Q2 2019 Earnings Call
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I'd now like to turn today's conference over to Gehrmann, who chairs.
<unk> President Investor Relations.
Thank you Holly good morning, everyone and thank you for joining international paper's second quarter 2019 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 was important information at the beginning of our presentation on slide two including certain legal disclaimers.
For example, during this call we will make forward looking statements that are subject to risks and uncertainties.
We will also present certain non U.S., California initial information.
A reconciliation of those figures to U.S. financial measures to GAAP financial measures is available on our website.
Or whats like also contains copies of the second quarter 2019 earnings press release and today's presentation slides.
Relative to the Ilim joint venture and graphic packaging investment like to also provides context around the financial information and statistical measures presented on those studies I will now turn the call over to Mark sorry.
Thank you Guillermo and good morning, everyone.
We appreciate you joining our call today will begin our discussion on slide three.
And the international paper delivered solid earnings and outstanding free cash flow in the second quarter.
Performance again demonstrates the strength of international paper to generate strong cash flows and take full advantage of our system flexibility to deliver solid results in a more challenging environment.
Taking a look at demand in North America, our box shipments improved seasonally in the second quarter.
But what were weaker than we expected with sluggish demand and a few of our non durable and durable goods segments.
Uneven global demand and continued customer de stocking affected our containerboard and pulp volumes in the second quarter.
Operational performance was strong and we managed cost well across our businesses, while executing our highest maintenance outage quarter of the year.
During the first half of the year, we generated nearly $1.2 billion in free cash flow and returned $810 million to shareholders through dividends and share repurchases.
Continuing with the second quarter performance on slide four revenue was down about 3% year over year, largely due to the impact of a lower price and volume for export containerboard and Paul.
We operated well in the quarter and control cost effectively to deliver $948 million of EBITDA and continued strong margins.
Our equity earnings were $80 million in the quarter, which includes $67 million from our Ilim joint venture and $13 million from our investment in Scranton graphic packaging.
Free cash flow was 732 million in the second quarter and this does include cash dividends of $239 million from our Ilim joint venture.
I'll now turn it over to Tim who will cover performance across our business sectors, and our third quarter outlook Tim.
Great. Thank you Mark good morning, everyone I'm on slide five which shows our quarter over quarter operating earnings I'm pretty sure bridge as Mark said, we delivered solid earnings in the second quarter, while navigating through.
A more challenging environment.
Price and mix.
Decrease mainly due to lower prices for containerboard and pool, which was partially offset by increased prices in our north American papers business.
Volume increased on seasonally stronger demand in our North American packaging and Latin American papers businesses.
Which was partially offset by lower export containerboard volume.
Operations and cost performance was strong.
Our mills performed well in our heaviest maintenance outage quarter of the year and we executed downtime efficiently.
Input costs were favorable with lower fiber and energy costs across our businesses.
No that would cost were favorable quarter over quarter. After a steep run up in 2018 and early 2019 due to severe weather conditions in the southern U.S.
Corporate and interest expenses were favorable and taxes were as expected at about 25% effective tax rate in the quarter.
Lastly, equity earnings were nine cents lower sequentially.
Which includes the three cents quarter over quarter drag from the noncash FX impact on Olympias U.S. dollar denominated net debt.
I'll now turn to the segments, starting with industrial packaging on slide six.
Our business performed well against an uneven demand backdrop.
Price and mix were favorable mostly due to lower export pricing, which was partially offset.
By improved margins in our European packaging business.
Volume in our North American box business improved seasonally but as Mark mentioned, we saw weaker than expected demand in the second quarter.
I'll provide a little color on that in just a few minutes.
In general export containerboard volume was also weak with inventory de stocking and lower demand in the middle East and Asia.
Operations and cost performance was strong we ran well we managed cost effectively to mitigate the impact of downtime in the quarter.
Our performance against.
