Q3 2020 International Paper Co Earnings Call
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I'd now like to turn today's conference over to the animal that he had us Vice President Investor Relations.
Thank you Maria good morning, and thank you for joining international paper's first quarter 2020 earnings call. Our speakers. This morning are Mark Sutton.
Carmen <unk>, Chief Executive Officer and Tim.
Mechels Senior Vice President and Chief Financial Officer.
There was an important information about the beginning of our presentation on slide two excluding certain legal disclaimers.
For example, during this call will make forward looking statements that are subject to risks and uncertainties, including the effect of cold chain.
We will also present certain non U.S. GAAP financial information.
So maybe I should have those figures to U.S. GAAP financial measures.
Well go on our website.
Also contains copies of the third quarter 2020, <unk> earnings press release after today's presentation spot relative to the old joint venture.
Switching infrastructure like to also provide context around the financial information and statistical measures presented on those subjects.
Now I'll turn the call over to Mark.
[music]. Thank you very much good morning, everyone.
We will begin our discussion on slide three.
National paper delivered solid results and robust cash flows in a dynamic environment.
We generated $1.6 billion or free cash flow.
The first three quarters as we continue to demonstrate the strength and resilience of our company.
We're on track to generate $2 billion in free cash flow this year through our early actions and strong execution.
Relative to demand recovery trends continue to vary by business and by end user consumer segment.
Demand for our corrugated packaging accelerate in the third quarter and that momentum continues in the fourth quarter.
And fluff pulp as expected, we experienced seasonally lower demand and de stocking across most regions.
Papers, we're in the early stages of recovery as offices in school activities began to restart.
Against this backdrop, our commercial supply chain and manufacturing organizations are executing at a high level to ensure we meet our customers' changing needs leveraging the scale and flexibility of our system and optimizing our cost a.
The company's solid performance in the third quarter reinforces our financial strength and commitment to our capital allocation framework.
[music], turning now to slide four which shows our third quarter results operating earnings were 71 cents per share which included a favorable foreign.
Foreign exchange non cash impact of 14 cents in the quarter.
Sales improved sequentially and came in for that our expectations.
By strong demand in our North American packaging business.
EBITDA increased by nearly $100 million sequentially.
Even as planned maintenance outage expenses stepped up by about $80 million.
As already mentioned, we generated robust free cash flow in the third quarter, which we continue to apply in a manner consistent with our capital allocation framework.
During the third quarter, we reduced debt by about $800 million, bringing year to date that reduction to 1.1 billion earlier.
Earlier this month the board of directors approved a fourth quarter dividend, bringing the full year authorizations for our dividend to $800 million.
[noise] moving to slide five as.
As I reflect on our performance this year it reaffirms my admiration and appreciation for our 50000 employees worldwide, who continue to perform at a high level like taking care of each other and our customers I'm, especially grateful to our front line teams in manufacturing and converting facilities around the world.
We remain absolutely committed to our COVID-19 principles.
And we will continue to focus on what we need to do to further strengthen the company for all of our stakeholders in the short term and the long term.
Now I'll turn it over to Tim who will cover our business performance and our fourth quarter outlook Tim [noise].
Thank you Mark good morning.
Moving to the quarter over quarter earnings bridge on slide six third quarter operating earnings were better than we expected driven by strong commercial and operating performance.
As well as help standing cost management higher.
Higher volume contributed to improved fixed cost absorption in the quarter.
Which is captured in operations and cost.
Third quarter performance also benefited from one time items, which favorably impacted operations sort of cost.
Looking at the bridge price mix was essentially flat.
Volume was favorable driven by strong demand for corrugated packaging in North America.
And improved demand for printing papers across all regions.
Operational costs benefited from improved fixed cost absorption on higher volumes.
The business continues the businesses continue to do an excellent job managing costs and delivered strong operational performance to mitigate the impact hurricanes in the quarter.
As mentioned earlier onetime items contributed favorably to operations and cost.
Adding about 30 million or six cents per share with each business, saying about $10 million and benefits.
As expected maintenance outage costs were a drag in the third quarter, which is our highest planned maintenance out over this year.
I'll remind you that in response to COVID-19, we made significant adjustments to the scope and timing.
Our maintenance outage plan, we now expect the full year maintenance outage expenses to be $450 million compared to 585 million.
And the original forecast that we shared with you at the beginning of the year.
Input costs were favorable.
Mostly due to lower recovered fiber costs we.
We did experience higher energy and distribution cost as we exited the third quarter, which we see as a positive sign of an improving economy.
Corporate expenses were lower than expected benefiting from about 20 million on foreign currency adjustments.
Tax expense was lower by seven cents per share in the third quarter with an effective tax rate of 19% compared to 26% in the second quarter.
Most of this was related to adjustments to our federal tax provision after finalizing our 2019 tax return.
