Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the first quarter.
Best or 2020 earnings Day conference call.
Time, all participant lines are in listen only mode.
After the speakers presentation, there will be a question and answer session do ask a question. During this session you don't need to press star one on your telephone keypad to withdraw your question press the pound cake.
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Vice President Investor Relations. Please go ahead Sir.
Good morning, Thank you for joining international paper's first quarter 2020 earnings.
Our speakers this morning, our Marx, Chairman and Chief Executive Officer.
I'm not called senior Vice President and Chief Financial Officer.
It's important information at the beginning our presentation on slide two.
External legal disclaimer.
Yep.
During this call.
Okay.
Subject to risks and uncertainties.
[music].
You must GAAP financial information.
[music] triggers to U.S. GAAP financial measures available on our website.
Oftentimes copies first quarter 2020, <unk> earnings press release after today's presentation.
Relative to the only 25 trucks graphic packaging.
Not to also provides context around financial information statistical measures presented.
I will now turn the call over to Mark sorry.
Thank you care about and good morning, everyone. Thank you for joining our call.
Our discussion on slide during.
The common 19 pandemic is unlike anything we've ever experienced.
And then it brings an unprecedented challenges and requires us to focus on what we as a company need to do to remain strong and resilient for all our stakeholders in the short term and long term.
International paper entered this crisis in a position of strength.
Oh strike more important than the talent commitment.
80000 employees worldwide.
It's important responsibility as the health and safety our employees and contractors.
I will take this opportunity thank our employees across the company.
All of the business and support groups for their commitment and ability to adapt in this challenging period.
It's really grateful to our frontline employees in manufacturing and converting.
So many is around the world. They ensure our customers can continue to supply essential products to consumers around the world.
We also entered this crisis with world class manufacturing and supply chain capabilities, our scale flexibility and geographic reach allows us to meet our customers rapidly changing needs, which is more important than ever in times like that.
And we have a strong balance sheet in liquidity position that provides us financial flexibility to navigate through this period of great uncertainty.
Turning to slide four.
International paper is a critical part of the supply chain required to produce a deliberate central food pharmaceutical hygiene products.
Emergency supplies for consumers around the world.
This privilege calls with enormous responsibility to our employees and our customers.
We've taken significant steps to protect our employees and contractors.
We also implemented contact tracing protocols and all of our facilities.
Our cold 19 measures are proving to be affected we have not had any material disruptions to our operations.
I'm proud of the collaboration ingenuity and commitment of our employees to take care of our customers. During this pandemic.
Our teams have generated product and service renovations for customers, while others are ways to simplify and streamline work Oh.
All of which is essential to navigate and secondly city enormous dislocations caused by cold 19.
For example, our packaging business developed corrugated separators to allow citrus customers to run their packing operations with appropriate social discussing protection at the height of the harvest season.
Our global cellulose fibers business is ensuring customers have real time visibility of their orders, which is especially critical when ocean supply chains have stretched out.
And our papers business quickly introduced new packaging sizes that allows saved home delivery of uncoated freesheet products.
As I said earlier international paper entered this crisis in a strong financial position.
Due to the unprecedented uncertainty regarding the ultimate economic impact of cold in 19, we're taking prudent actions to further strengthen the company's liquidity and preserve cash.
We are undertaking vigorous sensitivity and scenario testing to make sure we make informed principle based decisions.
And we manage each phase of this crisis, where the geared toward both the short term and long term success and sustainability of the company for all of our stakeholders.
[music] now, let's turn to our first quarter results on slide five.
We don't whether a solid performance with EBITDA at $802 million and free cash flow of $363 million.
Very rapidly changing environment.
Containment measures across the globe accelerating.
Inspired by the commitment and resilience of our teams who want are unprecedented circumstance or Sanchez delivered strong operational performance in our mills and converting plants.
Packaging business, we were able to mitigate the impact of significant production loss in our rolling Bogalusa Mills.
We leverage is scaling flexibility of our system to meet strong demand for corrugated packaging and absorbing Paul.
And two outstanding collaboration across our commercial supply chain and manufacturing organizations, we adapted quickly to meet our customers rapidly changing needs.
All of which contributed to solid performance in the first quarter.
And further strengthens our position as we navigate the uncertainty that lies ahead.
I'll turn it over now to town to cover performance across our business segments.
Our second quarter outlook and details on actions, we've taken to further strengthen our liquidity Jeff.
Thank you Mark good morning, everyone I'm on slide six which shows our first quarter results.
As Mark mentioned, EBITDA and free cash flow were solid.
Operating earnings were 57 cents per share, which included a not favorable ilim FX noncash impact.
13 cents and the core.
Moving to the quarter over quarter earnings bridge on slide seven.
Price mix was a headwind as expected.
Due to the prior index movements in North American packaging and global cellulose fibers.
Volume was mixed strong demand for corrugated packaging and Paul was offset by a sharp decline in demand for printing papers.
Hey at home measures accelerate.
Operations and costs were favorable our mills are converting plants performed well and we successfully manage through the incidence oh loose and well.
We also had the lower benefit cost of 40 million across the businesses that will not repeat and the second quarter.
Input costs were also favorable driven by lower energy distribution and chemical cost.
Recovered fiber costs increased rapidly in the latter part of March as generation decrease, but it did not impact the first quarter materially.
Corporate items and taxes were unfavorable due to onetime items equity earnings were essentially flat quarter over quarter before adjusting for 13 cents non cash currency translation loss that's all.
Turning to the segments and starting with industrial packaging on slide eight.
Our business performed well in the first before we adjusted our system to meet our customer strong demand for packaging is a bit 19 containment measures accelerated in March.