Our performance again demonstrates the strength of our system and our ability to flex production to efficiently meet our customers needs.
We also completed our highest maintenance outage quarter of the year and we now have completed about 80% of planned outages for the year.
Taking a look at input cost would recovered fiber and energy were favorable versus the prior quarter and softwood inventories normalize in the second quarter as we expected.
On slide seven I'd like to come back to the North American corrugated packaging to ban and take a closer look at what we're seeing from our customers.
Demand in e-commerce and protein segments was strong.
Ecommerce continues to grow at double digit rates as we work closely with our customers to optimize packaging designs to meet their specific supply chain needs.
Protein, mostly pork chicken and beef.
It's benefiting from shifting consumer preferences as well as increased export demand.
And fresh produce demand has normalized after a late start to the season.
Processed food is a large category with many consumers segments, but broadly speaking demand was softer in the first half of the year.
This is in large part due to a drawdown of finished goods inventories for food manufacturers, which have trended down since late 2018.
We expect customer inventories to normalize as the third quarter progresses.
Which should lead to improved demand for boxes.
Nondurables, excluding food and beverage represents about 30% of U.S. box demand.
This is a wide ranging category with many consumer and industrial products, such as agriculture chemicals.
Resins plastics rubber products.
Paper, and printing titles and tissue and textiles and apparel.
Again, a large category for which the underlying box demand is closely tied to non durable manufacturing activity, which has been soft in the first half of the year.
The weak demand we've seen does have some circular elements, such as printing and writing and environmental concerns for plastic consumption.
However, the broader weakness is driven by high finished goods inventories as we exited 2018 and lower exports due to weaker global demand.
And ongoing trade tensions.
We do anticipate improved demand as the year progresses, and nondurable manufacturing re couples with the strength and personal consumption.
Taking a look at durable goods box man as lag the general economy through the first half of the year.
This segment includes building materials furniture, and other products for which demand is closely tied to housing starts.
Which is drilled the strength of the broader you us economy in the first half of the year.
So no doubt our box demand has been softer than we expected coming into 2019.
When we look at the underlying drivers of box demand. There's a disconnect between otherwise healthy consumption expenditures for non durable goods and demand for corrugated packaging.
So we believe is largely rooted in finished goods inventory levels, which continue to unwind.
Stepping back for the moment, we're confident the secular drivers such as sustainability E Commerce and consumer preferences, we will continue to drive healthy growth for corrugated packaging over the long term.
More importantly international paper is well positioned.
We have the scale and footprint to serve just about every corrugated segment in a material way and we apply our vast network of packaging design and innovation expertise to understand and exceed our customer's needs.
Turning to global cellulose fibers on slide eight.
The effective price and mix lowered earnings by 32 million in the second quarter due to continued trade and tariff uncertainty and persistently high inventory levels.
Given that this business, mostly serves export markets todays trade uncertainty certainly weigh on us.
Taking a look at underlying demand we continue to see growth in softwood, an absorbent pull even as trade inventory destocking pressure supply demand dynamics.
Operations were strong and we managed our costs well.
We did have a 10 million dollar insurance recovery in the second quarter related to Hurricane Florence last September .
We executed or high maintenance outage quarter, well and have completed 80% of our planned outages for the year and input costs improved $10 million on lower softwood and energy costs.
On slide nine alternative printing papers.
Our north American cut size business performed well, we're ramping up shipments with new customers and realization of previous price increases.
Or flowing through as expected our roll business is more challenging due to weaker commercial printing demand and increased imports.
Taking a look at underlying demand for uncoated freesheet in North America.
Through June demand is down about 3%, which is in line with our view of about 3.5% secular decline.
In Brazil, we had stronger seasonal volume and cut size as expected.
However, demand for offset was weak due to delays in the government textbook program, which started in June but was about three months later than the normal start.
Overall, the business performed well and we executed the heaviest planned outage.
Our quarter of the year.
