreasing by 40,000 tons sequentially across the system. Maintenance outages increased modestly as expected and input cost increased primarily due to higher wood and energy costs in North America. Looking at ILM, on slide 11, the joint venture delivered $49 million in equity earnings in the first quarter with an EBITDA margin of nearly 35% driven by higher average pricing. Volume decreased sequentially primarily due to fewer shipping days because of the Chinese New Year, as well as the impact of tight shipping capacity in China. Underlying demand remains strong as we enter the second quarter. And lastly, in April, we received a $144 million dividend payment for Millen, which is $44 million higher than the estimate we provided last quarter. Now we can turn to the outlook on slide 12, and starting with industrial packaging. We expect price and mix to improve by $75 million on realization of our March 2021 price increase. Volume is expected to decrease by $10 million on lower seasonal demand in Spain and Morocco as the citrus season winds down. Operations and costs are expected to improve by $15 million, with the full recovery of the winter storm impact partially offset by higher incentive compensation accruals related to a stronger outlook. Staying with industrial packaging, Maintenance outage expense is expected to increase by $77 million. And in-book costs are expected to increase by $20 million due to higher OCC, energy, raw materials, and distribution costs. In global cellulose fibers, we expect price and mix to increase by $100 million on realization of prior price movements. Volume is expected to increase by $5 million. Operations and costs are expected to decrease earnings by $10 million. Maintenance outage expense is expected to decrease by $10 million, and input costs are expected to be stable. Turning to printing papers, we expect price and mix to increase by $25 million. Volume is expected to increase by $5 million. Operations and costs are expected to decrease earnings by $10 million, due to the non-repeat of foreign currency gain in Brazil during the first quarter. Maintenance outage expense is expected to increase by $22 million, and input costs are expected to increase by $5 million. And under equity earnings, you'll see the outlook for our ILM joint venture. Turning to Select 13, I want to take a moment to update you on our capital allocation actions in the first quarter. We're committed to maintaining a strong balance sheet. We have no significant near-term maturities, and in the first quarter, we reduced debt by $108 million. We also returned $331 million to shareholders, including $129 million of share repurchases, which represented about 2.6 million shares and an average price of $50.28. We acquired two box plants in Stain at the end of the first quarter, you can expect M&A to continue to focus primarily on bolt-on opportunities in North America and Europe. And lastly, in the first quarter, we monetized about $400 million of our staking graph packaging. After that transaction, we now hold about 7.4% ownership in the partnership. And with that, I'll turn it back over to Mark.

Thank you, Tim. Turning to slide 14, As we enter the second quarter, I'm mindful that we're still in the midst of a global pandemic and there is still significant uncertainty in the geographies and markets that we operate. Having said that, we see momentum building in our three businesses. We continue to see very strong demand for corrugated packaging and container board in North America and Europe. We're also seeing solid demand for absorbent pulp with more favorable supply-demand dynamics as paper-grade pulp demand recovers. In printing papers, we're seeing a steady recovery in demand, and in areas where schools and offices have reopened, we're seeing a step-change improvement. Overall, we're seeing a much better supply-demand backdrop. We expect price flow-through from prior price increases across our three businesses. We expect margins to improve, even as we manage to the impact of higher input costs for recovered fiber, energy, and transportation. In addition, we expect productivity and other cost initiatives to offset general inflation. All of this contributes to a more favorable outlook for 2021. And I'll end our prepared remarks on slide 15. I just want to take a moment to reflect on what has now been a full year of living and working in a global pandemic environment. When we shared our first quarter performance last year, we talked about all the protocols we quickly put in place to keep our employees and contractors safe so that we could continue taking care of our customers. We stay diligent about adhering to those protocols, and we will remain steadfast for as long as it takes to get fully and safely past the pandemic. We continue to operate in this environment with a view toward the short-term and long-term success and sustainability of international paper for all of our stakeholders with an unwavering commitment to the health and safety of our employees and contractors, to understanding and taking care of our customers' needs as they also adapt to rapid change. to supporting the critical needs in our communities and to building a better IP for all of our stakeholders. Since the pandemic began, not a day goes by that I don't think about the commitment of our employees and especially our frontline teams for their ability to adapt well and perform at a high level across circumstances and geographies. Once again, I want to take this time to thank each of our employees for their role in making our company strong and resilient. And with that, Tim and I are happy to take your questions.

