Q4 2021 International Paper Co Earnings Call
Good morning, and thank you for standing by welcome to today's international paper fourth quarter and full year 2021 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be the opportunity to ask questions to ask a question. Please press star one on your telephone keypad.
Draw your question press the pound key.
I'd now like to turn today's conference over to Guillermo Gutierrez, Vice President of Investor Relations. Sir you may begin.
Thank you Ramzi.
And thank you for joining international paper's fourth quarter and full year 2021 earnings call.
Our speakers. This morning are 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 two.
Including certain legal disclaimers.
For example, during this call we will make forward looking statements that are subject to risks and I'm sure.
We will also present certain non U S GAAP financial information.
A reconciliation of those figures to U S. GAAP financial measures is also available on our website.
Our website contains copies of the fourth quarter of 2021 earnings press release, and today's presentation slides I would note that the printing papers business segment is now reflected as discontinued operations from 2019 2021.
Lastly, relative to the old joint venture Slide two provides context around the joint Venture's financial information and statistical measures I will now turn the call over to Mark Sutton.
Thank you Guillermo and good morning, everyone and thank you for joining our call.
I'll begin our discussion on slide three.
In 2021, and we serve is strong customer demand in a really highly challenging operating environment.
The continued uncertainty associated with COVID-19.
I'm really proud and appreciative of the commitment of our employees to continue to take care of each other and to take care of our customers our employees health and safety is our most important responsibility.
Looking at our performance International paper grew earnings and revenue, while managing through significant operational and supply chain constraints for much of 2021, we operated with a sub optimized system.
Limited our ability to capture the full opportunity that comes with a strong demand backdrop.
We made strong progress on price realization from prior increases to mitigate the impact of substantial cost pressure from him cuts and distribution.
While we anticipate the near term operating environment to remain fluid.
We expect to grow earnings meaningfully into 2022.
We are building, a better IP, where our corrugated.
Packaging focused company with less complexity and more focused and we've initiated meaningful actions to materially lower our cost structure and accelerate profitable growth we.
We have a strong balance sheet.
This debt by $2 $5 million in 2021.
Pension plan is fully funded and we will invest to grow earnings and cash generation by building out capabilities and capacity in our U S box system over the next few years.
We are also well positioned to return meaningful cash to shareowners in 2021, we returned $1 6 billion to shareowners.
Including about 800 million.
Share repurchases.
Turning to the full year results on slide four revenue for international paper increased by 10% driven by strong price realization in our two business segments.
Operating earnings improved by 50%.
Operating margins were impacted by input operating and distribution costs, which outpaced price realization.
Looking at segment performance earnings in our packaging segment decreased by about $100 million year over year with significant cost headwinds from fiber energy and distribution, while our earnings in our cellulose fibers business improved by about $200 million.
Driven by commercial improvements and price recovery.
Equity earnings were $313 million driven by very strong performance from our <unk> joint venture, which delivered EBITDA of $1 $1 billion in 2021.
Free cash flow was $1 5 billion I would note that free cash flow included about $500 million in tax payments related to the various monetization actions that we took in 2021 as well as payroll tax payments related to the cares Act.
Turning now to slide five revenue in the fourth quarter increased by about $650 million or 15% compared to last year.
We delivered EBITDA of $645 million.
Margins decreased primarily due to higher operating and maintenance and input cost.
It was partially offset by price realization.
And I would note that input costs were higher than anticipated.
Free cash flow in the fourth quarter was impacted by about $300 million in tax payments again related to the various monetization actions that we took throughout 2021 and the impact of the cares Act.
Now I'll turn it over to Tim who will cover business performance and our outlook.
Thank you Mark good morning, everyone I'm on slide six which shows our year over year earnings.
Yes.
Price and mix improved with strong price realization across all of our channels mix was also favorable driven by growth in higher margin U S packaging channels and lower export containerboard volume.
Volume was essentially flat versus last year significant operational and supply chain constraints limited our ability to capture the full benefits of a really solid demand backdrop.
Our north American packaging business operated with depleted inventories throughout much of 2021.
<unk> increased our costs across the system.
The company's supply chain operating costs increased $170 million.
We're about 35 per share representing more than half of the increase in operations and cost in 2021.
The second half of 2021 was especially challenging due to the slow supply chain velocity and very poor logistics reliability.
But any additional cost pressure on our manufacturing system.
Maintenance outages increased as planned following deferrals, we chose to make in 2020.
Input costs rose sharply across just about every category.
Cost increased throughout the year with $370 million of higher input costs just in the second half of 2021 resulted in significantly elevated input cost levels exiting 2021.
Total corporate expenses decreased by 29 per share interest expense decreased by 21 per share benefiting from significant debt reduction.
Tax expense was lower by <unk> 17 per share within.
With an effective tax rate of 19% as compared to 25% in 2020.
These benefits were partially offset by higher corporate costs. Following the recent spin off as expected.
Lastly equity earnings improved by 57 per share <unk> equity earnings increased by 66, while equity earnings from graphic packaging.
Creased by nine cents.
Moving to the quarter over quarter earnings bridge on slide seven.
Fourth quarter operating earnings per share of <unk> 78 cents as compared to $1 10 in the third quarter.
