International Paper Company

Good morning and thank you for standing by. Welcome to today's International Papers first quarter 2022 earnings 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 in your telephone keypad. To withdraw a question, press the pound key. I would now like to turn today's conference over To Guillermo Gutierrez, Vice President, Investor Relations. You go ahead, sir.

Thank you, Charm. Good morning, and thank you for joining International Paper's first quarter 2022 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 two, including certain legal disclaimers. For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP financial measures is also available in our website. Our website also contains copies of our first quarter of 2022 earnings press release and today's presentation slides. I will now turn the call over to Mark Sutton.

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

Tim? Good morning, everyone. Thank you, Mark. I'm on slide five, which shows our sequential earnings bridge. First quarter operating earnings per share were 76 cents as compared to 78 cents in the fourth quarter. Price and mix improved by about 131 million, or 27 cents per share, with strong price realization in both business segments and across all of our channels. Volume was slightly lower, as expected, due to seasonally lower demand in North America and the impact of Omicron in the early part of the first quarter. In global cellulose fibers, fluff pulp shipments were constrained by the ongoing vessel delays. Operations and costs were an eight-cent headwind in the quarter. Our mills and converting system performed well, and we made excellent progress normalizing container board inventories across our network. We received $20 million of insurance recovery or about 4 cents per share related to Prattville. In global cellulose fibers, ongoing logistics constraints impacted operating costs by about 25 million or 5 cents per share in the quarter. We successfully completed our highest maintenance outage quarter of the year. These costs were in line with our outlook. And we expect to complete nearly 70% of our annual maintenance program in the first half of the year. Input costs rose sharply in the latter part of the first quarter, driven by higher energy, chemicals, and distribution costs, mostly due to higher diesel fuel prices. These costs more than offset moderately lower recovered fiber costs. On slide 32 of the appendix, we provide details on our consumption of key inputs, including natural gas, which was a significant cost headwind in the quarter. Moving to corporate expense, we improved by five cents per share sequentially. Lower corporate S&A was partly offset by higher tax. Corporate expenses also benefited from lower interest expense and a lower share count. Lastly, equity earnings improved sequentially. I'd also note that in the first quarter, we received the dividend from Millam as expected. Turning to the segments and starting with industrial packaging on slide six, in North America demand normalized in February and March as expected following the labor impact from Omicron in the early part of the first quarter. Overall box demand in North America is stable as we enter the second quarter. Our mills and converting system performed well and we replenished system inventories which puts us in a much better position to optimize our cost as we navigate continued logistics constraints and poor carrier reliability. Looking at first quarter performance, price and mix was strong, driven by realization of our August price increase. Volume was lower sequentially due to slower seasonal demand and Omicron labor constraints in the early part of the first quarter. To put the Omicron impact into context, Our January volume was down nearly double digits. As expected, our volume normalized at elevated levels following a very challenging January. Volume across our U.S. channels continued to perform well. As a reminder, our U.S. channels include our U.S. box system, our open market container board customers, and our equity partnerships with strategic sheet feeders. Operations and cost improved sequentially, with overall performance significantly better than expected. As I mentioned, our mills and converting system performed well, and we made good progress normalizing our system inventories. Operating costs remain elevated due to ongoing logistics constraints. However, we are in a much better position to navigate this environment with healthier system inventories. I would also note that operation and cost includes $20 million of insurance recovery in the first quarter related to Prattville, which follows $40 million of insurance recovery we received in the fourth quarter. We successfully completed our highest maintenance outage of the quarter and expect to incur nearly 70% of outage costs in the first half of the year. Lastly, input costs were a significant headwind in the first quarter relative to our expectations. In the latter part of the quarter, we experienced sharply higher costs for chemicals, energy, and distribution. We anticipate these higher costs to persist in the second quarter. Turning to slide seven, as we look ahead in our North American industrial packaging business, we're making good progress restoring margins to our historical low 20 percent range. And we fully anticipate margins to expand in the second quarter In the second quarter, we expect further benefits from the run rate of our August 2021 price increase, as well as the initial benefits from our March 2022 