Q1 2022 International Paper Co Earnings Call
Good morning, and thank you first finding by welcome to today's entry National papers first quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the Speakers' remarks, you will have an approach.
To ask a question to ask a question press star wanting your telephone keypad do we draw a question press the pound key.
Like to turn today's conference over to Gilead them, a good yet as Vice President Investor Relations. You go ahead Sir.
Thank you Charles.
Good morning, Thank you for joining international paper's first quarter 2022 earnings call.
Our speakers. This morning are Mark Sutton, Chairman and Chief Executive Officer.
Nichols Senior Vice President and Chief Financial Officer.
Its important information.
If our presentation on slide two including certain legal disclaimers.
During this call we will make forward looking statements that are subject to risks and uncertainties.
We'll 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 also contains copies of our first quarter 2022 earnings press release and today's presentation slides.
I will now turn the call over to Mark Sutton.
Thank you Guillermo and good morning, everyone I'll begin our discussion on slide three.
International paper's first quarter earnings are better better than we had outlook driven by strong price realization and solid operation.
Overcome significantly higher input costs.
For energy <unk> chemicals and distribution.
We also delivered strong cash from operations.
We delivered strong year over year and sequential revenue growth in the first quarter driven by price realization from prior increases.
And our two business segments.
On the crime related constraints impacted volumes in our packaging business in January our shipments recovered as expected throughout the quarter with demand normalizing at elevated levels as we enter into the second quarter.
Our mills and converting system performed well as we manage through continuous logistics constraints, which negatively impacted operating costs.
We executed our highest maintenance outage quarter of the year very well and we expect to complete about 70% of our planned maintenance in the first half of the year.
We achieved $40 million of earnings derived building, a better IP initiatives and we are confident in our full year target of 200 to 225 million of gross incremental earnings in 2022.
Where we are excited by the opportunities we have to materially lower our cost structure and to accelerate profitable growth.
Later on in our presentation, Tim will walk you through our first quarter progress.
On capital allocation in the first quarter, we returned $580 million to shareholders, including $406 million of share repurchases.
And highlights the choices that our strong balance sheet and cash generation provide for us.
Before we continue I'd like to share some perspective on something that's top of mind.
First and foremost our thoughts and prayers are with the people of Ukraine stories images and reports coming out in the country continue to be both tragic and troubling.
Many of our own employees, especially those in Europe have friends and family who are directly affected.
As a way to help all the people impacted we have continued to donate to support humanitarian relief efforts.
With respect to our <unk> joint venture, we announced last month that we were exploring options, including selling our 50% interest we are pursuing the completion of this work with urgency from engaging external advisors to having discussions with interested parties.
The complexity of our JV structure may impact the pace of reaching a resolution.
It will not affect the urgency of our efforts our commitments to resolve this situation in a responsible way.
As we move through this process, we will continue to comply with all regulations and sanctions and we will update our stakeholders. When there is more information to share.
Turning to first quarter results on slide four.
Revenue increased by 14% year over year, driven by strong price realization of our two business segments.
Operating earnings per share improved by just over 50% versus last year, and we generated strong cash from operations.
Margins in the first quarter were impacted by higher input costs and the execution of our highest maintenance outage quarter of the year.
We do expect margins to expand in the second quarter with further expansion in the second half of the year as price realization outpaces higher input costs and as we stepped down from higher maintenance outage quarters later in the year.
I will now turn it over to Tim who will cover our business business performance and our outlook Tim.
Good morning, everyone and thank you Mark amongst slide five which shows our sequential earnings bridge.
First quarter operating earnings per share were <unk> 76, as compared to 78 cents in the fourth quarter.
Rice and mix improved by about 131 million or <unk> 27 per share with strong price realization.
Both business segments and across all of our channels.
Volume was slightly lower as expected due to seasonally lower demand in North America and the impact of <unk> in the early part of the first quarter.
In global cellulose fibers fluff pulp shipments were constrained by the ongoing vessel delays.
Operations and costs for an 8% headwind in the quarter, our mills and converting system performed well and we made excellent progress normalizing containerboard inventories across our network.
We received $20 million of insurance recovery or about <unk> <unk> per share related to pretzel.
In global cellulose fibers ongoing logistics constraints impacted operating costs by about 25 million or <unk> <unk> per share in the quarter.
We successfully completed our highest maintenance outage quarter of the year. These costs were in line with our outlook and we expect to complete nearly 70% of our annual maintenance program in the first half of the year.
Input costs rose sharply in the latter part of the first quarter, driven by higher energy chemicals and distribution costs, mostly due to higher diesel fuel prices.
These costs more than offset moderately lower recovered fiber cost.
On slide 32 of the appendix, we provide details on our consumption of key inputs, including natural gas, which was a significant cost headwinds in the quarter.