Equity earnings includes a non cash foreign exchange loss of 14 cents in the third quarter Fort Hill.
As compared to a knives that game and the second quarter.
Turning to the segments and starting with industrial packaging on slide seven the business performed well driven by strong commercial and operational performance.
Across the segment price and mix was stable.
Volume improves sequentially across all regions with strong demand in North America.
Demand accelerate in the third quarter and just about every segment, we're seeing the benefits of strong at home consumption.
We're in the early stages of a recovery in food service.
We continue to see very strong double digit growth in ecommerce with increased consumer reliance on E commerce as a buying channel.
More recently, we're seeing better performance for industrial and durable goods across a broad spectrum of end use segments.
Especially those linked with construction and home improvement.
Our export containerboard shipments were lower in the third quarter.
Due to the strong demand in North America, and the impact of weather events.
With that said underlying demand in our export channels picked up as we enter the seasonally stronger fourth quarter.
Our mills and converting facilities performed well.
We managed direct and indirect cost well, while fixed cost absorption improved on higher volumes.
All of which helped mitigate the impact of precautionary downtime related to the hurricanes.
Maintenance outage costs were lower than expected as we de scope and shifted some outage activity to the fourth quarter to better support come up customer demand in the third quarter.
[noise] input costs were favorable driven by lower recovered fiber costs, we did see higher energy and distribution cost as we exited the third quarter.
Along with a sharp increase in natural gas costs from the Kobin related flows as economies reopened last.
Lastly, an update on Riverdale 15, quite tough linerboard conversion the ramp up is progressing ahead of schedule and qualification activities are advancing rapidly through our box system.
As a reminder, this investment benefits, our box customers, who value high impact graphics and strengthens our containerboard offerings.
[noise] moving to slide eight we've often talked about how we're investing to enhance our capabilities.
And while that is often associated with investments we make in our mills and box systems. Another important investment, we're making is around innovation and enhancing customer specific solutions.
It comes back to the fundamental notion the boxes are tailored to meet each of our customers unique needs.
We're accelerating innovation to further our advantages and faster growing box segments.
We developed E boss, a software platform that enables our teams of experts.
To work with our E commerce customers to determine the optimal design and suite of boxes to minimize packaging waste and reduce their freight costs.
For a protein customers. We developed are recyclable moisture barrier that allows poultry beef and pork boxes to compete to complete the fiber cycle.
For fresh bread as customers, we perhaps provide a full service machinery platform that is tailored to meet each customer's packaging needs.
These are just a few examples of how we provide value to our customers to ensure they have the right box with the right support services for each particular application.
If we look at slide nine a quick update on the demand outlook for containerboard exports.
Demand improved as we moved through the third quarter and customer inventories are currently normal to the low side.
We are seeing an expected seasonal pick up in the Mediterranean region, within especially robust citrus season, and Northern Africa, and a solid start in Spain.
We're also seeing a nice pickup in demand in China for industrial as industrial production recovers.
And then Latin America favorable weather conditions are supportive to continued solid demand for banana and pineapple boxes.
Our export containerboard channels provide good inside the box demand expectations across key regions given a typical 60 day lead time.
From about minus 30% in the second quarter to about minus 15% in the third quarter and and are key regions.
The operations and cost benefit from improved fixed cost absorption as economic downtime decreased by 225000 tonnes sequentially across all regions.
We also benefited from about $10 million in one time items.
Primarily related to Covid subsidies and Green energy credits in Europe.
The business continues to generate meaningful cash flows by focusing on cost management and working capital.
We exited the quarter with our inventories and our target range based on the current demand environment.
As we think about recovery, we saw a meaningful improvement in demand in the third quarter. We know uncertainty remains while covid restrictions persist. However, we do expect the recovery to accelerate as economies fully reopened.
Looking at the <unk> results on slide 12, we.
We had an equity loss of $33 million in the quarter. This includes a non-cash foreign exchange loss on <unk> U S. Dollar denominated net debt of which eyepiece. After tax portion was $55 million or 14 cents a share.
Volume improved sequentially and year over year, driven by Harris softwood pulp exports to China.
However, price and mix decrease on lower pulp pricing operations for solid and maintenance outages, where well executed the third quarter was llm's highest maintenance outage quarter in 2020.
Turning to slide 13, we will cover the outlook, we continue to operate in a dynamic environment with demand trends varying by business and in used customer segments.
As mentioned demand for corrugated packaging accelerated in the third quarter and that momentum continues in the fourth quarter <unk>.
Demand for fluff pulp is normalizing following the inventory destocking, which occurred in the third quarter.
And pruning papers, we're seeing a modest recovery, although demand challenges persist.
Taking a closer look at industrial packaging.
We expect price and mix to be stable.
Volume is expected to decrease by 5 million.
With strong box demand, mostly offsetting the impact of three less shipping days in the fourth quarter.
