Q4 2020 International Paper Co Earnings Call

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Okay.

Good morning, and thank you for standing by and welcome to today's international paper fourth quarter and full year 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the Speakers' remarks, you will have an opportunity to ask questions to ask a question press star.

And then one on your telephone keypad to withdraw your question press the pound key I'd now like to turn today's conference over to Vice President of Investor Relations Guillermo Gutierrez. Please go ahead Sir.

Thank you Holly and good morning, and thank you for joining and international paper's fourth quarter and full year 2020 earnings call. Our speakers. This morning on Mark Sutton, Chairman and Chief Executive Officer, and some Nicholls Senior Vice President and Chief Financial Officer.

There is important information at the beginning of our presentation on slide two including certain legal disclaimers. For example, during this call. We will make forward looking statements that are subject to risks and uncertainties, including the impact of COVID-19, We will also present certain non U S GAAP financial information and <unk>.

Reconciliation of those figures to U S GAAP financial measures.

And on our website and web.

And I would also contains copies of the fourth quarter and full year 2020 earnings press release, and today's presentation slides relative to on the alone joint venture and graphic packaging investments slide two also provides context around the financial information and statistical measures presented on those entities and I will turn the call over to Mark.

Yeah.

Thank you Guillermo and good morning, everyone.

John our discussion on slide three and with full year 2020 and resolved.

And one international paper and that extended the impacts on the pandemic and 2020 and reaffirms my admiration and appreciation for our employees and their ongoing commitment and care of each other and to take care of our customers and.

I'm really proud of and the outstanding collaboration across our commercial supply chain and manufacturing teams to adapt to our customers' rapidly changing needs and we ran our manufacturing system well and.

Leveraged the flexibility of our mill and converting systems to overcome significant challenges due to the pandemic, while managing costs extremely well across our three businesses.

Looking at our performance International paper delivered solid earnings and outstanding free cash flow and in 2020.

We generated $2 3 billion and free cash flow and delivered the companys 11th consecutive year of value creating returns.

And our performance demonstrates the strength and resilience of our employees, our diverse customer base and on a world class manufacturing and supply chain capabilities.

Given the significant economic uncertainty, we took prudent and early actions to reinforce our cash generation and enhance our financial strength.

On capital allocation.

We're making choices consistent with our capital allocation framework.

We repaid $1 7 billion and debt to further strengthen our balance sheet.

We're also seeing significant benefits and our pension plan from the actions that we took to Derisk. The plan during the past few years, which contributed to a 95% funding level at year end 2020.

Also in 2020, we returned $800 million.

To our shareowners, and we continue to invest and our North American and EMEA.

And on the packaging business to enhance our capabilities and.

And our learnings.

We're really excited about the path, we're charging to build a better IP.

We're building on the strength of our corrugated packaging business.

And taking meaningful actions to drive sustainable profitable growth and accelerate value creation for our customers and shareholders and.

And a few minutes I'll discuss some of the initiatives, we have underway and deliver on our commitment.

Turning to full year results on slide four we delivered EBITDA of $3 1 billion and free cash flow of $2 3 billion.

Lower year over year sales was driven by the decline and printing papers demand due to market disruptions from the global pandemic.

Earnings were impacted by lower demand for paper as well as lower average pricing for packaging and cellulose fibers.

These headwinds were partially offset by strong volume growth and our packaging business outstanding cost management and.

And lower maintenance outage expense.

And 2020, we made choices around planned maintenance and other spending priorities to mitigate the impact of market disruptions.

Our equity earnings were $77 million, including $48 million from our <unk> joint venture, which was impacted by challenging markets and a non cash foreign exchange loss of 50 million for debt.

Full year.

Moving to $141 million from dividends from Miller.

Across international paper, and we proactively managed cash lenders to deliver another year of outstanding cash generation.

Moving to slide five.

At the outset and the COVID-19 pandemic, we established three principles to focus on.

What we needed to do as a company to remain strong and resilient for all of our stakeholders first was to keep our employees and contractors safe second was to take care of our customers.

And third was to maintain the financial strength and the company and I believe international paper execute extremely well against that success criteria. We did not experience any material operational disruptions due to COVID-19, and taking care of our customers.

And it all starts with our employees and their health and safety remains our most important responsibility.

Outperformance reaffirms my appreciation for our 48000 employees worldwide, we recognized our teams financially for their tenacity and commitment and resilience with a bonus totaling $25 million and the fourth quarter.

I'm also proud to work with you and to support the critical needs and our communities, which included the donation of 2 million corrugated boxes and agent.

Please stand and deliver essential food and supplies.

We remain absolutely committed to our COVID-19 principles and will continue to focus on what we need to do to further strengthen the company for all of our stakeholders and the short term and on a long term.

Now I will turn it over to Tim who will cover our business performance and our first quarter outlook Tim.

Thank you Mark good morning, everyone I'm on slide six.

First our year over year operating earnings bridge.

Our 2020 and results reflect strong execution and effective cost management to mitigate the.

The impact of market disruptions associated with COVID-19.

Looking at the bridge price and mix were a significant headwind, mostly due to the full year impact of 2019 index movements, and our north American packaging business as well as lower average pricing and cellulose fibers and the printing papers business.