Moving to corporate expense, we improved by five cents per share sequentially lower corporate SG&A was partly offset by higher tax corporate expenses also benefited from lower interest expense and a lower share count.
Lastly equity earnings improved sequentially I'd also note that in the first quarter, we received the dividend from Milan as expected.
Turning to the segments and starting with industrial packaging on slide six in North America demand normalizes.
In February and March as expected following the labor impact from <unk> in the early part of the first quarter overall box demand in North America is stable as we enter the second quarter.
Our mills and converting system performed well and we replenish system inventories, which puts us in a much better position to optimize our cost as we navigate continued logistics constraints and poor carrier reliability.
Looking at first quarter performance price and mix was strong driven by realization of our August price increase.
Volume was lower sequentially due to the slower seasonal demand and omicron labor constraints in the early part of the first quarter to put the <unk> impact into context, our January volume was down nearly double digits as expected our volume normalize that elevated levels following a very challenging.
January .
Volume across our U S channels continued to perform well as a reminder, our U S channels to include our U S box system, our open market containerboard customers and our equity partnerships with strategic sheet feeders.
Operations and costs improved sequentially with overall performance significantly better than expected.
As I mentioned, our mills and converting system performed well and we made good progress normalizing our system inventories.
Operating costs remained elevated due to ongoing logistics constraints. However, we are in a much better positioned to navigate this environment with healthier system inventory.
I would also note that operational costs includes $20 million of insurance recovery in the first quarter related to Praful, which follows $40 million of insurance recoveries, we received in the fourth quarter.
We successfully completed our highest maintenance outage quarter and expect to incur a nearly 70% of outage cost in the first half of the year.
Lastly, input costs were a significant headwind in the first quarter relative to our expectations in the latter part of the quarter, we experienced sharply higher cost for chemicals energy and distribution.
We anticipate these higher costs to persist in the second quarter.
Turning to slide seven as we look ahead at our North American industrial packaging business, we're making good progress restoring margins to our historical low 20% range.
We fully anticipate margins to expand in the second quarter and step up further in the second half of the year.
In the second quarter, we expect further benefits from the run rate of our August 2021 price increase.
As well as the initial benefits from our March 2022 price increase with further realizations in the second half of the year.
Our price realization is expected to al <unk>.
Outpace higher costs for energy chemicals and distribution.
As we move through the second quarter and into the second half of the year.
Operationally, we've recovered from the system disruptions that affected us last year, our mills and converting system are performing well and labor across our box network continues to improve.
Containerboard inventories across our system are back to normalized levels, which helps us proactively manage ongoing rail and truck constraints.
And as mentioned, we will step down from the highest maintenance outage quarter. All of this gives us confidence in our path to restore margins as we move through the second quarter and into the second half of 2022.
Moving on to global cellulose fibers on slide eight.
Start with a few comments on the demand environment and supply chain.
We feel really good about the resiliency of demand for fluff pulp our confidence reflects the central role of absorbent hygiene products for consumers and.
In addition, we expect the supply demand environment for fluff to remain relative to remain.
Highly favorable feedback from our customers indicates that.
Fluff pulp inventories are at historic lows. This is partly due to significantly stretched supply chains.
Put this into context schedule reliability for ocean vessels, which typically ranges from 70% to 80%.
It's currently running at 30% to 40%.
Additionally, the average vessel delay that was historically one day is now five days, we expect these challenging conditions to continue for the foreseeable future.
Taking a look at first quarter performance price and mix improved by $17 million.
I would note that the pace of price realizations from our prior price increases is impacted by ongoing shipping delays as a reminder, we export 80% to 90% of our pulp production with price realization typically achieved when the vessel sales.
Volume in the quarter was stable I would note that backlogs are about double our normalized levels due to the logistics challenges.
Our mills ran well all of our operations and costs were impact for us $45 million headwind in the quarter with more than half of the unfavorable impact due.
Due to ongoing logistics challenges.
Higher seasonal costs related to energy consumption and represented an additional $10 million headwind in the quarter.
We also successfully completed the highest maintenance outage quarter of the year.
Lastly, input cost increased by $50 million sequentially split about evenly between wood chemicals and energy.
Turning to slide nine and taking a closer look at our global cellulose fibers business, we are well positioned to deliver our cost of capital returns in the third and fourth quarters of this year.
As I said earlier, we have a favorable demand supply outlook for fluff pulp with price realization from prior increases accelerating as we move through the year.
Keep in mind that price realization in this business lags about two to three quarters.
I would also note that we are making solid progress in our fluff pulp contract negotiations.
Rich will provide additional commercial benefits as we move into 2023.
So now I'll turn to slide 10, and our outlook for the second quarter, starting with industrial packaging, we expect price and mix to improve by $75 million on realization of price increases.
Volume is expected to increase by $35 million on seasonally stronger demand.
