Q3 2019 Earnings Call
Good morning, and thank you for standing by welcome to todays International paper third quarter 2019 earnings conference call a lines have been placed on mute to prevent any background noise. After the speaker's remarks, you will.
Last question to ask a question Press Star then one on your telephone keypad to withdraw question press the pound Keith I'd now like to turn todays conference over to Gamma Gutierrez Vice President Investor Relations. Please go ahead.
Thank you Holly good morning, Thank you for joining international paper's third quarter 2019 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 was important information at the beginning of our presentation on slide two including certain legal disclaimers. For example, during this call. We will make forward looking statements that are subject to risks and uncertainties.
We will also present certain non U.S. GAAP financial information.
A reconciliation of those figures to U.S. GAAP financial measures is available on our website.
Our website also contains copies of our third quarter 2019 earnings press release and today's presentation slides.
Relative to the Olin JV and graphic packaging enforcement slide two also provides context around those financial information and statistical measures presented on the alternatives I will now turn the call over to Mark Sullivan.
Yeah, well good morning, everyone. We will begin our discussion on slide three.
National paper continues to deliver solid earnings and outstanding free cash flow.
Results again demonstrate the strength and resilience, our cash generation and the flexibility of our company to navigate well in a challenging environment.
Demand in the quarter was mixed North America packaging improved seasonally largely as we had expected however, export containerboard in pulp shipments face pressure from continued supply demand imbalance.
Operational performance was strong we took full advantage of our manufacturing and supply chain expertise and managed cost well in our three businesses.
Taking a look at our cash through the first three quarters, we generated $1.8 billion in free cash flow and returned nearly $1.1 billion to shareholders through dividends and share repurchases.
And we also used $400 million for debt repayment.
Earlier this month, we increased our dividend for a 10th consecutive year reinforcing our policy of a strong and sustainable payout of 40% to 50% of free cash flow, which is an important part of our capital allocation strategy.
And a brief update on our portfolio yesterday, we announced the completion of the sale of our controlling interest in the papers business in India. We're now passive investors with minority ownership of the company, which we intend to fully exit I want to think our team in India for their dedication and wish him well in the future.
Continuing on with our third quarter performance on slide four we leverage the flexibility of our system operated well and controlled cost to deliver $1 billion of EBITDA and margins of 18% in the third quarter.
Revenue was down 6% year over year due to the impact of lower pricing in our packaging and pulp businesses, especially in our export channels.
Our equity earnings were $27 million, which includes $18 million from our Ilim joint venture and about $10 million from graphic packaging.
He'll I'm equity earnings were largely as expected and the reflect and they and they reflect the impact of lower softwood pulp prices into China.
Free cash flow in the quarter was very strong at nearly $600 million.
During the third quarter, we have generated free cash flow per share a $4.43 compared to just under $4 per share for the full year in 2018.
Now I'll turn it over to Tim who will cover our business performance and our fourth quarter outlook, Tim Great. Thank you Mark Good morning, everyone I'm on slide five which shows our quarter over quarter operating earnings per share bridge.
Price mix was a headwind mostly due to the impact of prior index movements in North American packaging and global cellulose fibers.
As well as the flow through of lower prices for export containerboard.
Oh, you improve modestly in the third quarter, driven by higher seasonal demand in north American packaging as well as improved containerboard exports.
This was partially offset by lower seasonal demand in our European packaging business.
Operations and cost performance was strong we continue to operate optimize our mill and converting that works as we match our production to our customers needs.
We did experience $10 million of additional costs in the quarter related to hurricane Dorian, mostly in our cellulose fibers business.
Maintenance outage costs were favorable and input costs were better due to lower fiber costs across our businesses and geographies.
Corporate expenses and taxes were higher in the third quarter with an effective tax rate of 27%.
Compared to 25 person in the previous quarter. Most of this was related to adjustments to federal tax provision after finalizing our 2018 tax return.
I'll now turn to the segments and start with industrial packaging on on slide six.
Our business performed well in the North American business earned $525 million with margins of nearly 23%.
Across the segment price and mix was unfavorable mostly on the impact of prior index movements in North America, and realization of lower export containerboard pricing.
Almost flat.
Improve volume in North American packaging is containerboard export.
It was offset by seasonally slower demand in Europe , as well as weaker demand in our packaging business in Turkey.
In North America box demand improved seasonally.
We had strong double digit year on year growth in E Commerce and the protein segment continues to perform well.
Processed food improved modestly, but beverage nondurables and durables remain weak.
In October we've seen a slight pickup in demand overall, we're confident or commercial outlook in the trajectory of our growth as we move into the coming here.
The segments, we serve or customer portfolio and recent business wins add to our confidence.
Containerboard export shipments.
Also improved in the third quarter, although a bit less than we expected underlying demand was actually pretty good but customer inventories took longer to drawdown.