Volume was a drag on earnings due to the unprecedented and.

Precedented decline and demand for printing papers and the impact was partially offset by strong volume and our packaging business driven by higher demand across most consumer segments.

We manage the operations and cost well and a challenging environment with no material operational disruptions due to COVID-19.

Our teams performed at a high level under reconfigure and work systems to protect our employees and contractors.

We did experience higher operating and distribution cost and the latter part of the year and.

And we flexed our system to meet very strong packaging demand.

Input costs were favorable for the full year, driven by lower wood and energy cost and distribution cost, partly offset by higher recovered fiber cost.

I would also note the cost for wood and recovered fiber energy and distribution increases and the fourth quarter.

Corporate items were favorable driven by outstanding cost management, and lower interest expense based on significant debt reduction.

On a full year 2020, our operational tax rate was 25% compared to 26% and 2019 and.

And equity earnings decreased due to lower <unk> earnings, which includes <unk> subs.

Unfavorable FX impact.

Turning now to slide seven which shows our fourth quarter results opt.

Operating earnings were <unk> 75 per share, which includes a five cent impact related to the employee recognition bonus that mark discussed earlier.

Sales improved sequentially and came in better than our expectations driven by strong demand and our north American packaging business.

EBITDA decreased due to the higher operating and input cost.

And as already mentioned, we generated robust free cash flow, which will continue to apply in a manner consistent with our capital allocation framework and the fourth quarter and we reduced debt by about $600 million, bringing our full year 2020 debt reduction to $1 7 billion.

Okay for the quarter over quarter earnings bridge on slide eight.

Fourth quarter operating earnings were <unk> 75.

Looking at the bridge lower price mix was driven.

By prior period price flow through and packaging and cellulose fibers volume was favorable driven mostly by strong demand and corrugated packaging and North America, and EMEA as well as higher seasonal demand for paper and Brazil and Russia.

Operations and costs were a significant headwind and the quarter, we experienced some reliability issues on our north American containerboard system, most of which are behind us now.

We also experienced higher marginal operating and distribution costs to meet very strong packaging demand.

We had a $20 million asset write off and cellulose fibers and the fourth quarter.

And as a reminder, our sequential earnings were impacted by the non repeat of $30 million of favorable items and the third quarter.

I'd also like to note that the employee recognition bonuses reflected and operations and call.

Allocated to each business.

Input costs were unfavorable due to higher wood and recovered fiber.

Higher seasonal energy cost and higher distribution cost.

We're experiencing significant rail truck and ocean transportation and congestion.

And we expect recovered fiber and distribution costs to trend higher as we enter 2021.

Higher corporate expenses reflects the effective tax rate of 26% and the fourth quarter as compared to 19% and the third quarter, which included a favorable adjustment after finalizing our 2019 tax returns.

Equity earnings includes a noncash foreign exchange gain of five cents and the fourth quarter.

And as compared to the 2014 loss on the third quarter.

Let me turn to the segments now and I'll start with industrial packaging on slide nine.

Volume improved sequentially across all regions with strong demand in North America outpacing the impact of the three less shipping days and the fourth quarter.

We're seeing broad based demand strength across all of our channels, including box and the sheets and containerboard.

Just about every consumer segment accelerated and the fourth quarter.

We continue to see strong double digit growth and E Commerce, and we believe the vast majority of E commerce adoption is permanent.

We're also seeing strong demand for our consumer and durable goods, especially for building materials.

Foodservice categories continued to lag and the pace of recovery will depend on the restaurant and travel industry.

Industry recovery.

Export containerboard demand is also robust we have strong backlogs as we have prioritized containerboard shipments to our integrated system here in North America to meet our customers' demands.

Operations and costs were a significant headwind due to several factors we experienced some isolated reliability issues late in the quarter most of which are now behind US. We also faced higher cost and our mill and box system to meet the strong demand, including the impact of glass optimal containerboard source.

Turning to our box plants.

We also experienced higher supply chain costs and overtime with just about every box plant running on weekends and.

And lastly, recall that ops and costs includes the employee bonus we discussed earlier, which for packaging represents about $15 million.

Maintenance outage costs and improved sequentially as planned input.

Input cost increase driven by higher recovered fiber seasonal energy and distribution costs.

Cost pressure for recovered fiber and distribution continued as we entered the first quarter.

Which reflects the broad strength and spent on a per se.

Moving to global cellulose fibers on slide 10, and.

Price and mix was unfavorable on the contract flow through of lower third quarter was price.

Volume was stable demand for fluff pulp improved late in the fourth quarter following the expected and Destocking.

Operations and costs were impacted by a $20 million write off of capital and engineering costs falling a review of the capital investment needs for the business.

Maintenance outage cost increase and input costs were essentially flat.

Taking a closer look at fluff pulp demand as I mentioned demand improved throughout the fourth quarter.

Demand continued to improve as we enter 2021 with healthy backlogs for fluff pulp and addition, port congestion and stretching supply chain due to the high levels of imports and the U S.

Turning to printing papers on slide 11, the business delivered earnings of $80 million and the fourth quarter with continued strong cash generation.

Our North American Brazilian and Russian regions delivered returns above the cost of capital.

