International Paper Company

Good morning and thank you for standing by. Welcome to International Paper's third quarter 2024 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 1. To withdraw your question, press star 1 again. As a reminder, to ask a question, press star 1. To withdraw your question, press star 1 again. It is now my pleasure to turn the call over to Mark Nelson, Vice President, Investor Relations. Sir, the floor is yours.

Thank you, Regina. Good morning, and thank you for joining International Paper's third quarter earnings call. Our speakers this morning are Andy Silvernail, Chairman and Chief Executive Officer, and Tim Nichols, Senior Vice President and Chief Financial Officer. There's important information at the beginning of our presentation, 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 differing materially from such forward-looking statements can be found in our press 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 third quarter earnings press release and today's presentation slides. With that, I'll now turn the call over to Andy Childrenale.

Hey, thanks, Mark. Good morning and good afternoon, everyone. I'll begin on slide three. After my first six months in the seat, I'm encouraged by the pace of improvement and proud of the team for aggressively engaging in IP's transformation. We're building a performance-driven culture at IP that will enable us to create significant value for our employees, customers, and share owners. That work begins with strong alignment around a very clear and compelling strategy. We will drive profitable growth by being the low-cost producer and the most reliable and innovative sustainable packaging solutions provider in North America and EMEA. We're using our 80-20 approach to guide investments and align resources to win with our most attractive customers, reduce complexity and cost around the company, and drive transformational performance. Ultimately, Building great teams and a customer culture are foundational to our improvements. We're passionate about delivering superior experience to our best customers and best-in-class returns for our shareholders. Let's turn to slide four. We're on our way to driving transformational changes at IP. We've conducted 80-20 training with our top leaders across the company and are actively deploying the methodology. We will continue to embed this practice with our commercial teams, at the mills, at box plants, and with administrative functions. I was delighted that about 80% of our active investors joined us for the 80-20 overview session in August. Importantly, we're completing 80-20 segmentation across the company. We're looking at our portfolio, at business segments, markets, customers, products, suppliers, and assets and facilities. We are completing zero-up analysis to determine our key resource needs. and we're developing implementation plans and aligning resources to position our businesses to win for customers. We have fully entered the implementation phase by engaging our teams and taking actions to accelerate our strategy and significantly improve IP's performance. I'm now on slide five. I'll share some strategic actions we're taking in the fourth quarter to position IP for success. What all these actions have in common is that they give us greater focus on strategic customers and markets align resources and investments to win, and simplify all aspects of IP, which reduces complexity and cost. While we're confident that these actions are necessary, they include some difficult decisions that impact our team members, their families, and the surrounding communities. One of the great strengths of IP is our values. We make these decisions with care and compassion, ensuring that we treat people with dignity and respect while providing support, Our actions at the enterprise level are centered on reducing complexity and shifting resources into the businesses and closer to the customer to accelerate strategy. This is the fundamental principle of 80-20. We are simplifying to enable greater focus and collaboration, improved execution, have more agility, improve the customer experience, and lower cost. Within our North American packaging business, we're investing for outstanding service, reliability, productivity, and enhanced capabilities to win with customers while optimizing our total system and reducing structural costs. As I mentioned on the Q2 call, we have two regional optimization pilots underway in our box system. We are reducing complexity and investing in equipment and people to improve safety, product quality, on-time delivery, while lowering costs. Importantly, we are seeing a 20 to 30 percent productivity improvement in these early stages at these pilot areas. There's opportunity to apply this approach across our national box network. This will be a key lever for delivering profitable market share growth now and in the future. Recently, we announced five plant closures in regions where we have excess capacity and an opportunity to optimize our footprint, working closely with our customers to transition their business to other IP plans. We expect to retain 100% of our strategic customers, and we're making investments in remaining facilities for future growth. Importantly, We have identified multiple opportunities for greenfield and brownfield box plan investments that will be industry leading in all aspects of safety and performance. You should expect to see announcements and investments soon to increase our strength in strategic markets. After a strategic review, we've decided to evaluate opportunities to better position GCF for long-term success. Our board has authorized us to pursue strategic options. We have engaged Morgan Stanley as our advisor. as a leader in FluffPult, is very well positioned in a growing global market. We have a talented team and a strong market position and great technical expertise. We have a highly advantaged mill system, and as I mentioned in our marketing, we have a global supply position. Throughout the process, we are fully committed to support our business and committed to serving our customers. We'll update investors when the process it will be positioned to win for the long term. While we are engaged in this process, we will continue to accelerate their strategy to focus on fluff and improve business performance. The decision to close the Georgetown Mill allows us to exit about 300,000 tons of commodity SBSK and low-value specialty grades across the system. This move significantly lowers complexity and costs, improves returns, and reduces earnings volatility. we expect to retain 100% of our fluff grades and customers and increase our absorbent mix to about 80%. GCF will continue to have plenty of capacity for growth with key customers. These actions strengthen GCF, make them a stronger supplier of high-quality fluff pulp to the market, and for our strategic customers. And again, regardless of the outcome, GCF has the potential to be an attractive business with meaningful upside potential. I'm now on slide six. This slide reflects some 80-20 early wins we're seeing across the company. Our teams are engaged. They've jumped in and they're not wasting any time. We're taking action to win with our customers, reduce complexity, and improve performance. And here are just some examples I thought I'd call out of all the great work that's happening with our teams. On safety, our intent is to set the industry standard as a great place to work, starting because we are the safest place to work. We're using 80-20 analytics to understand opportunities for safety improvement, that include better root cause analysis and advanced technology. Simply put, safety must be above everything else. I've already talked about the pilot plans in two regions where we're seeing double digit productivity improvements. Also, the corporate reorganization will allow us to focus on our customers and business results. We're moving from a matrix organization to a customer focused organization. Importantly, we've changed our sales incentive programs They are simpler and better aligned with our commercial strategy to drive profitable growth and reward those people who deliver. Another great example is a large strategic customer who we partnered with to look at their mix of business that was driving huge complexity. By working together, we reduced the complexity of their order patterns, which saved 1,300 hours in changeover time and significantly improved service levels. These kinds of examples can be found across our operations. We also had a couple of quick-hit wins in sourcing in the U.S. and Europe, where we were able to partner with strategic suppliers to approve costs and terms. There is more to come, but we're encouraged by the level of commitment and excitement across the company as we work to deliver safe, profitable growth. All right, I'm on slide seven. There's good momentum in the company, but we're just starting our 8020 journey, and it needs to take hold to every part of the company. Ultimately, 8020 is a powerful business model one that has lived not only in the C-suite, but with customers at paper machines and at shipping docks and box plants. Along with the progress at IP, we're very excited to complete the DS Smith acquisition. I'm sure you've all seen the strong shareholder support. We're bringing together two great organizations and building winning positions in the attractive markets of North America and Europe. We expect to close in the early first quarter upon completion of regulatory reviews. Our teams are actively involved in planning for the integration, I'm pleased to announce that after closing the transaction, Tim Nichols will serve as the interim leader of the combined IP and DS Smith MIA teams. In addition to his responsibilities as CFO, we are fortunate to have outstanding finance teams at IP and DS Smith that enable us to do this. Finally, we're happy to announce that we will host an investor day on March 25th, 2025 at Freedom Hall at the New York Stock Exchange. This will be an opportunity for us to share details about our strategy and value creation opportunities across the company. Now let me turn to the third quarter performance and the outlook. First I'll share some highlights and then turn it to Tim who will walk us through the details. I'm on slide nine. Our third quarter earnings came in above our outlook for the quarter. Better performance was driven by strong price improvements across the portfolio. This included about $17 million of benefit from our box go-to-market strategy. Volumes were seasonally lower than expected. Operating costs were higher sequentially due to lower volumes, seasonally higher labor costs, employee incentive compensation, and some reliability issues at our mill system, which Tim will address as he covers the business segment performance. In terms of the underlying market, We continue to see stable to moderately improving demand trends in North America across the various segments we serve. In Europe, we have seen some softening, however. As expected, IP's packaging volumes lag the overall market as we restructure commercial agreements to improve overall profitability. Relative to prior year performance, we've had higher sales revenues who are offset by higher costs primarily related to inflation, employee incentive compensation, as well as some reliability issues in spending to improve future performance. As I mentioned earlier, we are laser focused on reducing structural costs across the company and we're taking actions. As we look into the fourth quarter, we expect higher earnings across our packaging business as our price increases from the prior index movement stick. We also expect lower costs for improved operations and lower planned maintenance outages. We expect lower earnings in GCF as a result of prior price index declines and higher planned maintenance outages. In the fourth quarter, we're also calling out With that, let me turn it over to Tim, who will provide more details about our third quarter performance and our outlook.

