International Paper Company

Good morning and thank you for standing by. Welcome to today's international papers second quarter 2024 earnings call. All lines have been placed on mute to prevent background noise. After the speaker's remarks, you will have an opportunity to ask questions. To ask a question, press 1 then 0 on your telephone keypad. To withdraw a question, press 1 then 0. As a reminder, to ask a question, press 1 then 0. To withdraw a question, press 1 then 0. Again, that is press 1, then 0 on your telephone keypad. To withdraw a question, press 1, then 0. It's now my pleasure to turn the call over to Mark Nellison, Vice President, Investor Relations. Sir, the floor is yours.

Thank you, Alan. Good morning, and thank you for joining International Paper's second quarter earnings call. Our speakers this morning are Andy Silvernell, Chief Executive Officer, and Tim Nichols, Senior Vice President and Chief Financial Officer. There is important information at the beginning of our presentation, including certain legal disclaimers. For example, during this call we will make forward-looking statements that are subject to risks and uncertainties. These and other factors that could cause actual results to differ arbitrarily from such forward-looking statements can be found in our fresh releases and reports filed with the U.S. Securities and Exchange Commission. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP financial measures is available on our website. Our website also contains copies of the second quarter earnings press release and today's presentation slides. With that, I'll turn it over to Andy Silvernell.

Thanks, Mark. Hey, good morning to everybody in the Americas, and good afternoon to all of our friends in Europe. I'm excited to have joined the IP team with our rich history, important mission, and dedicated, talented people. Prior to joining IP, I spent a decade as CEO of IDEXX Corporation. where we delivered strong, consistent results through great teams, customer obsession, and embracing an 80-20 operating system. I also spent several years working with private equity, where speed and impact are at a premium. I've been asked many times since my announcement, why IP? The bottom line is that through my deep diligence, very similar to how I approach acquisitions, I found a company that matters in terms of its mission. a company with solid underpinnings and a company with a lot of opportunity for improvement and significant upside potential it is absolutely a diamond in the rough i spent my first 90 days on a learning journey with the goal of getting fact-based insights aligning the team dimensionalizing the opportunity and launching the improvement plan it's been a powerful experience an opportunity to speak with employees customers suppliers and investors All of this has reinforced my initial beliefs and opened new insights. Let's turn to slide five. So before we go through the quarter, I'm going to talk about the case for change international paper. And later in the presentation, I'm also going to talk about what we're planning to do differently to drive significant change at IP and significantly improve performance. So I'm going to spend a few minutes walking you through some of the data that highlights the challenges we faced as a company in a very candid, fact-based way. The data and feedback have told me that most of our performance issues are self-induced. And as a result, these can be fixed with intense focus on the right strategy and courage to do what must be done. I'm going to start on slide six. You can see 10 years of data here. These are the facts that I know as owners of IP you appreciate. We have underperformed on every meaningful metric. You can see the realities of sales, margin, and profitability decline. And although it's not on this chart, our return on invested capital has followed the same trend and is underwater today. I want you, as our share owners, to know I understand this is totally unacceptable, and we are going to fix it. But to fix it, we need to understand the root cause, we must face the brutal facts, and do something very different. Let's go to slide seven. IP's performance deterioration has been exacerbated by some very important choices in capital allocation and resource allocation. You can see over the past decade, we've spent more than $35 billion, including returning cash to shareholders, making investments, and improving the balance sheet. Let me start with the efforts around the balance sheet. We made excellent choices here, deleveraging and funding our pension. A strong balance sheet is foundational and gives us great degrees of freedom for value creation. But we've also spent more than $12 billion on dividends and share repurchases. Both of these tools can create substantial value if used well, but are value destructive if used poorly. IP will pay an attractive dividend. We can support our dividend at the current level, and we will grow into it as performance improves. But as I think about share repurchases, when and how you do it really matters. As with most companies, IP purchase shares when cash was generated, but not in the mind of maximizing the opportunity based on market factors and intrinsic value. The remaining spend, $2 billion on acquisitions and $12 billion on cutbacks, have not generated the returns we expect. I'm now turning to slide eight. Importantly, our spending since 2018 on investments that drive performance for customers and productivity have lagged. I'm not saying that we can't be more efficient with capital than our competition, but we pushed the envelope too far. While our mills are well capitalized and advantaged, we spent too much on unproductive capacity and haven't stayed ahead of the curve. We have underinvested in our box system. On the right-hand side is where you can see this show up. We've underspent on maintenance and repair, and this is the heartbeat of our operations and what drives reliability for our customers and productivity. These numbers are supported by the conversations I'm having with our folks across our system, particularly in maintenance. We've got an incredibly long list of great opportunities that need capital to drive performance for our customers and expand profitability. When we're driving excellent reliability internally, we get excellent reliability externally, and we will excel for our customers and get paid for value. That means we've got to spend some money, and I believe we can do that with a capital plan in the range of $1 to $1.1 billion per year. If opportunities exist to drive results by expanding those investments, we will do so. I'm turning to slide nine. This is probably the most important slide that we're going to go through here today, that and capital allocation. The lack of investment back into the businesses has directly contributed to a cost problem. Operating costs have ballooned on modest sales growth. The good part here is that it's in our control. We can attack this and control our own destiny. What doesn't show up on this page is the impact of the slippage of reliability for our customers. defined as quality, delivery, and service is the most important factor for the vast majority of our customers. We made our own bed here under investing in cost that has lost its market share over the past decade. The share loss will continue over the near term, but again, we know how to reverse this and can control our own destiny. We've done a lot of work commercially to position ourselves correctly in the market. We've made sensible value or volume trade-offs recently and we're ramping up our commercial talent, capability, and incentives. We have lost other share where we let customers down. We will change this by being the leader in reliability. We've made some solid progress in on-time delivery, and our corrugator and converter capacity is up. But we have more to do to arrest the share slide. I'm now turning to slide 10. I'll talk about this, of where to build from, and things to improve. IP has a strong culture of ethics. We work with integrity. This is a really hard thing to change within an organization, and we have a great foundation here. We have talented, experienced people up and down the organization. I'm finding them willing to face the reality and embrace significant change. My team wants to win. They are tired of getting their butts kicked. My job is to focus and align them on the critical few and away from the trivial many. The strongest thing we have to build from is our North American packaging franchise. Our packaging franchise is incredibly valuable and has tremendous upside potential with the right strategy. And as I mentioned earlier, we have a strong financial foundation. Turning to the opportunities for improvement, we are embracing an 80-20 operating system to do four things. First, an outside-in, customer-driven strategy that differentiates through reliability and leverages our reach. Second, optimize our cost structure. Third, align our team and resources toward differentiation and profitable growth. Finally, we will instill a high performance culture that achieves superior results. In a little bit, I'm going to talk about how we are embracing 80-20 to drive results. So now let me turn to the second quarter about performance and the outlook. I'll share some highlights and then turn it over to Tim to walk through the details. I'm now on slide 12. Our second quarter earnings were higher than the first quarter, but relatively unchanged year over year. We saw sequential improvement driven by higher sales across our selling prices across the portfolio, and we got benefit from seasonally higher box volumes. Regarding the market environment, they were stable to moderately better demand. However, IP's packaging volumes came in below our expectations and continued to lag the overall market, and that will continue for some time. We're seeing expected volumes decline from repositioning and optimizing value and volume. We do have residual effect from a history of underinvesting in certain regions and markets where we have ongoing reliability and capacity issues that we are addressing and have seen improvement in already. We need to make sure that we are close to the market, pricing appropriately, and investing to be the leader in reliability. As I mentioned earlier, we're focused on investing and differentiation. and we are seeing specific results that are leading indicators to positive change. It will, however, be messy over the next three to four quarters. We expect near-term performance to be challenged by seasonally lower volumes and higher mill outage expense. With that, I'll turn it over to Tim to provide more details about our second quarter performance and our outlook.

