Q4 2019 Earnings Call
Good morning, and thank you for standing by welcome.
Welcome to today's international paper fourth quarter, and full year 2019 earnings conference call.
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I'd now like turn todays conference over to get remote the terrorists Vice President Investor Relations. Please go ahead.
Thank you Christine good morning, Thank you for joining international paper's fourth quarter and full year 2019 earnings call. Our speakers. This morning are Mark Sutton, Chairman and Chief Executive Officer, Tim Nicholls, Senior Vice President and Chief Financial Officer.
There was important information at the beginning of or 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 <unk>.
Well what side also contains copies of the fourth quarter 2000, <unk> earnings press release and today's presentation slides.
Relative to the Olympic joint venture and graphic packaging investments on slide two we also provide context around the financial information as statistical measures presented on those entities.
I'll now turn the call over to Mark sorry.
Thank you Guillermo and good morning, everyone. Thank you for joining our call we'll begin our discussion on slide three.
International paper delivered solid earnings and outstanding free cash flow in 2019.
Our performance data demonstrates the strength of our cash generation and the flexibility of the company to navigate well even in challenging environments.
While the U.S. economy remains healthy we manage through significant inventory headwinds and broader trade tensions that impacted our exports.
Against this backdrop, we focused on optimizing our full value chain.
We grew with customers who are market leaders in their respective segments. We ran our manufacturing system, well and we leverage the flexibility of our mill in converting system.
All of which allowed us to continue to grow value for our shareholders with an ROI see of nearly 11%, which is well above our cost of capital.
On capital allocation for making choices consistent with our framework.
In 2019, we returned $1.3 billion to shareholders through dividends and share repurchases.
We also increased our dividend for the 10th consecutive year reinforcing our policy it'd be strong and sustainable payout of 40% to 50% of free cash flow.
And we repaid $1 billion of debt to maintain a strong balance sheet.
We continue to invest strategically to strengthen our industrial packaging business.
In 2019, we made targeted investments in our U.S. box business to enhance our capabilities and reinforce our strong position in the fastest growing segments.
We also made selective acquisitions in our European packaging business to expand the converting that work around our Madrid mill.
I also want to share some context around our decision to start monetizing our investment in graphic packaging, which we announced earlier this week.
The thinking around the original structure supposed to maximize the value of our north American consumer packaging business by combining it with graphic packaging.
The investment provided us time to evaluate the role of consumer packaging for IP, while participating in the benefits of the combined business in a tax efficient structure.
Ultimately, we determined that a significant addition to our portfolio in the North America.
Consumer packaging space is not a strategic priority. So it makes sense to start monetizing our investment and deploy that capital consistent what our capital allocation framework.
Turning to slide four and full year results, we delivered EBITDA of 3.9 billion and outstanding free cash flow of 2.3 billion.
Revenue did decrease about 4% due to lower average pricing and the impact of lower export containerboard and pulp volumes.
Our equity earnings were $250 million, including 207 million from from our Ilim joint venture, which was also impacted by challenging pulp markets.
Despite a less favorable commercial environment in 2019, we delivered healthy margins of about 17% by taking advantage of our manufacturing and supply chain expertise and managing our cost well at our three businesses.
Now, let's turn to the next slide and take a closer look at free cash flow.
As you can see on slide five international paper generated $2.3 billion in free cash flow in 2019, which puts our five year average at 1.9 billion reflect reflecting our strong and sustainable cash generation.
We proactively managed cash levers across the company to mitigate the impact of lower earnings and to exceed our full year free cash flow commitment.
Cash from operations was $3.6 billion compared to $3.2 billion in 2018.
That includes a 300 million dollar improvement in working capital.
Capital expenditures were 1.3 billion or about 300 million lower.
Then in 2018.
We've often discussed IP strong and resilient free cash flow I think 2019, once again demonstrates our ability to deliver outstanding cash generation, even as we manage through more difficult market conditions.
So now turning to slide six we delivered another solid year, a return on invested capital with a five year average return of 11%.
Performance reflects the strength of our portfolio, we're making the right investment choices and delivering on those commitments.
I'll now turn it over to Tim who will cover the performance across our business segments as well as our outlook Tim.
Thank you Mark good morning, everyone I'm on slide seven which shows our year over year operating earnings bridge.
Operating earnings decreased by 89 cents before dollars and 43 cents per share than 2000, my team and what was clearly a challenging environment, especially outside the U.S.
Our results as Mark said reflect our ability to optimize our mill and converting systems.
And manage marginal cost as we matched our production to our customers needs.
Looking at the bridge price and mix, where a headwind mostly due to significant price pressure in export Polk within containerboard markets.
As long as the price impact dog index movements in our North American.
Packaging business.
Volume was a drag on earnings largely due to challenging export markets export containerboard was impacted by unusually high customer inventories as we enter 2019 and it took about three quarters to normalize.
Operating operations in costs were impacted by significant economic downtime, especially in the first half of the or as export shipment slowed and we reduced inventories across or North American packaging system on improved supply chain velocity and reliability.
Input cost were favorable for the full year, driven mostly by lower recovered fiber and energy costs.