Operations and costs are expected to lower earnings by $15 million, including the non repeat of one time benefits and the and the third quarter.
Staying with industrial packaging maintenance outage expenses expected to decrease by $45 million and input costs are expected to increase by $20 million, mostly due to higher energy and transportation costs.
And cellulose fibers, we expect price and mix to decrease by $5 million volume is expected to be stable.
Operations and costs are expected to lower earnings by $20 million, which again includes the non repeat a favorable items in the third quarter.
Maintenance outage expenses expected to increase by $4 million and input costs are expected to be stable.
Turning to printing papers, we expect price and mix to be stable volume is expected to improve $20 million on higher seasonal demand in Latin America opt.
Operations and costs are expected to lower earnings by $25 million, mostly due to the non repeat.
One time benefits in the third quarter and hire seasonal energy costs.
Maintenance outages expense is expected to decrease by $16 million and input costs are expected to increase.
By $5 million.
Lastly, under equity earnings you will see our outlook for the <unk> joint venture.
Turning to slide 14.
As Mark said in his opening remarks, we're on track to generate $2 billion in free cash flow of 2020.
And our first quarter earnings call, we highlighted the company's financial flexibility and some of the cash levers we had available to enhance our cash generation and what has been undoubtedly one of the most uncertain environments we faced.
Given the economic uncertainty at the time, we chose to pull some of these levers including capital spending.
In addition, COVID-19 changed the way we worked in 2020 and choices were made around our planned maintenance outages and other spending priorities.
Which we expect will contribute contribute about 15% of our free cash flow of this year.
Or early actions and strong execution across the company are enabling us to deliver another year of strong free cash flow generation, reflecting the resilience of international paper.
Turning to slide 15, I wanted to take a moment to update you on our capital allocation choices in the third quarter.
Debt repayment as a priority during the third quarter, we reduced step by nearly $800 million, which brings debt reduction to 1.1 billion through.
Through the third quarter.
We've essentially eliminated all bond maturities through the end of 2021 and improved our maturity profile over the next decade.
I would also note that we've reduced annual interest accidents by nearly $60 million.
On debt reduction activity through the third quarter.
You can expect additional additional debt reduction in the fourth quarter, what's unexpected debt to EBITDA of around three times at year end on a Moody's basis.
Returning cash to shareholders as a meaningful part of our capital allocation framework.
Our board of directors authorized the fourth quarter dividend earlier. This month with this decision we will have returned about $800 million to shareholders through the fourth quarter.
Looking at it investments we're on track with our 800 million dollar capital spending target in 2020, which includes the Riverdale conversion as well as other funding priorities to ensure we have the right capabilities and R. U S box business.
With regard to our investment in graphic packaging.
We received $250 million in cash in the third quarter related to the second transaction. This is the maximum amount permitted for each period under the agreement.
Our ownership position is now approximately 14, 8%.
And with that I'll turn it back over to Mark.
Thank you <unk> for all the detail.
Well. This is this is our third earnings call under the realities of COVID-19.
And as I said from the outset International paper entered this crisis in a position of strength.
It really starts with the talent and commitment of our employees.
That strong position is reinforced by our capabilities to provide the best solutions for our customers and by our customers are themselves. We are partnered with many of the winning customers and multiple segments across our three businesses.
In a strong position supported by our world class manufacturing and supply chain capabilities.
All of which contributed once again to our solid performance on strong cash generational over quarter.
I am pleased with our performance and really excited about our strong outlook for the fourth quarter, and then momentum, we're generating especially in our packaging business.
And with that we're ready to take your questions.
Thank you you as a reminder to ask a question press star one so let's draw question.
Again, Starwood ask a question.
Thank you for the pumps for a moment to compile the Q&A Ralph there.
Our first question comes from the line of Gabe Hygiene Wells Fargo Securities.
Good morning, everyone, you and your families are doing well.
Okay.
First question Mark has to do with the the global cellulose fibers business and from my perspective quite frankly, I don't think you guys are getting much credit for it so.
I recognize that where you guys play this is somewhat of a sub segment of the larger help complex.
Some curious if there's something unique about this cycle.
Side of the obvious covid impact that we're seeing in printing tissue and tell that negatively impacting kind of the supply demand dynamics globally, and then relatedly.
You guys made a management team here and given Mister amyx background with seemingly imply a more of a that fixes might be commercial.
But I'm curious if there's anything in the operational side that might be contemplated.
We didn't see much in the way of footprint consolidation postal ehrenhauser.
Those are three really good questions about our global cellulose fibers business first come on the cycle I think that there is nothing unique about this particular cycle. If you think about 18. It was at the peak of pricing. The peak of demand 19 was a somewhat normal reset and then as we were turning the corner in the beginning of 20.