In North America, we leveraged the skill and flexibility of our system to manage the impact of production losses on bogalusa on Roe.
Our converting facilities performed well in a rapidly changing environment remains strong and often irregular customer demand.
Our European packaging business delivered strong year over year earnings growth driven by margin recovery on the successful ramp up at the Madrid mill, which performed at a 100% despite challenging conditions.
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.
Volume improved sequentially driven by strong customer demand.
Encoded 19 stay at home measures.
Export containerboard demand was strong across all regions.
Operations and costs were favorable mostly due to the non repeat of last quarter's positive LIFO inventory adjustment.
The first quarter also includes $15 million and costs related to incidents bogalusa in Rome, as well as the expected 20 million dollar and cost related.
So the Riverdale conversion.
Maintenance cost increase sequentially, we didn't however, adjusted scope and timing of planned outages unresponsive unplanned production losses.
And broader cash comps conservation initiatives.
Input costs were favorable across the segment driven by lower energy and chemical cost.
As mentioned earlier recovered fiber costs rose rapidly in the latter part of the quarter due to significant dislocations to traditional channels.
We expect recovered fiber to be a significant cost headwind in the second quarter.
I'd also note that we're extending the riverdale conversion schedule to manage contractor staffing levels to ensure appropriate social this the same practices.
The expected startup moves out a quarter to the third quarter of this year.
Turning to slide nine, let's take a closer look at North American corrugated.
Packaging segments and the impact we're seeing from Cowen 19.
Consumer behavior change rapidly in response to containment measures. This resulted in immediate changes to packaging demand for our customers both positive and negative.
Mismatch on Green, obviously shows the benefit from some of these changes and rat shows the unfavorable impact from some some of the changes in our near term outlook.
Hello indicates a moderating from elevated levels of demand as we are in April.
We experienced strong initial demand in March and April driven by processed food protein chemicals.
She went on in Commerce.
Conversely customer segments oriented toward goods deemed non essential as well as those with higher exposure to restaurants, and foodservice experienced a sharp pullback in demand.
The near term outlook, we provide on this slide is our best view of current demand across our segments keep in mind the environment remains fluid and there is variability within the site.
Growth and processed food is stabilizing after strong initial customer demand.
Sooner demand for meat and poultry remains strong. However, recent processing plant shutdowns are expected to slow demand for packaging in the near term.
Produce remains weak due to significant exposure to restaurants in food service.
First the seeing unprecedented growth consumers have greater reliance on E commerce as a primary spending channel as a result of the containment measures and lastly, we're seeing a sharp pull back and packaging for durable goods.
Corrugated packaging plays a critical role in supply chain spring essential products to consumers.
We will continue to take care of our customers changing needs as communities around the world start to ease containment measures.
Turning to containerboard exports on slide 10 demand remained strong and customer inventory levels are normal too low.
Demand in Latin America, and Europe is solid driven by resilient.
Consumer demand for bananas and citrus.
Demand in the middle Eastern North Africa, solid, but expected to slow season ramps down.
Demand in China is strong industries are restarting following covered 19 closures and customer inventories are low.
And the rest of Asia, we see strong demand the Philippines, which is focused on banana exports.
Slide 11 recaps the status of Bogalusa enroll mills following the incidence in March.
As I mentioned earlier, we had a 15 million dollar impact on the first quarter.
Looking ahead, we expect a 30 million dollar impact in the second quarter. After the initial insurance recovery.
We continue to excess.
The full cost impact of these incidents and are working with our providers to determine the potential insurance recovery.
Global cellulose fibers on slide 12, we experience very good demand as our customers responded to strong consumer demand for absorbent hygiene products and tissue products as a result of covered my team.
Across the segment price and mix was unfavorable due to the impact of prior index movement.
Absorbing pulp shipments improved 13% year over year.
Driven by improved supply demand conditions, and our successful customer contract season in late 2019.
Maintenance outage cost increased sequentially for the full year, we will reduce the scope of planned outages and the first spending to preserve cash.
Operations and cost management were strong and inputs were favorable.
On slide 13, let's take a closer look at our global cellulose fiber segments on the impact for saying from carbon 19.
And I'm, sorry, Paul which represents about 75% of our mix we experienced strong initial demand in March and April.
All absorbent hygiene product categories were strong, although adult incontinence, and sanitary wipes solve particularly strong consumer demand.
We expect strong demand for fluff pulp in the near term. However, we could start to see the impact of lower consumption as behaviors due to economic hardship, especially in emerging economies unfold.
And Mark apart, which represents about 25% of our mix, we experienced strong initial men tissue and towel segments on a sharp decline in printing papers, we expect recover paper shortages to support demand for our Virgin pulp in the near term. However, we could see destocking of tissue and towel as containment.
Sure Steve.
[noise] looking at printing papers on slide 14, the business delivered earnings of 96 million in the first quarter.
The next decrease due to the flow through.
Prior periods across the segment and weaker geographic mix in Latin America.
Volume decreased sequentially.
The 19 containment measures drove unprecedent unprecedented demand declines.
In all regions was which accelerated in March.
Operations and cost management were solid planned maintenance outages were executed well in at a lower cost than planned.
Our North American business successfully manage the first quarter of operations without Riverdale 15 capacity, which had previously represented about 240000 tons of printing papers per year.
Input costs were favorable favorable across the segment on lower fiber.
And chemical costs.
On slide 15 will take a closer look if any the printing paper segment in the impact for saying Frank Open 19.
Across our regions, we experienced an immediate an unprecedented unprecedented demand decline in demand for a cut size as work from home another containment measures accelerated.