And even though would cause moderated in the second half of the year.
They were actually a significant drag on earnings in 2019.
All in corporate items were favorable with lower corporate and interest expense.
Really offset by higher tax expense in 2000 my team.
Equity earnings decreased due to lower earnings.
Turning to slide eight.
And our fourth quarter results EBITDA was a billion dollars with margins of 18%.
The year over year revenue decline is mostly driven by lower pricing and packaging and global cellulose fibers.
As well as the impact of the India divestment earlier in the fourth quarter.
Free cash flow in the quarter was again strong as we continue to proactively manage capital spending.
And working capital during the fourth quarter, we reduced the by nearly 600 million.
Moving to the quarter over quarter earnings bridge on slide nine.
Operating earnings were unchanged at $1.90 cents.
Price mix was a headwind due to the prior index movements in global cellulose fibers in North American packaging as well as the lower prices in export containerboard.
Volume improved in the quarter due to stronger containerboard exports as expected as well as higher seasonal demand and Latin American papers and European packaging.
Operations and calls were offset in the quarter by favorable.
Maintenance outage costs and input costs improve due to lower wouldn't chemical cost.
Corporate items were also favorable and equity earnings were essentially flat.
So, we'll turn to the segments and I'll start with industrial packaging on slide 10.
Our business performed well the North America business or 584 million with Martin, so nearly 25% and a like maintenance outage quarter.
Across the segment price and mix was unfavorable due to the impact of prior index movement in North America, as well as the mix impact of higher containerboard exports in the fourth quarter as we expected.
Staying with containerboard export demand is healthy and customer inventory levels of normalized across most regions and may even be on the low side and in select areas as we enter this year.
Volume improved sequentially, driven by containerboard exports as well a stronger seasonal demand in our European packaging business in North America, we had strong double digit growth in E Commerce and the protein segment continued to perform well in the fourth quarter, well processed foods and durables continue to lag the broader.
The strength of the U.S. economy.
Demand in January is off to a pretty good start for us a plus 1% to 2%.
The growth trend, we discussed last quarter is coming through as expected as we ramp up a recent business wins.
Operational performance was favorable.
Economic downtime decrease significantly in the fourth quarter as we increase production to meet stronger demand.
Operations and cost also benefited by about $40 million of onetime items, including a favorable LIFO inventory adjustment.
Input costs were also for war across the segment driven by lower costs for wood and chemicals.
Turning to global cellulose fibers on slide 11 fourth quarter results were impacted by lower prices across all reasons and a very challenging supply demand conditions.
The near term headwinds, we are facing the business had been material due to the severity of the commodity pulled cycle.
It has resulted in more supply fluff pulp.
Higher mix of market fault in our business.
In light of the current performance and our outlook.
We have impaired the full amount of the goodwill in the business, a 52 million, which is a special item in the quarter.
We expect very challenging earnings in the first half of 2020 due to the flow through of prices from 2019.
And the impact of higher maintenance outage expenses.
We do see better fundamentals as we enter 2020 customer false inventories of normalized an underlying demand is improving.
Looking beyond the improving supply demand conditions, our strategy is to grow profitably and fluff pulp to reduce or market pulp mix.
We continue to feel good about the 2% to 3% structural demand growth food fluff pulp, which is our focus.
We had a successful contract season on pace to bring fluff and specialty mix the 75%.
Total volume and 2020.
All of this positions us for an improvement in the second half of the or.
Looking to printing papers on slide 12.
The business delivered earnings of 109 million in the quarter.
Across the segment price and mix increase.
Pricing mix decrease mostly due to lower pricing for exports from or North America, and Latin American paper business as well as the mix in part to fire export volume from North America.
Volume improved sequentially across all regions demand in Brazil was seasonally stronger as expected, but was partially offset by weaker demand in Latin American countries due to the G geopolitical environment.
In our North American business, we had strong performance in cut size with new customer business.
However, the roll business was weak due to challenging conditions and commercial printing.
Mill performance was solid across the segment operations and cost was impacted by a noncash LIFO inventory charge of about 15 million, mostly related to the hardwood inventory adjustments is riverdale Riverdale as we execute the conversion and some other onetime charges.
Input costs improved across the sector on lower purchase pulp prices in Brazil, and lower hardwood cost in North America.
Staying with printing papers uncoated freesheet shipments in North America were volatile in 2019 due to the influence of trade flows through the year.
Fundamentally, though we continue to see long term secular decline of.
<unk>, 4%.
In line going forward with the to your industry average over the past few years 3.7 person.
Looking at Elon results on Slide 13, the joint venture delivered 21 billion in equity earnings in the fourth quarter volume improved as expected with no planned maintenance outages in the quarter and was offset by negative price flow through.
Equity earnings include a foreign exchange gain on elements U.S. dollar denominated net debt of which I piece. After tax portion was $8 million were two cents per share.
For the full year adjusted EBITDA was 706 million, which represents a 32% margin.
For your equity earnings were to 207 million.
And although 2019 was a challenging year across global pull more goods.
Illinois strong operational performance and local system make it a powerful cash generator, we expect to receive about $120 million and dividends for bill in 2020.