Thank you, Andy. Good morning, everyone. I'm on slide 13 now, where I'll provide the details around the second quarter as we walk through the sequential earnings bridge. Second quarter adjusted operating earnings per share was $0.55 as compared to $0.17 in the first quarter. Recall that the first quarter included a $0.10 per share drag related to the January freeze and the ICSAC box plant fire. Price of mix was higher by $0.23 per share driven by the flow through of prior price index movements. as well as margin and mix benefits from successfully executing our box go-to-market strategy and our GCF optimization strategy. volume was favorable by six cents per share although we continue to see favorable demand trends deploying our commercial strategies across the portfolio continues to impact volumes in the near term as expected as we transition uh based on our strategy operations and costs was unfavorable by one cent per share sequentially this is largely from the impact of inflation higher S&A, and spending to improve reliability in our packaging business, partially offset by mill efficiencies following the pulp machine closure at our Regal Wood mill. Maintenance outages were lowered by $16 million or 3 cents per share in the second quarter, and input costs were overall flat sequentially with decreased costs for energy and freight, offsetting increased costs for OCC and chemicals. And finally, corporate items favorably impacted earnings by 7 cents per share sequentially due to a lower effective tax rate. Turning to the segments and starting with industrial packaging, second quarter results on slide 14, price and mix was higher due to the realization of approximately $45 million of benefits from prior index movement. Additionally, benefits from our box go-to-market strategy contributed approximately $25 million of earnings benefit from improved margins and mix. And higher export and mix contributed approximately $21 million. Volume was higher by $27 million sequentially, given stable to improving demand trends we are seeing. However, as expected, our box go-to-market strategy is about making choices that impacts our volume in the near term. Although we expect to trail the industry for the next few quarters, we believe our box go-to-market strategy will allow us to improve our margins and mix over the long term. Operations and costs was $43 million unfavorable sequentially due to the impacts of inflation, higher S&A, and spending to improve reliability. Planned maintenance outages were higher by $3 million sequentially, and input costs were $3 million favorable, primarily due to lower energy more than offsetting higher OCC costs. Moving to slide 15, I'll cover the global cellulose fiber second quarter. Price and mix was sequentially higher by $22 million due to the price index movement and GCF optimization strategy, driving benefits from higher absorbent pulp mix and the reduction in commodity rates. Volume sequentially was relatively flat overall as improved demand for absorbent pulp was offset by lower sales of commodity grades as we continue to focus on strategically aligning our business with the most attractive customers and segments. Operations and cost was favorable sequentially by $36 million. A large portion of this benefit is related to the pulp machine closure at our mill in Regalwood, North Carolina. Planned maintenance outages were lower in the second quarter by $19 million as planned. And finally, input costs were higher by $1 million with lower energy costs not quite offsetting higher chemical and wood costs. Turning to slide 16, I'm going to provide our outlook for the third quarter. As Andy said earlier, we expect lower sequential earnings due to volume decline and higher costs, offsetting benefits from the prior price index increases. For our industrial packaging segment, earnings are expected to be down sequentially in the third quarter by approximately $160 million. and earnings will be relatively flat for global cellulose fibers. Now let me give you the breakdown. I'll start with industrial packaging. We expect price and mix to improve earnings by approximately $60 million sequentially. This is the result of prior index movement in North America, as well as higher export prices today. I would also note that approximately $13 million of the expected improvement is related to our box go-to-market strategy. Volume is expected to decrease earnings by approximately $65 million due to one less shipping day and seasonally lower demand. We expect operations and costs to decrease earnings by approximately $80 million. This includes higher reliability spending, labor and benefits costs during the summer months, and higher unabsorbed fixed costs. Higher maintenance salvage expense is expected to decrease earnings by approximately $44 million. And lastly, higher input costs are expected to decrease earnings by approximately $30 million, primarily due to higher energy costs. Switching to global cellulose fibers, we expect price and mix to increase earnings by approximately $10 million as a result of prior index movement. Volume is expected to decrease earnings in the third quarter by approximately $5 million due to seasonally lower demand. We expect operations and costs to decrease earnings by approximately $25 million, largely due to higher distribution costs and timing of spend, as well as higher unabsorbed fixed costs. Lower maintenance outage expense is expected to increase earnings in the third quarter by approximately $25 million. And lastly, input costs are expected to be stable. With that, I'll turn it back over to Andy.