I would note that there is one less day sequentially.
As we said earlier volume is stable at elevated levels as we enter the second quarter operations and costs are expected to decrease earnings by $10 million, driven mostly by lower sequential prattville insurance recovery.
Staying with industrial packaging mainly.
Maintenance outage expense is expected to decrease by $60 million and lastly input costs are expected to increase by $50 million again. This is driven by higher energy chemicals and distribution costs, mostly due to higher diesel fuel prices.
In global cellulose fibers.
We expect price and mix to improve by $50 million on realization of price increases.
As a reminder.
Price realization in this segment has two to three quarter lag we're running on the longer end of that range right now due to the ongoing vessel delays.
Volume is expected to decrease by $5 million.
Operations and costs are expected to decrease earnings by $10 million driven by logistics constraints.
Maintenance outage expense is expected to decrease by $26 million and again lastly input costs are expected to increase by $20 million.
By higher energy chemicals and distribution.
Okay.
Turning to the full year outlook on slide 11, we are confident in our full year EBITDA outlook of three 1% to $3 4 billion.
Input costs for energy chemicals, and distribution rose sharply in the latter part of the first quarter, we successfully mitigated the impact and deliver earnings that were better than our outlook in the first quarter.
Demand for corrugated packaging normalized that elevated levels following omicron.
Mobile cellulose fibers, we see a favorable supply demand backdrop for fluff pulp.
As we look ahead, we began to realize our March 2022 price increase in our North American packaging business. Additionally, we anticipate margin recovery in our EMEA packaging businesses as box price begins to offset the higher energy and containerboard cost and.
In global cellulose fibers, we expect price realization to accelerate in the second quarter.
All in we anticipate margin expansion in the second quarter with further acceleration in the second half of the year as price realization outpaces higher input costs.
We will also step down from the highest maintenance outage quarter of the year with nearly 70% of our maintenance program completed in the first half.
We are also confident in achieving $200 million to $225 million of gross earnings from our build a better IP initiatives.
As I said earlier, we are confident in returning to 20% plus margins in our packaging business and delivering cost of capital returns in our cellulose fibers business in the second half of the year.
Yes.
On slide 12, I'll take a moment to update you on capital allocation actions in the first quarter.
Starting with the balance sheet.
As I said last quarter, we're very pleased with the progress we've made to strengthen our balance sheet.
As a reminder, we reduced debt by $2 5 billion in 2021 and more than $4 billion over the past few years.
With these actions our 2021 year end leverage was two three times on a Moody's basis, which is below our target range of two and a half to two eight times and looking ahead, we have limited near term maturities with about $900 million due over the next five years.
Returning cash to shareholders is a meaningful part of our capital Alec allocation framework in the first quarter, we returned $580 million to shareowners, including $406 million through share repurchases, which represents $8 9 million shares or about two 4% of shares out.
Standing.
At the end of the first quarter, we had $2 $5 billion remaining in share repurchase authorization.
Investment excellence is essential to growing earnings and cash generation, we're targeting capex of $1 1 billion. This year, which includes funding for strategic projects and our packaging business to build out capabilities and capacity in the box system to drive profitable growth.
We also plan to increase funding for cost reduction projects with expected returns on those projects in excess of 25%.
We will continue to be disciplined and selective when assessing M&A opportunities that may supplement our goal of etc accelerating profitable growth.
You can expect M&A to focus primarily on bolt on opportunities in our packaging business.
<unk> in North America, and Europe , any potential opportunity, we pursue must create compelling value for our shareowners.
One final comment on capital allocation last week, we monetized about half of our investments against Obama with proceeds of $144 million.
This reduces our ownership interest to about 10, 5%.
Turning to slide 13, I'll provide further detail on the work that we're doing around building a better IP.
As you can see on the right side of the slide we are also introducing a charge that will highlight our progress each quarter.
We're confident in our build a better IP set of initiatives, which will deliver more than $200 million of gross incremental earnings.
2022 that represents more than two times, the dis synergies, resulting from the spin off.
And our value drivers continue to ramp in 2023, and 2024 with net incremental earnings of $350 million to $430 million in 2024.
Through the first quarter, we achieved $40 million of earnings improvement from dedicated teams working on more than 50 initiatives across the company.
Approximately 70% of these initial results are coming from structural cost reductions.
By streamlining our corporate and staff functions to realign with our more simplified portfolio, we have already offset 100% of the dis synergies from the <unk> spend.
And we have line of sight to additional savings from initiatives.
Targeting lower overhead spending and further optimization were.
We are designing the organization to support a packaging focused company with a more focused footprint, which is what lean effectiveness is all about.
Taking a closer look at the other two drivers we believe our process optimization initiative has potential to significantly reduce costs across our operations by leveraging advanced technology and data analytics.