price increase with further realization in the second half of the year. Our price realization is expected to outpace higher costs for energy, chemicals, and distribution as we move through the second quarter and into the second half of the year. Operationally, we recovered from the system disruptions that affected us last year. Our mills and converting system are performing well, and labor across our box network continues to improve. Container board inventories across our system are back to normalized levels, which helps us proactively manage ongoing rail and truck constraints. And as mentioned, we will step down from the highest maintenance outage quarters. All of this gives us confidence in our path to restore margins as we move through the second quarter and into the second half of 2022. Moving on to global cellulose fibers on slide eight, I'll start with a few comments on the demand environment and supply chain. We feel really good about the resiliency of demand for fluff pulp. Our confidence reflects the essential role of absorbent hygiene products for consumers. In addition, we expect the supply-demand environment for fluff to remain highly favorable. Feedback from our customers indicates that fluff-up inventories are at historic lows. This is partly due to significantly stretched supply chains. To put this into context, schedule reliability for ocean vessels, which typically ranges from 70 to 80 percent, is currently running at 30 to 40 percent. Additionally, the average vessel delay that was historically one day is now five days. We expect these challenging conditions to continue for the foreseeable future. Taking a look at first quarter performance, price and mix improved by 17 million. I would note that the pace of price realization from our prior price increases is impacted by ongoing shipping delays. As a reminder, we export 80 to 90 percent of our pulp production with price realization typically achieved when the vessel sailed. Volume in the quarter was stable. I would note that backlogs are about double our normalized levels due to the logistics challenges. Our mills ran well. However, operations and costs were a $45 million headwind in the quarter with more than half of the unfavorable impact due to ongoing logistics challenges. Higher seasonal costs related to energy consumption represented an additional $10 million headwind in the quarter. We also successfully completed the highest maintenance outage quarter of the year. And lastly, input costs increased by $50 million sequentially, split about evenly between wood, chemicals, and energy. Turning to slide nine, taking a closer look at our global cellulose fibers business, we are well positioned to deliver cost of capital returns in the third and fourth quarters of this year. As I said earlier, we have a favorable demand supply outlook for fluff pulp with price realization from prior increases accelerating as we move through the year. Again, keep in mind that price realization in this business lags about two to three quarters. I would also note that we are making solid progress in our fluff pulp contract negotiations. which will provide additional commercial benefits as we move into 2023. So, now I'll turn to slide 10 and our outlook for the second quarter, starting with industrial packaging. We expect price and mix to improve by $75 million on realization of prior increases. Volume is expected to increase by $35 million on seasonally stronger demand. I would note that there is one less day sequentially. As we said earlier, volume is stable at elevated levels as we enter the second quarter. Operations and costs are expected to decrease earnings by $10 million, driven mostly by lower sequential Prattville insurance recovery. Staying with industrial packaging, maintenance outage expense is expected to decrease by $60 million, and lastly, input costs are expected to increase by $50 million. Again, this is driven by higher energy chemicals and distribution costs, mostly due to higher diesel fuel prices. In global cellulose fibers, we expect price and mix to improve by $50 million on realization of prior increases. As a reminder, price realization in this segment has a two to three-quarter lag. We're running on the longer end of that range right now due to the ongoing vessel delays. Volume is expected to decrease by $5 million. Operations and costs are expected to decrease earnings by $10 million, driven by logistics constraints. Maintenance outage expense is expected to decrease by $26 million. And again, lastly, input costs are expected to increase by $20 million, driven by higher energy, chemicals, Turning to the full-year outlook on slide 11, we're confident in our full-year EBITDA outlook of $3.1 to $3.4 billion. Input costs for energy, chemicals, and distribution rose sharply in the latter part of the first quarter. We successfully mitigated the impact and delivered earnings that were better than our outlook in the first quarter. Demand for corrugated packaging normalized at elevated levels following Omicron. In global cellulose fibers, we see a favorable supply-demand backdrop for fluff pulp. As we look ahead, we begin to realize our March 2022 price increase in our North American packaging business. Additionally, we anticipate margin recovery in our EMEA packaging businesses as box price begins to offset the higher energy and container board costs. In global cellulose fibers, we expect price realization to accelerate in the second quarter. All in, we anticipate margin expansion in the second quarter with