Operational performance was strong we leveraged the flexibility of our system and control cost effectively to mitigate the impact of economic downtime in the quarter as we adjusted production to meet our customers' needs and finally would and recovered fiber costs were favorable versus the prior quarter.
Like the come back to containerboard exports for just a moment on slide seven and give you a regional view on how we see things shaping up.
Underlying demand has improved throughout the year generally as we expected while inventories took about a quarter longer to normalize than we anticipated and have pressured shipments through the first three quarters.
Summarizing the regional dynamics.
In Latin America, more favorable weather conditions are contributing to better crop harvest for bananas, and other agricultural products that require kraft liner to go to market.
In Europe customer inventories took essentially three quarters to normalize while demand improved modestly.
Shifting to Asia, and China demand remains sluggish as tariff uncertainties linger.
And then other reasons in Asia demand is mixed although customer inventories are back to normal levels.
Take away here is that we expect export containerboard shipments to continue to recover and we're seeing this in October .
Turning to global cellulose fibers on slide eight third quarter results were impacted by lower prices across all regions.
Which was partially offset by better mix on improved fluff pulp shipments.
Im improved by $4 million also driven by improved fluff pulp shipments in the quarter.
Supply demand conditions remain challenging and although we see better customer demand overall industry inventory levels remain high.
And trade and tariff uncertainties continue to weigh on China demand.
Against this backdrop, we continue to focus on optimizing our system and controlling cost we ran well and successfully mitigated some of the impact of hurricane Dorian in the quarter.
Operations in cost also includes the impact of economic downtime as we adjusted production to meet our customers demand.
Input costs improved by $6 million.
Printing papers on slide nine overall, the business performed well and delivered earnings of 162 million in the quarter.
Across the segment price and mix decrease mostly due to lower pricing for exports from our Latin American and European papers businesses.
Volume was essentially flat the seasonal demand pick up in Latin America was a bit less than we anticipated and lower volume in India fully offset increases in other regions.
And our North American business, we had strong performance and cut size as we continue to ramp up new customer business.
However performance in the roll business was weak due to challenging conditions and commercial printing.
In Latin America supply demand conditions are challenging as we enter the fourth quarter due to pressure from imports, especially from Asia.
In North America underlying demand is decreasing well within our expected range of 3% to 4% annually, while the level of imports decreased in the quarter.
Operational performance was very strong, we ran well and control cost across the system.
In North America, we also benefited from a favorable LIFO inventory revaluation of about $10 million.
And then but cost improved on lower hardwood cost in North America.
On slide 10, the Ilim joint venture delivered operating EBITDA of 113 million and an EBITDA margin of 24% before foreign currency charges.
Earnings were impacted by lower export pulp prices as well as the completion of the highest maintenance outage quarter of the year, which also affected volume in the quarter.
Equity earnings were $18 million and were impacted by a noncash foreign exchange charge on all the U.S. dollar denominated net debt.
Of which I piece portion was $4 million in the quarter.
So, let's turn to the outlook on slide 11.
I'll start with industrial packaging, where we expect price and mix.
The lower earnings by $45 million on the impact of prior.
Index movement in North America, and export price flow through as well as the negative mix impact of export volume recovery.
Volume is expected to improve by $25 million on improved demand in North America and continued export containerboard recovery.
Operations and costs are expected to lower earnings by $15 million.
Due mostly to non repeats of positive items in the third quarter.
Staying with industrial packaging lower maintenance outage expense is expected to improve earnings by about $45 million and input costs are expected to remain stable.
In global cellulose fibers, we expect price and mix to lower earnings by $30 million on the impact of prior index movement.
Overall volume is expected to be stable with higher fluff volume offset by lower market pulp.
Operations and costs are expected to be flat sequentially.
With the Nonrepeat of the hurricane impact being offset by higher seasonal energy cost inputs are expected to remain stable.
Moving to printing papers.
We expect price and mix the lower earnings by $25 million, mostly in our North American and Latin American businesses.
Volume is expected to improve by $20 million on stronger seasonal demand in North America and Brazil.
Operations and cost are expected to lower earnings by $40 million related to the higher seasonal energy consumption across our papers portfolio.
As well as the non repeat of life of benefits in the third quarter.
And input costs are expected to improved by $10 billion on lower fiber costs in North America and Brazil.
Lastly, under equity earnings you will see the outlook for the Ilim joint venture.
Slide 12 summarizes our full year outlook as we continue to perform well and an uneven global environment.
Our focus is on free cash flow generation.
And executing our framework for capital allocation.
For the full year, we expect EBITDA of 3.8 billion and we expect free cash flow to be 2 billion.
On capital allocation through the third quarter review, we've returned about 1.1 billion to shareowners through dividends and share repurchases.
And Weve used another 400 million to strengthen our balance sheet.