We continue to work closely with our customers to support shifts to online and home delivery platforms by adapting packaging designs to meet customers' needs.
We also experienced unprecedented declines in commercial printing segments due to a significant pull back in print advertising.
The near term outlook will provide we provide on the slide is our best view current demand across regions. We remain focused on optimizing cash and working capital and more match our production to our customers demand as we manage through a very challenging environment.
Looking at the Elon results on slide 16.
We had an equity loss of 35 million in the quarter, which includes.
A noncash foreign exchange loss on Lmps U.S. dollar denominated net debt.
Which I piece.
Hi fees after tax portion was 51 million or 13 cents per share.
Volume was essentially flat sequentially average price decrease on the flow through of prior period price movements as expected.
Element cheap record production March on successful de bottlenecking projects completed in 2019.
Demand for softwood pulp in China at a solid driven by consumer demand for towel and tissue products, we expect volatility in the ruble exchange rate to continue due to fluctuations and global oil markets.
As a reminder, operationally about 60% to 70% of films revenue is in us dollars.
Illness committed to the health and safety of its employees.
And as practicing appropriate containment measures the business has not had any material operational disruptions due to cope with my team and lastly, and April International paper received 141 million dollar dividend payment for mill. This brings total dividends received from 11 to more than $1 billion since the end.
Option of the joint venture.
Turning to slide 17, and our outlook.
In light of the uncertainty regarding the impact in duration of Cobot 19, we are withdrawing our full year adjusted EBITDA and free cash flow outlooks.
We intend to continue to provide an update on business conditions on a quarterly outlook.
Keep in mind that our second quarter outlook is our best view at this time and a fluid environment.
So let me start with industrial packaging.
We expect price and mix to be down $5 million on the flow through a prior index movements in North America.
Which is part partly offset by favorable.
Price and mix and our export channels.
Volume is expected to be down $70 million as demand slows from an elevated level as well as the impact of one less shipping days and the second quarter.
Operations and cost are expected to lower earnings by $60 million.
Due to the non repeat a floor medical claims and higher costs related to the ROE mill in the second quarter.
Staying with industrial packaging maintenance outage expense is expected to decreased by $27 million and input costs are expected to be higher by about $55 million due to higher recovered fiber cost.
In global cellulose fibers, we expect price and mix the increase.
$20 million on the impact of prior index movements.
Volume is expected to be sequentially flat.
Operations and costs are expected to lower earnings by $25 million.
Maintenance outage expense is expected to decreased by $25 million and input costs are expected to remain stable.
Moving to printing papers, we expect the impact of price and mix to be flat.
Volume as it is expected to be down about $50 million due to the impact of cobot 19, and all of our regions.
Operations in cost are expected to lower earnings by $85 million, mostly due to the impact of unabsorbed fixed costs.
Maintenance outage expense is expected to decrease by $12 million and input costs are expected to remain stable.
As noted in the segment details I just shared.
Maintenance outages all in are expected to improved by 64 million in the second quarter.
Details by business and quarter are included in the Appendix and response Dakota 19, we now expect maintenance.
And this outage expense for the full year to be about 480 million versus our original forecast of 585 million.
And lastly, other equity earnings you will see the outlook for the billing joint venture.
Turning to slide 18, I want to take a moment to update you on how we're thinking about capital allocation as we navigate cobot 19.
Our allocation framework does not change we will continue to make thoughtful choices as we navigate circumstances.
I'll start with the balance sheet, our commitment to a strong balance sheet, an investment grade credit rating does not change.
We reduced debt by one of the half billion dollars during the past few years.
And closed 2019 around the upper end of our leverage target.
Our leverage could be adversely impacted if negative global economic conditions persist, but as Mark said earlier, we entered the coven 19 crisis strong position.
That strength extends to our pension plan.
It remains sufficiently funded and previous actions to de risk. The plan help preserve the funding ratio at about 90% as we exited the first quarter.
Returning cash to shareholders as a meaningful part of our capital allocation framework and the past five years, we've returned nearly $5.6 billion to shareholders or about 60% of free cash flow.
Given significant economic uncertainties worst suspending share repurchases.
We pay the first quarter dividend in March we are not making a change to our dividend policy. At this time, we continue to evaluate it with our board of directors as we conduct testing on the impact of covert 19 under different economic scenarios.
Looking at investments, we intend to reduce capex to 600 million in 2020.
We will find only mission critical needs, including the completion of the Riverdale conversion.
We will not compromise the health and safety of our employees more take any environmental or regulatory short cuts.
We're taking a deliberate approach to funding decisions to ensure we continue to have the right capabilities to provide the best solutions for our customers.
And are well positioned for the essential economic recovery.
Taking a closer look at that and pension on slide 19, our maturity profile provides us with financial flexibility as we navigate through the crisis.
We have no commercial paper debt outstanding and no near term bond maturities.
I'd also note that we reduced our annual interest expense by about $100 million since 2017.
As I've said earlier, our pension plan a sufficiently funded at around 90%.
This time, we do not expect any required contributions in the next five years.
During the past few years, we've taken meaningful steps to de risk the pension plan on the structural basis.
You see the result of these actions on the chart our pension gap is essentially unchanged as we exit the first quarter despite significant market volatility.
Turning to slide 20.
We have about $3.8 billion of liquidity as we exit April which includes cash of about a billion and committed credit facilities up 2.8 billion.
We've taken prudent actions to further strengthen our liquidity as to covert 19 crisis accelerate.
Entered a new $750 million bank revolver, we also extended our a our facility and change that from uncommitted two committed to ensure access.
All our facilities are available and unused at this time.
In addition, our credit ratings provide attractive access to the bond market.
