International Paper Company (NYSE:IP) Q3 2023 Earnings Call Transcript

International Paper Company (NYSE:IP) Q3 2023 Earnings Call Transcript October 26, 2023

International Paper Company beats earnings expectations. Reported EPS is $0.64, expectations were $0.58.

Operator: Good morning and thank you for standing by. Welcome to today’s International Paper’s Third Quarter 2023 Earnings Call. All lines have been placed on mute to prevent background noise. After the speakers’ remarks, you will have an opportunity to ask questions. [Operator Instructions] I’d now like to turn today’s conference over to Mark Nellessen, Vice President, Investor Relations.

Mark Nellessen: Thank you, Greg. Good morning, and thank you for joining International Paper’s third quarter 2023 earnings call. Our speakers this morning are Mark Sutton, Chairman and Chief Executive Officer; and Tim Nicholls, Senior Vice President and Chief Financial Officer. There is important information at the beginning of our presentation on Slide 2, including certain legal disclaimers. For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties. 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. I will now turn the call over to Mark Sutton.

Mark Sutton: Thank you Mark and good morning, everyone. We will begin our discussion on slide 3 where I will highlight our results. In the third quarter, our teams across International Paper executed well with intense focus on optimizing our cost structure while taking care of our customers. Looking at our performance, we delivered on the earnings outlook we provided last quarter and we continued our efforts to drive out the highest marginal cost across our system. In addition, International Paper for delivered $75 million of year-over-year incremental earnings benefits from our building a better IP initiative. Year-to-date this program has contributed $195 million in benefits, exceeding our full year target for the second year in a row.

Our performance was driven by commercial and process improvement initiatives which I will highlight later during the call. We’re also encouraged to see that the demand environment continued to recover across our portfolio in the third quarter and we expect this trend to continue going forward. Despite these improvements, I’m not satisfied with our absolute level of earnings. Therefore, we are taking additional actions to further strengthen our businesses and improve profitability. I will share more details regarding these initiatives later in the presentation. However, before we move off this topic, I’d like to share my perspective on the series of strategic actions we announced last week to optimize our mill system and reduce fixed costs. These actions include the permanent closure of our container board mill in Orange, Texas and two pulp machines, including one at our Riegelwood, North Carolina Mill and the other at our Pensacola, Florida Mill.

While these actions will help us achieve our objectives, they are incredibly difficult to make because of the impact on our team members, their families and the surrounding communities. We are truly grateful to our team members at Orange, Riegelwood and Pensacola for their contributions to IP over the years and we are committed to supporting them through this transition while continuing to serve our customers. I’d also like to update you on another strategic action completed in the quarter. We completed our sale, the sale of our ownership interest in the Ilim Joint Venture in Russia. Proceeds from the sale total $508 million as expected. With the completion of this sale, International Paper no longer has any investment in Russia. I will now turn it over to Tim who will provide more details about our third quarter performance and our outlook.

Tim?

Tim Nicholls : Thank you, Mark. Turning to our third quarter key financials on slide 4, operating earnings per share increased sequentially and came in better than the outlook we provided last quarter. We continue to optimize our system through commercial and operational initiatives and we also benefited from lower employee benefit cost and on lower effective tax rate. Operating margins continue to be under pressure from macroeconomic headwinds, impacting sales price and volumes. However, margins improve quarter-over-quarter driven by more favorable operating costs and lower outage expense. Moving to the third quarter sequential earnings bridge on slide 5, third quarter operating earnings per share was $0.64 as compared to $0.59 in the second quarter.

Price and mix were lower by $0.35 per share are primarily due to index movements across our portfolio and lower export sales prices. Volume was relatively stable overall as higher volumes across our container board export channel and global sales fibers business offset one less shipping day in our North American packaging business. Operations and cost improved earnings by $139 million or $0.30 per share. During the quarter, our mill system did very well and our teams across the businesses continued their focus on reducing marginal cost and spending. We’re accomplishing this by optimizing mix and usage of fiber and energy, reducing labor cost and overtime, shifting to lower cost suppliers and driving lower distribution costs. During the third quarter, we also had lower employee benefit costs totaling about $80 million or $0.18 per share, which was in our outlook provided last quarter and will not repeat in the fourth quarter.