And earlier this month, we also increased our dividend.
Looking ahead, you can expect our capital allocation choices to be consistent with our framework with that I'll turn it back over to Mark.
Thanks, Tim for covering the details on the quarter and for the outlook.
As I always do at the end of our call I'd like to just close with a few thoughts about the company in the quarter.
Our solid earnings and outstanding free cash flow in the third quarter I think again demonstrate that we built a really resilient company that can perform well and just about any environment and while the U.S. economy remains healthy we've been managing through some inventory headwinds and broader trade tension that are impacting our exports that said our focus at international paper.
<unk> is to execute well and maximize results in any environment for us that means being relentless about our pursuit of long term value creation for our shareowners by focusing on free cash.
Free cash generation and executing our capital allocation strategy with that free cash flow.
And for our businesses that means managing well, what we can control.
Exceeding our customers' expectations and strengthening our value propositions, making sure we optimize the full value chain and running our manufacturing network, well and leveraging the strength and flexibility of our mail and converting systems. When we put all of this together, we performed well in generate very strong free cash flow.
Our free cash flow per share is up year over year, our strong execution in the company's levers allow us to raise our full year 2019 free cash flow out look to $2 billion.
We have unique capabilities to thrive to just about any challenge we may face. Most importantly, we have the people the innovation the products at a low cost high quality system to succeed with fantastic customers and with that we're ready to take your questions.
Ladies and gentlemen at this time, we'd like to remind you if he would like to ask a question. Please press Star then one on your telephone keypad again that star one to ask a question.
Drop question.
Keith.
To remind you.
Ask one question and one follow up question order to allow all callers to post our question.
Our first question will come from the line of Mark will.
Capital markets.
Thanks, Good morning, Mark morning, Tim.
Good morning.
Mark just kind of staying on the free cash flow theme I wondered if you are in a position they give us any thoughts on sort of capex as we move in that kind of 2020 and and kind of wrapped up with that what you think the proper kind of maintenance Capex is.
Across the cycle I think you're at about 780 of maintenance capital for this year.
Hey, Mark as Tim.
Good question, we're still.
We're getting close where we're still finalizing what 2020 is going to look like and we'll report that out when we released fourth quarter earnings.
A question on maintenance capital there you know there's depending on schedules. These are big pieces of equipment that have different timelines and so we're always looking to make sure that we are being balanced by what an asset needs, but also recognizing that there is flexibility and timing.
And we're always looking at how we can do it for less money in terms of outage schedules.
How we use contractors, how we use our own labor.
So it will it can go up and down but there is some flexibility there that we can we can realize overtime. So I would just add to what Tim said Mark the one of the objectives, we shoot for on the whole maintenance subject and we look at that as protecting today's cash flows and making them sustainable.
Theres the Capex piece, but there's also the expense piece and what we try to do is make sure we use our resources effectively so we lower the total cost of maintenance because it's all cash and we try to lower the total costs up a capex solution can solve a recurring maintenance expense issue, it's probably the right thing to do to go hadn't.
Lemonade that issue. So we really do look at it holistically.
Okay, and then just as a follow on Mark.
I would call out in overhead reduction of about $20 million and I don't recall, having heard about that initiative before so perhaps you could give us a little color on that and what the trajectory might look going forward.
It's Tim again, Mark I'd, just say, it's it's kind of normal practice, we had some.
Charges last year due to restructuring we're always looking at how we deploy across the organization for for what we need to run the business and tried to get better and do it at a lower cost with better processes. So.
There is initiatives underway, we don't we don't promote them, we don't talk about them broadly, but we're it's just continuous improvement and trying to make sure that we don't spend any money that we don't need to so that that's really the charge in the third quarter and and the charges the third quarter, because we know.
Where there's going to be impact the the savings from that George will play out over a series of quarters as we implement.
Okay very good I'll turn it over.
Thank you. Our next question will come from the line of Mark Connelly Stephens incorporated.
Your your price cost performance in containerboard was excellent again, despite all the downtime.
Is there any reason you would change the way you you manage that that downtime. If we have to continue at these sorts of levels I'm. Just wondering if there are things that you do that that work in the short run, but that you don't want to do longer term.
To keep those that level of performance so high.
That's a great question Mark I think the way we try to look at it on the output of our system, especially containerboard given it's a large as we look at things that are structural versus cyclical and obviously if you thought there were structural changes in the amount of containerboard, we needed to supply all of our box customers and open more.
Okay customers that you'd probably do some things differently, but right now we believe we built the system through the last few years by integrating Weyerhaeuser and integrating temple and then Ben Kinda normalizing our capability at the mills and taking a real real focus view on marginal cost that we have.
The lack of a better term we have a throttle.