We like the <unk> financial flexibility our liquidity position provides given the severity of the economic crisis and the uncertainty of the shape and pace of recovery.
On slide 21, we summarize some of the cash levers available given the significant economic uncertainty, we chose to take prudent and early actions to maximize liquidity.
We will continue to evaluate conditions and make decisions based on the best information available and our view of risk.
As a reminder, we monetize $250 million of our stake and graphic packaging in the first quarter.
This puts us on a monetization path and we will continue to be thoughtful on our approach.
The net of all of this is that we're well positioned with our operations balance sheet and liquidity.
To manage the current economic crisis, and with that I'll turn it back over to Mark. Thank you. Tim We began today's conversation by sharing with you Holly International paper's navigating the comment 19 crisis.
We've weathered many star and start our company's 122 year history, and every day I hear another inspiring story empower employees are stepping up to the current set of challenges.
Provided their steadfast commitment to international paper, our customers and each other.
I think plays a critical role in the supply chain required to produce and deliver food pharmaceuticals hygiene and other essential products to consumers and as I said earlier is a privilege that comes with enormous responsibility to take care of our employees and our customers. They are the foundation of how we create value for our shareholders I'm confident that the top.
Any we built and our strong financial footing positions us well to succeed in the near term and the long term and with that Tim and I are happy to take your questions.
Thank you last year in mice.
If he would like to ask your question. Please press Star then one on your telephone keypad again that star one to ask a question.
Your first question is going to come from the line of George Staphos Bank of America Merrill Lynch.
Hi, everyone. Good morning, Thanks for taking my questions and thanks for all you're doing on covert both for us and your employees.
A couple of questions to start Mark Tim could you talk a bit about what kind of growth you're seeing and E commerce.
Hi, there in the quarter or maybe the current run rate as we were in April and then related point, what kind of volumes are you in fact, staying in box shipments to extent that you can comment in April and I had a couple of follow ons.
On George this is mark on ecommerce you normally we've talked about double digit growth, we're experiencing extremely strong double digit growth so orders of magnitude above the normal double double digit growth.
In April.
Our indications to April are that we are still seeing.
Although moderating from the heavy March that we showed at 4.7 to more normalized levels were still seeing positive activity.
In the box market in April in the in the neighborhood of 2%.
Okay.
Thanks for that and then recognizing some of this is just going to be driven by co bid and social dispensing can you comment on where you found the opportunity to cut back a bit on both capital spending and maintenance on the latter it seemed a fair amount of that was on a north American industrial.
Packaging.
Medically bridled more color in terms of what can be cut permanently and what gets.
We utilized pushed into 2021.
Yes George.
Make just a opening comment asked him to give you a little more color on capital and maintenance expenses, we make these decisions from principal basis number one.
And we often get credit.
Well the credits the right, we're not for having really good assets and spending a lot of money maintain our asset quality is really high and we're not operate and typically in crisis mode. So our ability to adjust and I don't think of it as cutting I think of it as delaying adjusting changing the timing of Capex and maintenance expenses we.
We're allowed to do that managing the risk because we keep our equipment and our processes in very good shape. So there's a number of areas that we are just looking at before we really understand what is going to happen to the consumer GDP and demand that we don't tie up cashing.
Projects in areas that we may not need to as early as we originally planned and Tim If you want to give some additional private ample well I think you said it well mark the only thing I would add is a mark referenced.
But this is not a cutting so much as a waiting and see so all of the measures that we've taken we can we can begin ramping them back up as we see less volatility and a return to some type of normal so, but I think more characterize that well we do have great assets. It gives us flexibility and example, just to go.
A little more George.
We have cost reduction projects every year most of that is it related to consumption to of input materials. So any type of input trying to be more efficient consume less of it in an uncertain economic environment. Those projects don't pay as early as you think if you're not using that input anyway because of low demand.
So until we have better clarity, we can we can change the cash outflow.
Timetable and keeping the company's cash and cash out at a much stronger position and that's really all we're doing here.
Okay and it sounds like it's more proactive then then just social distancing. Thanks for that and my last one could you comment a bit further on bogalusa enrollment what do you think the production loss for the year might be.
You gave some preliminary timing for the restart at Rome. If you could go into what is required there that'd be great. Thanks for taking my questions I'll turn it over.
Yeah, we've got bogalusa, its back up and running on Rome, where we're looking at June as the likely.
Restart.
So we're going to lose a quarter in Rome, we lost much less than that at bogalusa.
We don't typically give out capacity universe and things like that George So I'll refrain from that.
Yeah understood I figured into circumstance you could but I appreciate it guys. Thank you.
[music].
Yes.
And our next question will come from the line of Mark Weintraub with Seaport Global.
Thank you and thank you for the very helpful presentation slides and all the actions you're taking for your constituents.
The one thing I was trying to get a better sending is on the volume side and industrial packaging I think you said a negative 70 million dollar.
Good.
I I think you also indicated that in April box shipments were looking like they are up about 2% domestically and I realize that theres international as well as domestic in here, but if I look at this slide.
For the for the just ended the quarter, India, I'd like an 18 million.
And if it from volume it just seems like a very large negative.
Expected impact from that can you help.
I understand what why it would be quite as big as that unless you're you're expecting you know very sharp falloff, which which I don't let's say get from the slide you put out in volume for the second quarter.
Markets down what Youre right April.
This has been very good our caught up is between two and 3% that's not a shipment number that's a consumption as we as we.
Produce boxes to.
Satisfy orders.
But we won't know what ship supply of course until we close box at the end of the month and see all of that.