Price and mix improved by 22 per share with strong price realization in our north American packaging business, partially offset by mix associated with labor challenges in our U S box system.
Volume improved less than we anticipated.
Primarily due to the significant omicron related labor and supply chain constraints late in the fourth quarter, especially in the U S box system.
Many of our suppliers customers and logistics providers have also reported labor impacts due to the ongoing COVID-19 resurgence.
In our global cellulose fibers business fluff demand solid however vessel delays worsened in the fourth quarter and limited our volume potential.
Operations and costs were a headwind in the quarter.
Cost impact in the fourth quarter from the tank failure at the Prattville mill was less than we anticipated due to timing <unk>.
Additionally, we received $40 million of insurance proceeds for Pretzel op.
Operating and distribution costs were impacted by poor reliability from logistics providers across every mode of transportation.
Maintenance cost increased sequentially as planned input.
Input cost increased by 22 per share or about $110 million with energy fiber and chemicals rising in the fourth quarter.
Corporate expenses and taxes increased sequentially and interest expense decrease.
<unk> equity earnings were lower sequentially, partly due to supply chain limitations, resulting from increased health measures on rail shipments to China.
Turning to the segments and starting with industrial packaging on slide eight in North America demand in the fourth quarter was solid across all our channels including boxes.
<unk> and containerboard.
However, omicron intensified supply chain and labor constraints in the later part of the quarter, which impacted box volume.
The labor impact from omicron across the value chain is substantial and continues into January with labor constraints impacting our box plants suppliers customers and logistics providers.
We're very proud of the IP team and their continued resilience and ability to adapt almost on a daily basis to deliver for our customers.
We're experiencing very stretch supply chain support carrier reliability across just about every mode of transportation.
Which puts significant strain on our shipments and cost pressure on our mills and box plants.
Our mill to box plant velocity for containerboard is running three to four days longer than our normalized flow and in some lanes even longer.
Loss production of Prattville, and the fourth quarter further stressed our network and operating cost production at the other mills in our system with 100%.
Looking at the fourth quarter performance.
Price and mix was strong with very good progress on price realization of our August increase.
This was partly offset by weaker mix related to higher export shipments in the fourth quarter as expected.
Volume improved by $20 million sequentially on strong seasonal demand in North America, and EMEA, Despite three fewer shipping days as.
As mentioned earlier box shipments in North America were impacted by supply chain and labor constraints, especially in the latter part of the quarter due to the Covid omicron variant.
Operations and costs were a headwind operating and distribution costs in our mills and box plants increase we operated with very lean containerboard inventories and higher distribution costs throughout most of the fourth quarter to compensate for loss production.
Pretzel mill.
The cost impact of prevalent in the fourth quarter was about $40 million and we did receive $40 million and insurance in late December .
We are currently in the process of restarting the second Prattville machine and expect additional cost in the first quarter.
Input costs have increased by $90 million in the quarter energy accounted for $40 million of that total, including $15 million in Europe , where energy prices rose to historically high levels.
Wood and OCC accounted for another $35 million, despite modest relief in OCC costs in the latter part of the fourth quarter.
Wood fiber costs rose sharply in the third and fourth quarters due to the challenging operating conditions conditions, especially in southern regions as well as inbound transportation constraints.
We expect difficult operating conditions and elevated costs in the first quarter.
Yes.
Let me turn to slide nine earlier in the month, we announced plans to build a new corrugated box plant in eastern Pennsylvania.
The new box plant will complement our northeast box plant network and support customers growth across multiple customer segments. We expect the new plant to start early 2023 and deliver returns of about 20%.
We plan to further invest in our U S. Pos system to build out needed capabilities and capacity investing in our UX bus system is one of the elements of building a better IP to accelerate profitable growth in our most attractive business.
We have some regions, where we are limited on box capacity, we have plans to increase capital investments at existing plants as well as invest in new box plants in the next few years, we will ensure we have the right capabilities and capacity.
To grow earnings and cash.
Moving to cellulose fibers on slide 10, I will start with a few comments on our performance in 2021.
We made progress on our commercial initiatives with price mix and volume contributing about $450 million of improvement.
<unk> for fluff pulp was solid throughout the year, however, the operating and supply chain environment was extremely challenging which affected shipments and cost we.
We also experienced distribution and input cost pressure more than $200 million with inputs rising in just about every category.
For the full year 2021, our earnings improved about $230 million versus 2020, and we expect further improvement in 2022.
Taking a look at the fourth quarter demand for fluff pulp is strong globally and our backlogs are healthy.
Looking at our sequential earnings product mix impacted earnings by about $5 million volume decreased by $10 million due to shipment delays our shipments continue to be negatively impacted by port congestion and vessel delays, which worsened in the fourth quarter keep in mind that we export about 90% of our volume in this.
Business.
Operations and costs decreased earnings by about $10 million, driven by higher distribution costs lower energy sales and the non repeat of nitrogen nitrogen credit sales in the third quarter. These.
These headwinds were partially offset by a favorable LIFO adjustment of $10 million in the fourth quarter.
Planned maintenance outage costs increased sequentially and input cost increase primarily due to higher chemicals and energy costs.