On the company, we can run wide open we can lessen wide open and we can shed certain types of cost and variabilize a lot of things that used to look fixed so for us. It's what do we believe about the near term and long term growth and the fundamentals in the industry and right now we see what's happening right now is mostly cyclical not structural.
Okay.
Form is real there has really been excellent and that throttling effect is clearly you know massively different than what you've been able to do historically.
My second question is simple one.
You're doing pretty well with the challenges in the pulp market are you seeing any difference in the way customers are thinking about contract terms in terms of pass throughs or anything else.
I think theres always some discussion on how the commercial arrangements are constructed.
When you're in a moment of excess pulp supply sometimes customers do want to revisit the way contracts are are structured usually the conversation goes to or normalized period, and not just a cyclical high or low so theres always discussion on that mark and I'll be I'll I'm able to say one thing what we're seeing in the targeted mark.
As we have which is the absorbent products. It really is becoming very customer specific and what type of economics. They are looking for based on their go to market strategy for the baby diapers and the other products and they're not all the same and years ago I used to see much more of a similar approach our desire by most customers, but we're seeing it.
Segment into unique commercial.
Types of conditions.
That's great. Thank you very much.
Our next question from the line of George Staphos Bank of America.
Hi, everyone. Good morning, Thanks for all the details.
Hey, Mark I thought I heard you mentioned during your prepared remarks that there were some recent win I think you mentioned related to the containerboard business. If you could comment a bit more in detail. If there was something of stuff that we should keep in mind, there and related Lee I think you said your businesses.
Modestly in October , but if you could provide a bit more color about what you're saying and containerboard, especially domestically and then I had a follow on.
Yes.
George assumed it was actually speaking to our box business, where we're constantly working with customers about innovative solutions that how we address their needs and you know there's a cadence to these things they don't neatly follow quarters, even multiple quarters, sometimes but we've been very active this year.
On with our commercial team talking with customers in some cases existing in some cases, new and a number of wins that we've had for the box business that will start coming through over the next few quarters. So that was the that was what I was relating to in the prepared comments, we feel really good about the teams wins so far.
Okay and.
Just through later point how are you doing in July did you say July in October .
In July I can tell you about that.
[laughter] how does this on go.
October was a little bit better. We you know we don't have a clear view on shipments we have a clear view on what we're processing through our facilities and so when we close the month, we'll see how much of that flow directly to customers versus preparing inventories for seasonal demand, especially around e-commerce , but yeah, we saw a slight.
Uptick in.
Demand for October and and feel good about it we think it's going to be a good season for for the fourth quarter, Okay and the related question I'll turn it over the the wins that you're seeing is or any kind of.
Common denominator in terms of what IP is offering that might be somewhat different than what's being off in the market. We tend not to hear some much from IP on how your marrying systems and machinery with your corrugated business is there any benefit that you're getting there. If you just give us a bit more color in terms of why you're winning this business recognizing it doesnt always come in Smes.
Thirdly, and how sustainable that is going forward. Thank you guys.
Yeah. Thank you George.
We do because of our size and where we service customers. We do some of everything and we do most of them in a very big way. So, yes machinery and yes, all types of innovative solutions innovative solutions are really important customer by customer for what they need not for creating something you try to go sell or.
Across the entire space.
I would just to add.
On that George the they approach, we're taking with a large segments that tend to be the faster growing segments like ecommerce like protein some of the things that IP has built over time, our scale and our reliability as a supplier and bringing some innovation on top of that has allowed us to grow our positioning with customers that we already.
We have a very large position with and we try to earn that every single day every interaction and I would give a lot of credit maybe it's not differentiated I can't speak for other companies I would give a lot of credit to our to the IP people that serve these customers. We had employees that are embedded with some of our customers, helping them solve problems, helping them run Pat.
Packaging at faster rates, and I think that that really works well for us when we bring the full.
Skills of IP to our customers when I made my prepared remarks, I said something about.
Leveraging and optimize the entire value chain and this is what we mean by by doing that it's not just the product, but it's how we provide the service and how we get even some of our human resources to our customers. Our manufacturing team for example, even go out and help customers in their manufacturing operation if it.
It's applicable.
Very good hey, very solid quarter. Thank you very much.
Our next question.
Steve Chercover.
David.
Thanks, and good morning.
I wanted to actually focus on the special cellulose business. So first of all can you just remind us what you thought the mid cycle earnings or EBITDA potential of the segment was post weyerhaeuser.
So I think what we said on our.
Two quarters ago that we believe that that that business had a 600 million dollar EBITDA potential and we still believe that we're in a period right now of some disturbances in the softwood pulp market and absorbent pulps not immune to that it affects both the pricing it also affects demand.
So we believe that that's still an achievable objective.
We remind you, though Steve one other things we stated as a strategy is to have our business at about 85% of our capacity.