Great. Thanks, Andy. Now turning to slide 10, I'll provide more details about the third quarter as we walk through the sequential earnings bridge. Third quarter adjusted operating earnings per share was $0.44 as compared to $0.55 in the second quarter. Price and mix was higher by $0.29 per share driven by the flow through of prior price index movements in both businesses. higher export prices, as well as margin benefits from successfully executing our box go-to-market strategy. Volume was unfavorable by 12 cents per share due to the seasonally lower box shipments and some volume trade-offs related to commercial contract restructuring actions. 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. Operations and cost was unfavorable by $0.28 per share sequentially. This is largely from the impact of lower volumes, seasonally higher labor costs, higher employee incentive compensation, some reliability incidents and spending, and some weather impacts. Maintenance outages were higher by $14 million or $0.03 per share in the third quarter, and inputs were unfavorable sequentially with higher costs for energy and wood. And finally, corporate items were favorably impacted earnings by $0.08 per share sequentially due to the timing of corporate items and a lower effective tax rate. If we turn to slide 11, I'll cover industrial packaging. Price index was higher due to the realization of approximately $70 million of benefit from the prior index movement. Additional benefits from our box go-to-market strategy contributed approximately $17 million to earnings, and higher exports contributed approximately $18 million. Volume was lowered by $48 million sequentially due to seasonality and one less shipping day in the third quarter. In addition, we made choices based on our box go-to-market strategy that will negatively impact our volume in the near term, but will allow us to improve our margins and mix over the longer term. Operations and cost was $89 million unfavorable sequentially, primarily due to lower volumes, seasonally higher labor costs, and higher employee incentive compensation. Option cost also includes a $42 million unfavorable impact from reliability incidents that occurred at a few mills, partially offset by $20 million of insurance proceeds for the Ixtac box plant fire that occurred earlier this year. Plant maintenance outages were higher by $38 million sequentially, and input costs were $24 million unfavorable, primarily due to the higher energy and wood costs. If we turn to slide 12 and covering GCF, price and mix was sequentially higher by $24 million due to price index movements. Volume sequentially was lower by $4 million. Operations and costs were unfavorable sequentially by $35 million, which includes an $18 million unfavorable impact from reliability incidents at a few of our mills, in addition to other items, including higher employee incentive compensation. Plan maintenance outages were lower in the third quarter by $24 million. And finally, input costs were flat, with lower energy and chemical costs offsetting higher wood costs. I'm on slide 13 now, and before we get into the details of the outlook, I would note that accelerated depreciation expense will be a significant impact in the fourth quarter due to previously announced facility closures, so we've called that out for each business. And in line with guidance from the SEC, accelerated depreciation will be included in operating earnings. Earnings for our industrial packaging segment are expected to be higher sequentially by approximately $55 million, which includes accelerated depreciation expense of $15 million. Earnings for global cellulose fibers are expected to be lower sequentially by approximately $275 million, which includes accelerated depreciation expense of $220 million, as well as higher planned maintenance outages. Now let me give you the breakdown by business segment. I'll start with industrial packaging. We expect price and mix to improve earnings by $45 million sequentially. This is primarily the result of prior index movement in North America with some benefit from previous actions under our box go-to-market strategy. The sequential improvement also includes favorable mix in our EMEA packaging business given the strong fresh fruit and vegetable season in Morocco. Volume is expected to decrease earnings by $15 million due to two last shipping days, partially offset by seasonally higher daily demand. We expect operations and costs to increase earnings by $5 million. This includes improved performance and reliability, which are partially offset by higher seasonal costs and the non-repeat of insurance proceeds received in the third quarter. We expect accelerated depreciation will decrease earnings for the packaging business by approximately $15 million due to the five packaging facility closures in the fourth quarter. Lower maintenance outage expense is expected to increase earnings by $21 million. And lastly, lower input costs are expected to increase earnings by $15 million, primarily due to lower OCC and wood costs. Switching to global cellulose fibers, we expect price and mix to decrease earnings by approximately $25 million as a result of prior index movement. Volume is expected to be stable. We expect operations and costs to increase earnings by approximately $5 million due to improved performance and reliability, which is partially offset by higher seasonal and distribution costs. We expect accelerated depreciation will decrease earnings for the pulp business by approximately $220 million due to the closure of the Georgetown Mill in the fourth quarter. Higher planned maintenance salvage expense is expected to decrease earnings in the fourth quarter by approximately $36 million. And lastly, input costs are expected to be stable. And with that, I'll turn it back over to Andy.