There is some uncertainty in Europe as Europe starts to reopen and I think it's you know Unfortunately is just where we are there was a lot of fluidity and uncertainty around everything three or four days ago, we had protein packaging plants being down and now they're going to be coming back and so that's just.
How quickly things can change we do have one the one less day in the quarter and the second quarter in North America. So that has not insignificant impact, but we're looking at what we're seeing at the moment, where short cycle a short order cycle business. We can only really gauge on order intake up a couple of weeks.
So we're just trying to triangulate across all these segments segment by segment as to what we think we're going to see in May and June. So Mark just one added piece of color. If you go back to the side with the market segments for box that Tim walked us through with the red yellow and green.
Again, our best view right now as multiple states in jurisdictions attempt to try reopening.
Strategies.
We didn't we didnt have a view of whether that was going to be successful or not but lets assume part of it is more successful than we're all carrying at our heads you got flow through in foodservice and some of the other week segments that would be all upside to as we sit here today, none of that has happened.
Trying to call. It we're just trying to be very transparent and say this is what we see now but as Tim mentioned on the protein plants and I think they will figure that out and on successful reopening and that anything else that gives the consumer confidence therapeutics that were reported earlier this week with some traction those are all views.
That could give us upside into the demand cycle, but to put that out there as we see it as international paper seems to be a little bit.
You know a little bit wishful thinking, but all of it is moving and real and.
Could be upsides to our to our near term outlook.
I appreciate that and it's real quickly if I could obviously waste paper costs are moving really thought through oak Ccgts moving really fast can you give us a sense as to where you see.
Them currently and how that flow through into your business and what if anything can you be doing two to mitigate the impact if you've got a big collection system et cetera.
Yes.
Well they are up significantly three or four times, what they were earlier in the year.
The good news as we have tremendous flexibility across our system. So we do have some facilities that are 100% recycled but most of our facilities are a blend of.
Urgent and recovered fiber and so on a normal basis. We go about some amount of balancing and arbitrage and cost facility by facility. So we'll have some flexibility to work around that.
But you know it again it depends on what the reopening it depends on how fast and to what degree.
Because this is really.
Generation issue for certain parts of the supply chain for RCC.
I have been impacted quite negatively.
Thank you.
Thank you.
Next question will come from the line of Anthony Pettinari with Citigroup.
Hi, Anthony.
You may be on mute.
One month Anthony Your line is open yep.
Sorry about that.
So thanks again for all the detail, especially with what you're doing on safety, maybe maybe just following up on George's question. It's it seems like this experience may accelerate E commerce any grocery at the expense of physical retail.
If that's true how do you think about the long term impact to your corrugated business either from your ability to engage those customers and then any difference in the margin profile if theres any difference from.
Some of the other traditional customers who serve.
To answer a great question.
We are well positioned to serve E commerce, where its business to consumer opening a general retail sense and the ecommerce that business to business anymore industrial products as we position with almost everybody who is anybody in that particular type of business model.
We have product and service platforms that do very well in there and I think the margin.
Comparisons are not a big issue some of the retailers, replacing lower margin retail some of the food through E. Commerce is replacing some of the.
Average margin in the process of center store staff. So when you look at it all ecommerce is a good business for us and it's got a margin arbitrage issue that we look at in the long term.
And relative to the total size of the market is still relatively small as the segment and and the segments not homogeneous theirs.
Commerce is not E commerce as we look at the customers that we supply.
Great Great that's very helpful.
And then in printing papers I think you anticipate essentially stable price mix into Q, just wondering with demand down 40% globally, who wanted to gauge whether the shutdowns that are being taken or sort of appropriate about supply to demand and then as you move from March to April to me are you seeing sequential weakening.
Thing or stabilization in printing paper demand any kind of thoughts there.
You know, it's like we said when we covered on the slide with.
40% to 50% lower.
Order intake is as we said unprecedented so again.
These are short short order cycle businesses, and we don't have unless it's an export shipment, which has a little bit longer lead time.
Don't get tremendous.
Look through to what it might be a month or two months out. We're just we're gonna have to see how I think it's going be a function of how quickly and how successfully things reopened.
And we're taking all of the steps we need to take.
To match, our productive capacity to our customers demand. The last thing we want to do as we referenced earlier as type cash we don't need it and so it's better for us to adjust our productive.
Brad.
In the short term than than tied up in inventory.
Okay. That's helpful I'll turn it over.
Thank you.
Our next question is going to come from the line as Steve Chercover Davidson.
Thank you and good morning, everyone.
First of all.
Do you anticipate I think you'd do future insurance recoveries from the outages at Roman Bogalusa, Tim said that they were initial.
Recovery, so maybe whats the deductible and how much more can we perhaps expect yes, we have a 10 million deductible in each of the mills for the two incidents.
We're just going have to wait and see how it plays out this is still an ongoing process. So.
We'll have more to say about it and future quarters results.
Okay, and sticking with containerboard I guess the implications Risi had suggested that you were perhaps trying to fast track the riverdale.
Conversion in order to offset the impact Roman Bogalusa, I mean, I think it's fine that you're doing it safely and it's even a quarter pushed backwards, but.
Was that just pure speculation on their part where do they get.
I have no idea, where they get it wouldn't even be accurate in terms of greater product, because we're going to be producing a totally different product to riverdale than we are those other two mills, so I can't speak to what they write or how they obtain a.
We're just managing the project, we're trying to protect our employees and our contractors and do it on a very responsible way.
Sure, Okay, well, we don't always know where they get their stuff and then a longer term. If you can think about it view on on paper.
Is it possible that post coded like there might be many other.
Long term impacts that we're not.
Anticipating.