On slide 14, I want to take a moment to update you on our capital allocation actions in 2019.
And provide clarity of what you can expect from international paper and 2020.
Starting with the balance sheet. Our commitment is unchanged, we will maintain a strong balance sheet and investment grade credit rating.
With a target debt to EBITDA of 2.5 to 2.8 times on a Moody's basis.
In 2019, we repaid 1 billion of dead and our pension got decreased by $200 million or pension plan is sufficiently funded and we feel really good about the actions we've taken to de risk the plan.
All in we closed 2019 at 2.8 times leverage which was flat with prior year.
Returning cash to shareholders is a meaningful part of our capital allocation framework in 2019, we returned 1.3 billion to shareholders through dividends and share repurchases.
And over the past five years, we've returned nearly 5.6 billion to shareholders or about 60% of free cash flow.
As Mark said earlier in 2019, we increased our dividend for two consecutive year reinforcing our commitment to a competitive and sustainable dividend of 40% to 50% of free cash flow.
Looking ahead to 2020 free cash flow after dividends will continue to be directed to debt reduction and share repurchases.
Looking at investments, we continue to proactively manage capital spending.
As we invest to maintain a world class system and strengthen our packaging business.
The types of M&A, we would be interested in or targeted smaller scale opportunities that would round out our capabilities and create value.
And with regard to the graphic packaging transaction, we announced earlier this week, we received $250 million and cash from graphic packaging.
Which is the maximum amount permitted and each period under the agreement.
We do not expect to pay taxes on this and that initial transaction our ownership interest in graphic packaging is now approximately.
18.3%.
This transaction puts us on a monetization path.
Moving to our for your outlook on slide 15.
We are projecting full year EBITDA for the company that's up 3.0 to 3.2 billion. This is driven by the.
The full year impact of price carryover from 2019 as well as the January Containerboard Index movement.
We also plan about $70 million apart maintenance outage expense.
In 2020, as we execute a high cold outage cycle.
To put this in context, we completed two cold outages across our system in 2019.
Compared to eight cold outages planned for this year.
And lastly, we anticipate about 80 million of cost related to the Riverdale conversion in 2020, including the impact of Unabsorbed fixed costs.
Free cash flow is expected to be at 1.7 billion and we will proactively manage capital spending with the cap of 1 billion. The proceeds from the graphic packaging monetization like all of our cash will be put through our capital allocation framework.
Turning to slide 16, or first quarter outlook I'll start with industrial packaging.
We expect price and mix to be down $30 million on the flow through of prior index movements in North America.
Volume is expected to be down $20 million.
On lower seasonal demand in North America.
Operations and costs are expected to lower earnings by $85 million.
Partly due to the non repeat a favorable LIFO adjustments in the fourth quarter.
Included in this 85 million is $20 million of Unabsorbed fixed costs related to the Riverdale mill conversion.
And staying with industrial packaging.
Maintenance outage expense.
As expected the increased by 93 million and input costs are expected to be seasonally higher or by about 15 million.
In global cellulose fibers.
We expect price and mix to be down $15 million on the impact of prior index movement.
Volume is expected to improved by 5 million on improved fluff volumes.
Operations and costs are expected to lower earnings by 15 million.
Maintenance outage expense is expected to increase by $20 million and inputs or expected to remain stable.
Moving to printing papers.
Nice flow through is offset by improved geographic mix.
Volume is expected to be down $50 million, mostly on lower seasonal demand in Brazil.
Operations in costs are expected to improved by $40 million, mostly due to the non repeat of LIFO charges in the fourth quarter and improved fixed cost absorption in North America.
Maintenance outage expense is expected to increase by $17 million and input costs are expected to remain stable.
As noted in the segment details I, just shared maintenance outages, all in or expected to increase by $130 million in the first quarter.
Tells by business in quarter are included in the appendix.
And lastly under equity earnings you will see the outlook for Ilim joint venture.
Let me turn it back over to Mark Thanks, Tim.
I'm on slide 17, as I reflect on our performance this past year. It reaffirms my confidence in international paper I've often commented on these quarterly calls about our ability to succeed and generates strong cash flow.
Practically any set of conditions and I think that's exactly how 2019 played out as we enter 2020, we are delivering commercial wins and we'll continue to tightly manage our cost capital spending and working capital to generate strong free cash flow. Despite earnings headwinds that we look at as cyclical.
And most of these earnings headwinds that are price related or due to flow through from actions that have already occurred in 2019.
The fundamentals of our packaging and fluff pulp business are solid our commercial and operational levers position us for positive momentum as we navigate through the year.
International paper has the best customers the best people, the best system, and a strong financial position and we'll continue to make the choice is consistent with our capital allocation framework in order to drive long term value creation.
That I think we'll open it up for questions.
Thank you source now open for questions to ask a question press star one on your telephone keypad.
We do ask could you please limit yourself to one question and one follow up.
Our first question comes from Anthony Pettinari of Citigroup.
Hi, good morning.
Yes.
Hi, you know we saw some signs of improvement in China, and the pulp market at the end of last year kind of beginning of this year. The corner viruses, obviously kind of shaking things up I was wondering if you could talk about what impact your maybe seeing fewer customers I guess on the upside in China understanding the situation is unfolding. It's a great question asked.