further acceleration in the second half of the year as price realization outpaces higher input costs. We will also step down from the highest maintenance outage quarters of the year with nearly 70 percent of our maintenance program completed in the first half. We are also confident in achieving $200 to $225 million of gross earnings from our Build a Better IP initiatives. As I said earlier, we are confident in returning to 20 percent plus margins in our packaging business and delivering cost of capital returns in our cellulose fibers business in the second half of the year. On slide 12, I'll take a moment to update you on capital allocation actions in the first quarter. Starting with the balance sheet, as I said last quarter, we're very pleased with the progress we've made to strengthen our balance sheet. As a reminder, we reduced debt by $2.5 billion in 2021 and more than $4 billion over the past few years. With these actions, our 2021 year-end leverage was 2.3 times on a Moody's basis, which is below our target range of 2.5 to 2.8 times. And looking ahead, we have limited near-term maturities with about $900 million due over the next five years. Returning cash to shareholders is a meaningful part of our capital allocation framework. In the first quarter, we returned $580 million to shareholders, including $406 million through share repurchases, which represents 8.9 million shares, or about 2.4 percent of shares outstanding. At the end of the first quarter, we had $2.5 billion remaining in share repurchase authorization. Investment excellence is essential to growing earnings and cash generation. We're targeting CapEx of $1.1 billion this year, which includes funding for strategic projects and our packaging business to build out capabilities and capacity in the box system to drive profitable growth. We also plan to increase funding for cost reduction projects with expected returns on those projects in excess of 25 percent. We will continue to be disciplined and selective when assessing M&A opportunities that may supplement our goal of accelerating profitable growth. You can expect M&A to focus primarily on bolt-on opportunities in our packaging businesses in North America and Europe. Any potential opportunity we pursue must create compelling value for our shareholders. One final comment on capital allocation. Last week, we monetized about half of our investment in Silvamo with proceeds of $144 million. This reduces our ownership interest to about 10.5 percent. Turning to slide 13, I'll provide further detail on the work that we're doing around building a better IP. As you can see on the right side of the slide, We are also introducing a chart that will highlight our progress each quarter. We're confident in our Build a Better IP set of initiatives, which will deliver more than $200 million of gross incremental earnings in 2022. That represents more than two times the dis-synergies resulting from the spinoff. And our value drivers continue to ramp in 2023 and 2024, with net incremental earnings of $350 to $430 million in 2024. Through the first quarter, we achieved $40 million of earnings improvement from dedicated teams working on more than 50 initiatives across the company. Approximately 70 percent of these initial results are coming from structural cost reduction. By streamlining our corporate and staff functions to realign with our more simplified portfolio, We have already offset 100 percent of the dis-synergies from the Sylvamo spend. And we have line of sight to additional savings from initiatives targeting lower overhead spending and further optimization. We are designing the organization to support a packaging-focused company with a more focused footprint, which is what lean effectiveness is all about. Taking a closer look at the other two drivers, We believe our process optimization initiative has potential to significantly reduce costs across our operations by leveraging advanced technology and data analytics. Over the past year, dedicated teams have been working with outside experts to identify opportunities and develop new tools and capabilities to increase efficiency and reduce costs in areas such as maintenance and reliability, distribution and logistics, and sourcing. We believe these opportunities are significant, and we will begin scaling these capabilities across our system. And finally, strategy acceleration is about delivering profitable growth through commercial and investment excellence. We are focused on profitably growing our North American box channel and optimizing our EMEA packaging business through organic growth and targeted capital investments. We are also committed to delivering cost of capital financial returns in our global cellulose fibers business. Through the first quarter, we have structurally improved margins in our GCF business by realizing more value for absorbent pulp through restructuring commercial contracts, and we're growing our specialty products through innovation. We've also realized benefits from mixed improvements in our North American packaging business and further optimization of our European operations by improving performance and increasing integration of our Madrid mill and box system. As I mentioned earlier, there are dedicated teams working on many initiatives across the company that will drive structural earnings growth going forward. We have good line of sight on the expected benefits for 2022 and beyond, and we'll continue to update you on our results going forward. And with that, I'll turn it back over to Mark.