Focused on absorb and pulp so fluff pulp and the specialty grades that are kind of above fluff pulp and the product continuum. We're only at about 74% right now so we're making some products market Paul products and other products that are not long term products for us given the north American fiber and cost structure and the only place we were.
We plan to make non absorb and pulp is in our mill in Canada, which makes a high quality northern softwood. So we've got.
A pretty clear strategic path, we've lost a little bit of time, given this kind of soft what supply issue globally.
And the commercial things, we talked about from last year, but we are very convinced that this is going to give international paper.
The right growth profile, it's a great product line in the kinds of things that goes into and we believe we can get the business to that point, it's just going to take us a little bit of time.
Okay. Thanks for the detailed there and just unless something changes dramatically. It looks like we're going to start 2020.
From a pretty low point. So I'm wondering are there anything any plan do you have to do you know in place to improve results.
Are you still being impacted by the commercial FFO, Paul or whatever you want to call. It that impacted you earlier this year.
So that the.
The exit rate of the 2019, you're right, we will put us in a in a challenging position and yes, we have commercial initiatives.
The good news is we're beginning to see commercial wins in the targeted customers in grades we want to make which is the absorbent products and that'll start to come to fruition as we go into 2020, and then there's a lot of opportunity on the cost structure. We have essentially we have two businesses. We have the weyerhaeuser business, we acquired which is doing very.
Well it was built for purpose pulp mills and then we have the IP legacy part of that business, which was largely mills converted from other from other uses had not not yet optimized and there's still the ability to optimize several of those facilities and get our total costs down so combination of commercial success cost and then.
Operating in this environment of supply and demand where pricing returns to more normalized levels all of that should come to fruition. The question is just how long does it take on the market based stuff. The other things we control and we'll begin working on that.
As we go forward.
Okay. Thanks Hope deal count that as one pulp question I, just wanted to ask but the Italian anti trust.
Fine is this another situation, where you chose to settle as opposed to litigate and are there other folks who were also impacted thanks.
No it's Tim.
Steve.
We were assessed the fine we're appealing that decision.
Decision.
And so we're recognizing the charge in the moment, while we go through the appeal process.
Thank you very much.
And our next question will come from the line of gave holiday with Wells Fargo Securities.
Gave your line is open.
Right.
I'm going to go to the next question.
Next question is going to come from the line Anthony Pettinari City.
Hi, good morning.
What what are your competitors recently called out a capital investment to increase their own cc processing capacity and I'm wondering for your North American system or are there opportunities to shift from Virginia recycled given what looks like.
Potentially a structurally lower RCC price and then maybe if you can just remind us what your system mixes between Virgin and recycled.
So the candidates the system mix is roughly.
35% recycled fiber we have.
What we look at is the actual fiber cost.
Through the system to where you actually form the sheet of paper. So we call that fiber to the head box because there is other cost involved for example.
You want to make sure you maximize your energy production and the integrated mills, even if your blending and recycled fiber. So if you look at some of the investments we've made over the last few years, we've increased our capacity at our 100% recycled mills and we've increased our capacity at some of our Virgin mills that use a certain amount of recycled fiber. So we have the ability to do more.
Sure.
We but we look at more than just the cost of those cc. It really is the cost of the fiber to the forming part of the equipment that really matters. Because if you can we use morosi see in it causes you to generate less boiler feel to make your biomass energy you've not done anything on your cost. So that's how we look at it.
Okay. No. That's very helpful. And then maybe a related question pulp and paper, we recently introduced or recycled liner index.
Do you anticipate any commercial impact from this index and do you think the index makes sense I mean, it seems like craft liner has a pretty standard basis weight recycled liner seems like it has a lot of different basis, which that are used to maybe quality differences.
Just your thoughts on that.
Anthony is Tim.
Belief is the box markets pretty competitive and.
You know the market's pretty efficient and so knowledge. This theres not any new knowledge. This being created here is just being represented a different way.
So.
Can't speculate on what will happen, it's kind of hard to tell see how it plays out but.
In one sense, we don't see this as a significant change that's been put in the market.
Okay. That's helpful I'll turn it over.
Our next question will come from the line of Mark Weintraub Seaport Global.
Thank you I'm going to try and tiptoe into what's a complicated question. So I realize it may be hard to.
Really answer.
In this context, but you'd mentioned.
Your your view on footprint that you'd look to see whether they are structural changes in on the containerboard side.
<unk> two to guide.
You are actions, which makes perfect sense.
I guess one of things that's been very no suppose that the falloff in demand. This year has has really been more weighted to the export business and the domestic business. So it just kind of focusing on the export business.
How confident are you that that bounces back and I guess, the two things at the two variables at play, which maybe if I may be great to get your perspective on is one.
With you had the slide where you show China demand has been pretty weak, which you know given that they are importing so much less oh cc is been somewhat the bundling even recognizing that maybe their economy is slower.