We continue to leverage our strong brands, our world class customer service and.

And our low cost system to maximize performance as we navigate a challenging demand environment.

Looking at the fourth quarter performance across the segment price and mix was stable volume improved sequentially across all regions with stronger seasonal demand in Brazil and Russia.

We're seeing a gradual recovery and demand across all regions.

Which we expect will accelerate with broader return to office and returned to school activity.

Operations and cost includes higher seasonal energy consumption and the non repeat of favorable items and the third quarter of about $10 million.

Fixed cost absorption and improved with economic downtime decreasing by nearly 100000 tons sequentially.

<unk> outages increased as expected and input cost increased primarily due to higher transportation and seasonal energy costs.

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Looking at the L and results on Slide 12, the joint venture delivered $53 million and equity earnings and the fourth quarter with an EBITDA margin of nearly 30% on improved commercial performance Volte.

Volume improved 16% year over year on strong softwood pulp exports.

Price and mix was also favorable with price realization and for softwood accelerating and the fourth quarter.

Fourth quarter equity earnings include a foreign exchange gain on <unk> U S. Dollar denominated net debt of which Ip's. After tax portion was $22 million or <unk> <unk> per share.

For the full year, adjusted EBITDA was $519 million, which represents a 26% margin.

Full year 2020 equity earnings were $48 million.

Which includes a $15 million foreign exchange loss on <unk> U S dollar denominated net debt.

Although 2020 was a challenging year across global pulp and.

Pulp markets.

<unk> operational performance and low cost system make it a powerful cash generator we.

We expect to receive.

$100 million and dividends from <unk> and 2021.

Moving to slide 13, as Mark said in his opening remarks, we generated outstanding free cash flow of $2 3 billion and 2020.

And our first quarter earnings call last year, we highlighted the company's financial flexibility and some of the cash levers we have available to enhance our cash generation.

Given the significant economic uncertainty, we chose to pull some of those cash levers to reinforce the company's financial strength.

We executed well on the things that impacted cash and addition, COVID-19 changed the way we worked in 2020 and the choices that we made around our planned maintenance and other spending priorities.

And the fourth quarter and we also benefited from a tax refund claim which contributed $115 million to free cash flow.

Our early actions and strong execution across the company enabled us to deliver another year of outstanding.

Free cash flow generation.

Turning to slide 14, and I want to take a moment to update you on our capital allocation actions and 2020 and provide clarity on what you can expect from international paper as we move forward.

We will maintain a strong balance sheet and we're committed to our current investment grade rating with a targeted debt to EBITDA of two five to two eight times on a moody's basis.

We're very pleased with the progress we made on the balance sheet debt and pension in 'twenty and 'twenty.

We repaid $1 $7 billion of debt and our pension GAAP improved by $500 million.

Our pension plan and sufficiently funded and we closed 2020 with a healthy 95% funding level and we feel really good about the actions we have taken over the past few years.

To Derisk the plan.

We closed 2020 at two nine times leverage.

On a much better place and we're committed to getting to our target range.

Returning cash to shareholders through a meaningful part of our capital allocation framework.

And 2020, we returned $800 million to shareowners.

Over the past five years, we've returned nearly $5 2 billion to shareowners through dividends and share repurchases are just over 50% of our free cash flow.

We remain committed to a competitive and sustainable dividend with a targeted range of 40% to 50% of free cash flow.

Which we review annually as earnings and cash flow growth.

And we will continue evaluating our free cash flow and intrinsic value to ensure that share repurchase opportunities are weighed against other capital allocation options always with a commitment to maximize value creation.

Investment excellence as a central growing earnings and cash.

We expect Capex in 'twenty and 'twenty, one to be around 800 million we.

We will continue to proactively manage capex and have the ability to increase or pullback as circumstances warrant.

You can expect strategic capital to be deployed mostly to our packaging business to build out capability and capacity needs to drive profitable growth.

We will continue to assess disciplined and selective M&A opportunities to supplement our goal of accelerating profitable growth you can expect M&A to focus primarily on bolt on opportunities and our packaging business in North America and Europe.

Continuing on slide 14, and want to provide and update on the 2006 temporary monetization on installment loans.

After careful consideration, we've decided not to extend the notes.

When these notes mature on August of 'twenty, and 'twenty, one, we expect to receive $630 million and cash which represents our equity.

We expect to pay about $75 million and taxes upon maturity of the timber notes.

Now I will turn to slide 15 on our first quarter outlook.

Demand for corrugated packaging is very strong as we enter the first quarter.

Demand for fluff pulp accelerated and the fourth quarter and that momentum continues and the first quarter.

And printing papers were seeing a modest recovery and demand, but challenges will likely persist until we see a broad based return to offices and schools.

Taking a closer look at industrial packaging.

We expect price and mix to improve by $65 million.

On the realization of our November 2020 price increase.

Volume is expected to be flat sequentially with strong box demand offset by one less shipping day and the first quarter.

Operations and costs are expected to improve by $35 million.

Staying with industrial packaging.

Maintenance outage expense is expected to increase by $87 million.

And input costs are expected to increase by $30 million, mostly due to higher and recovered fiber and distribution costs.