Over the past year dedicated teams have been working with outside experts to identify opportunities and develop new tools and capabilities to increase efficiency and reduce costs in areas, such as maintenance and reliability distribution and logistics and sourcing.
We believe these opportunities are significant and we will begin scaling these capabilities across our system.
And finally strategy acceleration is about delivering profitable growth through commercial and investment excellence.
We're focused on profitably growing our north American box channel and optimizing our EMEA packaging business through organic growth and targeted capital investments were.
We are also committed to delivering cost of capital financial returns in our global cellulose fibers business.
Through the first quarter, we have structurally improved margins in our gcs business by realizing more value for observed absorbent pulp through restructuring commercial contracts.
We're growing our specialty products through innovation.
We've also realized benefits from mix improvements in our North American packaging business and further optimization of our European operations by improving performance and increasing integration of our Moon Madrid mill and box system.
As I mentioned earlier there are dedicated teams working on many initiatives across the company that will drive structural earnings growth going forward.
We have good line of sight on the expected benefits for 2022 and beyond and.
And we will continue to update you on our results going forward.
And with that I'll turn it back over to Mark.
Thank you Tim This is an exciting time for international paper. Our team is focused on building a better IP and accelerating performance.
And we're mindful that there are real concerns on the macro environment I am very optimistic about the path, we're charging to accelerate value creation and.
Let me share a few of the reasons why I'm optimistic first I'm confident in our earnings outlook for the year and our ability to deliver strong earnings growth in 2022.
Additionally, our focus our portfolio and narrow our geographic footprint has enabled our teams to focus on building a better IP. This is the first quarter in which we reported the earnings benefits from these initiatives I'm very pleased with our progress and our momentum.
And we're on track to deliver $200 million to $225 million of incremental gross earnings this year and lastly during the past few years, we have significantly enhanced our financial strength. We view this as foundational because it enables the execution of our capital allocation framework, which has a clear objective to accelerate value creation.
And for our shareowners.
A clear path and the team to make it happen.
Before we move to the question and answer segment, Let me Express my appreciation to Guillermo Gutierrez for his work heading up Investor Relations.
Guillermo is moving to a new leadership role as Vice President and General manager, leading our Latin American packaging business Martin Allison has been named our new Vice President of Investor Relations.
Staying with international paper for 30 years and has served in leadership roles in finance and General management.
This transition is underway. So once again, many thanks to you Guillermo.
With that operator, we are.
Ready to take questions.
As a reminder.
Minder to ask a question press star one to withdraw your question press the pound key again that is star one to ask the question would you asset you limit yourself to one question and one follow up question. Thank you.
A moment to compile the Q&A roster.
Yes.
Our first question comes from George Staphos from Bank of America, You May now ask your question.
Hi, Thank you hi, everyone. Thanks for the presentation and the details and congratulations on the progress on the operation.
My two questions are centered around the box business. So mark you talked a lot about understandably.
Improving the packaging focus of the business and the capabilities on converting and we understand that what are you doing on the sales and marketing side the feet on the street to be able to leverage that increased capability.
Both in terms of volume and ultimately in terms of of March and what are you doing in terms of changes in incentives people you are adding and then I had a follow on.
Thanks, George Yes, it's two parts one is making sure we have our production system well aligned and we struggled a bit last year, that's a much better shape, our sales and marketing.
<unk> secured madness and the second piece is as you mentioned, making sure we align the incentives with margin improvement the right customer mix. So theres different objectives for different parts of the sales force around growing the business and <unk> segments, and others have a different set of objectives around growing from existing accounts.
Enacted mix and margin improvement team some of the data analytics that Tim mentioned are really centered around really understanding.
Before I answer to the question, Colin where can we make the most money. When you think about converting you have hours of productive machine time to sell to the market optimizing the use of that time across the right customers and segments.
And then making sure of course your pricing for value all of that is actively part of what we're refreshing and improving I think the number one thing we need for our sales force is the investment in our converting operations. So that we have the capacity in the right geography.
Where are the actual demand is and youre, making improvement on that that will continue.
Far as you can see.
Okay. Thank you for that and then the follow on.
When we look at your slides this quarter versus last quarter.
Also reflect back on some of the commentary early in the quarter.
To recall that you would expect in box volumes.
Up.
In the quarter now maybe that was a channel comment maybe it was a box comment but in either case volumes were down a bit and at the same time your price mix.
Looking at what you reported versus what your guidance was last quarter was actually better I think.
You got $114 million in the slides as you presented them I think the commentary last quarter for looking out to <unk> for positive 65 again. This is all in corrugated.
Is there any relationship between the two did you walk from business as you were implementing pricing any thoughts on those two points would be welcome and good luck in the quarter.
Thanks, George that's a great question and the answer is no we didn't walk away from business. The over achievement in price realization is just getting more price.