And then that the second part.
Being you know there it's a reasonably large amount of capacity that's being started up outside of North America. How much of that is the issue opt for the export business first is what's obviously again been pin a weak macro situation overseas.
So you're right that's.
That's a complex question or set of questions Mark, but I think taking it up a level. The the view that we have on containerboard is informed by the view, we have on corrugated packaging growth globally and the role that what what we do export Kraft liner plays in that and.
We still see growth in boxes globally as a preferred method of packaging and we'll see where sustainability and all these discussions go but we think it bodes well for fiber based packaging, which then feeds into a kraft liner growth rate.
We used to thank you Ms. three 3.5% is probably somewhere in that neighborhood, but for right now we've seen a demand decline and we saw inventories built last year and when you put the two together we have a correction in the year of 2019, we haven't seen anything structurally that changes the ultimate driver of containerboard demand, which is box demand.
And the fact that Kraftliner plays a very important.
Technical role or reality role, which is it is the feedstock for the global recovered fiber market. So they really work together and we still believe and see.
The future is very bright in corrugated packaging, which informs our view of our containerboard.
Business.
Okay and just I.
It did I did you give a specific indication on the EPS expectation for this year I think I may have missed hurt but did you actually get the number there were did I Miss here.
Okay.
We did not okay I'm sorry that was thank you.
<unk>.
Our next question is going to come from the line of gave holiday with Wells Fargo Securities.
Thanks for taking the questions sorry about that gentlemen.
My question was on the the Riverdale conversion on Downing Selma and.
I was trying to maybe see if you could frame up for us.
The impact to first half of next year, if I recall back to Regal wouldn't 16.
I think it caught some of us by surprise the magnitude of.
Differential between taking the mill down and doing the work and then when it ramped back up I don't know if there's any contact you can give us around that.
No it will be a pretty.
Long outage, there's lot of work to be done when we take it down and start making the conversion.
I think it's premature to lay that out at this point.
We're finalizing what that all looks like next year I'm sure, we'll be able to give some general indications as we.
Report on fourth quarter, but.
You know at some point papers will the production of printing papers will will shut down on the machine and.
And then all of the preparations for you know we try to do as much work on ancillary equipment ahead of time. So that that work is done construction work, but then on the machine itself and and related parts of the back into the mill that work will began early in the first quarters, we've outlined and and.
And so we can give you more insight on that as we report fourth quarter.
Okay. Thank you Tim.
And one more I guess focusing on the conversion.
I have read some.
Pieces different places that.
The capacity conversion may be more net neutral to capacity, which would seemingly imply.
Shuttering somewhere else and I was curious.
You guys have taken a pretty decent amount of economic downtime. This year, how you're thinking about your network and your needs as you see commercial wins in the corrugated downstream business and what you.
Might need elsewhere in the organization.
Gave what you may be thinking about is how it relates to white top liner.
But not the system overall, so you know we run our system based on our customers' needs. So that's where we start from but.
This will be incremental available productive capacity, what it's actually going to free up is other facilities that are currently producing this product to produce other products one of which.
As a large position and gypsum facing board.
And we'll now be able to grow that position. So it won't all show up in containerboard necessarily but gypsum facing board or gypsum facing paper is something that we've been in that market for a long time, we have great customers. We think we provide a good product and good service and we really would like to.
Grow that position over time.
Thank you.
Our next question will come from the line of Adam Josephson Keybanc capital.
Markets and good morning, Thanks for taking my questions I appreciate I added.
Hey, Mark just one on your box demand in the quarter is call. It flat in the quarter. If memory serves on the last call you talked about your your thought that your customers had whittled down.
They're finished goods inventory is quite considerably and I think you expected somewhat of a pickup in the second half as a result of that.
So did you see that Im just trying to square that with a flattish demand and related Lee you talked about ecommerce continuing to grow at double digits and I'm also trying to square that with flattish demand in the quarter.
Yes, so Adam we did not see to your point, but did not see it to the extent that we thought we would we did see it in E. Commerce, we feel really good about e-commerce on the protein side, we saw good performance.
Processed food as I mentioned was slightly better, but there's not as much of a pickup as we thought it would be and then some of the other segments other nondurables.
Beverage and the like did not come through the way, we expected it to but.
We also had you know.
In terms of some of these consolidations plays that have happened across the industry. We've we've had some business lost due to those that happened in a moment in time and then the replacement volume for that comes through on a longer timeline, but that's what I was referring to these customer wins, we we feel good about the commercial activity in the quarter.
That will show up in the coming quarters.
I appreciate the time and just one also on E. Commerce I'm, just trying to connect the e-commerce growth with total market grow so back in 16 and 17, obviously, everyone was talking about E. Commerce. It was growing double digits box demand was up 2%, but it happened to coincide with the economy really picking up and now you're still talking about ecommerce growth.