I think ex the Corona virus, we see what you just mentioned improving conditions both on the demand.
And on the economics.
The virus issue is obviously a fluid situation and it's kinda early to tell you know there are there our inventories in the system or the kind of products that our pulp goes into from GCF from our cellulose fibers business is in absorbent, Paul up the type of products that tend to be a little less discretionary.
On our Ilim joint venture, it's more market pulp for packaging and other softwood market uses and they have seen some improvements as well I think we're all watching very closely and looking at different contingencies based on the virus, which I think they'll get through but the question is how long does it take.
Okay. That's that's helpful. And then your 2020 guidance suggests capex could be below a billion and I don't think I'd piece Capex has been below 1 billion from maybe a decade I'm just wondering what the split there is between maintenance and discretionary maybe what kind of investments maybe you're pulling back on and then just how you would frame.
Capex level versus.
Normalized level versus where we might be in the cycle.
Just make a it's a good to great question because it isn't number you haven't seen let me just make a high level commented last Tim that talk about the categories. You know over these these periods of time that you mentioned, we're not the same company obviously in terms asset quality of the amount of strategic investment, which we've done a lot.
Organic strategic investment in the last few years and as we said earlier last year on I think maybe the third quarter call. We don't have those type of large projects every period. So the combination of all that allows us to have periods, where we'll have less our guidance has always been about 1.4 over time, but.
It wouldn't be that every year and Tim if you want to add a little yesterday to that I think had over as well in terms of talking about the ramped down in the strategic projects is roughly 60% that we have targeted for maintenance and regulatory and then the balance being discretionary, but you're right. A billion is the on the high side it could be lower than that it could be closer.
The 900 million for the year.
Okay. That's helpful I'll turn it over.
Thank you. Your next question is from Steve Chercover of D.A. Davidson.
Thanks, Good morning, everyone.
Well first quick question.
So I'm not mistaken your free cash flow was 300 million above your $2 billion guide so was that surplus.
Due to the mainly to working capital or can you elaborate Tim.
The big piece of it there were several factors one there was some timing on some items, we had lower capital spending than what we had earlier estimated in the year and then working capital we picked up some things part of its timing.
I will keep it part of it is just from one year to the next and and so it will probably come back in 2020.
Okay, and then a year.
Oh, you on graphic packaging, you're on a monetization path. So is it a bold assumption to say that you get another 250000 that will be put towards the repo and <unk> and or debt reduction.
Yeah, I mean, we'll put it through the capital allocation framework and that's the primary focus on that we have right now so I don't I don't assume any difference.
And it's just to clarify.
A maximum of 250 million every six months.
That we have under the contract the ability to monetize.
Can I just had one other question.
All right you've got some flexibility how did we see it should be share price dependent right I guess the valuation of Gbk.
We'll have some influence on your timing.
It will I would say modestly, but you know we're not we don't think of ourselves as.
You know investors an equity in equity shares so.
We're not trying to time the market and an undue way we're trying to just make sure we're smart about how we.
Think through our right some of the contracts to monetize the stake that we have.
Thank you very much.
Thank you. Your next question is from George Staphos of Bank of America.
Hi, everyone. Good morning, Thanks for all the details.
I wanted to talk about them the maintenance spending that you're doing this year and you said that there are eight cold outages this year versus too.
Last year.
Hey from those numbers, what and when you're done with the projects. This year Mark what will be further enabled either within industrial packaging or or GCF that you don't have already from the maintenance or will it be purely.
Yeah, obviously, a much of it is going to be related to.
Normally maintenance, but what what will be the different capabilities out of the systems on either side when we're done with us.
George I think one key point on maintenance as we talk about the capital and them and that's a portion of maintenance, but a much bigger portion is just on the expense side and how we do precision maintenance, how we make with heres, how well trained our technical staff sorry, they're just getting better every year. So we have less failures, we expect federal.
Liability, which ends up resulting in meeting less capital from major replacements, and that's just going to continuing story for IP. So we spend the money on the expense side in education training techniques and we save the money on the capital side. That's one point, what we've been trying to do is make sure that in containerboard and in in the new.
[music] cellulose fibers business that we combined with a formal weyerhaeuser business that we have flexibility in the system. So that we can make multiple products at multiple facilities. That's a strong value proposition for our customers. It's great in terms of managing marginal costs for water transportation. So what you'll see out of this as less very.
Ability between the worst facility, we have in terms of reliability.
And capability and the best so both systems are going to be more flexible and less variation there is much more work to do.
But we have made a lot of progress and so if it's kind of.
Normal that we would have a period, where we can.
I enjoy some of that kind of food.
Best mix, we've made so capability and consistency across those those mills systems in one case feeding box plants, largely our own box plants and the other case going directly to customers, who convert into absorbent products. So it's hitting a ball on that so part of what you'll get also going ability to further make your cost variable as opposed to fix.
Depending on the system that you're in the environment that you're in would that be fair.
That's fair George and you saw that you know again, we don't we don't want to get to good at this because usually only gets to show up when we're taking economic downtime and markets are slower, but you saw.