Prices were moving up volume was moving up Covid hit temporarily that was a benefit but now with the demand declining printing papers, a certain amount of software Paul.
Stranded so there's a supply issue that's unique to this cycle, but it's really covid related and it's related to the demand decline in putting paper some of that softwood pulp is finding its way into absorb products at the margins and that's creating what I believe is as a temporary.
Structural issue.
On the.
Operations I've talked before about what what the business needs to be successful post combination of IP and Weyerhaeuser and that is movie.
Moving the next to about 85% Absorbate products, so flopping specialties minimal position, but a small position and market Paul.
To balance the system and then having the cost structure.
Of the best meals, which tended to be some of the ones that we acquired B the cost structure of most of the mills and some of that is going to take some investment we've developed some of the projects and now it's a matter of timing those investments so improving the mix improving the cost structure in manufacturing cost structure and then.
Operating commercially and an excellent way through the normal cyclicality as far as the management change you mentioned Tom havoc.
His background Sue to what the business needs right now very well he's had tremendous success commercially in different businesses in the company and after we did the integration and.
And we put the teams together, which was done very well. He does have the right skill set for where we're going forward. So we're excited about the role he'll play in that business and we believe in the business long term.
We made this investment.
I take you back to the end of 2016 in order to position. It in another fiber advantage growth oriented market, albeit small market. It was a play for the longer term and I think as you think about the demand drivers for diapers adult and contents and the other.
Absorbent products, it's Scott good fundamental.
Demand dynamics around the world.
We have to.
That will set and improve our supply position mainly in the ways that I described.
Thank you very much more.
I'll try to be brief here with the follow up as it relates to industrial packaging segment, obviously demand has been somewhat episodic with covid impact, but I am curious kind of if you can see anything what you're hearing from your customers in terms of.
Inventory levels.
We're hearing that things are pretty well depleted.
And really we're just seeing the benefits of sell through right now, but just curious if you have any insight there.
It is it is by segment really gave a story my segment and we are seeing some very positive trends in areas that were or heard a little bit and part of it is I think inventory depletion. So the center processed foods center in the grocery store has has picked up very nicely we <unk>.
Talked a lot about e-commerce that's that's up a lot and it's staying up a lot.
We began to see some improvement as as restaurants open we have to see what that looks like as as we head into the fall and winter predictable.
Case load of Covid, moving up and what different governments due to deal with that but really.
Encouraging news across the board sequentially, but even on the year over year basis of the the E. Commerce channel is is.
Order to magnitude different than that it has been we think some of that will stay.
Thank you good luck.
For the next question from thyroid and Anthony Thomas Murray City.
Good morning, one.
You might <unk> some of the investments for customer tailored solutions for E Commerce and protein I'm, just wondering from a big picture perspective, if you could talk about the kind of returns you get from those investments and then for the products themselves. If there is a margin differential or just how.
How you get paid for those solutions when you are on the ground with customer.
So on the examples at 10 sure are just a few examples of of addressing the needs of our box customers and and that plus back through our value chain all the way to the type of substrates and containerboard that we would make to make those boxes and if it's a capital investment we're always looking at north of 20% returned.
Some of them not capital investments their design investments and that's what we tried to highlight.
In this particular earnings call that the the talent level of our go to market strategy in our designers is coming up with unique.
Products and unique services that that can run on our equipment that we have so the capital investment small.
Where we where we see the pay off is two ways usually there is a margin benefit if in fact, it's a total cost of ownership, meaning it lowers the customers cost and to it positions us in a differentiated way in a very competitive market to where we grow our position with a certain customer because we have an offer.
That's just enough different from the competitive set that it.
That it it.
It helps us to grow our position.
Okay. That's been helpful. And then just sticking with industrial.
Industrial packaging your visit containerboard price hikes expended notes and I'm just wondering to the extent that you can if you could talk about sort of the typical timing.
Price increases on boxes.
Much maybe using history is a guide might show up in <unk> versus <unk> versus two acute next year.
Anthony is Tim So we see the following morning staff for US we might pick up a little bit before.
Very minimal.
Every contracts different but most of our contracts allow 401 quarter lag and so we start seeing the real benefits in the first quarter and then continuing on in the circuit next.
Next year.
Okay. That's helpful will turn it over.
Our next question comes forward.
<unk>, let's see port global.
Joe packaging, obviously demand really seems to be picking up a lot. If we could get the quarter date bulk shipments that would be helping.
Helpful and maybe even more importantly.
What do you think is going on assuming that you obtain some this really strong pick up lately that we're hearing from others as well.
And how sustainable is it.
Do you think folks are rebuilding inventories that got very low and so to a certain extent our what we saw before was understated.
Or is it more potentially buyers getting ahead of the price increase any color you could give would be helpful.
Yeah, Hey markets.
I don't think it's.
Getting ahead of the price increase people, just Don warehoused boxes, they take up too much space.
