Q2 2021 International Paper Co Earnings Call
Good morning, and thank you for standing by and welcome to today's international paper's second quarter 2021 earnings Conference call.
Lines have been placed on mute to prevent any background noise.
For the speakers remarks, you will have the opportunity to ask questions to ask a question press star 1 on your telephone keypad.
<unk> a question press the pound key.
I'd now like to turn today's conference over to Guillermo Gutierrez, Vice President Investor Relations.
In Guillermo you may begin.
Thank you Sean good morning, and thank you for joining international paper second quarter 2021 earnings call for speakers for this morning for Mark Sutton, Chairman and Chief Executive Officer and Tim.
Nicholls Senior Vice President and Chief Financial Officer.
There is important information at the beginning of our presentation on slide.
Slide 2 including certain legal disclaimers for it.
Example, during this call we will make forward looking statements that are subject to risks and uncertainties. We will also present surface non U S. GAAP financial information a reconciliation of those figures to U S. GAAP financial measures is also available on our website our.
In contrast copies of our second quarter 2021 earnings press release and today's presentation slides.
Please relative to the oil joint venture in slide 3 provides context around the joint Venture's financial information and statistical measures.
I will now turn the call over to Anthony Thank.
Thank you Guillermo and good morning, everyone.
I will begin our discussion on slide 3.
International paper delivered solid earnings growth and strong cash generation in the second quarter.
We continue to see very strong demand for corrugated packaging and containerboard and solid demand for fluff pulp.
And in our papers business demand recovery accelerated in.
Second quarter across our key geographies.
Grew revenue by 15% as compared to the second quarter of last year with price realization accelerating in all of our business segments.
Our mills and converting system performed well.
However, we operated with extremely low containerboard inventory.
Across our packaging network.
Due to 2 facts the lingering effects of the winter storm in the first quarter.
And then our planned maintenance outages in the second quarter these operating conditions.
John.
Severely stressed.
Long with severely stressed transportation environments adverse.
Adversely affected volume in operating costs in the second quarter.
Input costs in freight where significant headwind in just about every category.
I would call out the sharp rise in recovered fiber cost in North America in Europe.
Although it certainly had a significant cost impact it is another.
Indication of the strong demand environment.
Our <unk> joint venture delivered outstanding performance with equity earnings of $101 million in the second quarter in a strong outlook as we move into the third quarter.
On capital allocation, we're making significant progress strengthening our balance sheet.
In the second quarter, we reduced debt by $770.796 million. We also returned $258 million to our shareowners, including $57 million for share repurchases.
During the second quarter, we monetized our remaining stake in graphic packaging.
Sheila I'm really pleased with the return on our investments the structure of the transaction in 2018 maximize the value of the consumer packaging business for our shareowners.
Looking ahead, we're making excellent progress on the spin off of our printing papers business, which we expect to complete on October 1.
Across IP the team is doing an outstanding job managing complexity.
Remain diligent in applying COVID-19 layers of protection for our employees and contractors and I really appreciate our teams' commitment to execute well take care of each other and take care of our customers as we work together to build a better IP for.
Pet owners in really all of our stakeholders.
I'm going to turn to slide for now which shows our second quarter results.
We delivered EBITDA of $793 million in free cash flow of 600 in $33 million, which.
Our free cash flow generation to more than 1.
For our shareholders for the first half of 2021.
Revenue increased by $750 million or 15% as compared to last year, driven by higher average prices in our 3 businesses as well as volume growth in our packaging and paper businesses.
Margins improved sequentially.
With price realization outpacing hiring input in transportation costs.
We expect margins to expand meaningfully in the second half of the year as price realization outpaces rising input in transportation transportation cost and importantly, as we stepped down from our highest maintenance quarter of the year.
Now.
Billions, but it over to Tim who will cover our business performance as well as our third quarter outlook Tim.
Thank you Mark moving to the quarter over quarter earnings Bridge on slide 5 second quarter operating earnings per share were $1.06 as compared to 76 cents in the first quarter.
Now I will turn my submits improve by nearly 50 per share sequentially, driven by very strong price realization across all of our business segments.
Volume was essentially flat versus last quarter demand for corrugated packaging is very strong demand for fluff pulp is solid.
Demand for paper continues to recover in.
Key regions.
Second quarter volume in our North American packaging business was constrained by severely low containerboard inventory in fluff pulp shipments were hampered by significant port congestion.
Our mills in converting system performed well.
Operating costs were adversely.
Impacted by highly stressed supply chain environment for both our inbound materials in outbound shipments as.
As well as the exceptionally low containerboard inventory conditions in our North America packaging system.
Maintenance outage costs increased by <unk> 18 sequentially as we completed our highest maintenance outage.
Quarter of the year.
On an absolute level maintenance calls for $250 million in the second quarter.
Input costs were a significant headwind for most materials in energy costs remained elevated providing little really following the winter storm.
OCC represented about half of.
The sequential increase in input costs.
Although some of the pressure in the input costs could be transitory such as the impact of heavy rainfall in our wood cost in the Gulf region. The extremely tight transportation environment will continue to put pressure on all inbound materials every mode.
Out of transportation is tight and we expect them to remain tight as we move through the second half of the year.
Corporate expenses benefited from favorable reserve adjustments or.
Our tax rate of 24% in the second quarter was sequentially lower primarily due to debt.
Discrete period tax benefit.
In equity earnings improved substantially on very strong performance from <unk>.
Turning to the segments in starting with industrial packaging on slide 6 we continue to see strong demand across all channels, including boxes sheets in containerboard.