Looking at Ilim on Slide 10, the joint venture delivered solid commercial and operational performance in the second quarter with EBITDA of 222 million and EBITDA margins of 40%.
EBITDA was sequentially lower driven primarily by lower average pulp prices and higher planned maintenance outage expense in the quarter.
Equity earnings were $67 million and benefited from a noncash foreign exchange gain on Elims U.S. dollar denominated net debt.
Which I piece portion was $7 million or about two cents per share in the quarter.
Now, we'll turn to the outlook on slide 11.
Overall, we expect lower price and mix improve seasonal volume and export shipments lower planned maintenance outages.
And lower input costs.
Now I'll take you through the changes business by business.
So, let's start with industrial packaging, where we expect price and mix to lower earnings by.
$110 million.
On the impact of prior index movement in North America and export pressure.
Volume is expected to improve by $20 million.
On seasonally stronger demand in North America.
And improved export volumes.
Operations and costs are expected to lower earnings by $15 million.
Due to higher seasonal labor cost in our North American box system.
And also within industrial packaging lower maintenance outage expense is expected to improve earnings by $68 million.
Well input costs are expected to improve by $10 million on lower fiber and energy costs.
In cellulose fibers, we expect price and mix the lower earnings by $45 million.
Operations and costs are expected to lower earnings by $20 million due to the non repeat of the second quarter insurance recovery and higher unabsorbed fixed cost.
Lower maintenance outage expense is expected to improve earnings by $52 million and input cost are expected to improve by 5 million on lower wood cost.
Shifting to printing papers, we expect price mix.
The lower earnings by $20 million, mostly related to export pressure in Latin America and geographic mix.
As an offset to this volume is expected to improve $20 million on seasonally stronger demand in North America and Brazil.
And lower maintenance outage expense is expected to improve earnings by $33 million.
To recap planned maintenance outages as expected we completed.
About 75% of our outages the outages during the first half of the year details by business in quarter included in the appendix.
And lastly under equity earnings you will see the outlook for Ilim joint venture, which includes $10 million higher maintenance outage expense versus the second quarter.
If we look at the full year on slide 12 on the demand side, we enter the seasonally stronger second half of the year in our North American packaging business.
We're also seeing improved shipments for containerboard exports to all major regions as inventory Destocking progresses.
And underlying demand improves.
In global cellulose fibers underlying demand for bleached softwood Kraft and absorbent pulp is growing however, we continue to see a difficult environment as we enter the second half of the year.
Due to trade uncertainties and high industry inventory levels.
In our paper business is performing well.
We are ramping up cut size business with new customers and for the full year expect to see benefits of recent price increases in North America.
Outside of North America, we are seeing increased pressure in export markets in our Latin American business.
Against this backdrop, our revised forecast includes the impact of prior index moves in North American packaging.
As well as the impact of lower realized prices for export containerboard and for our pulp business.
For the full year were projecting EBITDA of $3.9 billion.
And free cash flow of $1.9 billion.
Our outlook demonstrates international paper strong and resilient free cash flow.
Through the first half of the year, we returned $810 million to shareowners through dividends and share repurchases.
You can expect that we will use cash for debt repayment and returns to shareholders and keeping with our principle of maintaining a strong balance sheet and an investment grade rating.
With that let me turn it back over to Mark.
Thanks, Tim for the details on the quarter and the outlook.
Particularly given all the moving parts.
The way I'd summarize, where we are today as our businesses are well positioned and we are operating very well, but clearly what the market is presenting to asset.
Current time has lots of ripples in it there is no question, we're operating in a more challenging environment. This year relative to 2018 during the first half international paper has been able to do that navigate very well delivering results better than might be expected in this environment, including a strong level of free cash flow generation.
And this didn't occur by happenstance instead, our results are the product of the work we've done to improve our portfolio. We've established advantaged positions with low cost flexible manufacturing systems, and we have a laser focus on customers.