Thanks, Tim. I'll pick back up on slide 17. Excuse me. For over a decade, I've embraced an 80-20 operating system that has consistently produced superior results for customers and shareholders. At IDEXX, 80-20 became part of our DNA and we delivered over 500% TSR over my tenure. One of the reasons I joined IP is that through my diligence, I found a very compelling case where 80-20 can produce significant results. 80-20 is a data-driven methodology that creates laser-like focus on customers, products, and resources that drive dramatic profitable growth. It's about simplifying so we can say yes to the critical few and no to the trivial many that create value-destroying complexity. Using this approach, we are reviewing the entire portfolio and sub-segments as well as our enterprise functions. I'm now turning to slide 18 to talk about our 80-20 methodology. There are four steps to 80-20 that we're taking our entire business through and then sub-segments of our business and the enterprise. Step one is about simplifying customers and products quickly to focus on attractive markets. We should never become good at something we shouldn't have done in the first place. Step two, we want to segment unlike businesses so we can focus on winning for the customer and driving results. Step three, we're going to align minimum resources. Different businesses have different resource intensity. We need to give them uniquely what they need to win. Step four is accelerating profitable growth through customer obsession that shows itself in great quality, delivery, service, value-based pricing, and innovation. Now let's turn to slide 19. The most important insight of 80-20 is the misalignment of what drives a business and how resources are typically applied. I've deployed 80-20 dozens of times and found it to be universally true. We had 40 businesses at IDEXX, and I brought the approach to private equity also. The bottom line is that unaffected, complexity grows out of control and eats resources. IP is a very complex business, but we're complex by choice, not by necessity. We will simplify and focus IP. We will improve profitability while at the same time liberating resources to invest in differentiated capabilities for the most attractive customers, products, productivity, and capital allocation. My experience is that 80-20 is a highly differentiated approach that demands facing the brutal facts, and by making courageous choices that dramatically improve results. Now let's turn to slide 20. So what will you, our customers, and our team experience? First, we will simplify to focus on the businesses, customers, and products where we will invest long term and differentiate. Second, we'll segment the businesses to stand on their own. Third, we will zero up each business. You're going to hear that term zero up often, but we're going to zero up each business. This means we will rigorously understand what resources are needed to win for customers and deliver attractive profitability. Fourth, we will commit and align our people and our investment. Finally, we'll place authority and accountability close to the customer and decision-making to drive outstanding results. We'll take the same approach to the corporate center. Through the zero-up, we are determining the minimum resources required to be a public company and and then be very strategic about a small handful of things we will invest in to differentiate across the company. Turning to slide 21. We will be relentless in applying 80-20 across IP. We launched 80-20 shortly after I joined. We actually started the data process before I joined. We've completed much of the analytics that point us towards opportunity. IP has attractive and substantial upside. I believe that the current portfolio of IP has the potential to deliver $4 billion of EBITDA in a mid-cycle environment. The key drivers will be optimizing our cost structure to improve profitability and, very importantly, liberate resources. Investing in box plants for reliability and productivity. Investing in our mills for long-term performance and cost advantage. And investing in our commercial capabilities for innovation and sales talent. Ultimately, these will allow us to win for our customers and be rewarded for the value that we create for our customers. I'm turning to my final slide on 22. We're going to be laser-focused, working with the teams to accelerate 8020 and begin implementation. I commit to continue to engage with you and share updates. We're planning a roadshow in September, and we're also attending conferences. We'll update you on our progress at our next earnings call in October. We expect that required disclosure documents related to Dia Smith acquisition will be published in late summer and related meetings held in the early fall. And we will offer an 8020 101 webinar on August 14th to give you an opportunity to learn more about 8020 and how it drives change and results. So you'll get an invitation to attend that. Finally, we're going to have an investor day in March. This will give us an opportunity to share our progress at that time. The last thing I want to say is I want to say thank you to the IP team. I have pushed them very hard in a very short period of time. I found people to be willing and able to tackle this important mission. People are bought into what we're trying to do. They understand the stakes at hand, and we're going after it. With that, let me turn it over to the operator for questions.