Mark indicated we operated with extreme.
Only 1 in containerboard inventory in the U S system.
These conditions impacted volume in operating costs in the quarter.
We are working to replenish inventories falling in the winter storm in maintenance outages as we manage through a tight transportation environment.
Taking a look at our second quarter performance volume was sequentially flat.
Extreme strong demand in our North American box in container for channels offset lower seasonal demand in our EMEA business volume across our U S channels grew by 10% as compared to last year, which includes our U S box system open market containerboard customers as well as our recent equity.
Partnerships with strategic sheet feeders.
Price and mix increased by about $110 million in the quarter were making excellent progress on the realization of our March increase.
Our mills in converting system performed well however, operating costs were impacted by severely low containerboard inventory.
<unk> in a stress transportation environment with congestion in across all movies.
Maintenance outage costs increased sequentially as we completed the highest maintenance outage quarter of the year in our industrial packaging business. We have completed about 75% of our planned maintenance outages in the first half of the year.
Yes.
Equity input costs were a significant headwind in the quarter, primarily driven by higher costs for OCC chemicals in distribution.
About $10 million of the sequential increase in input costs occurred in our EMEA packaging business, primarily for OCC in energy.
Thank you for a closer look at OCC.
Jay we consume about 5 million tons annually across our U S mill system and Spain.
We see the rise in OCC cost is a reflection of the underlying strength in global demand for corrugated packaging.
We expect OCC costs to rise further in the third quarter, even in seasonal generation improved.
Improves we expect continued U S in export demand, especially from MDM in southeast Asia, which are largely offsetting pre restriction OCC exports to China.
Turning to slide 7.
We are well positioned for strong earnings growth in margin.
<unk> in our packaging business in the third and fourth quarter.
Demand is strong across all of our channels.
We expect continued robust volume growth across our U S channels, and we're making excellent progress on the price realization of our margin increase.
Our mills and box plants are positioned for strong second half performance following.
Showing the impact from the winter storms in the significant maintenance outages in the second quarter.
Replenishing, our containerboard inventories will enable operational in supply chain efficiencies as we move through the second half of the year.
We do expect further input cost inflation in the third quarter with substantial pressure on OCC.
In transportation costs.
Our teams are doing in admirable job managing cost in a tough environment.
Expect further opportunities to be more efficient as inventories a little loans.
In addition in our commercial initiatives are outpacing cost pressure in position us for strong margin expansion in the second half for Lisa.
Turning to global cellulose fibers on slide 8 demand for fluff pulp is solid in the end use demand signal for absorbent hygiene products is healthy.
Looking at our sequential earnings price and mix improved by.
$104 million in the second quarter with price realization accelerating across all regions in.
As expected.
Volume was moderately lower due to significant U S port congestion in frequent vessel schedule changes, which delayed our shipments.
Mill performance was strong however, operating costs were impacted by the tight supply chain environment. We expect these conditions to continue in the third quarter.
Maintenance outage costs decreased as expected in input costs were moderately higher with lower wood cost in the mid Atlantic region, offset by higher chemical and energy costs.
Turning to printing papers on slide 9.
Our paper business delivered earnings of $76 million in the second.
Second quarter with continued strong cash generation.
Our printing papers business carried strong momentum as we approach the spinoff on October 1.
And then continues to recover in all of our key regions. Additionally, our volume recovery is outpacing the industry in through the strength of our global brands and commercial excellence.
Looking at the second quarter performance price and mix improved by nearly $30 million with price realization in across all regions fixed cost absorption improved with no economic downtime in our North American mill system.
Other operating costs were impacted by the tight transportation environment.
We executed the heaviest maintenance.
Outage quarter of the year as well.
And then on input costs, we experienced pressure on wood chemicals in freight.
As I said earlier, we're on track to spinoff the papers business on October 1 separation planning is progressing well and we expect to file the form 10 with details of the spin off in the first half of August.
As you would expect there is significant flexibility our teams are doing an outstanding job managing the business as we prepare for a successful separation.
Yes.
Looking at the <unk> results on slide 10, the joint venture deliver in equity earnings of $101 million in the second quarter with an EBITDA.
Margin of 47% driven by strong price realizations for pulp and containerboard.
Volume improved sequentially on strong demand for pulp and containerboard as.
As well as more shipping days in the second quarter following the impact of the Chinese new year in the prior quarter.
Underlying demand is stable following.
We are in restructuring during the first half of 2021 shipping capacity is tight in supply chain to China are stretched.
Third quarter volume is expected to decrease moderately ex.
Executing the majority of its annual maintenance program.
So now I will turn to the outlook.
Inventory per quarter on slide 12, as Mark said earlier, we expect meaningful earnings and margin expansion as we move to the third quarter.
Yeah.
Looking at industrial packaging, we expect price and mix to improve by $110 million.
The continued realization of our mark.
For the for 2021 price increase.
Volume in North America is expected to improve by $10 million.
While volume in Europe is expected to decrease by $10 million.
Operations and costs are expected to improve by $5 million with the North American system.
From benefiting from a gradual recovery in containerboard inventory levels.
Staying with industrial industrial packaging maintenance outage expenses are expected to be down by $122 million input.
Input costs are expected to increase by 85 million.
With OCC representing about 60%.
Of the expected increase.
In global cellulose fibers, we expect price and mix to increase by $60 million on realization in the prior price movements.
Volume is expected to increase by $10 million operations.
<unk> costs are expected to decrease earnings by $5 million on continued supply chain stress due to port congestion.