Thank you. As a reminder, to ask a question, press star 1. To withdraw a question, press the pound key. We do ask that you please try to limit yourself to one question and one follow-up. Please hold while we compile the Q&A roster. Our first question comes from Mark Wilding of Bank of Montreal.

Good morning, Mark. Good morning, Tim.

Good morning.

Mark, I'm just curious, you know, it does seem like the, you know, the container board business really has accelerated globally, not just container board, but corrugated, and that the market is quite tight. And I'm just curious about how that might be impacting your thinking about a potential conversion of that second line down at Selma.

That's a good question, Mark. We obviously have looked at that and what product we might need in the future. If you just play out the current conditions, you'd probably look at using some of that from a packaging standpoint sooner. But outside of interruptions like we talked about with the winter storm and one-offs, we have largely the container board we need when you look at all of our channels, domestic, in our own box. domestic open market and export for what we believe is the foreseeable future. But that's a good option for us in the future. And it depends on the type of grades, whether it's medium or liner board that we need. One is quicker and less expensive than the other. But it's on our radar screen. We don't see a need to immediately do that right now. When we operate well and we don't have interruptions like we had in the first quarter, we feel quite confident in our container board quality, type of grade, and overall capacity.

Okay, and just as a follow-on, if I could, Mark, I know that both European producers and North American producers have been sort of pulling out of the export market and kind of re-channeling volume to their domestic businesses and domestic customers. I'm curious about how you think about this in the context of of taking care of long-term export customers? Because I think there's some real concern by converters in places like Latin America that have always relied on imported board.

Yeah, it's definitely important to us. You know, IP is probably the largest provider of Kraftliner board in Latin America and Europe for long-term customers who use it because it's needed. And that's critically important to us. And we've talked about the importance of our channels to market, especially for Kraftliner. Things are very tight right now. Disruptions make that you know further uh more difficult for for the supply chain i think where we are right now is inventories are very low through the system with our customers and our own processes and we are working individually with each of our customers i can't speak for others obviously to make sure we can provide as much of their needs as possible in the time that they need it But I think we're looking at a tight supply chain, especially for Kraftweiner, for the foreseeable future.

Okay, great. I'll turn it over. Thank you, Mark.

Our next question comes from one of George Steffos, Bank of America.

Hi, everyone. Good morning. Hope you're doing well. Thanks for the details. I guess my first question is really around corrugated volume. And Mark, you mentioned that from what you're seeing and the acceleration from e-commerce that you think the, and I'm paraphrasing, the new consumption levels, the new usage of cargated, they're more or less here to stay. You don't intend or don't expect that to recede. So can you tell us why, what evidence you're seeing that suggests that and how your volumes have looked to the extent that you can comment early in the second quarter?

So it's a great question, George. I think one of the things we look at is what our customers look at. And on the e-commerce part of your question, we're seeing really important winning customers investing more in their capability, putting real dollars and real equipment into and real capability in hiring employees, their data analytics around customer repeat buying and all that gives them confidence to believe that a good portion of this shift to an e-commerce way of retail is permanent. It may not be 100% permanent, but it is the majority of it. So we look for cues from our customers instead of trying to wish it or guess at it. What's uncertain is as things return to a more, quote, normal environment, what does traditional retail do? Is it a net loss to e-commerce or is it a hybrid where there's still going to be some normal return to in-store brick-and-mortar type retail. And you can look at a lot of information studies and listen to companies' earnings reports that are in those businesses, and it's hard to conclude from that. So our box volumes in April for our own make box the boxes we make, the trends look like they're continuing from the first quarter. But I remind you, we serve multiple channels. So we're in the box market, whether we make the box, whether we have a long-term strategic partner using our container board and making specialty boxes, or whether it's a pure open market. And we're seeing those volumes up close to double digit for the overall exposure we have for the North American box market. So it looks like more of the same. We do see some channel shifting, which is good news. We see obviously some food service and restaurant supply picking up. Where that shows up for IP and we're overweight in this area is fresh food, produce, the kinds of things restaurants buy on a twice weekly, three times weekly basis, which really got hit hard in the pandemic. So we're encouraged by what we're seeing in the demand trends and the segment exposure that we have.