Thank you. If you would like to ask a question, simply press 1 then 0 on your telephone keypad. To withdraw a question, press 1 then 0. We will pause a moment to compile the Q&A roster. We ask that you please limit yourself to one question and one follow-up question. Our first question comes from the line of Mike Roxland with Truist Securities.

Thanks very much, Andy, Tim, and Mark, for taking my questions, and congrats on a good quarter.

Good morning, Mike.

Good morning. I want to get a little more color for you, Andy, on the 80-20 and also the box strategy. Obviously, you're pruning the portfolio for unprofitable business. How much of the business you intend to walk away from or that you have walked away from is truly unprofitable where IP is actually losing money rather than maybe it's just lower EBITDA or lower EBITDA margin business relative to other businesses?

Mike, that's a great question. So, You know, look, a lot of people have the first experience that effectively what you're saying is you're going to exit a bunch of business. And what I have found to be true is, again, having done this many, many times, that is actually not practically what happens over a very short period of time, an intermediate period of time, call it a year or two. What ends up happening is what you're doing is you're segmenting your business. You're understanding the driver's for those customers and those products, and you are really aggressively aligning resources, minimum resources, for what's required to win. And so when we think of profitability, if you peanut butter spread overheads, which is what most companies do, right? You peanut butter spread most overhead. What you do is you're effectively saying your most attractive customers and your most attractive products, they typically get overburdened with overhead. So it actually, it shows them in a typical accounting system, right, the peanut butter spreads overhead. It spreads them usually by revenue. And so what you end up having, right, is an understatement of profitability for your most attractive segments and an overstatement of profitability for your less attractive. That being said, when you structure this correctly, when you go through segmentation, you simplify and go through segmentation, You're aligning the appropriate resources. And what I found when you're doing that, we use a gardening example, right? We use a farming example. That's why I showed those farming pictures. So think of it as, you know, you're farming and you make a decision that the thing you're going to farm for are tomatoes and pumpkins, right? That's what you decide you're going to farm for. So you simplify. That's what we're going to do. When you segment, you realize that tomatoes and pumpkins actually need different resources. So a pumpkin will take as much water as you can possibly give it. And a tomato, if you give it too much, you're going to kill it. And so if you actually put them together, you give them just enough water so both of them die, right? And it's a tough analogy, but it's a true analogy. And what I would say is we are going to aggressively segment and we're going to give them just the water that they need to flourish. And what I found historically is is you can actually recover any volume loss that you decide. You can actually recover from it pretty shortly because you're satisfying customer needs. You're meeting customers where they are with the right amount of resources, and you're getting real profitability, which then drives returns long-term.

Gotcha. Very, very clear. My follow-up then is how do you tend to deploy 8020 with Smith? Because doesn't that add some complexity? to the system. I mean, you mentioned trying to keep things simple. And so with DS Smith being, um, you know, if, when it closes, I guess just walk us through how you're thinking about deploying for me here, standalone, and then ultimately trying to do that approach with DS Smith as well.