And cellulose fibers.

We expect price and mix to increase by $15 million on realization of prior price movements.

Volume is expected to be stable.

Operations and costs are expected to improve by $35 million.

Maintenance outage expense is expected to decrease by $6 million.

And input costs are expected to increase by $10 million, mostly due to higher seasonal wood and energy costs.

Yes.

Turning to printing papers, we expect price and mix to be stable.

Volume is expected to decrease by $15 million on lower seasonal demand and Latin America and Russia on.

Operations and costs are expected to improve by $15 million.

Maintenance outage expense is expected to increase by $2 million and input costs are expected to increase by $10 million again, mostly due to higher seasonal wood and energy costs.

And under equity earnings you will see the outlook for film joint venture.

Coming back and planned maintenance outage expense for the full year 2021, we planned and $155 million of higher expenses.

This increase includes deferrals, we chose to make and our packaging mill system to meet strong customer demand as well as the impact of higher coal maintenance outages across the system and.

And with that I'll turn it back over to Mark.

Thank you Tim.

On slide 16, now as we shared with you in December.

We're taking meaningful actions to build a better IP and accelerate profitable growth with a focus on corrugated packaging we're.

And we're committed to deliver $350 million to $400 million and incremental earnings by the end of 2023.

As part of our commitment and we will deliver $50 million to a $100 million of incremental annual earnings growth and our businesses through commercial execution and investment excellence.

We will also deliver $300 million of structural cost reduction we have initiatives underway and in three areas first we will streamline and simplify our organization to support and packaging focused company.

And we're focused geographic footprint.

We will redesign processes to increase efficiency and reduce costs and areas, such as maintenance and reliability distribution and logistics and sourcing and <unk>.

And third we are identifying opportunities to better optimize our fleet of assets to make the right products on the right assets to further improve our cost position and to be more efficient with our capital.

As we move forward and we will be sharing with you and the multiple streams of earnings initiatives, we have underway and when you should expect to see them enhance our earnings.

Let me describe one of the key enablers to delivering on our process and as asset optimization cost savings and as you'll notice on the slide and area accounts for about 70% on our structural cost reduction target.

We will use new approaches debt leverage technology and data analytics and our businesses.

Stablish and dedicated team that's been working closely with external partners and our businesses over the past year to identify develop and pilot the wide range of highly attractive opportunities, which are now moving to scale and implementation.

Turning to slide 17, you can see a few areas, where we're using data to provide greater visibility and actionable insights. These tools enable new approaches to optimize our value chain from our mills to our box plants and ultimately to halt and ultimately to our customers.

We expect these initiatives to deliver between 150 and $200 million and annual earnings improvement.

And we are making excellent progress scaling up several of these initiatives and expect to realize about half of these benefits in 2022.

Let me give you a few examples on what this looks like.

We will use real time data to optimize production scheduling across our box plants in North America, Although many of the benefits result from lower cost across our system will also gained low cost incremental capacity and our box system to pursue profitable growth with very little incremental capital.

And we're also using third party logistics technology to optimize transportation planning and reduce distribution costs and our box plants.

And our mills well.

He is continuous online monitoring and data analytics to improve fiber and chemical and energy consumption.

In addition online equipment monitoring and <unk>.

Also enable us to predict potential equipment failures.

Prove reliability and reduce our overall maintenance cost.

And in sourcing, we have greater visibility and more effective tools across a broader set of our procurement activities, we will use internal and external data to develop a more targeted catalog of sourcing options to drive savings and all.

Operating and mature materials.

Working with our external partners. Our team is moving quickly to scale these opportunities and integrate them into our business processes.

<unk> is also working closely with our businesses to identify more opportunities.

Let me close on slide 18.

Our 2020 performance adds to my confidence and the path with charging to build and better IP.

Motivated by the opportunities we have to accelerate value creation for our shareowners.

Now on mindful that we're still on the midst of a global pandemic and there's still significant uncertainty and.

International paper strength and resilience endures.

Mark.

Proud of the essential nature of our products that we make.

Our employees have demonstrated a commitment to take care of each other and our customers.

And that commitment continues.

Our customers can count on international paper to be the dealer for them and deliver superior solutions.

And our communities can count on us to be responsible partners to improve the lives of the people who depend on us.

We have an exciting and ambitious agenda.

We will continue to focus on what we need to do to further strengthen the company and the short term and and the long term for all of our stakeholders.

With that we are.

And are ready to take your questions.

Thank you and as.

As a reminder, if you would like to ask a question. Please press Star then one on your telephone keypad again, Thats star one to ask a question and as a courtesy to other callers ask that you limit yourself to one question and one related follow up question in order to allow all colors of chance to post a question.

And our first question is going to come from the line of Phil <unk> with Jefferies.

Hey, good morning, everyone.

How should we think about inflation and when we think about 'twenty and 'twenty, one and particularly some of these bigger buckets, you've called out that's been a little more volatile, whether it's freight and OCC and.

And certainly really good to see operation costs improved sequentially, but are there any cost like distribution. For example that we should be expecting to be more elevated just given how strong demand is.

So when we think about inflation and a couple of ways we have.

The general inflation of.

Yes.

Employee wage increases and general materials and operating materials.