Thanks, Mark. Just a point of clarification, the close to double-digit reference that you just made, what was that referring to?

It's all the channels to market that we provide to the U.S. box market. So our vertical channel in our own box business, we have some strategic partnerships where we have either partial ownership or majority ownership downstream. in the converting, and usually that's specialty-type products, and then we have just the pure open market where we have long-term arrangements. When we look at the activity that we participate in the U.S. box market, it's really strong. Okay.

Thanks for that. My other question, you know, recognizing this was a very different first quarter from a storm and outage standpoint, and clearly we can understand why you saw such a pickup in energy costs in the quarter. You know, looking back over time, it looks like IP's consumption of energy has been relatively constant. Are there, given what we've seen the last quarter and given that experience, what are the areas that you see where perhaps IP can become even more efficient within its mill network in terms of energy consumption? Thanks, guys, and good luck in the quarter.

Thanks, George. That's a good question. On energy, the main thing we can do on the mill system side is maximize our own make energy in our fully integrated craft liner mills where we make anywhere from 75% to 85% of our energy with carbon neutral biomass. There's more we can do there. Sometimes it takes investment. As you know, what we've done with our capital investment program over the last couple of years to navigate some strategic projects like Riverdale and then the pandemic and managing our entire liquidity situation we those are the type of projects that you can go back and get later sometimes it's unfortunate but we delay them even though they have really good returns so we've got more investment we can make uh fuel switching we've done a lot of to natural gas from other higher cost fuels And in the converting plants, we don't make our own energy, so part of its geographical exposure to the grid, part of its energy efficiency through the uses of energy in the plant. Most all of that, where we are now in our company, in terms of consumption, most all of that is part of our investment profile. And usually, George, those projects have the highest returns, and we plan to invest, increase our investments in those areas now that all phases of our financial condition are much stronger.

Thank you, Mark. Our next question comes from Mark Montalb of Seaport Global.

Thank you. First question was, you really did have a lot more pricing in the industrial packaging business flow through than I think your original guidance had been, and you mentioned, Tim, that this was one of the fastest pass-throughs or your ability to get price what turned out to be very good. Can you give us more color on what happened and what it tells you?

It's a difficult question, Mark, because there's so many customers and so many unique commercial agreements. I think the general answer is when you have this type of demand, and a lot of our customers are dealing with multiple supply chain challenges, it's not just the packaging that they get, the other inputs. I think the discussion time around the gray area in every commercial relationship about how fast or how slow, no one loves price increases obviously, that dynamic just lends itself to let's get this done and get our material in and get it in as quickly as possible. I've got 17 problems, and the box is only one of them. That's just the general answer. The dynamic out there right now is things are very tight in multiple parts of the supply chain for a lot of our customers, and everything at the final minute of when you implement tends to be a human-to-human negotiation, and it just went faster.

Great. And can you give us a sense, I recognize that certainly by the end of the quarter it was all in. Is there still some carryover impact that's included in that $75 million that you're looking for in the second quarter versus the first quarter, or is that actually genuinely all from the new initiative?

Yeah, it's small, Mark. There's probably just a little bit from the first price increase, but virtually all of it's in. And so we're looking forward now to the March increase implementation.