Following a double digits, but your demand is flat. So I'm just trying to what do you think the relationship is between your ecommerce growth or the markets ecommerce growth and total box demand growth given that the relationship. This year seems to have de linked if you will.
Yeah, I think its appearing to be de linked only because we've had some of these losses that I talked about that kind of creates noise in the number I think you're going to see that reverse itself over.
The next couple of three quarters. So I don't think anything structurally has changed I think Adam we talked about the box demand kind of.
Trailing GDP by.
50, 70 basis points somewhere in that neighborhood total box demand you've got a couple of sub segments like ecommerce that are growing very very fast, but you've got pluses and minuses in some of the other segments. Some of these trade wars, if cramped some of the Exporters' from the U.S., there's always something going on but think about the third quarter GDP 1.9 box.
A man one five and so.
It's possible that ecommerce can be growing double digit what it is and box demand can be a shade below GDP. So I think the GDP number and then what drives the U.S. economy. The components of it are really what we need to look at in terms of trying to understand box demand and there are obvious and some periods, where there is three quarters in a role where try.
Next perfectly and then there is some noise in the system do you think about when this noise started it started to really show up around the time, we started talking about tariffs and trade and the number of those things. So I do think this notion of it being right below GDP is still still pretty solid.
Thanks, so much work.
Our next question will come from the line of Chip Dillon vertical research.
Hi, good morning, and thanks for all the details up you know I wanted to just pick up on the whole ecommerce piece again could you give us an idea of what proportion today. It makes up of your overall domestic us box demand and it sounds to me if it's up double digits that at least seems to be that it has either.
At worst is flattening would what you've seen in recent years or maybe achieved an accelerated a little bit from where it was at least earlier this year when when cyacq. Another concern seem to suggest that maybe the demand growth would would slow for it from E Commerce.
The chip, it's it's in the neighborhood between five and 10% of our demand and you're right things like Siac until you actually implement those there's a lot of different opinions on how it works, but again back to the fundamental roll corrugated can play in the supply chain most of those initiatives, we see as if we do our job right and innovate.
We see those is more net positives for corrugated box demand the negatives.
Okay and would you say, there's been any real change the growth rate.
As you look at where we are now versus last couple of years.
Not for me.
No not really is still holding up solid double digit.
Okay, and then just two quick ones as a follow up.
You had a caution with the whole China.
You know the export board side from from China that seem to be the one that had the most yellow I'll say on the chart and is that more from.
Knowledge that you think it's going to stay weak for an indefinite period or just the fact, the information from China just seems to be so murky you just can't tell and then another question is can you just update us on sort of the long term timing of some of the projects we've heard about 11.
In the next several years.
Yes, the so the view that we shared in the prepared marks up on on demand in inventory in the regions. That's our current view comes from a lot of sources. The other some reported numbers in places this what we see on the ground as we interact with customers for the most part.
And then on 11.
The project around containerboard has been approved it will start going forward.
But that's that's a couple of two and a half three years before anything starts flowing to market.
Got you. Thank you.
Our next question will come from the lineup Debbie Jones Deutsche Bank.
Hi, good morning.
Morning.
I was asking about the the volumes sequentially, so that 25 million of industrial packaging and typically in the past we've seen the seasonal moving down at least in the North American business. So I wanted to understand what your assumptions are for domestic box shipments in containerboard going into that and is being.
Fully offset any sequential weakness being upset export is that the way to think about it or have we reached a point.
Congress benefit is actually making for acute less seasonal intact.
I think on the box side, we're anticipating a strong season, we'll see how it plays out we expect ecommerce to be.
In a solid plays we are also starting to see export volume export demand pick up and so that is going to impact our fourth quarter.
In a positive way for volume that we did not have in the second third quarter I think Debbie on the E. Commerce question I think if you look back at the data over the last few years. The the past peak in the third quarter drop off in the fourth quarter has been evening out because e-commerce with their value propositions have.
Martin shipping times and people are still active in the fourth quarter and then it's even to some extent spilled into the first quarter with the whole return cycle. So theres just been an evening out of the demand less at the peak less of a drop off and that started if I remember right probably in 16, and then 17 it became more even and we're continuing to see that.
The other thing that may.
Beyond your memory Debbie is just the difference in days, especially last year from third to fourth we had two less days.
And the fourth quarter last year versus the third and we've got one less day. This year, so it's a little bit better in that regard.
Thanks, That's helpful. And then my second question, just focusing on paper I could you talk a little bit more about seasonal uptick in Latam paper that didnt really material.
Acting in the quarter, and then I wanted to understand a bit better.
Improvement in operations and costs sequentially, you mentioned that LIFO benefit.
My model situation I understand.
So that came from.