Maintenance outage expense is expected to decrease by $15 million in input costs are expected to increase by $10 million on higher wood and chemical costs.
<unk>.
In printing papers, we expect price and mix to increase by $25 million.
Volume is expected to increase by $5 million.
Operations in cost are expected to be unchanged.
Maintenance outage expense is expected to decrease by <unk>.
$2 million in input costs are expected to increase by $10 million, primarily due to higher wood cost.
And under the equity earnings you will see the outlook for our <unk> joint ventures.
I wanted to take a moment to update you on our capital.
Allocation actions in the quarter for.
We're committed to maintaining a strong balance sheet, we're comfortable taking leverage below the target range of 2 in a half to 2.8 times debt to EBITDA in our Moody's basis in the first quarter. We were in the second quarter, we reduced debt by $796 million, bringing our debt reduction.
The $904 million in the first half from 2014.
Returning cash to shareholders is a meaningful part of our capital allocation framework in the second quarter, we returned $258 million to shareholders through dividends and share repurchases.
Share repurchases were $57 million.
Instead of 1 million shares in an average price of $60.80.
We have about 1.5 billion available under the company's share repurchase authorization at the end of the second quarter.
Lastly, in the second quarter, we monetize our remaining stake in graphic packaging for about 400.
<unk> hundred million dollars.
This brings our total cash proceeds on the investment for $1.3 billion before expected cash taxes of about $300 million in the second half of 2021.
As a reminder, we also have a tax receivable agreement with graphic packaging.
Under which we expect to receive about $100 million in cash proceeds during the second half of 2020 Mark.
With that I'll turn it back over to Mark.
Tim Thank you very much for all the detail.
As we look forward, we are positioned for strong earnings in margin expansion in the second half of 2021.
In our confidence in making a statement based on the following our commercial initiatives are driving revenue growth in our mill in converting systems will regain meaningful operational in supply chain efficiencies as we replenish inventories.
Although rising input costs will likely linger on certain we can successfully navigate the environment given the strong.
In backdrop.
I think for us business carry strong momentum as we approach the October 1 spinoff our team is doing an outstanding job managing the business and taking care of customers.
Take this opportunity to thank our employees for their tireless efforts as we plan for a successful separation.
As we move through 2021, we have significant operating and non operating cash catalyst and we are laser focused on the capital allocation framework that Tim just described all of our cash flow flow through our framework with 1 objective for <unk>.
<unk> value creation for our shareholders.
<unk> debates about the actions, we're taking to build a better IP for accelerating earnings growth in building a foundation for long term success, we're looking forward to sharing more about that with you in the months ahead.
With that we're ready to take your questions.
Thank you as a reminder to ask the question for my Star 1.
Im excited to withdraw my question press the pound key.
That is star 1 to ask a question for.
For consideration of time. Please limit your question just for 1 question and 1 follow up. Thank you, we will pause a moment to compile the Q&A roster.
Your first question.
Question comes from the line of George Staphos from Bank of America.
Hi, everyone. Good morning.
Thanks for the details thanks for taking my question I guess my first question Mark.
Tim we've talked about this in the past about running the cash flow generation that the company.
He has both from an operating standpoint in non operating since you have so many transactions that have been occurring.
This year in will continue to occur this year through your framework.
Do we take away from that in terms of what.
Tools that you have in your core for maybe more applicable now versus what might.
Might've been the case.
3 in 6 months ago in Tim what gives you comfort in why do you think it is appropriate in your view.
For leverage to drop below your target range. What are the things that you think make that a prudent strategy you can give us some a couple of thoughts here and then I had a follow on.
Sure Good morning, George Good morning.
The way we're thinking about it is we are trying to maximize value we have a lot of cash coming in in a moment.
We do.
Everything looks positive as we go forward, but we recognize this is a cyclical business to some extent in so in relation to the balance.
Where we are trying to build strength reduce risk.
But also flexibility and optionality in so taking it down below the target range, which is really a target range through a cycle.
Sometimes we'll be below that in sometimes will not be a little bit above but.
We just view it.
That coupled with our pension performance is derisking the.
The company share repurchases and dividend is very important.
And so that is over over time, as we not necessarily quarter by quarter, but over.
Year by year, we look to be returning.
She's a substantial amounts of cash to shareholders. In then everything else gets tested whether it's organic or small bolt on types of acquisitions gets tested against them.
As a follow on would be accelerating performance that you are seeing into the second half.
Any way.
A.
Our guide Compas point for you in terms of how you may further allocate capital.
Especially to value return over the rest of the year and into 'twenty, 2 or is it really not so much because you look at this on a longer term basis in.
What are the wise in why not on.
And then my related question I'll turn it over for everyone.
Any kind of view that you could share with how much cash silvano will need to operate on an ongoing basis. Thank you very much.
Just filling in Alaska, we do in debt will be.
For instance is going to be coming out here in.
On that order in I think otherwise from longer questions to your to your first part of your question I think we tried to looking for growth we try to look in circumstances in the moment, but we definitely have a long term view in were.
Taking about how to create value in what our value is over time so line.
I hope, we try to take both in Tokyo.
And shortly in per ton, Tim if I could.
In Europe, just wrap up there was a lot in ground covered in the capital allocation question for that yet and we do take a long term view in as I said last quarter 1 of the things that we're really excited about is that we've got IP position for the first time in in.
Almost forever are definitely recent memory.
For our entire capital allocation lever set.
Strong balance sheet and ability to pay a strong dividend share repurchases at the right times and very importantly, smart investments in our business as Tim said organic or inorganic we have all of those levers are available at the same time.