And one last one, sort of in the same vein, but in the pulp business, where great to see that hopefully second quarter will actually be a little bit in the black. I imagine, though, because of the way those contracts are laid out, that even based on the price increases you've already implemented, that there should presumably be more to come in the second half of the year? A, is that valid? And B, do you begin to have pretty good visibility on that? Or is that going to be negotiations and conversations yet to come?

We gave an outlook. I think the number was $100 million in price in the second quarter. That's as far as we're going to go on that. But we like, as I said in my closing prepared remarks, we really like the momentum in cellulose fibers right now. A big part of that like is the movement in pricing. But I don't want to go out into the third quarter and fourth quarter. But if you just take the confidence we have in the trajectory, I think you can make some conclusions.

Thank you.

Our next question comes from one of Adam Josephson of KeyBank.

Hope you're well. Tim, one question on the guide, the 2021 momentum building slide. I asked the same basic question on the last call, but so everything seems to be getting better as you go through the year. So why not resume providing guidance at this point? I know about all the – there are many uncertainties, as there always are. So did you – how much consideration did you give to doing that, and why did you reach the conclusion, at least for now, that you don't want to resume doing so?

Yeah, it's a good question, Adam. I mean, technically we don't provide guidance as such. We give an outlook. It's true that in prior periods we had talked about a full year outlook and expectations sometimes within a range. It's something that we look at every quarter. I think we're, you know, some of the uncertainty around COVID seems to be diminishing. But I think maybe as we get to the middle of the year, we'll have a better feel for vaccination rates and what's reopening and what's not. And so it was just not enough in our view at this point in time to start talking about full year guidance. But we do have a lot of optimism about how we see the year playing out. Adam, this is Mark.

Just to add, it's a good question. We have given the investment community, as Tim said, at least an EBITDA range, a couple of other numbers for full-year expectations. I think what's missing is that EBITDA number. We did talk about our capital expenditures, for example. But as we get into this year, a full-year guidance given in the middle of the year I think is maybe less valuable than if we would have given it at the beginning of the year. Look, I'm an optimistic person. You know me personally. Adam, I am feeling really good about where we are. But just as soon as I say that, I think about our employees in Poland right now and our employees in Brazil. And they are where we were during the Christmas holidays and in January with COVID. pandemic and its effect on their economy and their lives. So I just don't want to get out over our skis and say things that imply this is all behind us, only to have to come back and say, boy, that was too quick. So I know it's a little frustrating, but we're trying to give as transparent an outlook as Tim walked through methodically all those numbers on the outlook slide, and hopefully that gives people a sense of of the big picture, which is things are really strong and improving. And we have, as Tim did on the capital allocation slide, a balance sheet that's headed very quickly to the low end of our range and good cash generation, flowing cash through the capital allocation framework, dividend share repurchases like we committed to. albeit interrupted for a pandemic, not casually. And so that's the message I really want investors to take away and analysts to work with. But your point is well taken. It's information you used to have that you don't have right now.

No, I really appreciate that, Mark. And just one other question for you on back to the e-commerce and the whole box demand issue. You used to talk about the relationship between Boxed demand and GDP and between boxed demand and non-durable industrial production. And you have that really good slide in your Rocho handout to that effect. How do you think those relationships have changed, if at all, given this new information you have about the presumed permanence of this e-commerce growth?

That's a really good question. I know our team is looking at the resiliency of that model that creates that slide you're talking about in our roadshow where we had the non-durable and the transportation index and a number of other metrics. I don't know if we've decided that there is a shift in it yet, but I know our team is looking at it. As soon as we have something that we feel good about and that it's legitimate and statistically valid, we like to share that in our investor material, and we'll do that in the future.

Thanks so much, Mark. Best of luck in the quarter.

Our next question comes from one of Phil Ng of Jefferies.

Hey, guys. Appreciating there's a greater lag in the flow through on pricing, but with fluff pull prices approaching 2018 levels and the commercial initiatives you guys are implementing, how quickly do you think that earnings power for sellerless can return back to 2018 levels?