Turning to <unk> results on slide 11, the joint venture to deliver equity earnings of 66 million with an EBITDA margin of 39% in the fourth quarter.
Volume and costs were impacted by distribution constraints related to Covid health measures on rail shipments to China.
We expect these conditions to continue into early February .
For the full year film delivered outstanding earnings performance with adjusted EBITDA of $1 1 billion and an average margin of 40%.
Strong operational performance and low cost system make it a powerful cash generator.
We received dividends of 154 million.
In 'twenty, one and expect to receive about $200 million.
Dividends in 2022.
Turning to slide 12, I wanted to take a moment to update you on our capital allocation actions in 2021 and provide clarity on what you can expect from international paper in 2022.
Let's start with the balance sheet.
We will maintain a strong balance sheet and investment credit and investment grade credit rating.
As we've said previously we're comfortable taking our leverage below our target range of $2 5 million to two eight times debt to EBITDA on a moody's basis.
We reduced debt by $2 5 billion in 2021 and more than $4 billion over the last two years.
Looking ahead, we have limited near term maturities with about $900 million due over the next five years.
Taking a look at pension we're very pleased pleased with the performance of our plant.
Our qualified pension plan is fully funded with a surplus of about $600 million at year end, we feel really good about the actions that we've taken to improve performance and de risk the plan.
All in we closed 2021 with a leverage of two five times on a Moody's basis.
Returning cash to shareholders is a meaningful part of our capital allocation framework.
<unk> 2021, we returned $1 6 billion to shareholders through dividends and share repurchases.
And over the past five years, we've returned $6 billion to shareholders or about 63% of free cash flow.
Looking ahead, we're committed to a competitive and sustainable dividend with a payout of 40% to 50% of free cash flow, which we will continue to review annually as earnings and cash flow growth.
With regard to share repurchases as of the end of 2021, we had $2 $9 billion of.
Available authorization.
We will continue to execute on these authorization in a manner that balances the investment needs of the business and maximizes value for our shareholders.
Investment excellence is essential to growing earnings and cash.
Capex in 2021 was $550 million, which was less than we planned due to the timing on equipment delivery and a challenging contract labor environment.
Turning to 2022, we are targeting capital spending of $1 1 billion.
The planned increase is primarily for strategic projects and our packaging business to build out capabilities and capacity in our box system to drive profitable growth.
We also plan to increase funding for cost reduction projects with expected returns in excess of 25%.
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 in our packaging businesses in North America and Europe .
Any potential opportunity, we pursue must create compelling value for our shareholders.
If we turn to slide 13, before we get into the details of our outlook, let me frame up how we're thinking about this year.
First and foremost we're confident in our ability to grow earnings in 2022, and we project our full year EBITDA to be in the range of three 1% to $3 4 billion.
Having said that we expect first quarter earnings to be impacted by a very challenging operating conditions and related to the omicron variant and our highest maintenance outage quarter.
As we said earlier omicron intensified supply chain and labor constraints in December which impacted volume and cost.
That impact intensified in January as cases increased impacting our workforce suppliers customers and logistics providers.
Our assumption is that continued conditions will begin to improve late in the first quarter Asama Omicron cases.
Begins to subside.
Looking at the full year, we expect the solid demand environment for 400 gig packaging and pulp with demand growth normalizing as we recover from the near term omicron constraints.
We're also making good progress on our building a better IP set of initiatives, which ramp up as the year progresses.
Lastly, we are positioned to optimize our mill and box plant from the various disruptions of 2021, which will further improve our operating and distribution cost.
We understand the challenges of the first quarter and how we will navigate these near term headwinds to ensure the company delivers on our full year.
Yes.
So if you turn to slide 14, we will take a look at the first quarter.
Given the heightened level of near term noise. The first quarter outlook, we provide a range of those items.
Whereas the timing of omicron recovery presents greater uncertainty, so we'll start with industrial packaging.
We expect price and mix to improve by $65 million.
On the realization of our August 2021 price increase.
Volume is expected to decrease by $15 million to $35 million.
With a gradual recovery in the first quarter.
Operations and costs are expected to decrease by 60 million to $75 million, which includes additional costs related to PREPA.
Staying with industrial packaging maintenance outage expense is expected to increase by $118 million.
First quarter will be our highest outage quarter. This year, representing about 40% of total planned outage cost in 2022.
First quarter maintenance expense includes the Riverdale printing papers machine. This cost will be fully recovered as part of the transfer price to silvana over the course of the year.
Lastly, input costs are expected to decrease by $30 million to $40 million.
In cellulose fibers.
We expect price and mix to be stable.
We expect volume to decrease by $5 million due to ongoing vessel delays.
Operations and costs are expected to decrease earnings by $45 million related to the higher seasonal costs and non repeat of LIFO benefits in the fourth quarter.
Maintenance outage expense is expected to increase by $11 million, the first quarter will be our highest maintenance outage quarter of this year.
Also representing about 40% of total planned outages in 2022.
First quarter maintenance expense includes Georgetown facility payments. This cost will be fully recovered as part of the transfer price to slip on over the course of the year.
Lastly, input costs are expected to increase by $5 million.
Mostly due to higher energy costs.
Moving to our full year outlook on slide 15.