In our past history as all of you know as we've had 2 or 3 or maybe 2 out of for sometimes only 1 out for.
And that's what we really are excited about as we're going forward as we separate into 2 companies in new IP is going to have a capital allocation posture that we haven't had in.
In all time in that.
That's very exciting for our shareholders. It is very exciting for the company because we have options to grow the businesses that are growing to manage our return of cash all generating hopefully outstanding shareholder returns.
Thank you very much.
Your next question comes from the line of Gabe.
Wells Fargo Securities.
Good morning, Mark in Tim Thanks for taking my question.
I guess not to belabor the point here, but and I. Appreciate that there is somewhat of a wall of worry out there, but I think.
You know 1 of your peers kind of talked about potentially you know a structurally higher lead.
Level of demand for corrugated for for various reasons.
Whether it's ecommerce or potential onshore in the manufacturing activity. So I guess.
Ask the question a little bit differently your balance sheet in pension probably have not been in in good shape for.
In 2 or 3 decades is there something that you see around the corner.
From that gives you pause in terms of any of your businesses in it sounds like again, you're pretty constructive near term.
Outlook.
I'll stop there.
Non game I think.
We also view the corrugated packaging market as potentially having a bit of a reset through this last year in the half.
5.
We listened to our customers on that.
I'm not sure it's 8% every every quarter to quarter in quarter out like it was in the last quarter, but definitely a step up from the low single digit growth rates in that's what we want to be positioned for when we talk about growing at a minimum with the market. We mean over time in a reasonable.
All assumption of growth on the U S market.
And that's a number that I think is leaning towards the higher end just because of a couple of things the adoption of e-commerce through the pandemic, which is I.
I think proven to be very sticky and valuable.
Proposition that fiber based packaging presents.
<unk> for people in terms of its circularity renewable natural resources, making energy in carbon neutral biomass way in a high recycling rate is finally with all the talk about sustainability and climate in a number of other issues finally getting attention all the way down in the consumer level. So we're very excited about corrugated packaging.
Outlook in we want to make sure. We are there with the right asset base, the right customer list for right technical capabilities to grow share.
To share in that growth.
Alright, Thank you Mark and I guess.
Switching gears.
Are you guys prepared at all it's been call it 8 months or so since you've announced.
For $350 million to $400 million of cost reduction.
To provide maybe a little bit more detail either you know cadence of that of how we might expect it to flow through.
I'm, assuming maybe we've seen a little bit here in the first half but.
And then maybe maybe by segment, what you expect to see or is that something that maybe you'd prefer to wait to.
Mark.
Yeah again, we flow.
Starting that as we have.
Towards the third quarter release in for.
At the end of the year to go in expectation of about 20 to 22.
Performance.
Thank you.
Your next question comes from the line of Anthony Pettinari.
Subsidy.
Good morning.
In an industrial packaging the FBA in AFP, a data would suggest that sort of industry inventories are kind of closer back to normal or more of a normal historic level for for July I'm just wondering if.
Jerry from possible to quantify or put a finer point on that.
How far below you are sort of normal or comparable levels of inventory in sort of where that was exiting the quarter in maybe as we were here in July.
Yes.
Through the second quarter.
If it's all in the lowest inventory levels in our system.
We've probably ever experienced.
Coming out in the second quarter into July.
Well to start recovering a little bit of that.
I mean.
In winter storm impact in his heart.
145000 tons for.
Followed by an abnormally high outage quarter in the second quarter. So.
It's going to take a little bit in time for us to recover that as we go through third quarter in probably into the fourth quarter to some extent.
So yes, we were at our lowest levels we've ever seen.
In the second quarter, Anthony I think the other perspective on inventories in Ive seen a lot in written by analyst on normal inventories in line just thing to remember in the way we look at it normal inventories in average for the past tend to correlate with more normal supply chain environment, So normal transportation.
<unk> in velocity, so forth and so on and we are nowhere near any kind of normal.
Why chain performance.
Thanks for third party partners in the transportation World. So our inventory view in IP for the next quarter in the quarter. After that is also influence in adjusted by what's happening.
In the transportation in supply chain network. So I would expect that normal right now should be higher levels of inventory.
To perform the same with customers as we have in transportation velocity was much higher.
Okay, that's very helpful.
In that point well taken.
And then just maybe following up on capital allocation in terms of you talked about the willingness to potentially go under the 2.5 to 2.8 range at what is I think a pretty.
Positive part of the cycle.
As you look to the spin would you.
Look at revisiting that 2.5% to 8 target range.
Either up or down I mean, youre going to have a more durable higher quality business with industrial packaging and pulp at the same time you have a publicly traded competitor in containerboard that's been operating.
Closer to 1 turn or certainly below 2 turns so.
If you could talk about the debt range and maybe your willingness to.
Revisit it over the long term.
Yes, it's a great question Anthony.
Certainly.
None of this is static right so.
Wanted to we wanted to be understood in we want to be consistent in true to a framework.
As.
We talk about it but that doesn't borrows from reevaluating based on portfolio in other specifics.
Potential changes that we think are beneficial to our investors and stakeholders. So.
Nothing now, but something that we will definitely look out over time Anthony.
Anthony I think.
The way you should probably think about how we make that decision together, Tim and his team.
In meeting as we try to look at the company in its optimal weighted average cost of capital in law.
That is what credit rating, we need to have that debt delivers.
Of course.
So you're absolutely right, we're going to be a different company going forward in that analysis is something that we do continuously we've arrived at the credit rating target. We have based on the company. We will continue to look at that and try to make sure that.