A lot of Oh.
So sort of a step change in 2019, containerboard ellow experience and our marginal cost management versus prior periods a few years earlier.
And we would expect that to continue so marginalized variabilizing, our cost and getting better at marginal cost.
Managing that is definitely part of it there are some structural cost issues in some of our mills, especially on the GCF side that are not related to reliability just related to configuration and there's there's things there that we can address and will address in the future as as our resources and priorities allow us to.
Okay second question I'll try to make a quick you mentioned that Europe , 60% of your free cash flow over the last five years has been dedicated to value return to the shareholder and your performance on cash flow underperformance returning value back to shareholders been has been impressive given the target of 40% to 50% over time what does suggest.
Maybe that ratio necessarily has to come down as you de lever or we shouldn't draw that conclusion, and what kind of circumstances when would we need to see whereas the dividend, which looks to be amply supported now might be something that.
It's a little bit more at risk thanks, guys and good luck in the quarter.
Well the approximate six of the dividend George and thanks for the question is that as both competitive and sustainable and so when we make these decisions when we put forth recommendations to our board and they decide dividend policy, we were trough testing and providing ample.
Outlook for how we think the the business is going right perform so I don't see a needs.
Two before the first part of your question then taking any action there I think we're in a bit of a trough year, we're still.
On the high end, but.
Within the range and and so we I think we have the flexibility to do what we need to do across our capital allocation choices I think also just Doug.
An additional points on Tim's comment as when you think about the combination of near term capital return via the dividend share repurchase we've reduced our shares outstanding and the actual outlay for the dividend as as is even though we've raised the dividend is as you can figure out for yourself not flowing into.
Or cash outlay. So we're committed to the dividend, we think 40% to 50% is is not the light balance of getting cash to shareholders, but not not doing it in a way that's not sustainable and that's that's what we're focused on in the company is generating the cash.
That.
And trough testing, our our recommendations to make sure that we are I think in any case talking about the dividend not being sustainable.
Thank you very much.
Thank you next question is can chip Dillon of vertical research.
Hey, good morning, and thanks for all the health.
If you could talk a little bit about the.
South American business, I think especially in in corrugated I know, that's something I think you're looking to exit and I just wanted to know.
Well, that's going to be one you mentioned some targeted M&A possibilities I don't know if there's a chance that you might actually want to keep a presence in Brazil, and if that would be a possibility.
On packaging.
Yes.
No no. We've we've talked about strategic options the process, it's taken a little bit longer than we thought but you know we don't want this to go on forever, but I think it started slower based on just some timing and holidays and gearing up we have made progress I think we'll be in a position.
In the not too distant future to talk to about the outcome, but.
In terms of an acquisition on packaging in Brazil, as we're still looking at options for how we exit that business. There's there's nothing that we're looking at the comment on on one Tim was talking in his remarks about.
Capital allocation and you made a comment about investments and targeted small acquisitions. If there are any those those are primarily for our north American industrial packaging business and for our European packaging business.
Like we did a few we bought a few box plants right near the Madrid Mill, that's what he was referring to on targeted M&A for packaging not not anything.
Not anything else that just to put brackets around it in terms of.
Size and and.
The targeted nature of it and how it improves a business that we have like packaging.
Okay. That's super helpful. And then just a quick follow up.
When you look at the.
Capex level going down just like 900 million 2 billion, which certainly makes a lot of sense given.
The very immediate environment, and certainly keeps your flexibility as high as it's been one is that sort of a level I mean that should include I would assume some riverdale extent capex. So she'll what should we kind a guess capex will be or would you would you expect capex to be a in the you know.
20, 120 to 23 period lets say things get better better is there a reason that capex would rise up again, you know given your current footprint.
It should there be situational a I think from a strategic investment type you know the bigger capital there.
You know those good identified overtime, we don't act on all of them the cost reduction side of it.
This where I think you could see.
An increase over time, but like I said it depends on the circumstances or the market conditions and how the business is performing so we don't forecast publicly that far out in time, but situationally I think we're in a spot where we can maintain around the level we have.
If if conditions warrant we can take advantage of some high return cost reduction type projects to improve the business. Yeah. I think they kept the way we're thinking about this if you go back all the way to 2014, where we started investing in our North American containerboard system for lots of reasons to.
To replace the purchase board, we were doing post the temple acquisition to improve all the things I talked about in a prior answer there's been a steady.
Demand for large projects in our mill system in containerboard, then we built in Madrid nail and now we're doing Riverdale, we've got the capacity, we need and the capability, we need largely for the foreseeable future not only in that business, but also in cellulose fibers and so.
Structural cost reduction in our system.
Probably hasn't gotten those same level of attention and that'll be a focus going forward, but it's not as large as individual projects its smaller projects across four facilities. So depending on what the environment looks like how much product we need based on our order book, we can time those structural cost reduction process.
The next a little bit better than the strategic projects, where you're trying to bring something on to market. So that'll be the focus going forward. We don't have an exact number of past 2020, but it'll be a different mix of projects because we've made the investments we need to make for the foreseeable future.
That's very helpful. Thank you.