We are projecting full year 2022, EBITDA for the company of three 1% to $3 4 billion.
I would note that our outlook only includes the impact from previously published price increases.
Free cash flow is expected to be one three to $1 5 billion.
And as a reminder, our 2021 free cash flow included about $300 million generated by the printing papers business, which was part.
International paper to the third quarter.
We are targeting capex of $1 $1 billion with increased investments in our U S box system.
Our free cash flow projection also includes about $100 million of cash used for the execution of our build a better IP set of initiatives as well as $60 million of payroll taxes related to the cares Act.
Lastly, the slide includes our outlook for corporate items, and our expected tax rate of 25%.
With that I'll turn it back over to Mark.
Thank you Kevin for all the details and for walking us through the key earnings drivers as we look ahead I'm very confident in our ability to grow our earnings in 2022.
Anticipating a solid demand growth environment, we're positioned to operate with a fully optimized mill and box plant system as we exit the first quarter and our team is laser focused on delivering $200 million to $225 million from our build a better IP initiatives. We have a clear plan and we have a team in place to make it happen with that.
We're ready to take your questions.
Thank you if you would like to ask a question. Please press star one on your telephone keypad.
Draw your question press the pound key.
To ask a question please press star one.
Your first question comes from the line of Gabe Poggi.
<unk> with Wells Fargo. Please state your question.
Good morning, Mark Tim I Hope you and your family are well.
I had a question.
I know, it's probably an oversimplification, but when I think about your north American corrugated business.
No, obviously industry data, but U S box shipments down three 3% can you talk about.
How much of that is missed opportunity.
And perhaps the market itself is still growing.
Versus maybe some customers that are having them go to competing suppliers and relatedly.
To the extent I guess, you can comment and Thats true.
What you may have to do to kind of re earn that business.
That gets better.
On time deliveries service et cetera, but just if you could expand on that a little bit.
I think thats a great question Gabe.
The results, we posted in the fourth quarter.
So I don't know what the market will be that.
But half of our or sort of gap too.
What we think the market was like just given our participation rate in all the segments was really due to that.
Alright, and ability to service demand that was there related to the gyrations caused by the lack of <unk>.
Containerboard from Prattville, and so just practically speaking what that means is we've got a source that board from another male.
And it just so happened some of those other mills or in that most rail congested.
Shipping lines, so getting it to the box plants in time to meet the order expectation by any customer list was compromised.
A different version of the same thing we struggled with after the.
Winter storm and freeze earlier in the year, which took a number of took a 150000 tons off align for US just based on the geography of our plants and the other half.
Of what we think we missed relative to where the market might be.
Is really just our own impact in our company and in our supply chain partners with labor around Omicron now the good news. If there is good news in all of that is actually look at our key targeted customers and the customers. We have large positions with it doesn't appear that we're losing any share.
We have not been able to do and it's been consistent really since the second quarter third the second quarter. When we were coming out of these production disruptions, we have not been able to enjoy some of the incremental growth.
Everybody in the industry has been running relatively full out so finding replacement packaging.
If you don't have incremental capacity coming online I think has been a challenge for a lot of customers.
So lack of ability to take advantage of incremental growth. So far has been where the quote damage has been limited to and we are ready to be able to be in a position post the first quarter when prattville fully back online big chunk of these outages are behind us and our system can be optimized again, where we're shifting from the <unk>.
Correct mill to the correct set of box plants, our cost will go down as well and we should be in very good shape to take advantage of what the market has.
Alright, thank you for that Mark.
I guess, it's fair to say that the Q1.
It's kind of a trough.
For the company overall, and then obviously the second half will be much stronger.
And then I guess my other question was where will we see benefits from build better IP is that going to show up in operations.
You presented I guess in your earnings bridges, Thats sort of what where I'm curious and then the cadence of that over the course of this year and again don't take us the wrong way, but it doesn't feel like there's a whole lot showing up in <unk>.
In Q1.
Yes, and we'll report out in Q1, when we get to the end of the quarter. So it'll show up mostly in cost now we do have as.
As we go into next year, we do have growth initiatives that we.
We believe we will begin ramping up but.
Early on it's going to be.
Couple of places one just rebalancing for the stranded costs that we have from silvana.
We shared a slide I believe last quarter that showed that we have just under $100 million.
Of course that we will overcome.
As we go through this year.
And then the other place.
Where there are significant opportunities that are going to see ramp up as we go through the year and these are things that we've been working on for 12 plus months.
Is around process optimization and a lot of that has to do with how we source inputs.
In our global sourcing organization, there is some supply chain impacts.
In our industrial packaging business.
Actually a lot of it.
Advanced technology projects that are <unk>.
Being deployed for allowing us to operate slightly differently.
Better operating decisions real time in the moment and and so we targeted the $200 million to $225 million for this year grows which will overcome and then some of the $100 million that we have in stranded cost.
And we will be as we go to the first quarter, we will start sharing.
Quarterly updates and we'll do that throughout the year.
Thank you gentlemen, good luck.
Escape.
Your next question comes from the line of Mark Weintraub with Seaport Research. Please state your question.
Thank you.
Just on the on the <unk>.
Global fiber side wanted to clarify I think you indicated you expected earnings to be higher in 'twenty two that in 'twenty one.