Thank you. Yeah. Mike, that's another great question. So the first thing is let's, let's start with first principles when we buy the business, right? Which is we want to segment the reality is, is what happens in the North American market. has very little influence on what happens in the European market, right? From a competitive standpoint, because of the nature of the geography and the fact that the box businesses compete in a 150 to 200 mile radius, you know, the competitive issues don't overlap. And frankly, the teams don't overlap. And so as we acquired DiaSmith, what's really important is to treat it as its own platform in Europe. So there are really, as I've said a few times to people, think of this as kind of three different pieces of integration. There's a relatively simple integration that happens in the Americas, right? They have a small handful of assets in the Americas that will integrate into our mills, into our box system. It's a pretty small footprint. And in Europe, it's really D.S. Smith that is integrating our European footprint. They are multiple times our size. They have done large acquisitions in the past. It's a capable team of people. And so we have a wonderful team, by the way, in Europe that punch way above their weight. And so we're going to end up with a terrific overall team in Europe. But the integration is going to happen that way. And so that's the second. So we'll focus our 80-20 efforts specifically in those regions, in those sub-regions of where they matter. And then the third part is corporate. And we had a call with our top leadership here this morning, and I was very clear to them. We need to be incredibly smart about this integration at the corporate level. At the corporate level, there's really only three things that have to happen. There are a few things that are shared, and they're relatively small to get the savings that we know are out there and we should go get. And it's a very small team of people who need to work on that. More importantly is we need to bring them in so we can close the books and be compliant, right? This is a public company that's very capable. What I don't want to do is overburden them, drive unnecessary administrative BS, and things that destroy value, right? So the beautiful part is we're going to do this from scratch, and we're doing it with a business that is really terrific. And so that thinking has to start up front, Mike.

Our next question will come from Charlie Muir-Sands with BNP Paribas.

Go ahead. Good morning. Thank you for taking my questions. Hi there. Thanks. Just regarding the reliability spending, which is one of the sequential increases in the costs you've called out in the bridge into Q3, I guess you were talking about that a quarter ago already. How much of this 80 million step up it relates to that kind of spending as opposed to the seasonality and other aspects and how much of that should we think about being part of an ongoing run rate now or is it just a sort of short surge and then you compare it back again thank you

Yeah. Hey, good morning, Charlie. It's Tim. So, I would say there's a significant portion of it that's directly tied to reliability. We do have, there's a little bit of timing between quarters. And we did underspend the estimate that we thought for the second quarter. So, some of that is bleeding into the third. In terms of ongoing reliability spending, I think you can think of it over the next three, four, or five quarters where we are getting the system to the point that it can sustainably be reliable and open up capacity.

Yeah, and I'd add to that, Charlie. I think very importantly, the 80-20 methodology, you know, if you think of it in two buckets, one is you improve profits, right, so we put some of it in our pockets and it's for you guys. And then a big piece of it is about liberating resources, right? And we know full well that we're not coming to you guys and asking for more money, right? We've got to figure out how to do this in the resource base we have, and we've got plenty to go from with tough choices. And so this should be self-funding. We should liberate resources, and we should be able to accelerate spending and reliability. I mean, it's hard to overstate how important this is. When you look at the vast majority of customers, and I'm going to say 80 plus percent of customers, by far their number one concern or their number one goal is reliability. They do not want to think about us, to be very clear. They do not want to think about us. And if we are a partner with them who solves their problems and does it in the right way, we're in a great spot. And we've let folks down. We have let folks down in the last five to ten years on this regard. The nice part is this is something that's relatively easy to fix, right? So if you look at the focus reliability spending that's happened just since I've been here, you're already starting to see benefits. So if you think about a corrugator and converting assets, right, that dramatically improves our capability. And as you up maintenance spending and you don't have breakdowns, that also dramatically improves reliability. So this is a critically important part of the game. If you break it into three pieces, right, reliability, the reach that we have, our depth and breadth geographically is a tremendous asset, and then ultimately innovation. And so we need to invest in those pieces and we need to self-fund it.

Thank you. My follow-up question just relates back to the go-to-market strategy. It's obviously been another 13 weeks since you effectively implemented it. It appears so far that the pace of market share losses has probably been stable. We haven't obviously seen every competitor report or the industry data yet. But are you confident that there is a NPV positive payoff going on and there's no risk that you know, customers aren't still shopping around and maybe three, six months down the line, you're going to see another wave of departures.