Certain segments of our customer mix during the first quarter than we expected and that has a lot to do with the final negotiation.
Implementation and all of those types of things on the larger customers it tends to be a little more predictable because its contractual in terms of time I think one of the things you got to think about with respect to IP and the volume challenges when we look at some of the customer issues labor issues. Our customers have when you think about the large food and.
Protein producers, both warranty ecommerce producers they had a very difficult time staffing everything in the month of January and it bled into February and that reflected in our numbers. So we have to give up any volume and we are now working to replenish their inventories because they were not running as full as they would like to so part of it is just.
We're in every segment, we're very large and we get we get impacted by not only our own internal situations when you're in a single quarter over a three months period.
What our custom breakeven.
Back on so no volume give up.
And just a better performance in getting each and every customer's price up got it a big thank you to Guillermo and congratulations to Mark we look forward to working with you. Thanks.
Our next question comes from the line of Anthony Pettinari of.
Citigroup Your line is now open.
Good morning, and congrats to Guillermo and Mark on the new roles.
Since you last gave guidance you realize the March containerboard hike and I think a number of fluff pulp.
And it seems like <unk>, maybe a bit better than expected I'm just wondering in terms of reiterating the full year guidance versus maybe moving to the higher end of the range.
Is it fair to say you see raw material costs and inflation, maybe offsetting the positives that you've seen in the last few months are you there.
Are there concerns about demand or is it maybe just too early in the year anything that we should think about.
As we think about you may be getting to the higher end or the lower end of the full year guidance range.
Yes, Anthony Great question.
Obviously, a hard one to predict and we're not any better at it than anyone but I think the one thing we're looking at in terms of where we were 90 days ago. When we gave our full year outlook as well.
Wildcard on where energy is going to be for the rest of the year because energy is an input to most of our inputs and so we are seeing that higher for longer. So yes. Some of this additional pricing will be necessary. If we didnt see that I don't think anyone saw that at the end of January .
Hope we're wrong on it because then we got much more opportunity for margin expansion, we're very confident on the pricing side, that's that's being implemented right now.
Judgment call.
On our view of energy, we don't we don't try to do too much on our own we look at strips, we look at the inputs to the chemical industry and the other things we use and then the last piece of energy is the flow through to diesel fuel and and our impact on transportation. So it's our it's our best look right now, but we believe what Tim said, we believe in terms of.
Principal that are pricing.
We will overcome our input cost as we sit here at the end of April . This is what we see for the rest of the year I would imagine there'll be some adjustments as we sit here at the end of at the end of July talking about whether or not energy actually did what everybody thinks it's going to do or not.
Okay, that's very helpful.
No George had a question on how you improve commercial performance and capabilities in industrial packaging I guess I had kind of a similar question on cellulose fibers I think Tim made some comments about maybe improving contract terms that could maybe help you next year.
Wondering to the extent you can can you talk about improving the commercial performance in cellulose fibers, obviously beyond the six hikes that you've announced which are great but.
Any further thoughts there.
I think it's.
It's really all inclusive on what we've been talking about for the last several quarters getting paid for the value of the absorbent pulp and I think you can start to see that is.
Certain proof points of that out in the marketplace relative to absorb in pulp pricing versus market pulp pricing and then how we operate the business what we what we make available to long term strategic customers and to shorter term customers in different parts of the world and then the final piece is where we are now working actively with our very large.
Strategic market, leading customers to improve the overall commercial conditions of these longer term contracts and that that is set and underway now it will go through the rest of the year and set us up for a very good position going into 'twenty three and beyond so it's a simple principle that in many cases, we just didnt.
Fully exercise and that is making sure our value is understood and then getting proper compensation for the value that we provide and the technical nature of the product and Thats, what were doing and I'm really happy with the progress I'll reiterate what Tim said business will be solidly.
At slightly above cost of capital for the entire second half of the year, which sets us up very well for 2023, and we shouldnt, we shouldnt have to be talking about whether the business is at a value creating level of returns for very much longer.
Okay. That's very helpful I'll turn it over.
Yes.
Yes.
Our next question comes from Adam Josephson of Keybanc.
Mark and Tim Good morning, Hope, you're well and Guillermo Congratulations it was a real pleasure working with you.
Tim just a clarification on the <unk>.
Cash dividend I assume you've got it.
Last month and that it was around $200 million. Please correct me if I'm wrong. There and then just I don't believe you would normally receive another one.
Regardless of the situation there, but can you just confirm that what if any additional cash dividends.
Youre expecting from element and when and how much you got and presumably in March.
Yes, you have the amount correct.
There is no expectation of further dividends being paid this year.
Okay I appreciate that Mark just back to the pulp business.
Have you set a tie.
<unk> for yourself in other words, okay, we need to get to a certain point by X date X quarter ex year.
Or else, we say you know what because of the market structure because of whatever else.