I think it's somewhat Mark said earlier there is some replenishing of supply chain is going on but there's also the continue to opening of economies.
As well and so we've seen pickups in the third quarter August was better than July September was better than August continuing on October.
Right now nearing the end of the month, where we're looking at about a 6% increase on a daily basis.
In a box system.
But.
It's really strong ecommerce that continues to grow and I think some of these other segments starting to come back one thing that we see a little bit of a ship just on durable goods. It looks like people are substituting travel for.
Durable goods purchases or.
Or maybe making other tradeoffs like that so.
We've seen it acceleration as we've come in from the third into the fourth if you look at the market overall on a daily basis, the market's up a little bit over a point year to date.
So.
Upset condition pretty good growth.
And I think like more subtle vary by segment as we go through the fourth quarter and into the next year.
Okay.
You made that comment that export markets looking strong in general demand picking up in one area, China you mentioned.
Industrial getting a bit better but guess one of the big questions is how is trying to going to be dealing with their their fiber issues with.
No OCC going and potentially next year.
And.
As you look at it could trying to become increasingly important buyer of craft liner from from North America, and how important to factor could this being the global equation.
<unk>.
So we are base cases, we take them at their word and we thank all imports, mostly suitable and like they say it will it will be of a fiber balance equation as you suggest.
Think some of it will get satisfied by market pulp for certain and uses and yes, I think there could be.
A step up in.
Not only craft line or purchases, but probably.
Recycled pulp.
<unk> as well that.
That may take a little bit of time to fully play out and as to where it comes from I think it's going to come from a lot of different places.
I would just add.
Marked at the highest quality recovered fiber in the world comes from the U S market because of the high concentration of craft line or boxes, and while China may not take any as OCC. It will probably take some of that feedstock as a version of recycled pulp or are processed one time before.
Or it goes in China in in the region. There are some people doing that and I think there'll be some people doing that from the U S with high quality recover fiber minimal minimal cost input to clean it up rolette and.
And then I think it probably qualifies as input fiber to China, but we'll see how that plays out no. One no one knows exactly how but a simple math says that there's a tremendous fiber need for the growing Chinese economy that will have to come from somewhere.
Thank you.
Our next question comes for one is Neil <unk> of Morgan Stanley.
Or the Riverdale project you makes it a third of being ahead of schedule. I was just wondering give you just talk about your plants are ramping volume, particularly with a stronger near period demand backdrop.
And are you seeing any significant differences in the supply and demand dynamics weitkamp versus traditional line of work.
I think on on Riverdale.
And we're really pleased with ramp up once we started up the ramp up of the startup is ahead of schedule. The project itself. Obviously was impacted in the final stages by trying to finish a large.
Construction projects during a pandemic, but it's running well and the quality is really really good in some cases exceeding our design expectations and.
We will adjust that product as we said before that white top line or into our system in place of some lower quality White top we were making and then we'll just balanced the brown and white, but we don't see any significant demand shifts.
Right now in the need for white top other than the growth drivers we saw when we when we approved the project. So we're excited about it it's going to help our box customers that can help some of our open market customers, who who make their own boxes. Some of this product goes into the premium segments print.
Premium wines premium beverages and.
There is a pretty strong demand for some of that and.
And probably some of it's related to the white people are confined to home.
Thanks, that's helpful and there is also an article recently about Amazon again looking to reduce the amount of packaging and uses and shifting towards padded mailer is guided in boxes and.
E Commerce demand has actually been very strong this year, but I was curious do you see any evidence mirrors can share from boxes.
And in general how do you think you'd like the efficiency of patchy any comedy can over time, I mean passenger you types of initiatives.
So we try to look at the solution that the customer needs, whether it's a box or a male or we try to obviously steer customers towards a sustainable choice, which is fiber base and we see growth in both mailers are used for certain type of items, where it's the better solution. Maybe some of those items were in boxes before mailers became more.
<unk>, but we see growth in the box segment, we see growth in the mail or segment, we participate a bit on the craft paper side of that at when Tim talked about this E boss technology, we are proactively helping all of our E commerce customers optimize their packaging sweet so right size box, if it's a <unk>.
Box and in many cases of box is definitely the right solution given the supply chain, it's got to travel through but if it's Peter piece of clothing, maybe maybe a mailer works fine, but we are actively working proactively to get the waist down to make the packaging experience for our customers cost effective and for the consumer.
<unk> to know that they are doing something that's sustainable if they recycle that box and 92% of them are recycle that that goes back in the stream and it's just a good overall solution too.
Commerce and so we.
We're actively involved in that Neil and view it as a positive.
Not a negative.
Alright, thank you.
Our next question comes from London.
Keybanc.
Market, Tim good morning.
At.
He marched one question on the Freesheet business you took a good.