That's a great question, Charlie. So what I would say in terms of high confidence, right, so we're tracking that and we know what has been, what agreements have been signed and we know what has been, what is unsigned, right? So we know where we have gotten, where deals are done and where they're not. I think Tim was, do you think it's kind of where 75% plus, 75% kind of through that in terms of, I'm going to think the contractual deals, how that flows still takes time, right? It takes time to flow through the system. So we're very much on track with the expectations. If you look at the accounts where we have really applied this go-to-market strategy, we are very much in line with the expectations. So that feels good. The negative surprise, and I think the negative surprise, you know, over the next few quarters, and why I'm signaling exactly what I'm signaling, is that – you know, there is a lag to reliability, right? So the stuff that was being shopped in the first and second quarter because people weren't getting the things that they needed, how they needed it, that's showing up now and will continue to show up. So those two things together are the net of market share loss. And, you know, that pipeline, you know, unlike some businesses that go into a quarter with, say, you know, half the business book. So in my IDEX days, we had about half the business book when we went into a quarter. We don't have that here, right? So it's hard to look at a correlation against something like that. So what you're really looking at is the health of the pipeline. And I would say we're okay at that. We got work to do to get really good at that. And I'm working with Tom Hammack and team to get much, much better at understanding the pipeline, what that looks like over time, and having the ability to call that in a way that's based on stuff that we know uniquely versus the overall economy. And so we've got to get better there.

Our next question will come from Mark Weintraub with Seaport Research Partners.

Thank you. First, thanks for laying out an exciting vision for the future, but I'm still sort of trying to work through a little bit why the magnitude of pain short-term and why Has reliability or those issues become even more significant that's leading to what looks to be an accelerated decline in the box volumes? Maybe if you can just kind of walk how much of it was the go-to market versus the reliability, and is that different?

Yeah, so if you actually look at the balance of go-to-market and I'll call it other stuff, right, let's just call it other, the total is about 50-50, right? So if I look at now through really the second quarter, and we believe that with the investments and reliability, that other part shrinks, and we feel like we're dialed in on the go-to-market piece of that. So that's kind of how it plays out. No, reliability hasn't gotten worse, but I think what it's doing is the timing of how it moves through the system. And look, overall, the pricing environment has gotten more robust, right? So people are shopping more in the overall environment. And so our ability to make sure we're the leaders in reliability consistently on an ongoing basis is the game. And so, look, Mark, there's no doubt in my mind that this is going to be bumpy as we work through this. And the investments are going to take some time. It's not three years away. That's not what I mean. But I think the next three or four quarters, we're going to see some chop in there, and it's going to be a little bit hard to call. And that's a conversation I know I've had with a lot of people who are on the call today. That is my expectation, and that is what's playing out.

Can you share? I know you noted that you expect now the industry to be up about 1% to 2%. Can you share what you expect IP's box shipments this year to be relative to last year?

For the quarter or for the year, Mark?

For the year. Okay.

The year, it's really hard, and we can't forecast the fourth quarter because of issues with the transaction. Look, I think Andy said it. There's CHOP, and we're going to have some up and down, but, you know, we're working with the market 1% to 2%, and we've got to see how all of these negotiations play out and the follow-through on getting the price to a competitive level and then what that means for volume.

And I think I add on there, Mark, just so everyone on the call is very, very clear and so you don't think we're being cagey about it, we actually have a legal responsibility through the UK takeover code. We cannot say anything that is construed as a forecast for the fourth quarter. That would trigger a whole bunch of things. So we can share in the normal course of business how we look at the third quarter. We're not allowed to share with time specificity and outlook past that without going through some very specific steps that we will go through as we post the proxy. We do have to go through that, but we have to be very careful on this call. So I apologize for that opaqueness, but we really have a responsibility that we have to keep to.

Your next question will come from Gaurav Jain with Barclays.

Thank you for taking my question. So two from me. One, you know, this uplift in EBITDA from $2 billion to $4 billion, does it include DSMX EBITDA? No, it does not.

That does not include it. No, that is for the current IP portfolio.

Sure, thank you. And then... Like it's a very big jump in EBITDA and you are not really calling out any incremental capex over and above what the run rate has been. So, you know, like the return on these incremental investments is, you know, significantly high and probably more than anything we have seen in the industry. So what is, like, are you budgeting for capex in the guidance properly?

So I think the question was around capital spending to support the value growth.

Yes.

Yeah, so what we're looking at is somewhere between a billion and a billion one on a normalized basis. There could be periods where, because of the opportunity, we might want to invest a little bit above that level to support the strategy. But it's really largely around the same level of capital that we normally target. We think we can do it within that.

But I think very importantly, right, how that capital is gonna be spent is gonna be different. So I would say one of the sins of the past, so to speak, if you look at all that capital spending that I outlined in the discussion, the prepared remarks, if you look at that capital spending over the last 10 years, that peanut butter spread mentality, the whipsaw of chasing bad investments or assets that are deteriorating That eats up a dramatic disproportionate amount of our investment. And so our ability to focus that on the right assets in the right geographies, box plant and in mills in the US and in Europe is going to be very important, right? So as you think about the sheer change that can happen by location, it can be pretty substantial. And we did that pretty dramatically at IDEX, right? When we made those choices, our CapEx, it went up a little bit, but more than anything else, it got proportioned very differently. It got proportioned toward building sustainable competitive advantage. It got proportioned to drive productivity. It got proportioned to really create great work environments. And in that environment, right, we drove about 700, 800 basis points of ROIC over that time frame. And so I know it can be done. And the great part here is we have, because of the nature of our assets and the focus of our assets, we know how to pull this off, right? We just have to have the courage to move the resources and make the tough choices.