And you've also indicated when you're providing your outlook for 'twenty two that you werent, including.
Any price increases that haven't been public. So I just wanted to confirm that that statement also didnt include the latest round of increases that you've announced on fluff pulp and then fill it in.
Given obviously based on the guidance Q1 is starting pretty deep in the hole.
What is it that's going to drive this superior or this improved earnings in 'twenty.
22 over 'twenty one because.
It would seem to be something beyond at least the types of published prices that we tend to see.
So mark you're correct on the first two points.
Those price increases are not in the commentary are not considered in the end.
And the full year outlook.
And I think what we're looking at.
In the first quarter, we outline Tim outlined additional maintenance so in past years, a lot of that was done in the second quarter. So what we got is a strong demand environment. We got the full year benefit of the prior published price increases, which I'm sure you're modeling correctly.
We have the $200 million to $225 million of initiatives that are part of our re imagine building a better IP and very very importantly, which we haven't had really since the second quarter of last year.
We should enter the second quarter of this year with our mail, our containerboard mill system in our containerboard and box system back in balance so that means.
<unk> premium freight because we're shipping off of our contractual rates were shipping from the wrong geography, all of the things we've been struggling with that a disproportionately probably added cost to our company beyond just the general inflation and the market goes away, so well organized back to our norm.
<unk> supply chain.
<unk> for three quarters of the year, we feel really good about being able to put the first quarter in perspective, and again, what Tim walked you through was a range because we are trying our best to be realistic about how long the disruptions related to omicron last for us at our supply chain partners.
I hope were wrong and I hope it goes back to full staffing and all of that sooner, but we're just trying to be as transparent as we can but we believe we're going to be set up, especially because the company would be optimized again.
Remainder of the year.
Thank you and.
And so that would be true on the Cellulosic because I guess the question was really just to make sure I heard right that you expected global cellular looks to be higher and so it is also.
Better positioning I guess I was trying to understand whether it's some of the commercial initiatives that you've talked about are also an important part of the global cellulose fibers improvement you're expecting in 2000, and so mark almost almost all of the improvement in global cellulose fibers in 'twenty, one and into 'twenty two has been the commercial changes we're making.
And continue to make to the business and without going into a lot of detail the businesses, mostly absorbent pulp and of the absorbent pulp there are three types of channel.
Sort of what might be called spot are month to month. There is long term volume based contractual.
And then there are some other part.
Configurations each of those has a different pace of change in commercial terms, how fast prices go through we will have the full year of this pricing environment, we're making changes you can see it in some of the data.
Around fluff pulp versus others and when we get to the second half of the year I mean, typically we've had one quarter, which is a low maintenance outage quarter, where the business produces 20% plus margins and cost of capital returns, we should see that in the entire second half of the year.
And then as we go into 'twenty three we start to see that for three out of four quarters and then we're going to have a business, where I said, we would get it which is value creating.
Throughout our full year at <unk>.
A big portion of that is driven by the commercial changes after or not after but asking as we get through the commercial changes will begin to make some of the investments necessary to structurally reduce the cost to make the product primarily in the legacy email for our cost structure is reflective of those mills.
Being converted mills and not built for purpose so.
It's moving in the right direction.
Commercial changes, we're making are working.
The business will be profitable this year, it'll be better than last year and it will be around the cost of capital for the final two quarters of the year.
Great I'll get back in Q4 for another question if there. Thank you.
Thanks Mark.
Your next question comes from the line of George Staphos with Bank of America. Please state your question.
Thanks, very much hi, everyone. Good morning, thanks for the detail.
Congratulations on all the efforts and progress this year I guess my first question.
Questions kind of joined at the hip around the box business.
Martin can you talk a little bit about what kind of shipments or bookings youre seeing early in the quarter.
From a market standpoint, if not for IP and then when we look at Pennsylvania, and the investments that you're making there you talked about 20% returns when youre done with the project do you have.
Our abilities with other box plant project to get that kind of return and then I had a quick follow on.
And so the.
January is very difficult to get any visibility to because what we've got is a fair amount of demand and orders, but the inability to get it made are to get it shipped or for our customers to accept it so.
I don't know how to give you a real focus on January what we are hearing though is that our end customer demand is not dissipating at all so I think what's going to happen is the man who will be shipments will be choppy in January and probably most of February .
If this virus curve tracks like it looks like it's tracking I think there'll be a tremendous amount of inventory replenishment.
Activity starting in March and the quarter will come out in the quarter, but January is very choppy, just because of the hit and miss ability for us to get.
Most of it is labor related for us to get boxes may if we have a may getting them shipped and for our customers, especially some of the large customers.
To be able to accept the shipments because they are running at a reduced rate.
The second part of your question can.
Can you repeat it.
George Yes, Mark just on Yeah, no worries at all the Pennsylvania box plant.
The returns that you're targeting there can you replicate that kind of return with other box plant investments that you have in your investment horizon over the next couple of years and sort of my follow up question and I'll hand, it over here. It does seem to be a fair amount of box plant capacity coming into the Pennsylvania, Delaware region does that give you any pause.
Relative to your investment and when we think about the European business, where the returns have been.