Bit of downtime in your North American papers business. This quarter as you did last quarter. If you assume that current demand levels stay roughly where they are how much oversupply would you say you have and after having just converted Riverdale are you more inclined to essentially converted another paper.
Machina containerboard or too shy to machine. If you eventually decide that you need to take more capacity actions in that business.
Yes, Hi, Adam.
Lot of Hypotheticals in terms, we don't well first of all we don't think paper demand will stay at the level of that it will recover probably not 100% of what the covid impact.
Did to it but some of it will recover as schools and offices open to some degree more than they are now.
You're right, we took riverdale out not knowing that this was coming but it actually was that was a benefit because it reduced our supply in the face of a real big demand decline.
Said this before and it will continue to be our guidance principal on containerboard conversions will only make investments and containerboard production, whether it's a conversion or a greenfield or anything else based on the box and containerboard market, we won't do that based on the issues in another product line like uncoated freesheet in this question.
Sometimes the timing doesn't match up perfectly and you don't want to make a bad decision with an asset, but that's really what would drive it. So right now we've got the ability we haven't done it in a while because we typically run uncoated freesheet relatively fall, but we have the ability to throttle that business.
With the same techniques, we use in our containerboard business. So that we can adjust our output to the demand we have.
And obviously, if you'd never thought the demand was coming back you would make some more permanent decisions and carrying that the cost of economic downtime as we call. It but we'll cross that bridge when we come to it but what you need to know, though is the principal for making more containerboard is about making more boxes not about another asset need something to do.
Sure and I appreciate their market just one on the box business. So you have a slide in your presentation in which you compare economic indicators to box demand obviously, the tightest correlation is with.
Nondurable industrial production.
And as you know CPG volumes. This year have been extraordinary because of Covid I think PNG at 16% sales growth, which is almost unheard of.
And we've seen that all year. So I'm just wondering what you would extrapolate from this year's experience in terms of box demand if anything I mean, obviously consumers behavior has been so unusual in so many ways that I find it hard to extrapolate much of anything into future years, unless we continue to be stuck.
At home for years to come what are you extrapolate into next year from this year's experience well.
A couple of things on the Non-durables I think correlations still holds I believe box performance is outperforming non-durables, because so much of the non durable collection of of market segments is not box in Texas. So some of those.
Non durable items are actually down at the box intensive proportions and nondurable goods is up a lot. So I think the correlations kind of hold I hope and and I think we're not going to be locked in our homes. So some of this demand and channel movement will settle out Coupla takeaways no just sitting here today.
Do think within at this long enough and some of our customers are saying is that some consumer behavior changes will be pretty sticky I think people are going to eat and go out a little different so I think some of the demand and shifts in the food channel or Venice stay with US maybe not 100% and then secondly, you have a lot of first time new.
Adopters to doing business in an E commerce kind of way and I think those people have had good experiences largely and some of the retail channel.
Will continue to be in an E Commerce Klein.
Kind of channel and for Us our IP given the investments remain the position we haven't believe that's a positive the rest of it's tough to call prob.
Probably it settles out to something like we had before but given this wasn't on one month or two months issue I think behaviors and habits are beginning to change and and it'll probably last awhile.
Thank you Mark.
Okay.
From some recliners.
Let's think of America.
Thanks for the details thanks for taking our questions.
My first question was.
It's kind of kind of a tag on to Adam's question, what we've been trying to.
Push companies on during hunting season. So far is what change in behavior has occurred that will be sticking to use your term mark on a going forward basis.
Specific the E commerce because of Covid and so I don't know that you are in a position at this juncture six months into this.
Determine what the incremental pick up might be from this change behavior, but if you had any initial goalposts that your customers are sharing with you or again, if you could affirm where you think.
Increase in demand will be most likely to stay at this new normal level that'd be great and then I had a quick question on operations.
Well as George's Tim said, when you take everything into account box demand and and a bit of a crazy year is is upper percent.
The year wasn't so crazy.
Maybe the normal correlations are there and box demand is up about the same amount or half a percent or a percent and to have the range. We've seen in the last couple of years I think.
Some of this E commerce activity does remain and we believe it will because because of what I said about first adopters and people buying things they never bought before.
That tends to drive some incremental purchases in some cases I think the big unknown is how fast if ever to people fully return to the way they spend money before and the things they spent money on fuel heavy travel.
The service industry that discretionary income tends to be now flowing into consuming goods, whether it's home improvement goods.
Luxury items are basic necessities of food and supplies for your home and that is a much more box intensive way to spend money from our perspective, and we believe that that our level of that will will continue well beyond.
When the all clear it sounded.
Understood.
We'll keep evaluating you.
You mentioned some of the things that you are investing in earlier in the presentation or there are areas that you can share at this juncture capabilities that you need to further invest in too.
Continue to participate in lead in this new world relative to corrugated again, maybe.