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

As a reminder, to ask the question, press star 1. To withdraw a question, press the pound key. Again, that is star 1 to ask the question. We do ask that you limit yourself to one question and one follow-up question. Thank you. We will pause a moment to compile the Q&A roster. Our first question comes from George Stafas from Bank of America. You may now ask your question.

Hi, thank you.

Hi, everyone.

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

Thanks, George. Yeah, it's two parts. One is making sure we have our production system well aligned, and we struggled a bit last year. That's in much better shape, so our sales and marketing can go out and secure business. And the second piece is, as you mentioned, making sure we align the incentives with margin improvement, the right customer mix. So there's different objectives for different parts of the sales force around growing new business and new segments, and others have a different set of objectives around growing in existing accounts. We have an active mix and margin improvement team. Some of the data analytics that Tim mentioned are really centered around really understanding the full answer to the question, how and where do we make the most money? When you think about converting, you have hours of the use of that time across the right customers and segments, and then making sure, of course, your pricing for value, all of that is actively part of what we're refreshing and improving. I think the number one thing we need for our sales force is the investment in our converting operations so that we have the capacity in the right geography where the actual demand is, and we're making improvement on that. That'll continue for as far as you can see.

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

Thanks, George. That's a great question, and the answer is no. We didn't walk away from business. The overachievement in price realization is just getting more price in certain segments of our customer mix during the first quarter than we expected, and that has a lot to do with the final negotiation of implementation and all of those types of things. On the larger customers, it tends to be a little more predictable because it's contractual in terms of time. I think one of the things you've got to think about with respect to IP and the volume challenge is when we look at some of the customer issues, labor issues our customers have, when you think about the large food and protein producers and large e-commerce producers, they had a very difficult time staffing everything in the month of January and it bled into February. And that reflected in our numbers. So we didn't give up any volume. And we are now working to replenish their inventories because they were not running as full as they would like to. So part of it's just, you know, we're in every segment, we're very large, and we get impacted by not only our own internal situation, but in a single quarter over a three-month period, what our customers are dealing with flows back on us. So no volume give-up and just a better performance at getting each and every customer's price up.

Got it. A big thank you to Guillermo, and congratulations to Mark. We look forward to working with you. Thanks.

Our next question comes from the line of Anthony Pitaneri of Citigroup.

Your line is open.

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

Yeah, Anthony, great question. You know, it's obviously a hard one to predict, and we're not any better at it than anyone. But I think the one thing we're looking at in terms of where we were 90 days ago when we gave our full-year outlook is the wild card on where energy is going to be for the rest of the year, because energy is an input to most of our inputs. And so we are seeing that higher for longer. So, yes, some of this additional pricing will be necessary. We didn't see that. I don't think anyone saw that at the end of January. I hope we're wrong on it because then we've got much more opportunity for margin expansion. We're very confident on the pricing side that's being implemented right now. It's a judgment call on our view of energy. We don't try to do too much on our own. We look at strips. We look at the inputs to the chemical industry and the other things we use. And then the last piece of energy is the flow through to diesel fuel and our impact on transportation. So it's our best look right now, but we believe what Tim said, we believe in terms of principle that our pricing will overcome our input cost. As we sit here at the end of April, this is what we see for the rest of the year. I would imagine there will be some adjustments as we sit here at the end of at the end of July talking about whether or not energy actually did what everybody thinks it's going to do or not.