This is just not working for us and it's been several years of underperformance and that at some point the business needs to prove itself or or not I would think.
Yes, we've set our internal targets, what Ive said X Charlie as businesses has got the potential to be value, creating levels of return I just mentioned in answering anthonys question.
That's where we're at we're just about there the second half of this year and you'll have to see it to believe it I understand that and we're well positioned for the business to be at that level of.
<unk>.
Now like in 2022 so.
It's right its right upon us.
Thanks, a lot mark.
Our next question comes from Steel Inc of Jefferies.
Good morning, Mark Tim Guillermo This is John Dunigan on for Phil.
I wanted to start off by reiterating prior comment. Thank you Guillermo for all the help we really appreciate it and good luck in your in your new role.
I wanted to.
Go back to the box shipment comment.
Could you give any.
Clarity on how your box shipments tracked throughout the quarter, maybe how much was impacted by inventories in prattville Wayne.
Weighing on results maybe earlier in the quarter.
And then talk about how box shipments of track month to date.
Yes, Hi, it's Tim.
Praful really was not much of an issue at all for.
Well, let's talk availability, we were able to run the mill, partially before getting it back up full so I wouldn't say that was.
A big item in the first quarter is certainly hurt in the fourth quarter of last year, and we started off the quarter from our box demand standpoint.
Near double digit decline in January we had the omicron situation we were having.
Staffing issues because with people.
Contracting COVID-19 .
And being away from work our customers as Mark said.
Similarly, and so production lines for us and for some of our large accounts, we're not running as they normally would be that once again, improving as we exited January and went into February but what I would say there is still a residual in February and then by by March.
It was starting to feel more normal again, we had.
Yeah.
Lines coming back up.
And we were able to run our system.
Not entirely to its full potential but more in line than certainly what it had been in January April was starting off kind of as expected.
The recovery continues.
And so we will see.
How things shake out as we closed the month.
In the next few days, but are caught up looks.
Right in line with expectations that we have for Q2 in total.
So John .
Tim mentioned in his remarks.
When we were gone when he was going to industrial packaging.
You talked about the box.
IP box number, but you also talked about the U S channels.
Two the corrugated market explain with those on the slide there's a minus <unk> <unk> a year over year, but that part. So that's the total U S channels minus <unk> eight with a box number minus four so what we didn't say is the rest of the channels is open market containerboard in our equity.
Partnerships through sheet theaters, and we were up 14% year over year in that part of the channels. So participating in the end use box market, while we had certain issues in our customers had certain issues other channels through containerboard and through any sheet feeders were better positioned some of that was geographic some of that was size of account and <unk>.
I as a customer.
But our access to the U S packaging market.
Thank is best viewed through that U S channels market and so we offset some of our issues in our own box, making operations with those other channels such that our overall exposure was down just about 1%.
Okay I appreciate that thank you.
I wanted to I wanted to just switch over to Ellen.
Earnings in the quarter came out ahead of expectation and that was despite the significant contraction of the non Chinese exports can you give us any color on the market dynamics.
Next quarter it seems like another solid result.
Can you just kind of talk about overall cost in the region demand.
Youre kind of expecting.
As youre looking to ultimately.
Get out of that business.
Yes, I said I think if you look at our outlet outlook slide you can see that the business.
Given all the puts and takes us roughly expecting the same level of performance in the second quarter than we had in the first so there is a number of dynamics, but rather than going through all of those I think the earnings expectation is what's important and that's right in line with first quarter.
Our next question comes from the line of Mark Weintraub of Seaport Research.
Thank you and also my thanks to Guillermo for all your help over the last several years.
You mentioned the production system is now better aligned.
And that certainly was something that had been been an issue last year.
Benefits from that show up in the first quarter or is that something thats going to start showing up more.
On a go forward basis.
Maybe I'll start there.
I think it shows up in the first quarter, Mark and it will continue to show up we.
We did several things we had inventory not only inventories when we had the right inventories in the right place, which is something we normally do very well and I won't rehash all of last year's issues, but that that is one.
So much disruption last year and as we exited the year and came in the first quarter.
We were back on track there Bill is also ran better.
Our converting operations ran better.
If you look at.
Uptime reliability, how they were performing the the thing that continues to be a drag.
And we will normalize at some point is our view.
To predict when is just all of this logistics disruptions that are taking place. So there is.
Across every mode of transportation rail truck and then for export Ocean freight.
Things are either moving slower.
Or they're not as reliable or theyre, taking longer once they leave from a velocity standpoint to get there.
And because these mills are meant to run make product.
Put it in some form of transportation and move it that can have an impact on operations still it's better and our team our supply chain team is working through it diligently we're making progress but.
We're working with what we have available given rail constraints and trucking constraints across the system.
Does that makes it makes sense.