Additional printing capability, maybe it's more I don't know how the small box initiative worked on E commerce or maybe it's more investments like that is there anything that you feel from a platform standpoint.
And really mourn converting that you need to invest in and then on the mill side.
We've seen dramatic drop off and demand and then a dramatic resurgence in demand.
You're not alone other companies have also pulled into some of their maintenance, partly because you can't get people to facilities because of Covid. What are you doing now to make sure that especially on the mill side you keep the reliability you avoid unplanned outages. Because this is a lot of stress on a on a very very capital intensive and.
Important.
<unk> of your business.
So George as of two great questions. Let me, let me hit the investment opportunity you basically said it. It's it's almost all in converting it has a lot to do with small box and E commerce configured plants.
The physical profile of an E commerce blank for a box is smaller so most efficiently rado the right size machines. So we've actually evolve to a percentage of our several hundred box plants are becoming E commerce oriented plants and they look different and if we ever build a new one from the ground up which I think we probably will and look <unk>.
Different physically as well building size and you'll have more of those located right near the fulfillment centers and that's where our investment opportunity is there's always an opportunity and we continue to see it to improve printing capability and we were investing in that and then sometimes it's just pure capacity, we don't have enough box, making capacity in a certain re.
<unk> of the country, and we have to add it organically or inorganically and you've seen as do it both ways.
With respect to the investment question in the Mills, we are blessed to have 16, containerboard Mills now 16, and a half if you take half of Riverdale, we have a big system. That's flexible it is going to be wide open sometimes like 2019, and it'll be less than that like it was in 2019, we're always going to try to keep that balance.
Right. So we will look at it over a several year period and decide whether we have too much or not enough capacity investing and reliability you set aside the recycled mills, which doll have the complexity of a pulp mill and a power generation unit those are pretty easy to manage and reliability spending it's mostly about.
For liability in the paper machine and we do that largely non capital investments on the integrated mills at taken would make their own energy and pulp Dawood, that's where the big maintenance capitalist and that's where the risk management is so we have a hierarchy process, where we when we cut back on maintenance we help cut.
Back on the maintenance that could result in multiple days down usually that's in power generation or and pulping and so we would do that work and we would forego some work that's in the paper machine area that even if it failed our teams can get it back up and running with a repair, albeit may be costly.
But ah repair within 24 hours or so so that's how we approached at some of that we just have a risk management framework that doesn't leave our middles.
Subject to major in large outages.
Mark that's great I appreciate the thoughts good luck in the quarter I'll turn it over.
Charles.
Our next question comes from these short survey.
Da Davidson.
It's similar to escape led off with.
So you guys used to talk a lot about industry structure and behavior in the context of containerboard and I think the results demonstrate how important that that is generating good rickards.
Would also think that the structure in fluffy pulp or absorbed fibers is equally compelling. So when you hit your 85 Fifteen's target mixed you think the returns.
In cellulose will be similar to what you're doing industrial packaging.
Steve I think our our goal is to get the cellulose fibers business to the cost of capital.
The industrial packaging businesses probably.
Got higher returns and probably always will there's a couple of differences, though the market in industrial packaging is a lot bigger.
Fluffy pulp as a smaller market so residing in a very large pulp ecosystem of softwood market, Paul hardwood, Paul and then specialties at the top and pure commodities at the bottom. So it's got a lot of activity around it so inside of that segment the structure looks really good but outside of the segment there.
A lot of activity in that play out over time, but our goal is to get solidly to the cost of capital to recycle that's part more all margin on the revenue and profit side on the top and that's part on yes, reducing our costs and then finally, the right mix as you mentioned on the $85 15, and we see a path to getting it there.
Federal correspond to some level of EBITDA, there's opportunities for us to work on the footprint as I think gave asked as well and we have plans to do all of that.
Well I thought that IP had evolved to the point where.
Earning your cost of capital wasn't enough you had to be generating in excess for it to be compelling.
Yes, that's correct, we believe that the best value creation. If you look at S&P 500 companies that perform the best and have first quartile ksr they tend to have it.
100 basis points spread.
Their cost of capital. So we did that with the entire company. If you followed us for Awhile International paper as a whole wasn't that has cost of capital. So the first call us get it there and then you build the spread and we fully expect to be able to do that and by the way we have spread to our cost of capital in the in the entire company now and that's that's R.
Cole and each component of the company, but it won't be it won't be democratic and linear there'll be some parts of the company that I have a five or 10 year run well above cost of capital and there will be others that are right at cost to capital, but you've seen us take action on businesses and parts of businesses that we've concluded we don't think where the right one or to get it there.
Sure and then switching containerboard.
I was just wondering if you could quantify the financial impacts and I know that they are already calibrated the to the guidance, but how much of those hurricanes and that direct you in Iowa hurt you in the second quarter Q3.