Thanks, Tim. We'll now turn to slide 14. Again, look, we're making great progress, and we're well on our way to building a performance-driven and customer-centric culture. And we're taking actions. We're taking actions to control our own destiny, and we're making the right choices to accelerate performance improvement. I'm confident that we have the right strategy and a talented team and a concrete plan to create a great place to work, deliver customer excellence, and drive profitable growth. Our actions will drive transformational improvements at IP and create significant value for our shareholders. With that, operator, we're now ready to take questions.

Thank you. If you would like to ask a question, simply press star 1 on your telephone keypad. To withdraw your question, press star 1 again. As a reminder, to ask a question, press star 1, and to withdraw your question, press star 1 again. We will now pause a moment to compile the Q&A roster. We do ask that you limit yourself to one question and one follow-up question. Our first question is going to come from the line of Phil Ng with Jefferies. Please go ahead.

Hey guys, Andy, it's been really inspirational in terms of the progress you guys have made in this short time. So really exciting. As you kind of look at the mix of customers that you're looking to optimize, how's that progress coming along? I know you've relined your sales on setup comp structure for a lot of your employees. Are you seeing any early findings, change of behavior? And if I look at Tim's forecast for box shipments sequentially in the U.S., it looked okay. It didn't seem like there was any more incremental leakage there. So give us an update on how that contract negotiation is progressing. Are you seeing any more incremental churn on the customer side?