The balance is primarily due to lower unabsorbed fixed costs related to last economic downtime across our portfolio as demand improved. Maintenance outages were lower by $36 million or $0.08 per share in the third quarter. Input costs were modestly higher as increased costs for energy and OCC were partially offset by lower costs for chemicals and wood, and corporate items benefited from a lower effective tax rate in the third quarter. Turning to the segments and starting with Industrial Packaging on slide 6, price and mix was lower due to index movements, lower export prices, and higher export mix as demand improved. This was partially offset by benefits from commercial initiatives focused on margin improvement. Volume was stable overall despite one less shipping day in box.

Container board shipments were higher across our export channels due to improved demand, and our daily US box shipments were stable slightly higher sequentially. Demand for packaging was also impacted by customer inventory destocking. However, based on customer feedback, we believe this is generally completed at the end of the third quarter. Operations and cost improved earnings by $103 million. This includes the benefit of $68 million from the non-repeat items I mentioned earlier. In addition, Ops and costs also benefited from lower economic downtime in the quarter as demand improved. Our mill system continued to run very reliably. And our teams across the businesses remain focused on reducing the highest marginal cost and spending while further optimizing our entire supply chain to align with the customer demand environment.

For example, by optimizing fiber, energy mix, and raw materials, we’ve reduced the cost of economic downtime by approximately $20 million on an annualized basis. We also have significant efforts underway to improve distribution costs, including initiatives to minimize high cost freight carriers, improve contract rates and load efficiencies, and shed warehouse and demerged expenses. These efforts have lowered our supply chain costs by approximately $40 million on an annualized basis. And there’s more opportunities in this area as we go forward. Planned maintenance outages were lower by $34 million sequentially due to a seasonally lower outage schedule and our efforts to further reduce outage spending in the current demand environment. Input costs were moderately higher, primarily due to the higher cost for energy and OCC, partly offset by lower costs for chemicals.

Turning to the Global Cellulose Fibers on slide 7 and looking at our third quarter performance price and mix was lower due to price index movements, partially offset by the benefits from higher fluff mix. Volume was higher in the third quarter as demand for fluff improved. This was partially offset by lower sales of commodity grades as we continued to focus on strategically aligning our business with the most attractive customers and segments. The destocking trend continued in the third quarter as improvement across supply chains allowed customers to manage more lean inventory levels. Based on feedback from our customers and from order bookings, we believe de-stocking was largely completed in the third quarter. We also believe fluff demand will continue to grow over time because of the essential role that absorbent personal care products play in meeting consumer needs.

Operations and cost improved earnings by $36 million. This includes benefit of $12 million from the non-repeat items I mentioned earlier. Ops and costs also benefited from strong operational performance, lower supply chain costs, lower spending, and higher energy sales as our teams remained focused on optimizing the entire value chain. Planned maintenance outages were relatively flat sequentially and input costs were lower by $5 million primarily due to lower wood and chemical costs. Turning to slide 8 and our fourth quarter outlook. I’ll start with Industrial Packaging. We expect price and mix to decrease earnings by $60 million as a result of prior index movement in North America and lower average export prices based on declines to date. Volume is expected to increase earnings by $20 million due to sequentially higher box volumes despite one less shipping day and an increase in container board export shipments.

Operations and costs are expected to decrease earnings by $10 million. This is due to the non-repeat of favorable employee benefit costs I mentioned earlier, partially offset by lower unobserved fix related to higher volumes and benefits from our ongoing cost management initiatives. Lower maintenance outage expense is expected to increase earnings by $21 million. And lastly, rising input costs are expected to decrease earnings by $10 million, driven by higher OCC costs, partially offset by lower costs for energy, wood and other raw materials. Turning to Global Cellulose Fibers, we expect price and mix to decrease earnings by $25 million as a result of prior index movements. Overall volume is expected to increase earnings by $5 million. We expect higher fluff volumes due to improving demand, offset by lower shipments of commodity grades as we execute our mix optimization strategy.