Our ROIC is constructed in the most effective way to get in advance solid.
<unk> high quality return, we can for shareholders in definitely debt ratios in credit ratings are part of that.
Okay. That's helpful I'll turn it over.
Your next question comes from the line of Mark Weintraub from Seaport Research.
Thank you.
Wanted to first just to.
Kevin maybe more color on the targeted volumes again solid up 3.9% industry, though was up 8.2% you mentioned supply chain.
In other challenges you had did that did that actually suppress where your volumes otherwise would've been in if that.
Is that business that when your systems operating easily comes back or can you kind of give us some color on how to understand the volume situation.
Well, Mark I think the way to think about.
I was looking at what we had hoped we sort of put in our outlook in the.
Our first quarter call in we actually had stronger performance in the golf and Youre going to have but we didn't know like a lot of people who know the market was going to grow 8%.
We had the inability during the quarter in some cases to pick up incremental business, we didnt lose any business with our core customer list that was in coming into the quarter in business they're.
That was the case in business that we didn't bid most of it in shorter term business. So the answer is yes, and yes people still calling us today can you supply need more boxes in some cases, we can we just couldnt do it in the second quarter. So I'm not concerned about losing anything permanently we basically had in classic mismatch.
There may be available capacity in our system and the demand in a 90 day period.
And the.
When you say the available capacity is that because your capacity. During these 9 days were constrained by unusual factors.
For it basically.
Match pretty much running in full to you about the 2 for 2 factors I mentioned Mark in my opening comments.
We have.
More than 1 quarter of recovery from the Winter Storm 140000 times debt just evaporated from our containerboard supply chain.
And on top of that we had.
You just asked maintenance quarter in ITG in the last 10 years. So if you just normalize what was above normal maintenance plus that winter storm, that's a chunk of containerboard capacity that could not be converted into a box.
And that's coming back, it's just going to take a little while to get it back so what.
We had available land in wide open.
<unk> capacity offline for maintenance and we have the lingering effect of the 140000 tons from the first quarter. None of those are permanent all of those will be significantly improved as we navigate through the second half.
Got it.
And then just on pulp obviously.
Great price mix showing in the quarter and you pointed to another I think it was $60 million or so for the third quarter does that pretty much reflect all of the benefit from the pricing thats already happened for forgetting about what happens from here or the way your contracts set up.
Is there meaningful additional lag that might come through based on what's happened previously with posted prices.
So that's a that's a complicated question because of the nature of some of these contracts by customer type by region, but let me just.
Kind of state restatement.
We what we've talked about the last 2 quarters, but you could expect.
Quarter by quarter quarter over quarter improvement in this business steady improvement in this business in we're seeing that but our strategy is to have the kind of margins in this business that reflect the value that fluff pulp provides for the end use customers. So we're taking a.
State was structured very measured approach to each market segment.
And to the agreements we currently have in those segments with individual customers.
And so as we implement this approach we would expect.
There'll be some volume shifts in movement between segments in our goal is to have.
Mix improvement better agreements with better.
Economics that reflect the value of fluff pulp and that is a kind of customer by customer region of the world by region of the World and I would expect in we're making progress good progress on that.
Given the length of some of these.
These agreements in the way, they're structured we should expect to continue to see margins improve over the next several quarters. So thats a long complicated answer to what we have any more price flow through it's not just about price flow through was about restructuring these commercial agreements and getting the proper value for this product.
I appreciate the color. Thank you.
Your next question comes from the line of Mark <unk> from Bank of Montreal.
Good morning, Mark Good morning, Tim.
Good morning.
I was wondering.
Mark or Tim.
Just help us a little bit with kind of cadence.
Seeing the pass through of the spring containerboard hike. In then I don't think you said anything about this perspective.
Early August so maybe if you could just give us some color around that as well just as we think about the next.
A couple of quarters in into 2022.
Yeah.
Hey, Mark it's Tim So I think the increase from the fall as we talked about last quarter I went through in record record amount of time it was.
The fastest I've ever seen.
The pace on the second 1.
We were kind of expecting a normal historical ramp on it.
To be growing faster in not as fast as the first but still faster than.
What we've seen over time.
We'll see.
As August comes we will see how that 1 plays out.
But <unk>.
Right now we see our fundamentals looking very strong.
It seems demand.
In.
As Mark talked about all of the complications from the supply chain in our.
Are really stretching inventories tighter than they would normally be.
So far through the first 2 price increase implementation, we feel really good.
So can you give us a sense Tim.
How much benefit from the spring you've had in the second quarter in just order of magnitude what we might expect in the third and fourth quarters.
Yes, I think.
If you look at the 2 of them combined would be about 80% complete on implementation at this point.
Strong.
And then any thoughts on sort of how August would roll in.
Yes, I don't want I mean, that's forward looking in.
We feel very confident at the moment, but I don't want to speak to forecasting price at this point.
Okay, all right that's fair.
Mark I just wanted to as a follow up.
Turning.
The containerboard business from just a kind of a supply in demand standpoint does this continued strength in global containerboard demand does it offer in your thinking at all about investing in either debottlenecking projects at existing mills or potentially the timing on that second conversion at Riverdale and.
And are you also doing anything to kind of gear up capacity on the converting side.
E Commerce continues to grow as a bigger and bigger percentage of the market.
That's a great question Mark in the answer is no.
Coming in.
Maybe in the middle of 2020 in we were seeing in I was saying, we feel really good about our container.