Thank you. Your next question its trimark well the BMO capital markets.
Good morning, good morning.
Mark I think you over the industrial packaging crew lunch today.
That happens often okay, well, that's a very good performance with some of the question I had.
The recovery in pulp performance. It sounds like there are a couple of moving pieces, we need to be conscious of as we go through 21 is kind of a lag in kind of pricing and the other is kind of the shift in mix. So Tim I wondered if you could just help us with a little more color on that.
Well.
I'll help you with as much as I can give I mean.
You see the price follow on a we do think that markets have begun stabilizing and so the question will be recovery and how fast it comes on the pricing front, but inventory levels. After some weak market conditions.
Based on individual country economies regional economies as well as the tariff situation, we think had a fairly dramatic impact on on price.
As we went through 2019 that we carry into this year.
But we think that we are.
In a place where fundamentals have shifted and and and look like they're beginning to improve on the mix side because of the lower growth for fluff over the overall based on those factors.
We had a higher per cent of market pulp commodity market pulp in our mix.
Which in for certain types of grades on the on southern <unk> certainly on southern saw fleets, we have a higher cost structure, we have a very good cost structure and our mill in Canada for Northern Bleached book for Southern we have a higher cost structure and prices were impacted more so that weighed on the businesses.
Well.
Going forward, it's about intelligently restoring.
The flops and absorb and specialty a percent of our mix based on the commercial loss that we talked about last year.
But doing it in a way that maximizes profit over time. So we're not just simply focused on volume we're focused on how do we improve the earnings performance of the business and working through these macro challenges and the moment.
Okay. That's it for follow on I, just wondered Mark can you update us on sort of where the Ilam capital plans are I know that they've had some big projects talked about overtime, but I don't know whether there's been a commitment to though so you can update us sure that the Iloan board approved some projects involving some container.
Our board production, primarily for China, and so that's underway and additional softwood pulp at one of the existing facilities de bottlenecking one of the facility. So both of those projects are approved.
And are beginning to get underway and will will come online.
Later in next year so.
Right now the the focus for element is is as anybody in the softwood pulp business is looking at getting the inventories stabilized and getting the market pricing hopefully back to a more normalized level as Tim mentioned in the Elam results even at these.
Lower cyclical price levels for commodity Paul the 11 cost structure is is so far out ahead of everything else in the world that it's still very very powerful cash generator and that's really what we want to do at our GCF business, which is really absorbent pulp focused we are still 10 percentage points away from them.
Next we really target to have 85% of our capacity, which is essentially all of our north American mills on absorbent, Paul and only the Canadian Northern bleached softwood nail on non absorbent, Paul and with a demand.
Step back and China economy. It just takes it just takes longer to get that mix up and as Tim said intelligently, where we're doing it at a profitable level.
So I'd say, it's a setback in terms of the path we were on but it's still the right path and the business in the end use in the customer book is all all very solid.
Okay forgot I'll turn it over.
Thank you. Your next question is from Adam Josephson of Keybanc capital.
Mark and Sam Good morning, Thanks, so much for taking my questions.
Tim just one on on Paul.
On slide 11, you talking about a successful contract season accelerating your recovery. This year can you just help me with what your pricing visibility is on the contracts that you successfully renewed or secured I'm. Just wondering if you know what pricing on that business will be throughout the year or it's similar to market pulp in that regard and then.
Just you mentioned slots is going to lower rate. The market I was just wondering why that just intuitively why that would be the case.
On the gross I think we've had some unusual challenges we've had.
Certain countries in the middle East, which are big fluff pulp consumers.
Their economies have underperformed their currencies have underperformed against the dollar.
There has been some for a moment demand destruction, there's been the tariff issue in China, which had to be sorted through a in caused a lot of uncertainty.
And so I think there's there's been the combination of some demand destruction in the moment, we don't think its structural and there's also the fact that we had inflated inventories around the around the world last year for a big part of the year that had to be rebalanced on fluff pulp on the contracts on.
Pricing.
I can appreciate why I can't go into a whole lot of detail here, but it's really across the gamut theres different customer types that we have and some of those work on annual contracts.
With price negotiations that happened as you go through the year some of them or annual in the nature of.
Amount of volume, they're going to take in and then there's openers along the way and then we have you know parts of the market that it's it's month to month or quarter to quarter.
Thanks, Mark just one on U.S. box demand yet at least through November was about flat last year after having been up quite a bit from 16 to 18 over the past decade, it's flat or so so what do you think just.
I guess forgot about longer term, but what are you expecting this year do you think do you have any reason to think this year Mark Mark will be much different than a flattish we saw last year for any particular reason.
We we look at a lot of economic.
Leading indicators that correlate very nicely with box demand, we built our own internal international paper model.
And it was reasonably accurate for last year.
We see a little bit of growth this year, but I think when you look at what came out today on the GDP number and you think about box demand occasionally it will track GDP, but largely in the way the U.S. economies configured it'll always lag that a little bit sell a 2% year roughly as what it looks like 2019 wise.