It does that's super helpful. Thank you and so was the issue with.
The volumes through your box system.
Is it fair that was primarily more I mean, you mentioned it was customer where they didn't have facilities open up.
And maybe that's a function of.
Your customer mix being more heavily focused on those types of customers and or.
On the other side.
Or was it that you were particularly hard hit right.
Omnicom in terms of your facilities and I guess, we will see where the industry data is soon enough.
Trying to sort of.
How much of it was specific to you guys versus.
It's more normal.
Across the industry type of EBIT, yes.
For us it was across the entire supply chain. So it was how we were getting bored to our box plants, how we were able to convert it and then move finished product to customers.
And their ability their ability to consume the product in need replenishment. So.
It was throughout the entire supply chain.
Okay.
Talked about kind of getting back in line with industry growth in the box business is there anything that sort of.
With that one delay from your perspective from what where you would have said previously.
I don't think so it's just a matter of normalizing some of these disruptions.
We feel like we've.
Doing a good job doing that.
Transportation is going to continue to be an issue, but in terms of growing we don't see an issue.
Thank you very much.
Our next question comes from the line of.
Gabe <unk>.
Of Wells Fargo.
Mark Tim Good morning, Guillermo pleasure working with you you're welcome Mark.
I wanted to ask a question I guess under the context that inventories are sort of back to where you want them to be.
And I think the North American low cost producer position is even more pronounced than it than it was before as well as other parts of the world.
Not importing containerboard from let's say Russia.
Are you seeing any pick up or the phones ringing.
More in terms of potential for export demand I appreciate that ocean freight is a little bit of an impediment at this point, but.
Just thinking about kind of the practical aspects there and then.
Does this alter your view mark in any way for the intrinsic value of your mills here in North America versus other parts of the world.
First part of your question Gabe, Yes, we are seeing as you Ajay.
Expected.
Increased demand for export.
Port congestion is timing.
Timing issue forgetting it there.
In a reasonable time, but the demand is picking up our output is.
In much better shape, we had.
A good year of annual outages in 'twenty, one after a choppy 2020, because of Covid and construction availability plus we've got the big issues behind us that affected our containerboard output all the way through our box plants and we've got more containerboard to sell through all the channels.
Still working very hard to manage that part that goes offshore through the ports.
Look we like we like our North American Mill system. We think is globally competitive for the long term, we don't get too excited about short term trends as high high OCC or loan OCC.
The business model, we have in the.
Mix, we have between Virgin Mills of recycled mills and the overall fiber makeup we have renewable natural resources coming into our company, we convert them, making most most of our own energy in a carbon neutral way and we make corrugated boxes that are recycled and I think that business model is a strong strong business.
Model from a profitability standpoint, and a sustainability standpoint, all of the other discussions about recycled in different parts of world I'll start with that you have to be a renewable natural resource that Virgin fiber to even have a discussion about recycled and we are well position at about 65%.
Wood fiber coming in 35% recovered paper, making most of our own energy I I really feel very strong and our customers do as well about our sustainable business model.
Okay.
Maintenance item are there any Tim.
In terms of recoveries left.
You might be getting over the balance of the year.
I'm sorry to insurance.
It's hard to say we are finalizing.
Glass.
Last bits of Praful and whatnot so.
We can predict at this point.
Thank you good luck.
Our next question comes from Mark Quilty. Your line is open.
Good morning, congratulations on a good quarter and congratulations to Guillermo.
Tim I have a question for you first and that is it.
It sounds to me like over the last 18 months you may have been kind of sub contracting out some more of your.
Box volume, just with kind of a tight labor market and strong demand from some of your customers I wondered if you could confirm that and secondly, if you bring that back in house, what might the margin impact of just that element alone be.
Yes.
Not have detailed numbers off top my head Mark we do some farm outs, we do some of them because it's just more economical in the Grand scheme to either put it in one of our sheet plants or if if theres not.
On IPG plan locally.
Available to us.
Our partner.
In terms of.
Filling certain orders, we flex that up and down.
It's not super structural to the business is more just using marginal economics in terms of how we run a very large system.
But have you been doing more of that the last 18 months.
We probably did some last year as we were going through some of the board constraint issues that we had just given the system.
But I would say the situational and.
And again it's.
It's there, but I wouldnt say that its hugely material to the size of the business that we have.
Okay. That's what I was looking for and then Mark and I have a question just longer term.
If you look at the containerboard industry, we see a lot of consolidation over the last 20 or 25 years, we've got three or four big players.
Just curious now with the.
New entrants trying to come into the market some from offshore.
Do you.
Protect the IP from becoming general Motors.
Yes, I think it's an ongoing discussion around the business is a good business. So therefore, it attracts interested parties and I think the way you protect your business as you perform very well and you <unk>.