And that roughly runs around $200 million a year for us so it can be a little bit more.

Less on.

And the input side of course, we track those quarter by quarter, and it's really driven by what's happening and the market so and the moment given transportation, we see that as a bit of a headwind just given the economic activity that we're experiencing across across the country spot rates on truck are elevated.

And as I mentioned and the speaker notes.

Congestion across most of the transportation modes.

We'll have to see how it plays out and some of it is driven marginally by just the incremental demand growth that we're seeing in a moment and sourcing.

Transportation and to make sure we get it to customers on time, so it's a bit of a headwind.

Got it and that's helpful and then.

I noticed that and most of your maintenance downtime, particularly and your corrugated segment in North America was going to be first half loaded. It sounds like demand is still really strong and market is pretty tight to begin with I just wanted to get some comfort on that day.

You have enough inventory to kind of meet demand and give us a little flavor, how lead times and backlog if youre looking right now.

Well, we've got long.

John.

Backlogs and extended backlogs and the export channel.

As we mentioned, we've been pivoting and prioritizing that to the North American market through our integrated system.

I'd say, our inventories are lean right now and.

We will manage our outages and accordingly to balance outage time and customer demand and the need for board.

But we ran very lean and the back half of <unk>.

2020, and we still see pressure.

Okay. Thanks, a lot really appreciate the color guys sure. Thank you.

Our next question will come from the line of Gabe <unk> with Wells Fargo.

Good morning, Mark Tim Hope all you all are well.

And again.

I was.

I guess the first question would be on industrial.

Trends and I think from the outlook in terms of flat would seem to imply kind of one 5% growth directionally on a per day basis can you comment at all as sort of what you're seeing currently and then given the difficult March comp, how you and kind of expect that to progress just given what youre seeing and you.

Backlog.

We're continuing to see the kind of demand profile and you saw in the fourth quarter and continued through the month of January.

We expect based on the backlogs, we have based on our conversations with our customers, even though the comps are going to be harder starting on March we expect on an absolute basis, a really strong market and that's why it's really critical that we manage what what Phil and was asking about which is the supply and we have available of containerboard and <unk>.

<unk>.

City with the demand and we're gonna have and also navigate the necessary maintenance outages.

The market for our customer order book is really strong.

Alright, Thank you Mark and then flipping.

Flipping gears kind of quickly to this.

Soma ramp up there wasn't much commentary or anything and the kind of prepared remarks, just curious how that ramped up for you and it is.

Helping kind of ease.

Some of those inventory pressures that youre seeing and.

And the incremental costs and do that kind of.

Contributing to the difference relative at least to our model to what we were expecting in terms of profit.

Yes. Thanks for the question is going extremely well. We're ahead of a ramp curve ramp curve will continue building through 2021, but really pleased with how the machine is running and the quality, we're getting off of and so forth.

Okay.

And our next question will come from the line of Dr. Mark <unk> with bank of Montreal.

Good morning, Mark Good morning, Tim.

Mark.

Mark as best you can I would like to talk about.

And any impact on IP from the cyber attack at one of your largest peers and maybe also what IP is doing to defend itself from similar things.

Well.

It seems like cyber issues are in and the news almost every day.

We haven't had any material impact related to any cyber issues.

We are working constantly with our.

Information technology process control and our Chief Information Security Officer, and our board to make sure. We're staying ahead of the curve and there's a lot of techniques. Mark every company has got approaches and outside help on what we focused on is making sure our our.

<unk> network, where it's connected it needs to be connected and where it doesn't need to be connected is not connected.

Hybrid connectivity to share data, that's necessary to share and a distributed system and it's not necessarily sure so isolating into sectors and different potential entry points on the business back office systems again, using our own and third party.

Skin protection protocols, but not only it's a moving target and we are continuously working on it and.

And we always feel and I think it's a healthy weight and feel that we're behind so that keeps us laser focused on it.

Good day.

On a piece of the Mark is from a disaster recovery and business continuity standpoint, those are things that we run drills on on a regular basis.

And to hopefully make sure that we're able to recover should we have and attack, but mark is right. There is a huge dose of humility and all that stuff.

Is there any impact on just like swaps that you do sort of a months.

Companies to kind of minimize freight costs I mean, one of the things we hear about is that there's just there's issues with shipping from some of those sites right now.

Yeah, I really can't comment on on.

On the company you are talking about but I'll tell you every day I'm talking about IP, though it does this have any impact on IP, because somebody is not able to meet their side of the slope.

We haven't we haven't seen any I'm, sorry, I misunderstood. Your question, we haven't seen any impact.

We are and all we can do with or without those disruptions to supply all of the channels to market that we have demand for them right now, but no mark we haven't seen anything that's affected us and a noticeable way.

Okay helpful and at other banks.

Thank you. Our next question will come from the line of George Staphos with Bank of America.

Hi, everyone. Good morning, Thanks for all the details.

My first question Mark and we're.

No we're not going to hold you to this but just wanted to get a sense for as you look at global cellulose fibers and hopefully a better demand outcome as we go into 'twenty, one and what looks to be a better market pricing across all of the cellular market.

Do you think the business can.

Turn profitable this year, where there's more work needs to be done.