For instance, ecommerce might have a permanent boost might there be a permanent negative shock to printing paper demand.
It could be I wouldn't argue that something's not possible. We just don't know just anecdotally I tried to refinance refrain from printing is I worked remotely at home, but then I found myself printing to remove the time to catch up with all the things that I would normally friends. So.
You know it depends there's.
We know on the.
Sizing side that still a combination of online platform marketing and direct mail marketing is the most successful.
Type of marketing approach.
So we'll have to see.
What happens as things start to start to open up again.
And last question on fine paper and it's.
On your specialties don't you make a lot of the did the course first Q tip swabs for instance are there any.
Benefits on your specialty side.
Yes, we do make those.
This is much smaller product so the amount of fibers business into it's much less but yes, we do we do make those.
One of where maybe the only at this point, we're one of the few producers that actually make.
Okay. Thanks said healthy.
Thank you to understand.
Thank you. Our next question will come from the line a Debbie Jones Deutsche Bank.
Hi, good morning, Thanks for taking my question.
I know you said this before but I can you just get a little bit more granular on what you're seeing in the export markets and if there's anything.
Notable by region.
Turning right now.
Okay.
Yes, the summary comment as those then really relatively strong across all of the products in regions that we shipped to both for export containerboard as well as our full systems.
Paul on the strength of.
Hi, Jane products.
And sometimes on tissue and on containerboard remember inventories were much lower as we entered the year end demand has actually been good to this point and so.
We think that inventory levels and customers around the world that we service our normal at best and low in some cases and the pull for banana and citrus has been strong.
Okay, and then I wanted ask the question about the dividend.
So the board reviewing it.
Jack testing it could you talk about what goes into that you might that would be that you're looking at the first half of the or.
One thing Brian.
Right.
Okay.
Question on bullet printed stress testing are you doing.
It's a great question and as I've said Theres no change to our dividend policy, we pay the dividend the first quarter no change to the policy at the time, but.
With all prudence for not only for dividend, but for all aspects of our operation we're doing as robust economic scenario planning as we know how starting with.
The impact that we saw during the financial crisis back in a way to know not.
And then working to.
Lower levels of performance from from that experience.
We don't know.
Given this is a different type of crisis with health applications. We don't know how cyvera can be so we're looking at a whole range of testing and scenario planning and trying to be as robust as we know how I would say this in terms of the actions that we've taken they've been taken out of caution and prudence and add.
Because we have flexibility to lower capital and lower maintenance.
Because of the asset quality, we just stopped for a moment in time, we can always resume things appear normal. So there is an amount the sequence of the cash mitigation levers that we have once we've taken so far or ones that we can turn back on if we want to.
But we thought in the moment.
Back in March as things accelerated it was very uncertain. These are prudent things to do at that point in time.
Okay. Thanks, that's helpful turnover.
And our next question will come from the line of Adam Josephson with Keybanc.
Good morning, everyone I Hope you and your families are safe and healthy.
Your soon.
Thanks, Mark one on demand I know Mark asked you earlier about that the Delta the 770 million Delta, but just more broadly I know you look at a number of economic indicators, whether it be GDP growth third non durable industrial production or otherwise and there's historically been about I think 150 base.
This point gap between GDP growth and.
Box demand I'm, just wondering how you're thinking about that relationship. This year, just given how unusual obviously the first quarter Wars, particularly March.
In April as good as well box man was likely much much better than what the what the actual economy was doing so how are you thinking about that relationship based this year in the context of what you saw in one queue up about 3% in Europe to wish in April.
Great question, how do we do have a demand model that we use for international paper. It's it's it's not only looking at GDP, but a constructive GDP and in some other inputs that correlate very closely with corrugated demand and we use that model.
Under different scenarios at GDP put out by others, not not not on our own number but well recognized external sources and then we look at for this particular.
Disruption you're right it's different it's a lot about the duration of the disruption and we look at what we think recovery patterns will be not one letter in the alphabet, but by segment.
And it's likely to play out differently by different types of segment. So what role the consumer plays in the.
The largest part of corrugated packaging, which is in the food and non durable section.
Really determines what we're going to see in demand and that may for several quarters be completely dislocated from the broader GDP, if that's being driven down by capital investment or other components of GDP. So we're not we're not looking at a delta or an offset to GDP and then calculating historic relationship for box demand its.
Much more granular than that and one of the biggest sources of input we have to our demand model is actually talking to our customers and seeing what they're seeing and that's why we think.
Kinds of products, we make and thus the role they play in the supply chain through an environment like this.
This isn't a bunch of luxury products that are you know you can volume or not by most of what we do is essential to everyday life and so we believe we're going to weather.
All these dramatic forecast and GDP pretty well.
I appreciate that market and Tim one on recovered paper I know you talked about the expected.
Sequential drag in industrial packaging from higher.
See cause I'm, just wondering embedded in that if you're expecting another call. It 20 to 30 Bucks.
Jump in the price in May and then and what if anything thereafter, and then more broadly how long do you expect this spike to laugh I know the it depends on how long the economy is effectively shut down for a long commercial collection stays down four but any thoughts you have about how much you're expecting those you see to go up again in May.
Okay and then.
Were you think it shakes out thereafter based on how quickly the economy reopens.
Yes, I think it's just that as we called out we were expecting of 55 million dollar impact on higher input costs must be recovered fiber in the quarter.
And I think you said I think it depends on.
How quickly into what degree.
The shape of the reopening takes and and.
Retail has been significantly impacted most of those non essential.
The food restaurant Foodservice segment has been significantly impacted so I think it's going to depend on how quickly and how successfully those come back Adam another another point on this to add to what Tim said is.