Easy on the LIFO, we had a benefit in the third quarter that we don't expect to repeat in the fourth and so that that was what that comment was about on the seasonal demand that didn't pick up there was some delays in government buying programs around certain segments of printing papers in Brazil that came through but came through late.
And the export business, especially around other parts of Latin America, where we surface Justin.
Musher from imports and people have plenty of inventory so is working off inventory position.
Okay. Thanks, I'll turn over.
Our next question will come from the line of Brian Maguire Goldman Sachs.
Morning market Tim.
Just wanted to come back to the really strong cost management in the quarter.
Yes, a lot of moving pieces, there, but I'm on slide 30, you talk about some of the input cost trends there.
And looks like.
Five or was it pretty meaningful one I guess I'm just trying to square the significant benefit you got from wood fiber on chart looks like Ballparking $20 million with the.
Yes, the average cost over to the right being up <unk> percent in the.
That you were pan just trying to.
Figure out how that could have been in maybe a little bit related to Anthony's question earlier, just theorizing, maybe if you shifted a little bit more.
The production over to recycle based from Virgin if it was that part of it or were there other factors in there.
Yes.
It's Tim so we've been battling would cost all year long if you remember.
A tremendous amount of rain and and wet weather, starting late fourth quarter last year and continuing into.
Well into the first quarter. This year. So it's just a matter of being able to access and have availability and then bias intelligently as we can to maintain the kind of inventory levels at the mills that we need for.
For wood fiber, it's starting to normalize we will probably be pretty close to a more normalized cost as we exit the year, but the would piece has been a challenge all year long for us.
Okay, so where average cost per cent or or where they actually down then versus twoq.
Hi square that.
Slightly down we've been managing a down all year along.
So we were really high as we exited last year and and it's been hardwood and softwood hardwood spin. The one that's been a little bit harder to bring down softwood. We've we've had a greater degree of success faster so.
Okay great.
So from my follow up sort of ask on some of the new box business you called out that will kick in and that a couple of course I Wonder if you could comment on the mix impacted that might have on pricing or margins. Just how would you describe the richness of that business versus the current portfolio or the legacy portfolio.
I.
Could you restate the question I'm, sorry, we didn't hear the first part yeah, just asking about the some of the new box business that you called out kicking in in the next couple of quarters, just interested to hear what the mix impact of that would be on pricing or margins. Just how would you kind of compare that to the existing portfolio.
I've customers I think I think is probably pretty flat we're out there winning business on capability, what we do for our customers how we serviced them the innovation, we bring in the quality so.
It's it's a pretty mixed neutral type of.
Equation.
Okay. Thanks very much.
And our final question today will come from the line of Dr., Mark Willy BMO capital markets.
Thanks, Tim I got a couple a box questions to kind of finish up on.
One is we had to Chicago PMI out this morning, which was down more than five points just month to month can you help us think about how you think about the relationship between indicators like that and your box business and then I've got one other question on boxes sure. Yeah. I mean, there's definitely related I didn't see the numbers haven't caught up.
Good.
Whether it's in the moment or there are some time time lag.
Sorry to say I mean manufacturing activity is what drives box demand. So there's got to be relationship. There I don't know if that's a moment in time and then a reversion, but as I said our volume we saw a pickup in October and we're still anticipating a pretty strong fourth quarter. So we'll see how plays out I think the important thing mark on things.
Like purchasing managers index is and those things is given enough time I mean, we've got a lot of disruption in the supply chain from for manufacturing in the U.S. a lot of it related to simply to the GM auto strike and so you got to let that data play out, but it isn't input to its an input among many several to our until our demand model.
Okay and the other one I wondered about is just how you think about the impact of.
New converting capacity because it seems like there's a lot of new converting capacity coming into the market just to name a few you've got the Smith and bio Palbo building these mega plants in Indiana.
That's building a bringing a lot of capacity in the market and then you've got some domestic public and private competitors that are also adding kind of box capacity. So what kind of effect are you seeing in the market from all of this and how do you think about how it plays out.
Especially demand.
Flat.
I think the issue with converting is at one of the tenants as it needs to be because of the nature of the product an empty boxes. What do you are making it needs to be close to the demand centers and so what you see sometimes is in our case, we add converting capacity, where we have customers and the desire for it we may actually have that capacity, but it could be clear across.
The country and we'll just not use that capacity.
And take a shift out or do whatever we have to do and then use the capacity close to the customer. So I can't speak for all these companies that are building or or adding but that's how we think about it is converting capacity is that last step in value add and transformation of containerboard into something people actually buy and for US it's about capabilities now.
Here, where our customers in our growth is.
Okay. Good luck in the fourth quarter and as we move into next year.
Thank you Mark.
I'd now like to turn the call over too.
Chris for closing comments.
Thank you again for joining international paper's third quarter earnings call has always Michelle and I will be available for your follow up questions. Thank you.
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