Thanks, Phillip. We do a morning call in advance of earnings, and we were able to talk to a bunch of folks here today and just recognize the incredibly hard work that people have done over the last six months to create momentum. So I first want to just recognize the monumental work that's been accomplished. Specific to your question on volumes, You know, what we're seeing there is it feels like the leakage has slowed, and I don't want to jump the gun here and say gone, because we still will have year over year volume down here for the next few quarters. But we do expect when we get to the back half of next year, we expect to turn that, and we expect it to be at least back to market growth. And so what I would say we're seeing right now is, The expected losses, so if we kind of look at the band of volume losses, we are better than the bottom end of that range of expectations, which is positive. We have also gotten much, much sharper through the 80-20 work of getting clear about what segments of the market are priorities for us. the U.S. market. So the U.S. market is about 400 billion square feet from a packaging standpoint. And there's about 60% that I put in the big middle. So 20% is on one end, which tends to be smaller local customers. And on the other end, it tends to be very price sensitive, larger customers. Frankly, the sweet spot for us is that big middle. That is where we are really, really good. Obviously, we do business across the spectrum, given our market position. And frankly, if we can do business with folks on good terms and conditions, we're open for business. But our focus is really on those people who match our strategy. And our strategy is very much, again, about we're going to be the low-cost producer. We're not going to be the low-price player, but we're going to be the low-cost producer. We are going to be great on service. And we are going to invest where we have strength. And the customers that really match that in that big middle is a sweet spot for us, and we really like that overall positioning. You know, in terms of the further segmentation, that really starts to become regional and then super local. And it's one of the things I love about this business is, you know, as I talked about when I first thought about joining the company, what was ringing in my head was commodity, commodity, commodity. And that's just not the case. differentiated position in our marketplace. So I feel good about the segmentation. I feel good about the focus. As we've been rolling out 80-20 training regionally, we've now done three regional commercial trainings, and we've identified big chunks of opportunity that are out there in the marketplace where our value proposition is highly aligned with what the customer wants. So I feel good that we're heading in the right direction. It's too early to call a turn, but I do think that the leakage has certainly slowed

Wow, super. And then you talked about a few things, early wins, in terms of the pilot program on the box side to kind of unlock more efficiency. Your ability to kind of ramp that more broadly, and then also you highlighted a large customer where you were able to kind of reduce the complexity and really reduce the changeover. That's pretty exciting. So, you know, your ability to kind of roll that out more broadly as well.

Yeah, so I think, Phil, both those two things, Those are really nuanced, but I can't stress how important those examples are as you think about rolling those out across the company. So as you think about the box plant pilots, fundamentally what's happening, let's just use a simple, you're in a region and you have two box plants. And one effectively becomes a low-mix, high-volume plant, and the other becomes a high-mix plant. And there can be a tendency for some to say, oh, well, we've now stratified our plants. No, what we've done is we've specialized our plants. And so the one that's dealing with high volume, they can capitalize, build their labor force, and build their entire plan around a certain business model that drives tremendous efficiency aligned with what the customer needs. And then the high mix plant can get great at changeovers, right? They can get great at changeovers. Even the equipment can be different when you start thinking about what you're talking about there. So the entire capitalization, the workflow, those things can be different. And so we can't do that everywhere in the country, but we've got 20, 25 regions that I would call them regions. And within that, probably at least half of those have the dynamics that we're talking about. And so we can look at those kind of options. So that's exciting. And don't forget what comes in that is really important. So we closed five plants. Someone could look at that and say, hey, you're taking capacity out of the system. That's a problem. Well, those are plants that were underutilized. We can move 100% of the customer to someplace that we have capacity. And as we grow our overall capacity in the system by driving productivity, we open up service levels. And then put on that the green fields and the brown fields that we're looking at, And we'll get more specific in the future, and probably after the fourth quarter call, we'll talk more about capital planning, and we can talk about what that means incrementally for capital. And I've said that as long as our strategy is going in the right direction, we're not going to be scared about investing. And so we're looking at these green fields, we're looking at these brown fields to really drive productivity, and hopefully productivity for our customers, rather, and growth for our customers. Relative to that one changeover example, what I love about that, right, is it's a total win-win. So you're working with a customer who, you know, service levels aren't quite what they want. They've gotten really demanding about a very specific business model, not a specific outcome. And we're able to partner with them and say, hey, what do you need? And what they want is rapid on-time delivery, even same day, right? You know, even kind of down the street show up, we order it by two and it's getting there by four. You know, that kind of stuff. Well, that's really hard to do when you have order patterns that are moving all around. And if you think about that, if you're trying to have that kind of delivery response to a customer, you either have to have inventory on hand or you have to be able to produce just in time. You've got to be able to have one of the two. And what we're trying to do is find that balance where we can meet that customer demand but also drive down our capital needs and our cost, and we found that great win-win. I mean, and you think about that. That's one customer, one facility, or maybe two facilities, 1,300 hours of changeover time. That's a big, big, big number when you think about how that impacts us.

Okay. These are all great examples. Appreciate the color, Andy. Thanks, Bill.

Our next question comes from the line of Michael Roxland with Truist Securities. Please go ahead.

Yeah, thank you, Andy, Tim, Mark, for taking my questions. Great quarter. Obviously, you've all been slightly busy.

Yes.

I wanted to follow up on Phil's question regarding the 20% to 30% productivity improvement. Can you talk about what that means for EBITDA on average at those box plans? And in terms of deploying this methodology at the box plans, over what time frame do you see this rolling out? And lastly, just, you know, is this something that you can apply to your mill system as well?