Well, we gave the outlook for the second quarter, and you can look at the trend there on just the pricing comment of $100 million. I think we are in that part of the pulp market dynamic, and we're also trying, as I mentioned multiple times, we're trying to change the business model commercially primarily on how we go to market and how we interact with our customers so that We put more sustainability and less volatility in the business, and that's a lot of work, not work I can comment on because it's customer-specific, but we feel good about where we are on it right now, and we think the business can get back to, and then if we can invest in the cost side, improve upon what numbers you're talking about from 18.

That's great. I appreciate that, Culler. Seems like a solid game plan. The 145,000 lost tons in container board from the winter storms, is your view you would have essentially sold pretty much all that, or would that have been kind of an effort to build inventory? The reason I'm asking, I'm just trying to gauge if you view that as pent-to-demand for 2Q, and then more broadly, just given how tight things are, do you have bandwidth to kind of supply your customers given how strong demand is right now?

Yeah, we're working hand in glove with customers across all of our channels trying to make sure that we're meeting their needs as quickly as possible. Having said that, it's a challenge. The 145,000 tons, a big portion of that was available for sale and ready to go. In some cases, as we go into the second quarter, it's a heavier maintenance outage quarter, and so part of it is preparing for that as well. David Miller- Definitely missed opportunities on the container board side, but as it's not more importantly on the box side with 30 plants down and. David Miller- Significant exposure, so you know our estimates around that exposure is that the the growth that we had the quarter we've been closer to the overall industry growth if we haven't had that disruption.

But do you see that demand still there or, you know, your customers kind of went elsewhere to kind of get supply just given how tight things are?

Well, some of it's there. Some of it we're still working through, as I mentioned in prepared comments, working through the backlogs. You know, all of these channels have different lead times on orders and when customers are expecting them. So we're working through it customer by customer on that basis.

Okay. Super helpful, guys. Appreciate it.

Our next question is from Mark Connell.

Following on Phil's question, if we remove the storm impact that held back first quarter, is there any reason to think that IP can't match the industry's shipments in 2021 or even exceed it? I'm thinking about the outages and the maintenance timing shifts and that sort of stuff, because obviously there was a lag in performance in 4Q2, so I just want to make sure we're not missing anything.

No, it's a good question, Mark. There's no reason to believe we can't match or exceed. Now, given our size, exceed means, you know, some basis points, not multiples. But there's no reason we can't match the market. Fourth quarter, we did have some operational issues, if you recall. And then, you know, not an excuse, but this geography and the winter storm matched right on top of us. But no reason you shouldn't expect us to perform at or better than the markets.

Okay. And then, thank you, that's helpful. Just on EMEA, following on Tim's comments, how does the push to mid-teens margins in EMA break out between converting and mill opportunities? I'm just wondering if there's spending opportunities at those mills or if most of the incremental investment and improvement is coming on the converting side.

Yeah, that's a good question, Mark. We think we have additional opportunities, not that so many of them require capital in the mill operations, but just in terms of how we're managing costs as we get fully up the ramp curve and integrate it, and it's both mill and supply chain. So we see more opportunity for the mill in Spain. The other mill is a more mature mill that's been there for a while, and so it's probably running at an optimal level. But in Spain, given the integration play, we see more opportunity.

So bringing some of the strengths in integration that you have in the U.S. over to there. Okay. That's very helpful. Thank you.

Our next question comes from Juan Euclid of UBS.

Hi. Good morning, everybody. Thanks for taking my questions. Good morning. First off, I wanted to follow up on the $350 to $400 million of incremental EBITDA. I think $300 of that was supposed to be from cost savings. I realize Q1 was kind of challenging, but I didn't hear an update on how much of that you've achieved to date or how much you expect to achieve this year headed towards that 2023 exit rate.

Yeah, well, we didn't provide one. So we're working through our plans right now, and we're in the process of beginning the implementation of all that. We pointed on the last quarterly call to some of the benefits that we saw coming through more of the process automation and using data analytics and technology. And as we go through this year, we're looking forward to – probably the third quarter where we provide a robust update in terms of all of the plans that are being executed and achievement this year, but also run rate expectations for 2022. Okay.