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

I think it's really all-inclusive on what we've been talking about for the last several quarters. Getting paid for the value of the absorbent pulp, and I think you can start to see that as certain proof points of that out in the marketplaces. relative to absorbent pulp pricing versus market pulp pricing, and then how we operate the business, what we make available to long-term strategic customers and to shorter-term customers in different parts of the world. And then the final piece is where we are now, working actively with our very large strategic market-leading customers to improve the overall commercial conditions of these longer-term contracts. That is set and underway now. It'll go through the rest of the year and it'll set us up for a very good position going into 23 and beyond. So it's a simple principle that in many cases we just didn't fully exercise and that is making sure our value is understood and then getting proper compensation for the value that we provide and the technical nature of the product. And that's what we're doing and I'm really happy with the progress. I'll reiterate what Tim said. Business will be solidly at slightly above cost of capital for the entire second half of the year, which sets us up very well for 2023. And we shouldn't have to be talking about whether the business is at a value-creating level of returns for very much longer.

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

Our next question comes from Adam Josephson of KeyBank.

Mark and Tim, good morning. Hope you're well. And Guillermo, congratulations. It was a real pleasure working with you. Tim, just a clarification on the ILM cash dividend. I assume you got it last month and that it was around $200 million. Please correct me if I'm wrong there. I don't believe you would normally receive another one. regardless of the situation there but can you just confirm that what if any additional cash dividends you're expecting from lm and when and how much you got in in presumably in march yeah you have the the amount correct um and there's no expectation of further dividends being paid this year okay i appreciate that i mean mark just back to the pulp business i mean have you set a timeline for yourself, in other words, okay, we need to get to a certain point by X date, X quarter, X year, or else we say, you know what, because of the market structure, because of whatever else, this is just not working for us. I mean, it's been several years of underperformance and at some point the business needs to prove itself or not, I would think.

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

Thanks a lot, Mark.

Our next question comes from Phil Ng of Jefferies.

Good morning, Mark, Tim, Guillermo. This is John Dunn again on for Phil. I wanted to start off by reiterating prior comments and say thank you Guillermo for all the help. We really appreciate it and good luck in your new role. I wanted to go back to the box shipment comments.

Could you give any

clarity on how the box shipments tracked throughout the quarter, maybe how much was impacted by inventories and Prattville weighing on results maybe earlier in the quarter, and then talk about how box shipments have tracked month to date.

Hi, it's Tim. So Prattville really was not much of an issue at all for full stock availability, we were able to run the mill partially before getting it back up full. So I wouldn't say that was a big item in the first quarter. It certainly hurt in the fourth quarter of last year. And we started off the quarter from a box demand standpoint. Near double-digit decline in January, we had the Omicron situation. We were having staffing issues because of people contracting COVID and being away from work. Our customers, as Mark said, similarly, and so production lines for us and for some of our large accounts were not running as they normally would be. That began improving as we exited January and went into February, but I would say there was still a residual in February, and then by March, it was starting to feel more normal again. We had... you know, lines coming back up and we were able to run our system not entirely to its full potential but more in line than certainly what it had been in January. April is starting off kind of as expected. The recovery continues and so we'll see, you know, how things shake out as we close the month in the next few days. Our cut-up looks, you know, right in line with expectations that we have for Q2 in total.

So, John, Tim mentioned in his remarks when he was going through industrial packaging, and he talked about the box, IP box number, but he also talked about the U.S. channels to the corrugated market. He explained what those were. On the slide, there's a minus .8 year-over-year That's the total, U.S. channels minus 0.8 with a box number of minus 4. So what we didn't say is the rest of the channels is open market container board and our equity partnerships through sheet feeders. And we were up 14% year over year in that part of the channel. So participating in the end-use box market, while we had certain issues and our customers had certain issues, other channels, through container board and through these sheet feeders were better positioned. Some of that was geographic. Some of that was size of account and size of customer. But our access to the U.S. packaging market I think is best viewed through that U.S. channels market. And so we offset some of our issues in our own box making operations with those other channels such that our overall exposure was down just about a percent.

Okay, I appreciate that. Thank you. I wanted to just switch over to Ilum. The earnings in the quarter came out ahead of expectations, and that was despite the significant contraction of the non-Chinese exports. Can you give us any color on the Ilum market dynamics? Next quarter seems like another solid result. Can you just kind of talk about overall costs in the region, demand, and what you're kind of expecting? as you're looking to ultimately get out of that business?