Either in terms of demand cost.

Commercial efforts, how would you have us think about that and.

And not looking for the quarter, but just conceptually do you think the business now is at a level of profitability that we can see some positive numbers at some point.

I think the answer is yes, you'll see positive numbers at some point I mean, the reason we didn't go beyond the first quarter with anything specific is because of the debt.

Certainty and on the likelihood that no one really knows how things are going to play out until we get this pandemic under control, but what do you ought to be looking at and we're looking at is continuous improvement and cellulose fibers on all fronts. We've got some internal things that we can do and we've been working on them to improve our cost position.

The integration of Weyerhaeuser and IP and then there is the market pricing volume and selected customers and all of that is moving and a positive direction right now.

Can't predict sitting here today is great, but youll see quarter after quarter more positive results and the business is getting start gaining some momentum and we're beginning to turn that corner now.

Okay, Mark Thanks for the comments, there and I wanted to kind of a longer term.

A question with you here. So if we go to the slide that you and Tim were discussing on on longer term.

Cash flow.

And the compound rate of growth over 10 years, you've been something around 3%.

Which is quite good given the capital intensity of the business and a lot of the challenges that you've had.

To consider over time, when you think about the outlook over the next five years and next let's keep it to five years, given the demand pick up that you've gotten from ecommerce given some of the optimization opportunities you're working on but also.

And given what might be a more inflationary environment.

Would you advise investors and analysts to think about in terms of your growth rate and cash flow over the next five to 10 years.

Should it be accelerating is at 3% and and qualitatively what would be the biggest drivers of that outlook. Thank you.

Joe or John that's it.

Great question, a little heavy for a quarterly earnings call and I guess its fair question and.

I figured I'd try and put up a little bit you know.

And we always want more strategic question Jay.

Our objective is building a better Ips, obviously to generate consistent credible earnings growth and that's going to have a positive effect on cash, but I am sitting here with my CFO, who really wants to answer. This question. So Tim why don't you.

I wanted to just give a little bit of perspective. So mark is right I mean, the key is growing earnings and adjusted gross cash, but the other things that we're working on that and we have mentioned.

As our capital.

On process.

And making sure that we are more robust about how we deploy capital.

And that's going to lead to higher returns on projects, we do and fewer projects.

They don't meet the criteria that they need to meet and so on balance we should get more for less cash.

And the other places just what mark talked about earlier some of these.

Technology, driven earnings improvement opportunities are giving us capability around both capability and capacity without the normal capital investment dollar on the front and so.

I just thought it was worth highlighting them.

Alright, Thanks, Tim I'll turn it over.

And our next question will come from the line of Anthony Pettinari with Citi.

Good morning.

Good morning question on the port delays and supply chain congestion impacting cellulose fibers. Just wondering if there's any detail you can give in terms of how that sort of stands in February and.

In terms of potential impact to <unk>, you talked about non repeats and the <unk>.

Outlook Slide I think you said 35 billion improved ops and cost is supply chain and supports a big part of that sequential improvement just wondering if there's sort of a finer point you can put on.

Well I think the.

And it's yet to be determined but that is we do expect that to improve.

And it's part of it but we haven't seen the improvement really take hold and any meaningful and meaningful way.

And <unk>.

Weighted average and result of the impressive demand improvement. So I think it usually works itself out through the quarter and and we hope we are hopefully beginning to see that.

And so we can get our product all the way to market.

Okay, and then maybe just related question I mean can you talk about the current pulp market conditions, especially in China, we're seeing some price increases and spot prices. There that are pretty eye popping can you just talk about what's driving that maybe the sustainability and then if you could just remind us.

In terms of IP cellulose fibers business and then from what.

What percentage of your shipments and pulp go to China versus North America versus other parts of the world.

And so on and I'm not I mean, what we see generally in China, So and our cellulose fibers and Tony fluff pulp or selling it.

And inside of our own softwood pulp market.

Environment.

The Chinese economy's, improving and paper and board.

Production is increasing and that's increasing the need for softwood pulp, which improves the entire.

Market supply and demand and dynamics and net flows to fluff pulp side, we think it's the broader Chinese economy, improving and it looks to be sustainable as China seems to be first and really recovering from the economic impacts of the and then most of your loans I think your second part of your question was.

And software and eliminated almost all on what Ela mix goes to China, if not all of it there could be a couple of other mark consider not technically China, but it's all China and greater Asia market and that area because remember.

Anthony on pulp mills are in are in Siberia.

We ship directly that way and very virtually nothing goes anywhere else.

Great and then.

IP is kind of cellulose fiber footprint proper in terms of U S versus China versus rest of world.

Yes.

So to China, if memory serves and the thing is roughly 30% of what we should virtually everything.

It goes offshore we have some customers here in North America, but 80% of what we make goes offshore somewhere either to Europe, or China, and I think China, if I remember correctly, it's roughly 30%.

For the absorptions.

Okay. Okay. That's very helpful I'll turn it over.

And our next question will come from the line of Adam Josephson with Keybanc.

Mark and Tim Good morning, Thanks for taking my questions Tim one on the price mix guidance, you gave for industrial packaging it on.