Linerboard capacity, we have what we need the amount of time for grades.
When everything is running we have in our capacity.
But everything is a run in every day with outages in of course.
Against that you don't predict like that in winter storm issue, but.
But yes, we are looking continuously in debottlenecking we've done.
In that in the last several years thankfully because we eat debt containerboard now.
We are looking at different options for adding containerboard in.
Into our system if it looks like this kind of demand level is going to be consistent remember we are structured maybe a little bit uniquely in the sense that we bring in containerboard to market.
3 distinct channels, our own box network open market in North America to the company's debt.
Provide a certain service in the box market had been long term partners of ours, but we don't make the box in in our export. So much you have seen in and we will continue to see is movement of containerboard within.
Within those 3 channel and obviously, we have favored the U S box market as much as we can but trying to continue over time not just in the second quarter of 2021 that over time get the highest possible margin in our business by participating in all 3 in those channels.
Containerboard is you're right.
This is a high demand products all over the world both recycled.
In Virgin, we obviously only export the Virgin we saw in the emerging version of it box capacity, we've been actively investing.
Secondly, with the with the.
The acquisitions, we did with that in the.
Early part of.
Of the past.
Period, we've had a lot of opportunities to fill out existing plants by adding.
Single or double lines of Fox, making equipment.
Built a few plants.
And we've acquired a couple of partnerships, but there is definitely opportunity for us to continue to invest in our.
In network the other the other option with converting as you well know Mark is when you when you know demand it looks like it's going to be solid you can bring on more employees in actually fill out an extra shift in many plants and you've got latent capacity turned into productive capacity.
Obviously want to do that when you're pretty sure and.
Converting to do it with over time, and then you do in with permanent employees.
<unk> right now given the labor market dynamics, but we've got several levers to pull to continue to invest in not only box capacity, but the kinds of capability we have.
E Commerce specific assets for example is something that we're also linking to me.
For.
Okay. That's helpful. Thanks, Mark I'll turn it over.
Your next question comes from the line of Mark Connelly from Stephens.
Thanks.
Tim mentioned that White paper price mix gave you about $30 million, but when I look at overall revenue per ton in this segment, we got only a couple of box switch in.
<unk>.
It may be overseas price mix was flat or even down can you talk about price mix across your system, particularly outside the U S.
On the white paper.
White papers Mark yes.
Little bit.
Muffled coming through so when you're talking about.
Looking for more.
But I'm curious what's happening in the system right now.
It looks like you got some gains in the U S. But you didn't really get much across the entire white paper business.
Yeah, well I mean.
All of the regions, we're seeing price increases.
Our realization of price increases in some degree some of this in other regions started earlier in the year. So Russia was kind of on the forefront earlier in the year implementing a price increase Brazil as well domestically.
So those are sort of they are running their course in playing out where we still see.
1 is in north.
Erica in in some of the export markets as well.
Okay. Okay, that's very helpful.
And Mark just to switch gears completely I'm curious.
What your position is on this packaging stewardship legislation that we're starting to see.
As states try to create in.
<unk> is to reduce waste.
Pointed to the growth in E Commerce, which some of these states are pointing to as part of the problem.
But.
How do you we know as AFP is against containerboard is being included.
How do you think about containerboard industry responsibility what should it be.
If the legislation should not apply to you.
Well I think if you look at the legislation in detail.
There's a federal view, that's kind of in its.
Nascent stage in their state by State view and we are actively working in the state by state.
Legislators.
The big issue in the big.
In simple of this extended producer responsibility tax legislation was really targeted at non recyclable or hard to recycle in many cases plastics in.
In some cases that has led people to believe all packaging should be included so the first thing is separating the facts of what corrugated packaging.
<unk> actually in corrugated can vaccine can be a solution to the problem because in the high recycling rates, but that message has to get to policymakers in we work very hard on that.
In a fair amount of my personal time.
Talking to people about that and in many cases, it's a new learning mark for people at the local level debt there is a completely different.
Can do story on fiber based packaging Thats made from renewable resource in a high recycling right in the 90 per cent range versus many of the other substrate choices. So I think thats. The case were making that is actually part of the solution not part of the problem.
But as usual.
In legislation, sometimes it starts with a blanket.
All packaging needs to be managed in a different way and people need to be responsible for their packaging.
Yes.
Put out there when we have a system. So for example, we spent a lot of time and it's in there right now on the infrastructure work.
Different that Congress is working on in that bipartisan agreement. They made yesterday, a significant amount of investment in recycling networks in the country as part of that we will see if it stays in there, but that's the answer is in improving recycling rates for easy to recycle and reuse materials, that's the value proposition for corrugated.
Not being included in the intent to some of that legislation.
That's super helpful. Thank you.
Your next question comes from the line of fill in from Jefferies.
Hey, good morning, everyone.
I appreciate in the winter storms.
Was it a big hit for you guys, but Tim.
Pack Mark do you expect inventory getting back to more manageable level for containerboard in <unk>, where you'll be able to better capitalize on the growth. We're seeing in good operating cost back to more normalized level I think in the past you've always kind of targeted to grow faster in the market, but any color in kind of getting back on track on that goal.
We.
Tim or Matt will be steady progress it won't be all solved in the third quarter. We think we'll make steady progress through the second half of the year, we have targeted to grow at or slightly above the market over time.
We were really hampered in the our ability to do that in the last couple of quarters because of the issues you just mentioned, but we will definitely.
We have more options available for incremental growth as we go forward just just based on the fact that we won't have so much of our system down for maintenance, but it will take it will take a slow steady progress month after month through the second half.