Ingratiate yourself with your customers to the point, where you are an integral part of their value chain. It's one thing to say I'm going to build a containerboard mill. It's another thing to supply hundreds and hundreds of locations for a large e-commerce customer or reliably supply.
Every day of the week, a local business multiple different grades.
Containerboard made into boxes that they need not just one so I think it really starts with the whole value chain and making sure that from a customer looking back into IP and there are others that are very good at this as well that we have the relationship with our customers and all the supply chain services, all the things that <unk>.
Make a business relationship sticky.
The best Defense everything else is table stakes lowering your cost operating safely and environmentally sound and all of those things I really think it matters. How you deal with your customers overtaking fan and I think you think about COVID-19, 2020 in 2021, we did some amazing things.
<unk>.
And for our customers that.
They're going to remember for a very long time when when the next great thing comes knocking at the door.
Okay very good I'll turn it over thank you.
Our next question comes from Kyle White with Deutsche Bank. Your line is open.
Hey, good morning, Thanks for taking the questions and congratulations Guillermo and looking forward to working with you as well Mark.
Apologies if I missed this but on inventories can you just give us a sense of your inventory levels in containerboard.
How they compared to last quarter, and maybe where they are relative to where you would like in terms of your target levels.
Yes, I mean, we don't know.
Hard numbers, but.
<unk> is in a very good position right now is really important coming out of the fourth quarter and the first quarter being the heaviest maintenance outage quarter appear in maybe the heaviest one we've ever had.
Which takes production offline as we take these mills down for maintenance, we had inventories in a good place and we exited the quarter.
With inventories in a good place so we feel good about how we're positioned right now.
Got it and then on the building back better.
Our building back better plan initiatives. They have you able to give us a sense in terms of how much benefits net of the dis synergies you realized.
This quarter.
Then as we look to the second half the 20% margins that you expect for industrial packaging do you have line of sight to accelerating that into 2023.
Just given some of the price realization in these initiatives or should we expect kind of a similar margin profile just given that a lot of the maintenance occurred already in the first quarter relative to the second half.
Yes.
A long way from 2023 in terms of getting into details I do think that.
Given what we've been able do to restore.
Restore.
We are.
From an inventory standpoint.
And how the facilities are actually running in the environment. Given also passed price increases now we are beginning to start the March.
2022 price increase we are well positioned as we go into the second half of the year and feel good about the springboard for 2023.
Remind me the first part of your question again I'm sorry.
Yes, I was just curious if you had the number in terms of what benefit you realized from the building better IP initiatives embedded the dis synergies in this quarter.
$40 million so yes.
Yes, we had we were carrying into the year.
Roughly $94 million close to $100 million in dis synergies and we feel like through the work that we've done in the quarter on an annualized basis, we've covered.
Got it thank you I'll turn it over.
Okay.
Our last question. Our final question for today comes from Paul Quinn of RCB C capital markets.
Good morning, guys. Good quarter, just a question on cellulose fibers.
I seem to be over predicting your shipment volumes every quarter here and I'm just trying to understand the business.
I look at it year over year, you were down in shipments by 186.
Tons in.
You describe it as solid mill performance, which suggests that production should be up.
Are you carrying a lot of inventory due to the logistics challenges.
In cellulose fibers and what can we expect we're shipping volumes in 'twenty two.
So we're not carrying tons of inventory in what we're doing is modulating how the mill is run based on availability of transportation logistics and the challenge has been for some time now and continues.
I've referenced in some of the prepared remarks, just reliability of.
Ocean vessels.
Being Super low and then also vessel delays, meaning they arrive at a port and theyre ready to be unloaded and Thats historically been about a day and now on average they are waiting for us so.
Just getting product through the supply chain, but we're modulating how we run the system. So that we're producing ultimately what we can get through the supply chain.
Okay. So volumes in 'twenty, two you should be very similar to 'twenty, one or is it back to sort of the numbers that we saw in 'twenty.
I think it depends on what happens with ocean freight we export 90% of what we make and so it depends on what's going to happen with.
Containers and vessels for the balance of the year.
But I mean, probably in line, yes, but there's a lot of a lot of questions around how supply chain is going to work.
Okay fair enough thanks, guys.
Thank you I will turn the call back over to Chairman and Chief Executive Officer, Mr. Mark Sutton for closing comments.
Thank you just wanted to reiterate a few closing comments.
I'm very confident and very optimistic about the future of IP. We have a strong 2022 earnings growth outlook, we're making very good progress and momentum as we focus on our initiatives around building a better IP and we have a very strong balance sheet. The company is as strong as it's ever been financially all of this acts.
<unk> value creation for our shareowners. So thank you very much for your interest in international paper, we look forward to speaking with you again soon.
Yes.
Thank you for participating in international paper's first quarter 2022 earnings call you may now disconnect.
Okay.
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Okay.
Yes.
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