Slides about 20 Bucks a ton of higher prices sequentially. So assuming you didn't realize much of the November increase in the fourth quarter for obvious reasons and that would suggest that cumulatively you will have realized maybe half of the $50 increase.

<unk> Q, if am I thinking about it correctly and is that the typical length of time that it takes you to to realize these price increases any more detail you could give would be helpful. John.

Yes sure Adam.

Two things one first of all in the fourth quarter, we had the last residual of the prize published down impact from January.

And the fourth quarter. So please.

And a very small percentage of these things have a lag effect that takes a few quarters to work through.

I would characterize our price realization on the containerboard and box price increase that was announced in November is following a typical pattern. We usually it usually takes a couple of quarters for the majority of it to flow through but then there is a residual that'll continue into the third and the fourth quarter of this year.

Sure.

But it got it and there are different and it's no different than what we've experienced in past increases we're expecting the same type curve.

Got it and then also related to guidance Tim normally this time of year, you give full year EBITDA guidance, obviously you do.

And you did not.

Do so this time can you talk about how strongly consider giving guidance and why you ultimately chose not to and.

Because obviously, we know what the price impact could be you have your idea of what cost inflation could be you know it maintenance will be up at corp. It'll be up so obviously, you've got some of the pieces. So I'm just wondering what your thought process was there.

It's a great question. So from a technical standpoint, we don't really give guidance, we provide an outlook and you are correct, we have and prior years given.

A rough outlook for what our expectations were in the coming year.

And if you had asked me that question on October about what we would do right now I would have probably been in a different place, but I think with COVID-19 stretching longer than we had imagined and vaccines not coming.

And to play to a greater degree as what was forecasted.

We didn't see at this point and time, a reason to change our practice from the past few quarters I'm hopeful that.

And as things play out and the first quarter, maybe second quarter will have much more clarity and we can start looking a little bit longer term, but that was that was the rationale around things.

And thinking about our outlook for this call for the first quarter.

Thanks, a lot Tim.

Alright, and then.

<unk>.

Alright.

Okay. Our next question will come from Mark Weintraub with Seaport Global.

Thank you to follow up first on the capital spend.

And it really is noticeable that you.

Been able to bring down that spend and apparently get what you need done in particular 2020. It was only $4 30 on maintenance and regulatory is that do you think that type of number is.

And sustained more what's really a good number for you too.

Meet those needs on maintenance and regulatory and kind of more generally what should we be thinking about or where do you think you are as to how much you need to spend to effectively run in place so to offset inflation and then presumably anything above that would drive.

Through cost reduction strategic et cetera.

Yeah, It's a great question, so I would say that.

Our maintenance capital investment and 2020 was on the low side.

We try to optimize and.

And maximize every dollar that we put into the facilities and do it and the targeted way.

But.

We have cycles and some things some types of maintenance are due on a calendar basis because.

Certifications are required and whatnot, we're looking at some of that this year or just on a higher cycle. We also took it as an opportunity given the unusual nature of last year as we reference to think a little bit differently about to what extent and how we would deploy on maintenance outages across the fleet. So it.

The trend or the normalized if you will would be higher than last year.

And what's the offset that we mentioned earlier, we are trying to become more efficient on capital and some of these predictive.

Reliability capabilities are.

Giving us an opportunity over time, we think to anticipate.

And before it actually happens, which should yield a lower cost, whether it's capital or expense and our facilities. So mark this.

Last comment you made is really important and I made this point a few calls ago, we really look at maintenance and totality. So there is a capital expenditure component, but there is an expense component and oftentimes is to exit the capital component and so when we look at lowering the cash needed to run in place. So as you say the name.

Today's earnings and cash flow when you look at the total number and sometimes well placed capital expenditures significantly and dramatically lower your ongoing expenses and the company would be better off and the cash generation profile will be better off. So we're constantly looking at that what's exciting about some of these new technological approaches.

As we can.

<unk>, if we're successful say not only on Capex. So it's mostly condition based not time, where inspection base, but also on the expense side. So there's a huge multiplier if we get it right.

Thank you and I and definitely appreciate the complexity, so maybe a different way to ask would be.

With what you spent last year on both capital and as you said that the maintenance et cetera that gets expense.

And where you do would you say that you were at a level that was meeting that.

Run in place maybe above it or because of the unusual environment had you elected to go below it.

I think we were if we were at a level that allowed us to run in place I answered that without knowing the impact of every decision. We made because it's a continuum, we made choices to do and not due to certain things in 2020 because of the pandemic influenced disruptions on the market. Some of those look like they've been good decisions.

Some of those may end up being bad decisions and the month of April and we realized something we didn't do created a disruption. So you have to constantly look at it on a continual basis, but I feel like the combination of capital.

And expense and the performance, we delivered and continued to deliver albeit a couple of operating issues and the fourth quarter that we start about the right balance and great.

Great. Thank you and then just on pulp a quick follow up.

Recognizing there's a lot of volatility and predictability.

Two questions one is on.

On <unk>, you have not that much of a change in the equity and earnings for.

The first quarter versus the fourth quarter, given what we have seen and the.

The Chinese spot markets that youre sort of seems a bit surprising I know if there's any color you can add on that and then second.

Is there is there are.