Probably below expectations last couple of years, how do you see that improving and fitting strategically within IP. Thanks, and good luck in the quarter. Thanks, George Yes, the box plant question.
Do have other opportunities there could be somewhere between three to five box plants geographically placed with the same set of economics.
Market area, where we are low on capacity in a customer list that wants to buy more from us and is fully integrated with our mill system that gives you a return and 17% to 22%. So we think we've got several more 20% opportunities for new box plants, and we've got many opportunities as I mentioned on our.
Last call and at the last conference I spoke at that we have to put additional equipment inside of existing plants that that have the physical room and space and are in the right market geographies. So when Tim talked about capital expenditures moving up most of that is for converting.
Ability and capacity throughout the U S box system on the Europe question.
Europe returns are moving up I think again, we got to look at the moment of extraordinarily high energy cost natural gas is at all time highs. We don't think that will stay that way.
We've got.
The normal lag in recovery of containerboard prices gone up against box prices that usually takes a couple of quarters. When you look at normalized energy. When you look at the value of integration from the small acquisitions. We made the business has had a value creating return level.
Not too distant future, so with one large mail and it being a 100% on purchase power because its recycled that that natural gas phenomenon. If you're following it in Europe as it is a huge blow to the profitability, but it's a moment in time, it's not a we don't believe it's a permanent issue.
Thank you very much.
George.
Your next.
Question comes from the line of Anthony <unk>.
<unk> with Citi.
Good morning.
In containerboard can you talk a little bit more about your inventory levels. It seems like from industry data mill inventories are somewhat elevated versus history, but some of your competitors had flagged box plant inventories is quite lean just wondering with all the moving pieces in prattville, how you think about your <unk>.
Inventories and kind of getting back into balance.
And it's a great question, Anthony I think the inventories.
The IP perspective, maybe what others are saying as well the engine. The absolute number is less important right now versus where it is.
And how fast or slow the supply chain is moving so we have struggled with having not enough inventory regardless of what the absolute number might be.
Really take advantage of.
Sourcing our box plants with board through most of 'twenty. One it started back in February March and we never really were able to catch up with demand kept accelerating. So we think we've got inventory as we enter 2002 and a much better position, it's not all in the right place.
Our experience is also that our box plants still don't have everything they need the papers <unk> is sitting at a mill in a warehouse and we're waiting for our railcars to get switched to a specific meal, we have several mills below.
Certain rail line kind of joins up in Birmingham, South and east of that is the biggest chokepoint in the country right now so moving our containerboard into our box network has been just a random carve outs almost every day. So our inventories are better but I measure it as can we fund.
The box plants with the board they need at the moment that they need and we're still not where we want to be on that.
Okay, that's very helpful.
And then maybe just a question for Tim.
On <unk>, the ruble has plunged I think to multiyear lows and obviously there is some some geopolitical uncertainty there how does that impact how does the move in the ruble impact.
Ill might report in <unk>, and then is there any operational impact of potential future operational impact if tensions.
Worsen or just any thoughts there.
It's really it's really hard to.
Speculate on on that.
That scenario or what might happen or how.
The U S government might respond.
I think the good news is from from a currency standpoint, there's very little exposure.
From currency movement to the debt position they hold a lot of that in rubles.
And so.
There is somewhat insulated from maybe what we would have seen.
In prior periods.
And we also referenced in the.
And the speaker comments about the dividend and that dividend is paid out of.
The entity in Switzerland, where they manage all their export sales and currently its view that there is sufficient cash in that entity to be able to pay the dividend unless theres. Some other type of restriction. So we feel pretty good about.
<unk> their position and especially how they're running the business, but from a finance standpoint.
They seem to be a pretty good shape.
Okay. That's helpful I'll turn it over.
Your next question comes from the line of Paul Quinn with RBC capital markets. Please state your question.
Yes, thanks very much good morning, just a question on our global cellulose fibers.
I see some price increases that marketplace and I understand your guidance doesn't reflect those recent price increases.
Just overall on pricing the spread between <unk>.
<unk> is at a historical high as I look back at the last seven years, I mean that that spread is less than 40 Bucks. We're currently at $240.
What has caused that and do you think thats going to hold going forward.
<unk>.
Yeah, Hey, Paul It's Tim I think.
Theres a lot of moving pieces, but certainly our approach to how we're interacting with customers as part of the strategy that we've talked about commercially and.
And so we feel good about the steps commercially that the team has taken up to this point.
Supply chain could also be providing a little bit of help just given how much disruption there is and we'll have to see how it plays out as supply chain normalized Budd.
I think the way the team is executing and how they're thinking about their opportunities in the market.
<unk>.
Relative to segments and geographies is producing the result that we wanted.
Alright, that's all I had best of luck.
Thank you. Thank you.
Your next question comes from the line of Mark <unk> with BMO. Please state your question.
Thanks, Good morning, Mark Good morning, Tim.
I wonder if.
I wondered if you guys could just help reconcile some numbers I mean, if we look at the pulp and paper week open market prices for containerboard, there kind of 800 to $875 that if we then look at kind of the data that's out there in estimated mill cash cost.
How do we get from those numbers to your segment results because it just it seems like there is an enormous gap there.
Mark I don't know what numbers, you're looking at I think.