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

Okay, thank you very much.

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

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

I think it shows up in the first quarter, Mark, and it will continue to show up. We did several things. We had not only inventories, but we had the right inventories in the right place, which is something we normally do very well, and I won't rehash all of last year's issues, but that is what caused so much disruption last year, and as we exited Deere and came in the first quarter, we were back on track there. Mills also ran better, and our converting operations ran better. If you look at you know, just uptime, reliability, how they were performing. But the thing that continues to be a drag, and will normalize at some point is our view, hard to predict when, is just all of this logistics disruptions that are taking place. So there's across every mode of transportation, rail, truck, and then for export, ocean freight, things are either moving slower, or they're not as reliable or they're taking longer once they leave from a velocity standpoint to get there. And because these mills are meant to run, make product, put it in some form of transportation and move it, that can have an impact on operations still. It's better and our team, our supply chain team is working through it diligently. We're making progress, but we're working with what we have available given rail constraints and trucking constraints across the system. Does that make sense?

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

Yeah, I mean, for us, it was across the entire supply chain. So it was how we were getting bored to our box plans, how we were able to convert it and then move finished product to customers and their ability to consume the product and need replenishment. So it was throughout the entire supply chain.

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

I don't think so. It's just a matter of normalizing some of these disruptions, and we feel like we're doing a good job doing that, and transportation is going to continue to be an issue, but in terms of growing, we don't see an issue.

Thank you very much.

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

Mark, Tim, good morning. Guillermo, pleasure working with you. Welcome, Mark. I wanted to ask a question, I guess, under the context that inventories are sort of back to where you want them to be. And I think the North American low-cost producer position is even now more pronounced than it was before, as well as other parts of the world not importing container board from, let's say, Russia. Are you seeing any pickup or are the phones ringing anymore in terms of potential for export demand? I appreciate that ocean freight is a little bit of an impediment at this point, but just thinking about kind of the practical aspects there. Does this alter your view, Mark, in any way for the intrinsic value of your mills here in North America versus other parts of the world?

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

Okay, one quick maintenance item. Are there any, Tim, insurance recoveries left that you might be getting over the balance of the year?

I'm sorry, any insurance? Oh, it's hard to say. We're finalizing, you know, last last minutes of practical and whatnot, so I wouldn't predict at this point.

Thank you. Good luck.

Our next question comes from Mark Wilde.

Your line is open.

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

Yeah, I mean, I don't have – detailed numbers off the top of my head, Mark. We do some farm outs. We do some of them because it's just more economical in the grand scheme to either put it in one of our sheet plants or if there's not an IT sheet plant locally available to use a partner in terms of fulfilling certain orders, we flex that up and down. it's not super structural to the business. It's more just using marginal economics in terms of how we run a very large system.

But have you been doing more of that the last 18 months?

We probably did some last year as we were going through some of the board constraint issues that we had just given the system. But I would say it was situational. And again, it's It's there, but I wouldn't say that it's hugely material to the size of the business that we have.

Okay, that's what I was looking for. Mark, I have a question just longer term. If you look at the container board industry, we've seen a lot of consolidation over the last 20 or 25 years. We've got three or four big players. I'm just curious now with the new entrants trying to come into the market, some from offshore, how do you... protect IP from becoming General Motors?

Yeah, I think it's an ongoing discussion around the business is a good business, so therefore it attracts interested parties. And I think the way you protect your business is you perform very well and you ingratiate yourself with your customers to the point where you're an integral part of their value chain. It's one thing to say, I'm going to build a container board mill. It's another thing to supply customers hundreds and hundreds of locations for a large e-commerce customer or reliably supply every day of the week a local business of multiple different grades of container board made into boxes that they need, not just one. So I think it really starts with the whole value chain and making sure that from a customer looking back into IP, and there are others that are very good at this as well, that we have the relationship with our customers and all the supply chain services, all the things that make a business relationship sticky is, I think, the best defense. Everything else is table stakes, lowering your cost, operating safely and environmentally sound and all those things. I really think it matters how you deal with your customers over thick and thin, and I think you've Think about COVID in 2020 and 2021. We did some amazing things with and for our customers that they're going to remember for a very long time when the next great thing comes knocking at the door.