Oh, yeah, great questions, Michael. So if I were you, I wouldn't focus on EBITDA by box plant. I don't think that's the right measure because what you're really looking for out of your box plants is great customer service and a low-cost position while doing that. And so, if we can move that from box plant to box plant within a region, like I was talking about before, you want to have that kind of flexibility. The way that I would think about the math in all of this, and this kind of goes to your second part of your question, which is Emil, is, you know, if you create a unit of productivity in our business, right? So, if you create a unit of true productivity, meaning I can put another dollar of production over our fixed cost base, right? That's the way to think of it. When you do that, you drive... on a contribution level, 60 plus percent incremental margins if you're able to drive productivity. It's huge, right? In my old world, you'd get 30 to 35%. And now we're not going to put 60 or 65% in our pocket, don't get me wrong, because we're going to reinvest back in the business. And that's where the magic starts to happen. That's where the virtuous cycle starts to kick in. But if you think of it, let's go box plant and then let's talk mill. On the box plant side, as you do this, again, what it does is it creates local flexibility for great customer service, it lowers your cost structure, and it allows you to grow. That's what these things ultimately allow you to do. And then also, it lowers your capital intensity needs. So you're improving profitability, you're improving customer service, you're lowering capital intensity, so your ROIC is just outstanding. And the answer to your question is yes, you can do that in the mill system. It's different, right? It's a different thing, but philosophically it's the same. So let's just think about, let's use an example of a winder. So you're making paper, you're at the winder. You know, for us, winders are the most dangerous place in the company, and they also tend to be bottlenecks, right? And so what that means is your people are interacting, having to interact with the most dangerous place in your operation. So you start doing the analytics, you're focusing on what those bottlenecks are, you're focusing on the people interactions, you're introducing technology. One of the things that we're working on right now is optical technology that will actually shut down machines anytime a human gets in a dangerous place, right? So we're starting to beta test that in certain minutes. And, you know, it's like anyone goes to an Amazon Go, look, the technology's out there. And just how do you put that into an industrial environment? So you can absolutely do that with mills and with box plants. Very importantly, in 2025, we are going to create some what I'm going to call lighthouses, and we're going to use a process called strategy deployment. Those of you who are familiar with the Danaher or the Toyota production system, if you think of ocean planning or Danaher, we call it policy deployment. It's a very disciplined methodology of deploying strategy. So for us, we're going to focus on safety. We're going to focus on 80-20 and the integration of ESMF. Those are going to be the things that we deploy next year. In that deployment will be a handful of what I call lighthouses, where you're trying to create best-in-class examples of the strategy that we're trying to employ. So we're going to take these two pilots that we're using, the two regions of the country. Those will continue, and they'll be box plant lighthouses. We're going to take two different mills. We're going to take an integrated mill and a non-integrated mill, and they're going to become lighthouses in that strategy deployment. And then we'll do so also with a couple of commercial teams. So you get to the end of 2025, and what you have is examples of how we should do it and do it with true excellence. So my experience has been when you try to do things kind of at all the same levels across the entire enterprise of 40,000 people, soon to be 70,000, Smith, you don't get anywhere. You get kind of a mile wide and an inch deep. And what we want to do is we want to get a mile deep and then demonstrate great results and then drive that out to different parts of the organization.

Got it. I appreciate the call. It obviously has about a tremendous amount of work ahead, but the trajectory seems very positive.

And Michael, real quick, one of the things you guys are going to see also, so March 25th when we have the investor day, We'll definitely spend a bunch of time on these lighthouses, right? So we'll spend time on the lighthouses. We'll spend time on the DS Smith integration. So you'll get to see firsthand kind of how these things are working in practice. Sorry, Mike, we had another question.

No, this is great. One quick follow-up. In terms of the potential for additional portfolio optimization, obviously the company closed a mill orange earlier this year. I think at a recent conference you mentioned trying to analyze where the company is overcapacitized. Where does that analysis stand right now, and what's the potential for further portfolio rightsizing at the middle level?

Yeah, great question. So, again, we talked about this in the second quarter. We've got to be careful there in those conversations for lots of different reasons, not least of which, of course, is revitalizing the DS Smith acquisition. We're going through regulatory approval, so we're being careful there. I think what's fair to say is we are looking at this stuff throughout the entire portfolio, and we're looking at subsegments of business that look like, say, the SBSK example within GCF, right, which is more commoditized product that has lots of capital intensity and high earnings volatility. Those are places that, frankly, aren't good business for us. What you're going to see for us is a constant march You know, some of you who have read the Jim Collins book, the kind of 20-mile march down the path of how do we become a more integrated business with less volatility. You know, one of the things that's been, I think, just a wonderful thing for people to understand here is our core packaging business isn't very volatile. When you actually look at it, the demand patterns are not very volatile. We induce a lot of volatility into that business and therefore uncertainty. And being on your side of the table, right, that volatility uncertainty, you're going to value it lower. I mean, that's just going to be what you do, and I would too. And I think as we go forward, what you're going to see us do is look across our portfolio at the kind of businesses, integrated high-value businesses that we want to be in, and you'll see us de-emphasize things that are not that.