All right. That's clear. And then I guess just to follow up, you know, on the container board and corrugated box business, could you give us just a sense of where your inventory's stand, you know, given the disruptions, you know, I guess where you are today at an inventory level versus, you know, where you'd like to be or, you know, where you've been historically on average, you know, and kind of what the trajectory is there on the inventory side given the outages in the second quarter?

Well, the easy answer is we're lower than we'd like to be, and that's the source of the hand-to-glove comment Tim just made. So we need to rebuild. While we serve our customers' active demand, we need to be very efficient in rebuilding important roll stock inventories across the wide range of boxes that we have to make. So there's more for us to do. It's not unexpected when you have this type of demand coupled with the one-off interruption of the storm we talked about and then just the timing of outage schedules. But The good news is we have a really big system, and it's very flexible, and it recovers very quickly. So we feel like we can do it. But our inventories are lower than we would like, all things considered. And the main thing I'm concerned with right now is our ability to support our customers through their dynamic demand changes. And that's what our focus is right now.

That's clear. I guess just quickly, you know, Given what you know about the second quarter, would you expect you'd be in a position to build inventories?

Every effort is going to be made to try to restore inventory levels, but it's a heavy maintenance outage quarter. And so you're triaging and prioritizing and trying to satisfy all the needs across the channel. Now, the good news is... Most of the outages are behind us by the time we get to the middle of the year, but these supply chains are very long, and they take a long time to recover.

That's very clear. Thanks, guys. Appreciate it.

Again, ladies and gentlemen, if you wish to ask a question, simply press star, then the number 1 on your telephone keypad. Again, that is star 1 to ask a question. Our next question comes from one of Gabe Hodge of Wells Fargo Securities.

Mark, Tim, good morning. I hope you guys are well.

Good morning.

I'm thinking about integration levels in the corrugated operations or industrial packaging in North America and, you know, kind of whether or not you kind of still view this as the right destination. I mean, you have some competitors that are maybe trying to bump that up for different reasons. And I would also appreciate that maybe looking back in the rear view mirror, you're kind of playing a little bit more defense and or kind of making some asset changes along the way. Now you've got some kind of more, I'll call it disposable cash. uh to go on offense with and you made these two small box plant acquisitions um is that part of the strategy to maybe get that closer to something i don't know 90 or um do you feel good at that 80 level kind of over a longer term basis yeah so we think what's important about integration is how we go about building it we you know our most profitable channel is our north american thermically integrated

channel container board to box and to the customer. And we want to grow that part of the business by delivering superior solutions on the packaging side to our customers so that we're building long-term sustainable relationships where we can through small M&A or some of these more creative arrangements that we've that we've started implementing, grow that channel. So higher over time, but done in a very sustainable way.

Okay. And then I guess kind of to revisit the cost reduction or the $350 million of savings and trying to marry up the comments that you made about Europe, are those sort of mutually exclusive, meaning the $20 million or so that you saw in improvement in profitability this quarter, And I think what you talked about kind of getting back to mid-teens implies maybe another $100 million of improvement in aggregate for European industrial packaging. Is that more related to the mill conversion over there and that starting to contribute? Or is that, again, kind of included in that $3 to $3.50 of savings?

Yeah, part of it is included, but it's across commercial, operational, supply chain. It's all the things that we touch in terms of delivering a packaging solution to a customer. So we've got improvement plans across all aspects of the business.

Thank you, guys.

Our next question comes from one of Paul Quinn of RBC Capital Markets.

Yeah, thanks very much. Good morning, guys.

Good morning.

Hey, just had a question on global cellulose virus. Just, you know, when I look at the quarter, I mean, it's an improvement, but it's still a disappointing result, especially when I compare it to your European peers. Where do you see this business being mid-cycle? Can you get up to the, you know, the profitability of your peers? And how long do you think that's going to take?