And you'll end up with the box demand that for the inventory issues, we talked about that occurred at the end to 18 in our in our customers World you end up with a little bit of a disconnect from GDP I think would not without that inventory issue. Thank you probably saw 1.3% to 1.5% box demand in 19 against that too.
Percent GDP and I think the reason that Didnt happen is some of the 18.
Kind of stronger demand was really 19, we made boxes and 18 for our customers who didn't didn't ship the product to well into 19.
Thank you Mark.
Thanks, Adam.
Thank you. Your next question is from Mike Weintraub, let's see pork level.
Thank you.
First on the outlook you you noted that it includes the impact of 2019 price carryover in January containerboard index adjustment.
Does that mean that that it doesn't include any other.
Potential changes and so pricing is effectively kept flat from where it is always got not necessarily a conclusion to draw.
Well the challenges we don't talk about pricing on a go forward basis. So we have carried in all of the carryover from last year to where we currently are we have.
Included the 10 dollar published down for containerboard that just happened and within that range is our view on how we think about price.
Over the course of 2020.
Okay I understand so in terms also the inventory valuation.
Packed in packaging and paper could you.
Specify those for us.
It's a is that both of them or to do with LIFO and as you know we go through the year looking at how a number of factors are going to play out.
Over the course of the year and we're making estimates about what the LIFO charges as you get to the ended the year. Your truing up all of those in the case of papers, we had over estimated our benefit where we thought we were going to be earlier in the and the third quarter and it actually ended up in a in a worst position. So we had to make that true up.
And just the opposite on the containerboard side, it's it's not as you go through the year, it's not a precise science and we're putting our best estimates based on business conditions and you know as forecast factors change then we have to make sure that we trued it up to the appropriate amount at the end of the year.
Understood and can you share with us what the adjustments in the fourth quarter were in the segments.
Yeah, I think we do 15 million in papers and it was around 40 million and.
Just real packaging.
Thank you and then lastly, I'm on the box shipments so it sounds like it is the win that we should get from not having hopefully any inventory de stocking this year in the half to 1% range would you say and also could you let us know how how January had played out.
Yeah, we I know there's a lot of calls the more we were right now January looks like it's somewhere between one and 2%. We're late in the month and you say well should you know better, but we don't really have a final number until we go through the close process and see how shipments actually came in.
We're seeing some of the wins that we talked about them the third quarter actually coming through in our North American container business. So we feel good about that on the export containerboard side, you know we referenced inventory levels, having returned to normalized levels late last year, but in some places in some markets.
Our view is that inventory levels or low demand is very good right now and so I'm in the export markets.
We think its normal to skew on the lower side for inventory levels.
Thanks very much.
Thank you. Your next question is from Mark Connelly of Stephens, Inc.
Thanks.
We've obviously seen you take quite a lot of downtime without the sort of cross drugs.
Evident in the past so so clearly all the work on the supply chain is working I'm curious if your experience over the past year is leading to more changes and if in effect, you're getting more efficient taking that downtime.
With a great question, Mark and I would say the at the short answer is yes, we we took a level of downtime in containerboard last year that we haven't taken before so we were able to do it a little more efficiently primarily because of some of the investments. We made in the 14 15 16 timeframe. We also learned a little bit more.
About how to better manage the transportation component when we know we're going to take downtime and the wood fiber component.
So I think we're actively learning how to manage our output to meet our customer demand across multiple facilities.
A little bit better each each year.
18, we ran everything wide open and there was there was none of that work being done because we almost couldn't make enough product for us for all channels that we serve.
And we actually added cost in some cases to make that incremental amount. So I think last year.
Afforded us an opportunity to really try to use the benefits of all the investments we made both capital and Noncapital in systems and so forth in the supply chain. So I would say, yes, we are continuing to learn how to do that better.
Okay. That's helpful.
Question on pulp and I'm, sorry to keep plugging on this on this question but.
Markets have been tracking commodity markets a lot more closely in the last couple of years and that's not normal.
So what has to happen say in the medium term.
Sometimes when markets gets off contract terms get squishy and you start to increase that volatility is it going to take longer to get back to that normal because we've got to clean up contract.
I think mark that's a great question, there's too I think two main things going on with the connection between fluff pulp and the broader commodity markets. One is the shape of the curves on pricing for example are similar but there's still a pretty healthy differential between the two as or should be there's a level.
I love capacity in the market because fluff is still a relatively small market in terms of the other markets. It's about 6 million tons, there's about 15% capacity that can move in or out of the lower ends of fluff based on what's happening in commodity Paul the same producer has a choice we don't have any of that capacity.
But others do and so it's a meaningful.
Flex capacity that just needs to be absorbed as the market grows overtime I think that'll buffett things a little bit better and then of course anytime you have these kind of conditions you end up with contract terms and agreements that probably not a sustainable long term. So there is some of that that has to be done but this this flexible capacity.
That can make softwood market, our softwood absorbent is meaningful enough that in soft demand for market pulp or lower lower price environments for market pulp. It ends up showing up and just in the not enough at the margins to create some issues on the absorbent side.
Super helpful. Thank you.
Thank you. Your next question, Brian Maguire of Goldman Sachs.
Hi, good morning, Thanks for taking my questions.