Well, listen, thanks very much, and good luck in the quarter and in 25. Thanks, Michael.

Our next question comes from the line of Mark Weintraub with Seaport. Please go ahead.

Thank you. Congrats on all the progress so far. So your sort of big picture, $2 billion to $4 billion, you talk about a billion dollars from cost and ops, if I'm remembering correctly. And we certainly see some of the actions now being laid out. The strategic, now you're talking $2.30 billion. which I don't know, I assume that would be something you'd consider on that $1 billion. And then I guess what I'm trying to understand a little bit is, particularly as I'm thinking about even 25, but obviously beyond that too, if I have this base of, let's say, a $2 billion run rate entering into the year, and then I can layer in the strategic actions you've identified, how much more from what you're doing 80-20-wise could potentially flow in in 2025 and then beyond, you know, above and beyond, say, labor and benefits or something that you would be the typical offset. I realize that's a mouthful I just threw there, but hopefully you understand that directly.

Let me just make sure I understand what you're asking. Are you asking kind of what the benefits could be in 2025 over and above inflation? Is that what I'm trying to, is that what you're asking?

At the heart of it, yes.

Okay, okay. You know, the way that I look at this, right, is the numbers that I talk about are net numbers, right? So, and I think, by the way, Mark, I think it'll be more like a 60-40 split of cost versus commercial. And hopefully, you know, that's something that, you know, there's a lot more near-term control of that. And I do think it's a multi-year journey, right? So it's not going to all happen in 2025. You know, obviously, we want to pull as much forward as we can. You know, I had the wonderful opportunity very early in my career to work for a gentleman by the name of George Sherman. And George was the first CEO of Danaher. The Reynolds brothers, they started to build that business. They brought George in. And I had the privilege of being an intern and sitting across from his office. And what an awesome opportunity. One of the things that George would say is get ahead, right? Get ahead. And so what we're trying to do right now is we're trying to get ahead. We're trying to get ahead on getting our cost base right. And frankly, while it's great to improve the cost structure and profitability, you know, guys, to be candid with you, that's a benefit right now. What that gives us is the ability to invest back in the business. And we need to invest back in the business. And so, you know, we're going to do two things at once. So, Mark, I apologize. I'm not being as specific as I'm sure you'd like, but we're going to try to pull as much forward as we can into 25 while being responsible. Organizations, look, they're like the human body. When you don't exercise them, they get flabby and they start to fall apart. At the same time, when you're trying to get fit, you can't just go run a marathon tomorrow. Right. You have to work yourself into it. Um, and we're running hard, uh, today, but we're trying to do it in ways by, by dividing and conquering, having different people at different parts of the organization focused on different things. So we can run this marathon. We can, we can really run this marathon. Um, and, uh, and so we'll, we'll move as quickly as we can, but not so that we are irresponsible.

I appreciate that. Is it conceptually fair to say though, that the benefits from 80, 20, even in the earlier stages, like in 2025, should outdistance inflation and provide those months?

Oh, I'm sorry. I'm sorry, Mark. Yes, absolutely. Right. We should. My expectation is that the cost and inflation equation will be positive in 2025. Okay.

Super. Thank you very much. Thank you.

Our next question comes from the line of Matthew McKellar with RBC. Please go ahead.

Thanks. Good morning. If you're going to comment, does this concept of regional box plant specialization that you talked about on this call already exist across the DS Smith box plant system, or how would you characterize the opportunity to bring this approach to their system as well?

Yeah, look, DS Smith, they are a terrific company, and they've done some things really, really, really well that, frankly, better than us. They are better than IP commercials. There's no doubt about it. And so I think they are further ahead of us in some regards commercially. There's no doubt. But, yeah, there will be opportunities. I think you probably have fewer, proportionally probably fewer density plays in Europe than you have in the U.S. I think that's probably true. You have fewer than that. And part of that is due to country boundaries. Even though you theoretically have a union, in practice how it works, it doesn't work like that. And so you have uniqueness in Europe around country boundaries that will be different. That being said, the segmentation insights, the ability to think about how we focus on our most important customers, what we call our 80s, is absolutely going to be there. The ability to improve productivity, is going to be there. And obviously we've called out a bunch of that in the synergies that we've outlined, right? So we've outlined $514 million of synergies, 500 of which are costs. And we think there's potentially upside from there. But again, we want to be responsible and we want to be able to deliver and get ahead there. So yes, there'll be opportunities, but it will be different. DS Smith is in a different place than IP. And that doesn't mean always a better place, but some things are clearly better. Commercial, they are clearly better. They already have a decentralized corporate structure, which actually, frankly, makes it easier. I mean, one of the big reasons for moving so quickly with the decentralization of the corporate structure in Memphis isn't for the cost benefits. I mean, yes, there are some cost benefits. But what it allows you to do is it allows the organization to focus on the right things, right? So the businesses become highly focused on the customer, not on managing the matrix. DS Smith, they've already done that. That's a great thing. So what that means is we can kind of get to the fun of it, which is around customers and products and growth. And so there's lots of AB20 insights that we'll have there, but it's going to be a fundamentally different thing.