Operations and costs are expected to decrease earnings by $35 million relative to the third quarter. Approximately half of this is due to the non-repeat of favorable employee benefit costs I discussed earlier; the remainder due to higher planned maintenance outage costs in the fourth quarter. Higher maintenance outage expense is expected to decrease earnings by $28 million. Lastly, lower input costs are expected to increase earnings by $5 million. And with that, I’ll turn it back over to Mark.

Mark Sutton: Thank you, Tim. I’ll start on slide 9, as I mentioned at the beginning of the call, we are making solid progress with our Building a Better IP program, which has delivered a total benefit of $195 million a year-to-date, exceeding our original target for the second year in a row. This year, most of the benefits are coming from our strategy acceleration initiatives. Our business teams are focused on creating value for our customers while improving the profitability of our product and service offerings again paid for what value we provide to our customers, and by also growing in the most attractive segments with the most attractive customers and in the most attractive geographic regions. We have also seen meaningful benefits from our process optimization initiatives.

By leveraging advanced technologies and big data across our large system, our teams are identifying new ways to improve productivity and lower costs. I’m excited about our progress and in the next couple of slides I’ll share some examples of the actions our business teams are taking to drive profitable growth. So turning to slide 10, I’ll start with Industrial Packaging. Beginning with commercial excellence. International Paper has a broad range of capabilities and segment tailored packaging solutions to serve our customers. Our commercial teams are leveraging these advantages to improve mix by strategically aligning with the most attractive regions, segments and customers. Our teams are also using more advanced data analytics to manage product pricing across our sales territories.

This allows them to capture more value for customer tailored product and service offerings. Under operational excellence we are leveraging advanced technology and data analytics to improve efficiencies and lower costs across our large system of mills and box plants. We are seeing benefits in areas such as maintenance and reliability, raw material consumption, distribution and logistics and sourcing. And as I mentioned earlier, we’re also taking actions to optimize our bill system and reduce fixed costs. The mill closures will improve annual EBITDA for industrial packaging by about $140 million. Turning to slide 11, I’ll highlight some of the things we’re doing in the area of investment excellence. Due to the attractive long-term fundamentals of our industrial packaging business, we believe we have investment opportunities to drive profitable growth and create significant value.

Strategic capital investments in our mill system have targeted productivity improvements and product capability enhancements that align with customer needs and market trends. Added capabilities for lightweight and ultra lightweight liners and high quality version whitetop products are examples of these investments. More recently our strategic investments are focused on our box business. These investments allow us to grow with customers and increase profitability by strengthening our capabilities, improving productivity, and leveraging automation. We believe we can create the most value through organic investments across our large network of box plants. Examples of this include adding converting lines in existing plants and upgrading older equipment with newer and more advanced technology.

For some context, the investments we have made over the past two years in existing plants is the equivalent of adding almost three average size box plants to our system. We will supplement this strategy with additional investments in greenfield box plants and occasionally with bolt-on M&A where we can create additional value by addressing regional needs and enhancing our business. I’d also like to recognize that in September we celebrate the grand opening of our new greenfield box plant in Atglen, Pennsylvania, which has a great team and world class capabilities. Our investment will allow us to optimize our network of plants in the northeast while providing additional capacity for future growth. In summary, we have significant opportunity to leverage these new investments as well as our market expertise to grow with customers, improve our mix, and capture additional value.

Turning to slide 12, I’ll share some key opportunities in our Global Cellulose Fibers business. Over the past year, we have captured meaningful benefits from commercial actions which contributed to our Building a Better IP results. Our commercial teams renegotiated large contracts to ensure we get paid for value that we provide. In addition, we have earned a higher premium for fluff grades relative to commodity pulps by capturing more value and aligning with those customer segments and regions who value our differentiated product and service offerings. However, the benefits of our commercial strategy are currently being masked by a very challenging and unprecedented business cycle, as well as our exposure to commodity grades. On a positive note, the market environment began recovering in the third quarter as demand for fluff pulp improved, and we expect this trend to continue in the fourth quarter.