So we should still expect you to lag the market little bit in <unk> in obviously cannot do not.
We think not necessarily not necessarily a part part of what happens in 90 days.
As a pretty short period of time.
Sure.
Part of what happens in the 90 day period as your segment exposure and what happens in the seasonality if you've got more of this versus that and so I think you shouldn't I wouldn't automatically assume a lagged.
Not necessarily.
But I think it will take us.
The next.
Second half of the year to get to the point, where we feel comfortable that our inventories are more sustainable I think the first thing. We'll see is we won't Miss any sales second thing Youll see is our costs will come down.
Super helpful and in.
Mark I appreciate it's volatile in nature it is commodity.
Both for softwood and fluff pulp prices really surge this year, but the market appears to have softened up a bit what's your crystal ball, saying in terms of pricing for fluff and softwood pulp globally in India. The view in terms of how much inventory levels are in the channel it's tougher to give you.
Pulp runs from the logistical bottlenecks you guys are seeing in the market.
Yes, I mean I wanted to in our forecast price looking forward I am talking about how we think about it at the moment, what we believe were seeing were seeing.
A bit of a pullback.
In some of the markets.
Our view at the moment.
<unk> things are more stable.
Sure.
And you have to look at not only the underlying demand loans, but the transportation difficulties.
Which are really.
And in fact.
Sending supply chains at this point so.
Youre right pulp commodity products, but.
Our view at the moment is a bit of a correction.
Not a complete turn.
Okay Super helpful guys.
Your next question comes from the line of Adam Josephson from Keybanc.
Mark in Tim Good morning.
Youre well.
Mark.
Mark 1 more in pulp and then I have a containerboard question just I. Appreciate your comments that you expect segment margins to improve over the next several quarters, but when I look at the last 10 quarters, it's been.
A pretty tough slog for the business and as Phil Just said you know prices in China have been.
<unk> of late so.
I guess, what what gives you confidence just given what's happened over the past 2 to 3 years debt. This is a business in which you have a meaningful competitive advantage.
Well, if you think about the remarks in a couple of questions in kind of about what we're changing in the business for ourselves.
Coming down in the last 10 months.
Last headquarters that's what gives me confidence that this is a very.
Creating material for our end use customers and we just happen to always extracted that proper value that that gives us a value, creating return and thats what were working on.
Thank.
As the rate will stay.
Solid as economies around the world in Peru, So theres a growth component, but we're going to run the business in a different way than it has been run before.
When we made the decision to invest in the business. It changes the profile of this being a legitimate first rate.
Business for our company versus in many cases, a smaller side.
Midline type of business and some of that's reflected in some of the way the commercial agreements have been made in we're in we're working on changing that for the better.
I appreciate that Mark in just 1 on box, Tim and I think you mentioned earlier in the call that long.
Do you think the market could be at the high end of that.
1% to 2% range that you were talking about I, just want to make sure I understand that.
Let's say the market's up another 4% this year after 3 in a half last year, you were talking about kind of in 8% step change upward post pandemic in a market that had been growing at 1% per annum.
Are you thinking that we're going to keep stay at these higher levels and grow on top of that or that there could be some correction as retail sales normalize and then we'll get back to some kind of growth trend.
Yes, I mean, it's hard it's hard to for.
Take that uncertainty, obviously, but we.
We believe that part of what's happening is the role that fiber based packaging is playing in general commerce driven by a few segments.
It has taken a step change up and so we think in base will be stronger.
It depends on a lot of things in number 1 the structure in the U S economy.
And so.
If there is really action on some of the things that have been learned now around supply chains in global issues with supply chains. In we do have more manufacturing that actually occurs in the U S for certain components I think that will bode well for the business in.
And how strong the consumer is going for.
Coming out in this.
I think youre looking at maybe what's going to be close to 2 years of.
Pent up demand by consumers.
Cause of the things that happened during the pandemic in how that plays out in consumption.
We'll play will play a big role in what that growth rate's going to be.
I think the data.
You know we have we have this model we use I know others have models, there's third parties that have models.
A chorus.
Correlation around GDP has been slightly less has been what's.
All happened in the box market in we think that will still stand and it looks like we are poised to have.
A stronger consumption oriented GDP for at least as far as you can see right now.
Terrific. Thanks, a lot mark.
Your next question comes from the line of Paul Quinn from RBC capital.
Yes, thanks, very much just a question on pulp I understand you guys are making some.
Operational improvements in I'm, just trying to balance that with the Q3 guide here, where you've got ops in costs up $5 million or is there something on the cost side that.
More than offsetting the operational improvement that Youre seeing in then if you could give us sort of a scope as to what the big bogey is that there for 3 to 5 years out.
In terms of the things that you guys can control I E. How much improvement do you expect that that segment to have over that period of time.
On a longer term for in I'll ask Tim to look for that cost offset part of your question.
But on the longer term, we believe a combination of how we operate.
So in the in the manufacturing sector in the cost.
Cost structure of our mill system in I've said this before especially the part that was the legacy IP mill system, which is mostly converted mills from other products versus what we acquired with Weyerhaeuser, which is mostly all built for purpose. So they tend to have a better efficiency.
In lower cost, we've got opportunities to lower the cost primarily in the legacy IP manufacturing system, coupled that with commercial.
Arrangements improvement that we're talking about in whenever we're doing now you put those 2 together we should hit in the margin structure to have a solidly solid business above the cost of capital.
With a slight growth potential. So that's that's what we're working on in we see a path to debt.
It'll be a steady path quarter by quarter.