This retail components really going to be interesting to watch because around almost 30% of RCC generated in the U.S. begins its life as a box being imported to the U.S. from somewhere else. Many of those type of products and up through the U.S. retail chain chain and they're definitely impacted right now and not all of them are.
In that essential category, so again duration of the stay at home orders.
Confidence of consumers getting back into society, whether theres medicines and other treatments all of that fits together, but theres a full almost 30% of our recovered fiber that's available for recovery in the U.S. that begin somewhere else and that's really that's really ratcheted down a lot right now unlikely, we'll take a while to come back.
Thanks, so much mark.
And our next question is going to come from the line of Dr., Mark will deal with the amount.
Hi, Mark I Tim.
Hi, Mark.
I wondered if either you could just give us a sense of how you are responding to these declines in printing and writing paper consumption in the various regions around the world I think you produce in the U.S., Brazil, Poland and Russia.
Well I think the whaler responding as we're taking care of our customers were managing inventory very closely to Tim's point about not kind have cash and we got very flexible our system in Europe than in the U.S.
Not a line that individual mills left in that business, but they're large an important and we've got for the same reasons, we usually talk about it in packaging when we have supply and demand dislocations. We've got the same marginal cost sharing model and systems in place. We just don't use it very much in printing papers.
And we are able to shed a big portion of our marginal cost can variable costs to match our production with our demand and so we're set up to do it.
But we take care of our customers and we take care of our inventory and cash tied up there and we adjust our production.
Mark It both of your two biggest competitors domestically, it's sort of put out press releases and told us what they expected to pull out of the market in the second quarter is it possible for you to give us anything like that either domestically or for the offshore businesses.
No it's not.
But we did give you.
On a cost number in the outlook slide 10 locked through I think it was $80 million $85 million unabsorbed fixed costs and so that gives you some indication of what we're expecting but now we never give forward views of our planned production output.
We just don't do that we don't.
To quantify it after the fact everything.
All right. That's the other question I had is that for either of you can you. Just can you talk a little bit about how you're thinking about kind of foreign exchange and the strength of the dollar and I'm curious about this both from a translational standpoint, but also the impact for us for a largely a U.S. dollar based producer of.
Good commodities, what it means in terms of bolt.
Central for its kind of demand at price.
Yes, great question Mark.
You know it did strengthen some at the beginning of the crisis. It's been roughly the same zone for for a few weeks now maybe a month or two.
We we tend to get a bit of awash around the world. When you look at our our different businesses.
We pay a relative the dollar helps that business as they go to export markets.
The Ilim joint venture has all of its cost for the most part in rubles annex exporting selling in dollars.
As for us to some degree at times, depending on the strength of demand and supply on exports for the you from the U.S., but again a lot of.
Well it gets exported out of the U.S. as in our pulp business, which is a unique product.
And benefits from the fiber characteristics that we have in the southern part of view. So when we put it all together over a long period of time, it's it seemed to be.
Mostly net neutral.
Okay, and just last quick one Tim can you just update us on Elims capital plans.
Yes.
In this environment you'd expect that they would pull it back they have done it has taken some measures to cut.
Capital in the moment they are.
Still progressing on the large project that this lamps and.
Don't see any real significant delays to that but they have other places to balance out.
Capital spending across the rest of the business as well as.
That business is particularly good at managing their cash and taking any cash mitigation measures that they need to.
Okay fair enough I'll turn it over.
Thank you and our next question is going to come from the line of gave high Bay with Wells Fargo.
Smart Tim Guillermo.
Thanks for all the detail hope you guys are doing well.
Thanks, guys.
I was curious if you could comment at all.
I mean, you touched on some I think export customer inventory levels, but.
Maybe your domestic inventory levels and in industrial business.
I appreciate there's a balance going on right now with.
Bringing up one facility bogalusa, another one being out of June.
Demand kind of plays out as you see it although as you're projecting.
Are you might expect your inventory levels to be heading into the second quarter versus where you're at today.
Yes, I guess, what I would say, we don't as you know we don't.
We don't publish our share.
Our specific numbers and levels I would say, we're on the low side here domestically.
We've had a strong demand pull across the entire business all channels. So far this year given those factors that we talked about.
So if were low inventory levels and a lot of demand.
Through this point in time that we've seen in the export channel and you've seen the results that we had in the integrated channel here in North America and so at this point, it's been about balancing our supply to make sure. We are trying to take care of all of our customers.
At the end of the second quarter.
In venture predictions at this point.
Okay, and maybe to try to dig a little bit deeper on Adam's question I'm kind of on slide nine Mark you talked about trying to get into Weve, a little bit in terms of underlying demand drivers for core get.
And we think about maybe corrugated intensity through the supply chain.
For food and beverage specifically going through retail as opposed to foodservice.
Hey, your way that maybe for a leveling help us think about more core gets intensive.
For that channel versus and I appreciate against maybe you don't necessarily know what your customers do with the product once it.
Leisure.
Silly.
I understand your question Gabe I don't have a good clean ascertain corrugated intensity per unit about I'd like to just suffice it to say that both channels that retail channel, which you know doesn't it's corrugated intensive but as you know there's been a lot of innovations rent beverage and other thing.
We don't use as much anymore and the foodservice channel are very very important to our corrugated demand I would say the foodservice channel given the way product managers and the bulk in what you moves in the quantities I had a very large component of corrugated you think about even anecdotally.
Think about watching a restaurant get supply from the back side as a foodservice truck is there there's a lot of corrugated delivering multiple units of ingredients and supplies. So it's it's definitely important for our demand and it's important for corrugated.
Usage and so as we see some success and re opening even at reduced capacities.