Going forward, we believe there are more strategic levers to pull to increase the earnings potential of this business. Through our go-to-market strategy, we have an opportunity to improve our mix by reducing our exposure to commodity grades and by serving the most attractive fluff customers and markets that allow us to maximize the value of this business. Aligning with this strategy, we are taking actions to right-size our footprint and reduce fixed costs across the system. As I mentioned at the beginning of the call, we announced the closure of two pulp machines, which will improve EBITDA for the global cellulose fibers business by approximately $90 million. I believe there is a good business within this business. And that we can continue to grow earnings and cash flows over the cycle.

We have talented teams with significant market expertise and a mill system with a broad set of capabilities. This allows us to create value for our customers by delivering innovation and products that meet their stringent performance and product safety standards. Now I’ll turn to slide 13. We continue to see demand recovery across the markets we serve and we strongly believe in the attractive long-term fundamentals of our businesses. At International Paper, we are taking actions to improve earnings and drive profitable growth. Given our strategic customer relationships, talented teams, world-class assets, market expertise and strong financial foundation, I’m confident in our value-creating opportunities and IP’s continued success. And with that we’re happy to take questions.

And similar to last quarter, our senior business leaders are joining Tim and I to provide their perspectives as well. So operator, we’re ready to move to the Q &A section of the call.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Gabe Hajde from Wells Fargo.

Gabe Hajde: Mark, Tim, good morning. Thank you for all the detail. Wanted to ask a little bit about the Orange closure and I guess as we look into 2024, I guess the first one would be as the market begins to recover, would you expect than and even with this closure to kind of grow with the market and again taking into account a lot of your own commercial initiatives or is that something that might be on a little bit of a delayed timetable?

Mark Sutton : Gabe, I’ll ask Jay Royalty to comment, but at a high level, looking at all the variables around demand and our recent capacity investments that I think I mentioned in my prepared remarks, we feel good about being able to make this change and continue to grow with the market. I mean, essentially, with this level of downturn, there’s been somewhat of a reset and I think the market demand signal will engage again and we have options for future container board investments. So, Jay, I don’t know if you want to add any commentary on how we’re thinking about the near term ability to grow.

Jay Royalty: Sure. Good morning, Gabe. Thanks, Mark. First of all, our long-term view of demand has not changed. So this was more about kind of how we see the near term and options we have. If you think about where we are, we’ve been matching our supply to our customer’s demand and running the system as effectively as we can for quite a while now. And all along that way, we’ve been evaluating our options and trying to develop an informed point of view on a couple of things. One is demand and the shape of the recovery. And secondly would be where do we think the market is headed and what capabilities do we need for the future? And both of those factors influenced our decision to reset the mill system, as Mark said. We have a large low-cost fleet with tremendous flexibility and capability.

And so when you think about that, we’re able to close Orange without compromising our ability to serve customers and we have what we need for the short term and midterm. When you think about the amount of EDT we were taking and even with this closure, we still have room to grow. And then when we think about the future, we do have options to grow in the right product ranges at the right time. And as you heard, this move in the near term allows us to run the system in a more optimized way. And all in lowers our cost structure by about $140 million.

Gabe Hajde: Okay. And then maybe one on the capital side. I’m assuming as you guys went through this exercise, it was just as much about maybe variable production costs as perhaps investments. But again, kind of peeking around the corner to ’24, this year, you’re projecting to spend a little bit above D&A. Is that something that you envision over the next, at least maybe again ‘24 or ‘25, if you’re willing to comment, given maybe throttling back a little bit during the pandemic?

Tim Nicholls: Yes, Hey, Gabe. Yes. Good morning, Gabe. It’s Tim. So I think as you said, right around D&A and on a normalized basis, I think that’s where we are for the foreseeable future. Some years higher, some years lower. We haven’t finished our planning work for next year yet to have a specific thought about what the level will be there. So we’ll complete that over the next month or so. And then in January, when we release, we’ll have more to say about 2024 and how we’re thinking about capital at that point.

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

Anthony Pettinari: Good morning. I was just wondering if you had a sort of updated view on the full year adjusted EBITDA, CapEx and free cash flow guide. You provided that, I think in previous slides, if there’s updated view for ‘23.