Great. Thanks for all that helpful color. And then just one quick one on GCF. As part of your review of strategic options there, are you evaluating options other than a sale? And then in the case of the sale, how do you think about an appropriate value for that business? And then just any color around timeline to reach completion of your process. Thanks.

Yeah, so I understand why you're asking those questions. Some of it is pretty tough. I mean, yes, we evaluate other options. We will evaluate kind of every option, frankly. You know, I think the most likely option is a sale. That's the most likely option. There are certainly interested parties. We've had a lot of people who have reached out to us and have expressed interest. We think the process will be very robust. We have no doubt about that. In terms of value, I'm not going to speculate on value because I don't want to negotiate against myself. But very importantly, and I think this is important because more than just investors listen to these calls. One of the things that has impressed me, this is a good business. One of the things that people have failed to understand here or failed to recognize, and I don't mean recognize, meaning you didn't see something that wasn't true, meaning we didn't make it so. is that this is a good business. We've got a 35% supply position in a highly valued global commodity. Our customers, specifically on the fluff side, our customers absolutely trust us to provide them with the best absorbent products, right? They absolutely trust us to do so. And we have a great team and great assets that make that so. So whether we own it or somebody else owns it, the performance of that business is going to be meaningfully different than what it's been.

Thanks very much. I'll turn it back.

Our next question comes from the line of Charlie Muir-Sands with BNP Paribas. Please go ahead.

Good morning. Thank you for taking my questions. The first one is just staying with the global cellulose fibers business. Now that a sale is very much potential auction. Can you just give us a bit more detail on how much of the uplift in group EBITDA of $4 billion in the target you had anticipated coming from that is also a meaningful part of the $230 million EBITDA opportunities you've identified so far? And then, sorry, bundling into that $230 million, is the $230 I think it was $25 million from procurement within that number as well. Thanks.

I don't think I've got – and make sure I capture it right. So relative to GCF, it's a pretty small part of the kind of getting to $4 million. It's a relatively small part of that. And relative to the tradeoffs, Um, so that would be my perspective there. Uh, the, uh, um, the procurement savings, no, those are not part of that. Um, uh, those are two great wins that frankly, you know, what I love about 80, 20 is, is once you kind of provide people the insights and give them the guidance to go, they start digging. Um, and, uh, um, and the procurement team here specifically on caustic, uh, had a couple of great opportunities where we were able to partner with suppliers. And look, this isn't about beating down suppliers. I actually think that's a really stupid strategy. I think what you're trying to do is you're trying to partner with suppliers. You're trying to find win-wins, just like we did with our customers on changeovers, where you're getting better service, better terms, and they get to profitably grow with you for those who can really play ball. And so you're trying to create those partnerships. So those two examples, one in the U.S., one in Europe, no, they were not included in the 230s.

Very clear. And just returning to the 20% to 30% productivity improvement you talked about achieving in the pilots, can you just clarify what that actually means? Is that 20% to 30% lower total variable costs, including or excluding more materials, or how are you measuring that?

Yeah, the simple way to think of it in this example is think of it as square feet per unit. I mean, that's kind of the way to think of it. So it's output over a fixed base. And then from there, you have choices, right? So you can either grow, and that's the ideal thing, right? You're going to grow faster, and you're going to drop through at very, very high levels of contribution margin. It can allow you to consolidate other facilities into certain facilities. In our case, we kind of have two different stories. If you look in the U.S., you've got parts of the U.S. that are frankly, you know, they're overutilized. There's demand that can't be satisfied, and so we're trying to aggressively free capacity up to do that. And then you've got parts of the country that have too much capacity, and you need to take capacity out. So the five plants that we've closed so far have been about being in parts of the country that have too much capacity. And so you get very specific fixed cost savings as the volume from those plants that's existing moves to other facilities. But the real objective, right, is to free capacity for growth and recognize much higher variable contribution margins.

So some of the five plant closures are kind of tied into the pilots and therefore that's the savings.

Yeah, that has not been the case so far, but we'll certainly see opportunities as time goes on. So you'll see a mix of that as we go forward.

Thank you.

Thanks, John.

Our final question will come from the line of Gabe Hodge with Wells Fargo. Please go ahead.

Morning, guys. Thanks for taking the question. I wanted to ask, Andy, a little bit of what you started to address here in the last question, which is you're talking about freeing up maybe some capacity in certain parts of the system. And maybe the question is like, how much of what you're seeing across your converting system is more about increasing productivity? I think about it maybe per employee basis, so the square foot per employee or something like that, you talk about variable costs. versus freeing up capacity. Because when we look across what's been added from other players, it doesn't seem like there's a shortage of converting capacity in the marketplace. So it seems a little circular to free up capacity. So how do you think about that balance? Or maybe, again, like I said, quantify for us, oh, this many plants we see is there's cost savings and productivity on the cost side, and here's where we have a