Your next question will come from the line of Gabe Hodgie from Wells Fargo Securities.

Thank you, Andy. Tim, Mark, good morning.

Hey, Gabe, good morning.

Appreciate the candor and transparency and also tomatoes, pumpkins, and peanut butter getting you ready for lunch. I wanted to go to slide eight. The prior question sort of asked what I was thinking on the point and a half differential in CapEx relative to your peers. You addressed that. The piece to the right, spending per million square feet, The $0.40 differential, should I interpret that as, okay, maintenance costs have come up to, I think this year now you're talking about $530 million-ish, that there's another $40 to $50 million in there, all else equal? Or does that piece of it get reflected in option costs? How should we think about that?

Yeah, I think it's going to show up in ops and costs. There is capital investment that goes into maintenance and repair, but this number is about operating costs.

Okay. And then you talked about wanting to be self-funded, free up resources, and one of the implications here is seemingly free up some capacity, which... in today's environment isn't necessarily what IT or the industry needs. And you're also saying, hey, 80-20, we need to focus on what's important. Should we take away from that that there could be some additional capacity coming out of the system as you work through this process over the next medium term, if you will?

You have to expect that, right? I mean, ultimately, when you think about our overall cost buckets, we've got to make sure we match capacity. with overall demand, with opportunity to be successful, right? So we've got to be very thoughtful about that. We'll do it appropriately as we do that. But, you know, as we think about structural costs, we've got to be honest about where the structural costs are.

Your next question will come from the line of Philip Ng with Jefferies.

Andy, the presentation was pretty inspirational here. I guess in many aspects, this is a hard reset in the IP culture, kind of running it from more of a commodity business to more entrepreneurial and focus on the box side of things and being profitable. I guess my question is, how has the buy-in been internally? And then these investments you're making on reliability, certainly there's going to be some drag in the next few quarters. When do we kind of start seeing that ramp up on the positive side and flow through a little more fully? And lastly, do you have the right people and infrastructure to help you be informed to make these decisions in terms of where you want to align capital in the right places?

I think, you know, look, one of the major positive surprises when you come into a situation like this, right, long-term poor performance, and not kind of dealing with some of the major issues that need to be dealt with. You worry about what you're going to find, right? You worry about what you're going to find. And I will tell you, I have been extremely positively surprised by the capability and the willingness. So the team is willing and they are able. The pent-up frustration and the pent-up excitement about running this company the way it should be run, is palatable and what I have seen is just people grabbing onto a desire to get better and very specifically grabbing onto 80-20. We are moving at a pace, again I've done this an awful lot, and the pace at which this group has been willing to engage and their ability to engage has been frankly inspiring. They've done a great job with that. We've got great people at IP. I'll put this group against any group of people. And I mean up and down the organization. I've spent a lot of time in box plants and mills. We've got great people. My father-in-law was a 37-year IP employee. When IP bought Champion back a long time ago, my father-in-law went with that. He retired as an IP employee. So right after he asked me whether or not his pension was safe, Um, he, uh, you know, I, we talked a lot about maintenance and so I have a real affinity for those folks within our, within our business. And when I go and I talk to them, um, these people are fantastic, right? They're absolutely fantastic. I came in this morning, I was given a hat at our, from our Regalwood facility and it's a precision maintenance hat. Um, I went there and had a chance to sit in on some bearings training, um, and listening to these folks, these are incredibly capable folks. who they need the focus and they need the resources to win. They know how to do it. The list of high return projects by facility, by location is awesome. And they need for us to allow them to win. We need for us to, they need us to allow them to win. And so I feel really good about the team and about the engagement. Look, we're going into the next phase of this, right? In the next phase, there are kind of two, tough phases here. One is the buy-in, which you talked about, and we've got it. We have got buy-in. And frankly, our overall performance and other events that have happened recently, those are things that really solidify people into where they are. They understand what the stakes are. And that's That sense of urgency is very high within this group. They're very capable people. So we've passed that first test. The second test is now the doing of the hard things. Right now, we've got to go do them. And that will be, we're going to move very quickly, but you also have to move intentionally, right? You've got to be very smart about that. You've got to think about those strategies of how you win with customers, where you win with customers, and you need to invest very intentionally and ahead of the curve so you make sure you're winning, not hurting them. And we've got to do that and do that well. But I think this team is ready to do that.