Just a couple of around capital reallocation.
Obviously with the.
The recent cellulose fiber acquisition.
Writing up the goodwill.
Yes, and the challenges in the pulp market just wondering in aggregate does that make you.
Less likely or little bit more gun shy about doing large M&A I think some of your comment sort of alluded to really just focusing on smaller bolt on deals.
And then just sort of related to that it seems like.
The leverage is set to move higher with the lower EBITDA guidance in 2020.
So should we assume that kind of the focus the priority for the near term is more on.
Preserving the balance sheet as opposed to.
Share repurchase and things like that.
I think on the first part of your question, Brian You know the large M&A question is large M&A is not a focus right now because it's not necessary for international paper, We've got a great company, we've got the ability to improve the businesses. We have we done a lot of large M&A in the past and it's now time for us to optimize this and to profitably grow.
Oh, the target businesses, which which don't require large M&A. So the the second part of your question I think we'll see how the year plays out but the combination I think we put it on our chart of debt repayment and and share repurchases a constant.
Discussion and the company about which channel through our capital allocation framework to flow.
That cash.
We we have an outlook we're sitting here in January but we really don't know how the years going to turn out and it could be better or it could be not as good and we'll make the decisions, but obviously maintaining that balance sheet investment grade as Tim said is is an absolute priority and we'll make the cash flow adjustments we need to.
To make sure that happens and the only thing I would add is you know we we have been very clear about our commitment to the balance sheet and then how we would manage that we've been very clear about our approach to returning.
Cash to shareholders I think mark right it's dynamic.
So we have to see how markets and results play out.
We never viewed that we would be within those.
The 2.5 to 2.8 times, 100% at the time, we always talk that there could be reasons, but we don't want to be extremely wide of those and we don't want to be there for a long and so we have a very strong commitment to support the credit rating that we have we also or looking at share repurchase and making sure that we are returning value.
Sure owners it'll be dynamic.
Okay and then my last question just more of a.
Longer term set of an open ended question I'm actually 2020 EBITDA is.
Cyclically depressed.
You're cutting back on Capex, a bad some of the growth and productivity projects I.
I guess so the question is beyond 2020, where should we think about earnings growth coming from beyond price increases in other words, if we don't get any.
Movement higher and pricing beyond 2020.
What's right, where it would be the driver as Ive earnings growth from there I.
I think the earnings growth will come from beyond you know any market pricing. Those is the commercial investments we've made on new products better mix and growing our business in in the segments that are growing the most and that's a true statement for our box business as well as our cellulose fibers business.
And then there's a healthy dose of constantly looking at our cost structure and improving that overtime.
Okay. Thanks very much.
Thank you our final question for today comes from Debbie Jones up Deutsche Bank.
Great. Thank you I am just two questions I'm going to ask them together.
Are you happy with your current therapies that plant I know you are targeting any major M&A as you outlined earlier, but I'm just curious to hear proposition there and how you feel about it and then secondly could you characterize any major differences that you're seeing but the way that your customers in Europe , especially as the last had needs as they relate to their.
Sustainability efforts.
So I think that first answer is yes, we are happy with our footprint. There are some issues that we're trying to sort out around whether they are structural or cyclical like like them or market in Turkey. For example, which has been good and not so good over time.
But we do like the bit the business of format, we have which is.
Now that we have a large high performance nail and the mix and so we're continuing to look to to improve that business from its core.
And then on sustainable I, just think Europe tends to be.
A year or two ahead of this market in sustainability initiatives and that's largely partly due to regulation and partly due to just up the consumer and the mindfulness as a consumer but I think you're up say good leading indicator for a lot of things that we learned there we see.
We get we're able to prepare for here, but it might be a year or two later.
But I think that's the Google fiber packaging is playing and helping customers in various market segments with their sustainability story. The fact that we've got renewable natural resources recyclable products at our energy has generated from carbon neutral biomass is playing very very.
Heavily and well with our customers.
Okay. Thank you very much.
So before we sign off I, just want to wrap up a couple of key points that we talked about.
Our focus for this year and beyond is delivering on the commercial wins, we made a lot of investments in talent up approaches.
CWIP meant innovation and that's what we're focused on the commercial side. We're looking at the levers we discuss today to generate free cash flow will get a strong free cash flow year by year by year slightly different ways. The way you can count on for right from IP is to deliver it we believe our core businesses have solid long term fundamentals.
They'll always be some cyclicality, we are seeing some of that now, but the fundamentals of what we make in boxes and while we make in our fluff pulp and the role that our paper business plays are solid and we believe in them for the future and I think some of the things we talked about today commercially operationally.
Give us momentum as we navigate through the year of 2020 and I feel good about where we are as a company strong balance sheet as I said outstanding customers and outstanding people and the ability for a year like 2019 to still show us that we can generate strong free cash flow share it with our invest.
There's make smart investments and the company gets stronger every year. So I went back here I'm, all I'll turn it back over to you.
Thank you again for joining international paper's fourth quarter earnings call as always Michelle and I will be available for your follow up questions. Thank you.
Thank you for participating in today's international paper fourth quarter and full year 2019 earnings Conference call you may now disconnect.