It's not just restaurants, though the core school and cafeterias and other things are large users on the foodservice supply chain as well, but its meaning falling important for us.
Okay. Thank you good luck.
And our next question will come from the line of Mark Connelly with Stephen.
Thank you just two things.
Richard Dale obviously represents a nice opportunity to bring all that high value or how are you white top customers any more or less essentially co for terms with average I'm just wondering how to think about the customer side of that ramp up.
Well, Hey, Mark is Tim.
A large portion of what we produces around food.
So whether its produce or other types of food products.
A lot of the usage.
Hi top goes into that.
So without giving you a hard number I don't have a hard number off top of my head but.
But there has been component the consumer goods and food products.
Okay. So so you shouldn't you shouldn't go too much of a drag there and just one more question a little more.
So on Brazil can you remind us what the split of business down there in terms of.
Cut size versus rule and how much of that business stays domestic Brazil lately.
Yes, roughly half of our production if memory serves stays in Brazil, and then it varies up and down balance of it.
The balance of it does either to let the Latin American region, and some amount to Europe.
The split.
It's largely a cut size business.
Right, we have predominant brand in the country, Sean backs that is very well received by our customer base, we do some printing grades as well, but for the most part.
A lot of cut size.
Okay. That's very helpful. Thank you.
And our last question for today will come from the line of Brian Maguire Goldman Sachs.
Hi, Thanks for squeezing me and hope you all are doing well.
Right.
I just wanted to take another stab at the QQ sort of volume outlook in corrugated just trying to reconcile the tablet conflicting statements sounded like April is off to a good start within a year over year basis and.
The heat map shorter showed some deceleration I mean I'm guessing as the month progressed, but then the guidance on EBIT again down 70 million or so I. Just wondering if that's kind of representing your worst case estimate for how things could progress in Twoq you if things maybe.
Deteriorate, even more from here or is it something you're actually seeing I guess, just trying to get a sense.
You know how conservative you're you're taking a cut the to guide and you sort of related to that I understand pulling the full year guidance, but.
Why even give the twoq number is if it's so much as sort of up in the air and uncertain at this point.
No. It's a good question Brian.
We always give an outlook we're required to give an outlook. We try to give one is thoughtful as we can.
I would say April looks like it's turning out okay. We'll have to get into May and say again I continue to mention that were a short order cycle business and so a lot of this is triangulating based on what we hear from customers and and overseeing across all of the converting facilities that we have been looking.
Segment by segment by segment.
So.
It's our best estimate at this moment in time, but I think its acknowledging that there is a lot of fluidity and as I mentioned with the protein example, one day it looks like 25, 30% of supply is going to be constrained the demands there, but the supplies not and then a few days later, there's there's change.
He is in place and.
And protein plants.
Hopefully be starting back up at a point in time, so just a lot of fluidity.
Okay, and then just one last one just to switch gears, maybe more of a philosophical or longer term question on.
In uncoated freesheet, obviously, it's going to be off quite a bit this year and.
So Matt alluded to earlier some of that could be structural longer term in nature.
Yes, I mean, why your corrugated business is performing well I just wondered how you're thinking about the interplay between the two in the industry.
Essential for others, you've talked about conversions from from printing papers to packaging to maybe look to move forward on some of those as they need to shuts until then your role as a leader in both markets you guys year sales is.
As somebody who would love to proactively preemptively shut some more of your white paper capacity to try and.
Keep others in the industry from trying to move towards the conversion mentality.
So Brian I mean.
That's a difficult question to answer because it's so forward looking I think if you look at our track record on how we've managed our uncoated freesheet business over the years, it's been a combination of.
How we matched at supply side to it structurally declining market, it's a mix of converting some facilities to a different product that were already and light containerboard and fluff pulp. Unfortunately, we closed some facilities that didnt have a good conversion option and we.
Managed the business and I think a graceful way to meet.
The reality of the decline.
All the other parts of your question are really unanswerable in terms of.
What we would do and why we would do things and have done things with our printing paper assets and especially the talented.
Production people, we Havent does plant.
To proactively health one of our other businesses that would be the primary reason for making changes and so it's really early to figure out right now and whether there is permanent structural step down and that a return to a steady structural decline or not it's a good.
Question, it's possible that could happen, but we're going to stay flexible enough to make sure we see what's happening before.
Before we make any conclusions on that but in our uncoated freesheet business is now less than 20% of the company.
At a rate strong cash we've got great assets in good wood baskets.
That give us flexibility for the future so that that message hasn't really changed.
Okay. Thanks, so much stays thanks guys.
Thank you.
Thank you I'll turn it over to caramel gearing.
Thank you operator. This this is mark and I'm going to wrap up.
First of all I just want to again.
Publicly thank our employees and international paper further courage and commitment to our company and to our customers into each other as we operate through this we think theres. There's obviously more uncertainty has communities. We opened their economies. Our hope is that that's done well unsuccessful on that will help the people around the world.
All in also help our company.
The crisis has done one thing for US we talk a lot about the purpose of our company.
Making products that people need every day on renewable natural resources and that has really brought our purpose to life.
Reinforces the critical role our products play in People's lives and an important supply chains and I'll leave you with.
International paper and my confidence in our future we had a strong financial footing you can count on international paper to deliver you can count on our employees. If you invest in international paper, you can count on us to create long term value and lead the company and manage the company with all of our important stakeholders in mind for.
For the long term, we've been added for 122 years, and we're going to plan on being added for a lot longer. So thank you for joining our call and we look forward to talking with you in the future.
Thank you once again, we'd like to thank you for participating on today's conference call.
You may now disconnect.
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