The issue that we have.
As our margins.
North American industrial packaging have been compressed and there's two main reasons for that.
<unk> of the way we've operated since essentially March.
We have moved off of our most cost effective supply chain approach. So we have.
Hundreds of millions of dollars of incremental cost.
Related to running a sub optimized system sub optimize means making the containerboard and shipping it.
Two the wrong places because we don't have another alternative because other capacity was down given the size of our system. Given the fact that we make containerboard in the southeast and ship it to California, and all of those things we have not been able to realize as much of our price realization to the bottom line.
As we normally would and so that's been a big portion of margin compression for US and then when you look at the overall full breadth of our customer and segment mix, we have varying degrees of sizes of customers timing of realizations. So for example.
Tim called out, we're still getting $65 million of realization in the first quarter of 'twenty. Two that's not for every customer that's for a group of customers that it takes longer so I think thats really what youre seeing if you if youre probing on margins, which I know you talk about a lot and we.
Work on a lot that's really.
The biggest issue I think when we get to the second quarter and we're back to where we can optimize our network. It really works well like a flywheel for us.
And then we get margins north of 20% again, it's in the zone of what we would expect it's been very it's been very hard for us to achieve the margin structure that I think most people would expect us to be and when we have operated with the.
The initial 150000 tons that came offline with the the <unk>.
Weather events at the beginning of the year.
And then coupled with the challenges we had through the rest of.
Trying to make sure we put the customer first in many cases.
One way to not have had all of these issues is just to cut off a bunch of business in <unk>.
Reset everything which is the wrong thing to do for the long term, but the good news is most of that's behind Us <unk> <unk>.
Coming up as we speak and we should be ready to optimize and re gear the company back to the 28.
Margins north of 20% again, which we would expect to have at this point in this business.
I guess, Mark I kind of two follow ons to this.
First one is I'm just curious about whether there is maybe the need to rethink some of the bigger volume contracts and how those work for you.
And then I'd also like to get a sense. When you talk about this 20% return on the Philly area box plant.
Does that assume sort of a market level a transfer price and the 20% return is just the you know the.
Return you can generate at the box plant or are you assuming some of that is.
Mill related benefit.
Hey, Mark it's Tim It Hasnt mill related benefit in it.
We look at this business, especially here in North America as being an integrated business. So we're deploying capital in our mill system for the benefit of our converting business and.
The value proposition is across the whole supply chain. So we look at integrated returns.
For the investments that we make.
Okay last one Tim I, just we went through this whole exercise about 15 or 20 years ago with box USA and it just seemed like there were.
A lot of systems benefits that were priced into that deal and I'm not sure that we ever saw there maybe you've gone back and looked at some of these other prior transactions and does.
See what worked and what has not worked.
We do that on a regular basis.
Constantly trying to learn and make sure that we are.
Seeing if there were opportunities that we missed in one instance that we correct that going forward.
So I think we have a fairly robust process of and we're fairly critical of ourselves as we should be internally to make process improvements about how we do it box USA, specifically I havent looked at it in a very long time.
Okay, Alright, I'll turn it over thanks.
Sure.
Your next question comes from the line of Kyle White with Deutsche Bank. Please state your question.
Hey, good morning, Thanks for taking my question on the outlook that you provided are you able to give a sense of what the midpoint of that guidance range assumes for box shipment growth in 2022, and then what are you assuming from a supply chain and labor challenges in terms of any moderation throughout the year.
Yes.
Box growth I think what we said in the speaker notes without quantifying but.
But we can talk about historical numbers, we see if we get through this variant that we start normalizing on the demand function to pre COVID-19 . So we were consistently experiencing one 5% to 2% growth how that unfolds over the course of the year is a little bit of a question Mark but.
But that's the expectation at the moment.
And I'm sorry, what was the first part of your question.
Our U S supply chain and Les.
Labor cost issues, what are we assuming part of that.
Yes, just at a high level.
We think we begin normalizing as we.
Get through the first quarter and then we'll have to see how it plays out going into second quarter I mean, the disruption from mamba chronic came on so suddenly and so severely.
I think a lot of people were.
Surprised by how quickly that began impacting almost every aspect of the supply chain.
And so it started late November early December accelerated.
Hopefully, we're peaking here in the next in the next few weeks, but I would say geographically.
It's not uniform because of the way its spread is going to peak in different places at different times, and then fall off.
Got it that's helpful and then on Prattville it sounds like the paper machine. One is starting up kind of as we speak but just curious if you could give us an exact timeline of when you expect that midstream to restart and what are the additional costs.
That disruption included in the <unk> outlook.
Yes, what we're expecting in the first quarter is that there'll be roughly 25 million of additional costs related to the inefficiency of the machine coming back up and then we.
We won't have the mill fully restored until we get through the outage in the second quarter and then we would expect the mill to be back up and five are balanced and running at its optimal.
Optimal cost structure.
Got it thank you I'll turn it over.
Your next question comes from the line of Adam Josephson with Keybanc. Please state your question.
Mark and Tim Good morning, Thanks for taking my question Hope you're well.
Tim one on guidance for you my obligatory guidance question so since.
Since the pandemic star.
Started you've refrained from providing annual guidance understandably, so and I know you have a number of portfolio changes which may.