Methodology, you would provide for us on the outside to think about how to translate what we see and list prices to what flows through and on how quickly it flows through into your <unk>.

Cellulose fibers results for the North American operations.

So on global cellulose fibers, just start there we have a fairly predictable and normal overtime ramp curve on containerboard.

The pulp business is different and has a different set of dynamics we have.

And segments of customers contracts vary across the customer base and our experience has been.

Over the past few years, the price increases tend to take longer.

And to work their way through to the bottom line. So.

Confident and the price increases that we've put out there, but it always takes time for them to be fully realized on.

Ill.

I think most of what Youre, saying and contributed to flat. It is just.

It's just FX and.

Expectations around FX.

Thank you.

Yeah.

And our next question will come from the line of Mark Connelly with Stephens incorporated.

So I was hoping we could talk about pulp a little more long term.

And that tends to be pretty reliable and market's pretty attractive growth characteristics with the returns over time tend to be really inconsistent and we saw some of the assets you're long before you bought them is it realistic to think that theres going to be a time when contract terms start to delink from commodity pulp.

Sure.

The specification barriers broken down because of weakness on the pulp processing I'm really trying to understand how you think about the long term profile of pulp when we think about debt in contrast to what you've accomplished and containerboard.

And so great question Mark.

Commercial.

On the commercial strategy that we deployed.

And it looks like the market decline that club for a long time was and extra product on top of abroad pulp offering is now becoming a real market and on its own and probably.

And more on a different commercial.

Approach and that's always difficult once you start and one way to change it but that is definitely our objective.

To change the way, we value the product and to make sure we understand that we're getting appropriate value for what product and service, we provide and it'll take some time.

Inc.

And the downside of not improving and as debt.

The investment and making sure that products available long term will be less attractive and I think most markets.

Products are really valuable and the technical specifications are really important and it seems that they are.

And usually can correct over time, and it's not easy and you make a good point.

Okay, and if we could squeeze hooked on it.

And your process optimization program I'm, just trying to understand how it differs from what you've done before because we tend to think of IP as a leader in sort of process management, especially containerboard. So is this focused on different things or is it just bringing new technology I'm thinking back to Carol Roberts seven year program.

Yes.

And for that Mark.

And there's always opportunity to improve and we have systems and capabilities and talent across the organization that have helped us manage to where we are today, we're seeing new opportunities to use data and a different way and different types of data to make real time decisions. So for instance, you think about the supply chain.

Jane.

From fiber to the mills containerboard to box plants, and then the customers and thinking about how we manage.

Board combinations across our system based on availability and.

And where to arbitrage transportation for fiber cost is an opportunity that we think we can really exploit and so the tools are giving us a way to compare options that are just quite frankly too complicated to do in the moment by hand and.

And we are building <unk>.

Technology tools and we will.

Help us do that and make better trade off decisions.

That's super I appreciate it and obviously IP has been a leader in that space and nice to see and making even more progress.

And we do have time for one last question and our last question will come from the line of Neel Kumar with Morgan Stanley.

Hi, good morning, and so.

The OTC prices, we've seen and then start to run up a bit recently can you just give us a sense of your expectations for how you see prices evolved through 'twenty and 'twenty, one as well as longer term.

And then and just in terms of the Chinese ban on OTC imports. It seems that you guys are.

And as you already on fiber.

And whether it's kind of daniel's stake and how they'll address their fiber needs going forward.

Okay.

And we Couldnt hear exactly I think you asked about OCC prices, but you broke up a little debt at the beginning of your question is that what you were asking OCC prices.

Yes, you're asking about what your expectations are for ACC and <unk>.

And in 'twenty, one is the longer term.

Now turning to only one.

Okay.

And Crystal ball is not that clear going out towards the second half of the year in the quarter. We expect the trend that we saw on the fourth quarter to continue and the first.

And so on average I think we were expecting.

15% to $20, maybe a little bit more than that on OCC, but.

It really will depend on such a.

Fast reacting market to circumstances and conditions so well.

And we'll have to see what happens as we go from first into the second quarter.

Great and then just in terms of China's ban and ICT imports and you didn't that's going to stick or how are you going to address their fiber needs going forward.

Well.

Again, we always said, we take them at their word and.

And I think you've already seen the Mark is beginning to adjusted was adjusted adjusting.

Last year, and maybe even late 2019 and anticipation of this.

So I think you'll see some of that rotation from one fiber type to another and China and you see a rebalancing across other export markets for OCC.

So I think that probably states employees.

Great. Thank you.

Thank you.

So thanks, and thanks, everyone for joining us today and for the call for questions excuse me.

Closing comment we are excited about what's in front of us with international paper, we have strong demand and our packaging and cellulose fibers business.

Our paper business is recovering we are still navigating with kantar on it but as I said and my comments I had.

Total confidence and our employees to be able to continue to do that.

We are improving market conditions.

And so we're excited about the way 2021 is going to unfold and lead us into a very strong position as we enter 2022 and what I am very hopeful.

Pandemic free.

Economic playing.

Playing field. So thank you again for your interest and international paper.

Thank you for participating in today's international paper fourth quarter and full year 2020 earnings Conference call you may now disconnect.

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