And that's in that's where we're headed in.
The question on the op cost offset Tim.
It's modest in its really transportation I mean were continuing.
Total.
The transportation channels.
I think part of the transportation issue in this business call. It in the export port congestion much more.
Exposed to international Ocean freight in the other businesses in the company.
Okay.
Alright, Thanks for my ex that's helpful.
Best of luck.
Your next question comes from Neel Kumar from Morgan Stanley.
Hi, good morning.
In some wood costs being higher sequentially, partly because of the weather. We just give you a sense of the magnitude of inflation youre seeing there and you're starting to see more.
More of a <unk> issue or go to carryover in throughout fourth quarter as well.
Yes.
It's really due to having access to.
For the fiber in being able to do out of the woods based on the rainfall that we've had so.
We looked at it very.
Wait time at all in terms of how we manage wood inventories at mills in across basins, and it's really been in the Gulf States that had been more heavily impacted.
But some of the southeastern mills as well so.
It will depend on the weather as we go through the rest of this quarter into the fourth but.
Long.
Our inventories are in decent shape that they're a little on the low side in its just going to cost more to get the went out in go to the mills transportation is not helping either I mean, we've referenced inbound materials and whatnot in.
That's seemingly impacting every day.
Yes.
Okay. That's helpful. And then in terms of your maintenance outage expenses, you're now forecasting $642 million for the full year I know, it's early but just curious how youre thinking about 2022 maintenance do you expect that to step down year over year are generally remain near 2021 levels.
Well, we're still working through that.
Yes.
I think a good way to look at it the way I've looked at it last year was an abnormally low year. This year is a little bit of.
Out of out of range high here when you put the 2 of them together.
It looks roughly in line I mean, our outages can be anywhere from 500 to 500 million into a little bit less.
Maybe some years, a little bit more pushing $5.50.
Last year, given all the uncertainty we pulled back in curtailed this year where cash.
Looking up on some of those outages from last year. So we put the 2 of them together, what's more normal.
Next year, we will we have to finish our planning.
Please provide that as we.
Near the end of the year in looking into the coming in.
Alright, thank you.
Our last question for today comes from the line line of Kyle White from Deutsche Bank.
Hey, good morning, Thanks for taking the question I just wanted to talk about some of your end markets in <unk>.
Packaging.
How is the e-commerce performing relative to your initial expectations at the start of the quarter any slow down there that you see how is the recovery in foodservice going just any details on the end markets that you can provide.
Thanks.
E Commerce no debt.
Climate is still very very strong.
And then we're getting into the period.
When you start to bill for the year end.
Demand increases as you move toward holiday season, So still very strong story, we're continuing to invest in that segment foodservice continuing to improve I guess there is a question mark about what happens with the.
The Delta Varian.
And whether everything continues to open I think.
A big Quest.
A question Mark.
In potential upside as schools in advanced start to open foodservice related to those which obviously hasn't been opened during the summer.
Is another potential upside in that in any way shape or form gets.
In Kuwait in the foodservice growth could slow a little debt.
In the only segment that I think in it's kind of predictable that maybe saw some flattening was processed foods in I think it's directly related to the general opening up the economy in a little less stocking up.
Of.
Got.
The delay in the grocery store if you will so good good strong performance across the key segments.
And we believe listening to our customers in looking at in order patterns. That's continuing as we go into the third quarter.
That's helpful and then focusing on transportation I know, it's early but when you look for next year do you see any relief.
In the sentiment stabilization in transportation costs or do you anticipate kind of considering in inflation headwinds.
Is there anything internally maybe.
You can do to provide some relief against these costs.
Well in internally in the best thing we can do on the cost side is to have our system optimized with the right inventories in what that means is.
<unk> for can make a product in the right factories, so that the transportation cost for the customer or in the case of our industrial packaging business. Our containerboard mill makes containerboard for box plants that are nearby not box plants that are all the way across the country.
That's the number 1 thing on cost that we can do internally, we don't we don't.
All have our own trucking in company or anything like that it's about really optimizing our supply chain in any dramatic improvements we can make on cost.
In your first part of your question.
I don't know this for sure, but I'm looking at what the analysts that follow in the transportation industry talk about is that there is a belief that labor.
In some of the impediments to truck.
Capacity in the training that's required to bring on more employees in more assets in the rail industry.
We'll get better that people will want to return to those industries. Many of this company's laid off a lot of people. If you cant just bring people.
Back in rail there.
Required training and other things same thing for Trump in the belief is that that will get better so capacity should get better.
In the economy stays kind of Red Hot and it's a good problem to have but then I think total capacity will get absorbed pretty.
Pretty quickly so the jury's out in that but we think it's really disruptive right now in velocity is really.
For a lot of reasons, we think part of that at least on the human labor side.
Get better.
Got it thank you Brian will detail thank.
Thank you let me go ahead and.
And wrap up just a couple of takeaways I would.
Like to leave with investors first you heard to date.
Really slightly are really positive line.
The strong momentum we are building for the second half in both earnings and margin expansion.
Absolutely laser focused on capital allocation in a balanced approach to that in we are in very good shape, all elements of our capital allocation framework and we're very excited about.
Pay debt prospects, we have in front of us as we separate IP into 2 companies and we work on building a better IP going forward. So thank you for your interest in in International paper, we look forward to talking with all of you next quarter.
Thank you for participating in today's international paper's second quarter 2.
2021 earnings Conference call you may now disconnect.
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Good day.
Good day.
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Good day.
Thanks Jay.
Okay.
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In June.
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