Okay, very good. I'll turn it over. Thank you.

Our next question comes from Kyle White of Deutsche Bank. Your line is open.

Hey, good morning. Thanks for taking the questions, and congratulations, Guillermo. I'm looking forward to working with you as well, Mark. Apologies if I missed this, but on inventories, can you just give us a sense of your inventory levels in container board and how they compare to last quarter and maybe where they are at relative to where you would like in terms of your target levels?

Yeah, I mean, we don't have hard numbers, but inventory is in a very good position right now. It's really important, you know, coming out of the fourth quarter and the first quarter, it being the heaviest maintenance outage quarter of the year and maybe the heaviest one we've ever had, which takes production offline as we take these mills down for maintenance. We had inventories in a good place, and we exited the quarter with inventories in a good place. So we feel good about how we're positioned right now.

Got it. And then on the building back better plan initiatives that you have, are you able to give us a sense in terms of how much benefits net of the technologies you realized this quarter? And then as we look to the second half, the 20% margins that you expect for industrial packaging, do you have line of sight to accelerating that into 2023, just given some of the price realization in these initiatives? Or should we expect kind of a similar margin profile just given that a lot of the maintenance occurred already in the first quarter relative to the second half.

Yeah, I mean, we're a long way from 2023 in terms of getting into details. I do think that given what we've been able to do to restore where we are from an inventory standpoint and how the facilities are actually running in the environment, Given also past price increases now, we're beginning to start the March 2022 price increase. We're well positioned as we go into the second half of the year and feel good about the springboard for 2023. Remind me of the first part of your question again. I'm sorry.

Yeah, I was just curious if you had the number in terms of what benefit you realized from the Building Better IP initiatives, net of the synergies in this quarter.

Oh, 40 million, so... Yeah, we were carrying into the year roughly $94 million, close to $100 million in disk synergies, and we feel like through the work that we've done in the quarter on an annualized basis, we've covered that.

Got it.

Thank you. I'll turn it over.

Our last question or final question for today comes from Paul Queen of RCBC Capital Markets.

Morning, guys. Good quarter. Just a question on cellulose fibers. I seem to be over-predicting your shipment volumes every quarter here, and I'm just trying to understand the business, because if I look at it year over year, you were down in shipments by 186,000 tons, and you describe it as solid mill performance, which suggests that production should be up. Are you carrying a lot of inventory due to the logistics challenges in

in in cellulose fibers and what can we expect worship and volumes in 22. yeah so we're we're not carrying tons of inventory what we're doing is modulating how the mills run based on uh availability of transportation logistics and the challenge has been for some time now and continues as i've referenced in some of the prepared remarks just reliability of ocean vessels being super low and then also vessel delays, meaning they arrive at a port and they're ready to be unloaded and that's historically been about a day and now on average they're waiting five. So it's just getting product through the supply chain, but we're modulating how we run the system so that we're producing ultimately what we can get through the supply chain.

Okay, so volumes in 22 should be very similar to 21, or is it back to sort of the numbers we saw in 20?

I think it depends on what happens with ocean freight. We export 90% of what we make, and so it depends on what's going to happen with, you know, containers and vessels for the balance of the year. But, I mean, probably in line, yes, but a lot of questions around how supply chain is going to work.

Okay, fair enough. Thanks, guys.

Thank you. I will turn the call back over to Chairman and Chief Executive Officer, Mr. Mark Sutton, for closing comments.

Thank you. I just want to reiterate a few closing comments. Very confident and very optimistic about the future of IP. We have a strong 2022 earnings growth outlook. We're making very good progress and momentum as we focus on our initiatives. around building a better IP, and we have a very strong balance sheet. The company is as strong as it's ever been financially. All of this accelerates value creation for our share owners. So thank you very much for your interest in International Paper. We look forward to speaking with you again soon.

Thank you for participating in International Paper's first quarter 2022 earnings call. You may now disconnect.