Yeah, so you're touching on something that's very, very important and one of the conundrums when you look at it at the highest level. So, when you look at converting capacity on the highest level, you're absolutely right. There is not a shortage of converting capacity in the United States. However, region by region, that is not true, right? So, as you look region by region, you have places that have way too much capacity. and you have places that do not have enough. And one of the mistakes that we have made over time is we have not made the tough choices and then the aggressive choices about finding that right balance. So taking capacity out of places where we shouldn't have it and then investing aggressively in places that we should have it. I think that's what we're trying to do is we're trying to find that right balance. And really, look, very importantly, You know, the places that we have real strength and a really differentiated position, we need to play ball there, right? We've got to play, and we've got to play to win. In the places that we're a little bit on our heels, we've got to retrench, and we've got to sub-segment. We've got to get to places where we can win. And so we've got to be very thoughtful. I mean, this, again, one of the most exciting things about this business in the U.S. and in Europe is that this is a local business. I mean, this is a very, very local business, which actually then it ends up looking a lot more like what I had at IDEX, right? Which is you can be highly decentralized. You can build strategies that are around, you know, working with local customers. Because when you think about how local the business is, the overlay of that is there tend to be very specific market segments that are in those locations, right? There's general market segments, and then there's specific market segments. And the performance requirements of those market segments are different. And so while the general strategies are the same, when you think about low-cost position, when you think about service excellence, when you think about investing in strength locally, how that is actually executed based on the needs of the market is very different. And we should be different. We should allow our people to be entrepreneurial and allow them to drive that differentiation in the market, but then allow IP and therefore competitively to have a huge advantage because of our scale and our scope.

Thank you. You talked a lot about early wins and stuff you're encouraged by. And maybe this is just the I'm always cautious or I lean that way. You should be.

I am too.

Are there examples or things when you've walked across the organization and have been meeting with, you know, looking at assets and things like that where, I don't want to say you stubbed your toe, but, you know, it caught more of your attention or things that, you know, could trip us up?

Yeah. There are a few things that I look at that I know we've got to – they are – They are potential bottlenecks or roadblocks to success. I think that's what you're getting at. So again, one of the reasons of the early focus on Memphis and this is no one's fault. To be clear, the people who live and work here in Memphis are working their tails off and they're doing exactly what they're being asked to do and they're trying to do it with excellence. But the bottom line is we created a matrix structure That's really, really, really hard to work through. That's what we had. It makes it very complicated. It makes it difficult to understand what the priorities are and who your boss is. At the end of the day, the boss is the customer. The customer is the boss. And we need to be aligned to the customer, not to the CEO, not to the board of directors, not to you folks, the investors, sorry, but it's to customers. And we needed to be aligned there, and we weren't. And so the reason for the early focus around that is working through that. The reason I mention this is that I am not a Pollyanna here. Just because we've made the announcements and we've made the structural changes, people are used to decades of work, right? And there's a lot of institutional memory. We have to change how we actually work. And that is a potential stumbling block is that we don't change how we work. That's one of the reasons of bringing the strategy deployment process in and deploying 80-20. So every single function, and I'll give a goofy example of this, our earnings prep, right? So we 80-20 our earnings prep. I can't even guesstimate how much time we took out of earnings prep, 50, 60%. Yeah, easy. You know, just of the prep, you know, because frankly, guys, we were trying to answer every potential question that could ever come out of anything you would ever ask. Well, we're not going to. And so let's get to the 80%. Let's get to the things that really matter. We know the general questions you guys are going to work on, and let's get answers to that with excellence. And I know that sounds like a goofy example, but the downstream work that gets caused by stuff like that, things like how we do capital, things like how we do budgets, those things matter. And so we have to change how those things happen. And let's remember, you know, four weeks ago, there were 2,600 people who you would define as working in the corporate center. That's what you would have defined as a corporate center. Today, it's 226, right? That doesn't mean all those people went away. That is not what happened, right? You saw the number of people that we announced that are leaving the organization. And again, we're doing everything to make sure that those folks land in a good place on their feet. But the reality is that we don't need 2,600 people in the center. We need 226 at the center because we get a zero up. And that's what we need to be excellent at the functions of running a public corporate company. Everybody else is in the business. So everybody else is now aligned with the boss. And the boss is the customer.

Thank you for that.

Awesome.

And I'll now turn the call back over to Andy Silvernell for any closing comments.

Well, I want to thank all of you for taking your time and spending time listening today to our journey. Again, just a tremendous amount of work that has gone in in the last six months. I'm incredibly proud of this team for all they've done. Also, let's remember that organizations are made of people. And, um, and the things that we're doing are tough. We are having to do the tough stuff. Um, so we can get to, um, the good stuff and, but those, that means that people are impacted and I'm, and I'm really mindful about that. And we are going to move with pace. We are going to move with excellence. We are going to do the right things. And even though it's difficult, we are doing the right things and we're doing the right things because the goal is to build a great organization that delivers for our customers. It delivers for our owners. And when that happens, we deliver for our people. And so as we move through this and turn this into something very special, we're going to do it through our people. And I'm proud to be part of this team. I'm proud of what we have here. And I feel great about the direction we're heading. So thank you very much.

Once again, we'd like to thank you for participating in International Paper's third quarter 2024 earnings call. You may now disconnect.