Well, as I mentioned on the last quarter call, we see the business improving quarter after quarter after quarter, and we think it will be in very good shape. I don't have all those European numbers in my head, off the top of my head, but we think it will be in very good shape as we leave 21 and head into 22. Okay.

That's all I had. That's all I got.

Our next question comes from Neil Kumar of Morgan Stanley.

Great. Thank you. For corrugated, can you just talk about the cadence of volume growth through the first quarter by month? And then can you just give us a sense of what you're seeing in terms of box shipments so far in April?

April is running very close to maybe a little bit ahead of how we exited the quarter, just looking. It was pretty steady throughout the quarter. Yeah, I mean, it started really strong in January. Now, we think a big part of that is our exposure to e-commerce because you not only have the Christmas push around the holidays, but January with returns and and special sales and whatnot, it tends to be a strong month as well. But I think it was solid throughout the quarter.

Okay, that's helpful. And then in terms of your recent asset sales, I was wondering if you could just touch on how you're thinking about allocating proceeds between buybacks versus inorganic and organic investments. And then more generally, where are you in the process of evaluating your portfolio of assets? Could there be additional asset sale announcements, or is it generally complete at this point?

Well, what we've talked about on the acquisition side is look at what we've been doing for the past couple of years. They've tended to be one-off operations, sometimes two, bolt-on in nature and filling gaps in capability or exposure that we want, and most of them, to be honest, it's happened in Europe at this point. In terms of the cash coming in, we have a fairly robust capital allocation framework that we have talked about over time. including the strong balance sheet, target ranges of debt. You know, the fact that we were on a path of share repurchases before COVID hit, and out of prudence, we took a pause last year, but we're back in the market. But the goal is to be thoughtful about the cash coming in and making sure that we're doing everything in our power to maximize value through the actions that we take.

And our last question comes from one of Kyle White of Deutsche Bank.

Hey, good morning. Thanks for taking the question. On global cellulose fibers, just want to talk about the poor congestion that you're experiencing and maybe how that is impacting your volumes or your supply chain in that business.

It's a good question, Kyle. It's a big issue. We're not losing orders because of it, because we're specced in on a lot of the customers. It's just creating a long, long supply chain. So customers are trying to figure out the new duration between placing an order and actually receiving it. and in some cases trying to get our help to understand whether they should change their order cycle. So there's a lot of order management changes being talked about and figured out between IPS, the supplier, and our customers. But it affects more than our pulp business. It affects our export container board, and we're even seeing it in our export paper business in Brazil. I don't think there's an immediate fix to it, so it's a velocity issue in the supply chain that it looks like we're going to have to adapt to for some period of time.

Got it. That's helpful. And then switching to AMIA industrial packaging, do you guys provide kind of your integration rate for just that region and kind of where do you see it going with these recent acquisitions in Spain? And then maybe just a longer-term target for integration there as you continue kind of bolt-ons in that region?

We typically don't give a number because it's not as clean. We're integrated on our craft liner from our U.S. mill system to our European box plants. We have the world-class mill we just started up a couple years ago in Madrid that's almost at its full ramp, which is a lot of our high-performance, lightweight liner. But we buy most of our medium, the corrugated medium, from the open market. So we typically haven't given an absolute number. But as Tim said, building an integrated model regionally is where we have the most success commercially and on the financial metrics. And so that's kind of the... The approach we're taking in Europe is regional density, and so right now it's the Iberian Peninsula surrounding our new mill and supported with Craftliner from our U.S. system. And then we have some very important suppliers in the European market for grades that we don't make or just that make geographic sense because of freight. So we're still a large customer for some key European container board producers, and those are long-term relationships.

Got it. Thank you. Good luck in the quarter.

Thank you. So, appreciate everyone's questions. Again, thank you for your interest in the International Paper, and we look forward to talking with you again next quarter.

Thank you for participating in today's International Paper's first quarter 2021 Investor Earnings Day conference call. You may now disconnect.