How would you characterize your inventories in and finally, all containerboard or would you say that you are growing faster than the market or are you still walking away from suboptimal business.
So a inventories.
We're pretty low at the moment and we.
Reference that in some of the prepared remarks, just in terms of how we manage the channels during the quarter.
Where we had to we pulled back in some areas around export because we have such strong demand in North America.
And now we've given the flexibility of the system and the ability to recover we're on we're on a better footing and so we're we're increasing.
Volume to the export channels in the fourth quarter, which is good because it's Susan was stronger anymore.
On the first part of your question just in terms of the storms.
Through all of our operations and everything and being able to flex back and forth to move outages around we feel like we offset most of the impact so on a net basis.
<unk>.
And the final question question was.
Walking away for some businesses just not lucrative enough.
We always manager mix will talk about how we handle.
Segments of our customers, but we're always trying to improve.
The quality of our mix across all of our businesses.
Great. Many thanks, thank you.
Our next question comes from one of <unk> of bank of Montreal.
Greg Good morning, Mark Good morning, Tim.
I wondered could could either of you just help us and kind of on bundling sort of what the activity in your back business has been by different markets. This year in in in particular, I guess, you know how much that E commerce business has grown for IP year.
Year to date.
While Mark we don't give absolute numbers on that but if you remember what I said last quarter I. It was a cumbersome way to say it but I think I said.
Orders of magnitude.
Multiple double digit growth. So we were growing in double digit percentages.
With a one in front of it before 2020, and we are significantly higher than that and growth in that number or that range that I talked about in the second quarter on the second quarter call continues to be in the same range and and a little bit stronger assemblies assistant significant uptick.
Let's say 1918, and 17, where we were at double digit levels.
And it's just.
Several times that.
Okay and then.
This time supply in both the containerboard Inboxes can you could you talk about how you're managing particularly that Newport, Indiana milk is I think I had heard that you might be shifting that out of containerboard and back to gypsum basic vapor and then also just where you're at on the.
The box capacity, because I'm getting some reports from people who say hype.
So for right now that they're farming out business the independent converters.
Well I'm going to ask Tim to cover.
Some of that detail.
Yeah, it's a pretty dynamic environment. Your memory is pretty good on Newports of Tijuana, you take us through that thanks, Mark Martin Newport.
Facility that produced.
Not only white top line or recycled white top liner, but also gypsum facing more so if you remember when we decided to make the investment in Riverdale not only did we get a better sheet aversion she better.
Brightness and color and smoothness, but it frees up to the new port facility.
Over time, you dedicated to.
The gypsum products fully.
We liked that market, we really appreciate the customers we have entered in.
And we think it's good business for us.
On your question about the box business, we we as you know Mark we provide containerboard primarily to our own box system, but also to the open market, where we have long term partners.
They're they're making sheets and feeding the sheet she plant network and so if that's what you're farming out comment makes that's not new for US we have partners in every type of channel that ultimately gets to a box and I would say all of those channels are very busy and very strong right now.
For us so that may be what you are picking up I am not sure. Okay that last one for me Mark just to help us with modeling as we think about this price increase.
Is it reasonable to assume that all year corrugated volume has some links to the pulp and paper week indexes and if not what percent of the business might be on other mechanisms.
Yes.
There is a big part of a market that is.
To our references if not direct but references movement.
Published priceless or index, but we don't talk publicly about what those percentages or.
We have a variety of customers where prices.
It's set on time increment basis.
Contracts are written around those types of price mechanism, so not 100%.
Varies by customer and sometimes by segment as well.
That's helpful to them I'll turn it over.
<unk>.
And lane.
<unk>.
Currently for Stevens.
So try to keep these quick.
Mention the higher wood in energy costs in the pulp segment was the would cost mostly weather related or was there something else.
No I think it was I think it was mostly weather.
Okay. Okay, and then just curious question.
Just try to do a little bit of mass.
North America did Ya Teeterboard system runs full if you exclude the impacts you had with her cajun maintenance.
Yeah like I said inventories are on the loose on right now and we're we're working hard to cover a customer commitments, we even pulled back and redirected.
From the export channel, where we could so.
Running as hard as we can right now.
Perfect. Thank you very much.
Excellent.
Suddenly the gentleman that was the final question I would like to turn to.
Floor.
10 minutes.
For closing remarks.
Thank you operator.
I'd like to do just to wrap up this first thank everyone for joining the call today I really want to thank our employees as I mentioned earlier, especially our frontline employees, who are showing up everyday taken care of themselves each other and our customers.
I am pleased with our performance in the third quarter and I'm really excited about our strong outlook and the momentum that we're building as we finish up 2020, and we start to look into 2021. So again. Thank you for your interest in international paper and have a great day.
Thank you for participating in today's international paper third quota 2020, and say call you may now disconnect.
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