Gotcha. And then do you have all the infrastructure in place, Andy, to make some of these decisions where you need to put capital work and where you've overinvested perhaps? Have you aligned KPIs in terms of Salesforce and the box managers be more aligned with reliability pricing, net promoter scores kind of stuff for customer engagement?

Yeah, that's a great question. So I call it the scorecard, right? So one of the things that we've got to get better at here across the company is really having clarity of the metrics that drive results for our customers and drive results for our owners. And those things, obviously, we've got tons of data. You can imagine in a process environment, there's tons of data. But the data that really matters has got to stick out. So, you know, the basic stuff around safety, quality, on time, in full, productivity, and profitable growth, those are the basics ones. I was in Cedar Rapids, Iowa last week, and the team does a great job there. It's an OCC mill that just does a phenomenal job And they have, they're probably our leader in terms of the linkage between what happens upstream in terms of our reliability capability, our production capabilities, you name it, you name the metric. And so they understand the levers. They're also our probably first or second in the fleet in cost per ton, right? They're outstanding from that perspective. And so they really demonstrate, they're kind of a great forerunner, so to speak, of what happens when you really measure cause and effect. So we are seeing that. Specifically commercially, right, as you think about the commercial side, moving incentives They're more tied to profitable growth versus volume is very important. Understanding, however, that you've got to be competitive in the market, right? You've got to be competitive. You've got to price to value. And that is very important, right? You've got to price where customers see your value. And we're getting better at understanding that. We've got room to go. We are significantly improving our sales talent across the business in terms of the number of people that we have. and their capabilities. And we're seeing that pipeline grow because of that. But you've got to have clarity of metrics, and incentives have to be tied to those metrics from the customer all the way through your production capability, all the way through the supply chain. And that's something we've got work to do, and we're going to get better.

And your final question comes from Matthew McKellar with RBC.

Hi, good morning. Thanks for taking my questions. Are you able to give any more specificity around the approximate timeline to achieve that $4 billion EBITDA target and maybe give us a sense of contribution from the global cellulose fibers business that may be embedded in that target? And maybe with that, is there an updated view on whether that business is core to IP going forward?

Yeah. So in terms of timing, you know, look, I apologize. We just, you know, as you can imagine, we wrestled with that question internally and we had to talk to lawyers and whatnot. But as we're involved with the DS Smith process, we can't. And if we do, it constitutes a forecast and it triggers a whole bunch of messy things. So we have to be very, very careful of that. What I would say is that is a mid-cycle number, and it's not forever away. We're not talking about 10 years away. It's not something like that. For those of you who know me, you know my track record is to move, and we're going to move. That's going to be very, very important. Specifically, as we talk about GCF, let me talk about that more from the whole portfolio. We're looking at our whole portfolio. You have to, right? And you have to do it all the time. You don't do it once. You're doing it all the time. You're reviewing your portfolio. And what I've said to folks is, you know, I started on May 1st. And what I said out of the gates was we will not get to the May 1st and not have a decision. And I've said that to our people internally. I've been very transparent that we've got to go through a decision-making process and we will make those decisions. Sooner is always better. It's always better to do those things. And so that would be my goal, sooner is better. And we have to follow a deliberate process. In terms of the magnitude, the impact of GCF on that overall number, it's very small. So there is no expectation that GCF is a giant proportion of that. And so we'll obviously be more detailed over time when we can be more detailed. when we're allowed to be more detailed. And also, you're going to see some detail in the proxy. So the proxy is going to be filed in August. And the timing, I'm not exactly sure of. Tim, it's in August, is that about right? Yeah. Yeah. So you're going to get more detail there. We'll give more detail in the roadshow what we can give, again, within the bounds of what we can give. So between now and the third quarter earnings call, if you kind of bracket that time frame, so 90 days from now, We're going to give you a lot more detail here.

Great. Thanks very much for the help. I'll turn it back.

Yeah.

So, look, I want to say thank you again to everybody. You know, we've got important work to do. We're very much in the data analysis phase and building the implementation plans. I think it's important to note that, you know, we're going to make decisions based on facts, and we still have some data to gather. And that is going to point us towards how to get a bunch of these opportunities. It's very clear, however, how much opportunity is out there and the detailed work we've already done shows that. So we will get more specific. We will time bound it as we move between now and the end of the year. But I think the key thing that I would ask people to take away is that we have control of the vast majority of this. We have control of that. We can control our own destiny. Yes, things are going to move in the market. We can't control that. But we can control what we do. We can control how we approach understanding our business and where we apply our resources and focusing on the right customers, the right products, and the right assets to drive really outstanding results over time. So with that, I want to thank everybody very much for your time, for your partnership. And I look forward to talking to you here over the next month as we move through this process. Thank you.

Once again, we'd like to thank you for your participating in today's International Paper's second quarter 2024 earnings call.