Increase your desire to give a full year number otherwise we might be all over the place, but it seems like the uncertainty is greater than it's ever been in terms of the virus inflation. The state of the global economy, you just talked about Russia earlier.
Demand same thing so I guess, what how much confidence do you really have in this this full year EBITDA range that you've provided in.
Did you did you consider just not doing it because of all of these uncertainties that seem too.
Only be getting more pronounced not less.
Yeah, that's a great question, Adam I mean, just a few thoughts where consideration.
When we stopped we stopped because.
No one knew what the pandemic was going to bring.
I would argue there was more uncertainty at that moment in time back in 2020 than there is currently.
But.
And in 2021 as well.
I think if we look at what Omicron has done globally, we see where it started.
<unk> quickly quickly peaked and then fell off and so we use that as a base case for a set of expectations here.
As always going to be things that.
Crop up like you mentioned.
That is difficult for us to.
Really calibrate on in the moment, but what we have confidence in is.
This is what we've been working on for the past 12 to 18 months and how we believe those initiatives are going to come through this year. So there is the things that we can manage and control and then there is the impacts externally that we'll just have to deal with but in terms of how the business. We expect to perform what we're going to see in terms of Ines.
<unk> falling through to the bottom line, we're very confident in Adam if I could add to Tim's comments and you mentioned it in the way you phrased. The question one of the reasons, we're more confident than we have been is because the portfolio is narrowed and we now know that the packaging business and for that matter in cellulose fibers.
Both have performed very well in the.
Environment of a pandemic and we know what they perform like if we werent in a pandemic because so much of our packaging goes into essential materials like food if theres another difficult year with a pandemic, we think the packaging business because of who it provides packaging for its going to perform very well, we performed very well in the first.
Part of the pandemic, we got our system out of whack in the second year of the pandemic, but still grew our earnings and our revenue and whatever 2022 holes pandemic related we believe because of what we make we're going to have really good opportunities to to perform we think we have.
The ability, depending on where costco to capture pricing to be able to offset some of that and what we're not what we're going to have in 'twenty. Two that we didn't have in 'twenty one.
A more balanced.
Operating system.
That that's about as confident as we can be without without knowing the future.
No I understand that Mark. Thank you and just one more for you mark on the supply demand.
I asked you this earlier, but all we can see is what the industry data is with respect to inventories operating rates shipments in appreciating.
Appreciating how messed up the supply chain is what are your thoughts about what quote underlying supply demand is.
Such that we can perhaps six through whatever distortions you think exist in the industry data that would be supportive of.
Rising prices.
I just think what I would do if I. If I were you as an analyst I would try to look at the historical absolutes weeks of supply.
Whatever number you want to choose and then I would look I would map that against.
Supply chain, there's a few metrics out there around velocity and recognize that operating rates absolute inventory supply chain velocity.
And just pure supply demand balance so against the backdrop of firm demand.
And.
Companies that no Aip's case has has cut corners on maintenance because of availability of equipment and and just the demand environment last year, we'll be taking.
Facilities down for maintenance, which take supply offline.
I would look at that Holistically and I would shy away from looking at an absolute inventory number and comparing it to normal times I, just think that leads to the wrong conclusion.
Got it really appreciate it mark thank you.
Adam.
Our last question comes from the line of Phil <unk> with Jefferies. Please state your question.
Hey, guys. Thanks for squeezing me in.
Tim certainly a big step up in Capex. This year, but should we expect that to stay pretty elevated in 2023 with some of the box plant opportunities you referred to and how should we think about normalized capex with your slimmed down portfolio now.
Yes, I think normalized so.
With the new portfolio, we are at about 1 billion one is depreciation.
So were were in line with that for 2022 I think.
We should be close to that in future years, there may be times, when we were slightly above but it will be above four very distinguishable strategic opportunities that we can highlight.
Okay got you and then Jim you talked about this a little bit about the financial impact on the ruble and how you guys are positioned but any color on given some of the political unrest in that region and Covid shutdown, China have you seen any choppiness in order activity in your operations, whether it's <unk> or any impact on your CLO is fiber.
Yeah.
No not really is mostly supply chain related due to COVID-19 and all of the disruptions that we've seen as we've gone through the past year.
Yes, we haven't noticed anything outside of that at this point.
Okay, alright, thanks, a lot guys.
Yes.
I would now like to turn the floor back to CEO , Mark Sutton for any additional or closing remarks.
Thank you what I'd like to do is just reiterate that we're confident in our ability to execute for the remainder of 2022, we've got a solid demand environment. We've got the full year benefit of the pricing that we've already implemented flowing through for the full year, we highlighted the 200 plus million dollars of.
Benefits associated with building a better IP, we will have very importantly, the biggest part of our company optimized again for the majority of 'twenty to that being a mill and box plant system and very importantly, our balance sheet in the best shape that we've been in in a very long time, all the capital allocation levers are available.
<unk> to us and we plan to invest smartly in our U S box system over the next few years to grow profitably. So thank you for your interest in international paper, we look forward to talking to you next quarter.
Thank you for participating and international papers fourth quarter and full year 2021 earnings Conference call you may now disconnect.
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Yes.
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Okay.