As we enter the second half of the year and face continuing challenges, we are well positioned to navigate through them as we work on further improving our company. Our focus is on free cash flow generation, which is the basis of shareholder value creation.
Our expectation for free cash flow generation is strong at $1.9 billion.
This enables us to further improve our balance sheet and returning cash to shareholders.
I'm confident that the company, we've built will allow us to succeed and practically any set of conditions at any point in time.
I think about international paper's future often.
And given our company's longevity, sometimes my view of our future is prompted by an important event from the past.
The Apollo 11, lunar landing Fiftyth anniversary media coverage that we've seen over the past week and this is an example of this.
I remember watching a live TV coverage on July Twentyth 1969 on my eighth birthday.
We were leading that day on a family vacation.
While we were all glued to our black and white television watching.
What I didn't know at the time and only learn recently was at IP had an important connection to that broadcast.
Two weeks prior to the mission the sole sponsor on CBS reduced its support and international paper stepped into sponsor one third of the live broadcast on the lunar landing and Moonwalked day.
50 years ago, we could not dream of using the phone in our pocket to order almost anything and have it safely deliver to our homes in a corrugated box.
Disposable diapers, we're just beginning to gain traction with consumers and have led to other absorbent products that make people's lives better.
Just imagine the role renewable sustainable fiber based products will play in the future.
For international paper, the products ideas and services, we provide to our customers and more than 80 countries around the globe truly make a difference in People's lives every day.
As a company we've had many milestones during our 120 year history.
To be proud of but I'm just excited about the ones that are ahead of us as the world continues to change and we know it well international paper remains resilient and committed to improving peoples lives the planet and our company's performance.
So with that we're ready to take your questions.
As a reminder to ask a question press Star then one on your telephone keypad to withdraw your question press the pound key again that star one to ask a question.
Our first question is going to come from the line of Chip Dillon vertical research.
Hi, and good morning, and thanks for all the details.
Good morning.
The first question I have is.
If you could just talk a little bit about.
How the conversion at Ash, and Alabama is going at Riverdale I should say.
At that mill and you know how you see that start up and then as we look at Capex for 2020, I know, it's early days, but directionally do you see it going higher or lower than the 1.4 billion, you're guiding to this year and actually I hate to keep piling on here, but.
You did lower the EBITDA guide from a by about 350 million from last quarter.
But the free cash flow is only going down $100 million. If so maybe you could help us understand that that change, especially since you're not changing the capex guidance for this year.
So just on on the free cash flow you know a couple of things change as we lowered the guidance first of all we are expecting a bigger a recovery of working capital and also lower taxes for that matter. So we had some headroom in the 2 billion that we had talked about we had never quantified that but we feel we feel good at a real solid 1.9 billion on cash flow on capital for next year.
You know all of that work is underway at this point and so we're still in the planning stage and we have typically given that guidance as we report fourth quarter earnings in January and I expect that'll that'll continue to be our cadence.
But I don't see it being higher.
You know we had some big projects over the past couple of years that have pushed the number up a little bit so I don't see it being higher or the degree that how much lower it will be we're looking at right now and and we can give you more on that.
You know early next year, and then I'll just give you my perspective turn it over to Mark I know he will want to talk about Riverdale, but I think it's going extremely well we are still on track.
You know everything's coming together from my standpoint, the way we expected it to.
On the conversion I would I would echo what Tim said, we are well down the path of final engineering work Preconstruction is on plan the project being executed very safely. Obviously, we have additional workforce on a project of this size. So so far I'm very pleased with the progress that we're making in the schedule that we're on on the on the comment on Capex.
Chip I just take you back to the Big picture on what we said long term about Capex is we we look at our capital allocation based off of our EBITDA and hence the cash from operations and that that capex tended to be around half of that cash from operations to reinvest in todays.
Cash flows in this facilities, we have today to take structural cost down to meet any environmental regulations, and then occasionally to make some strategic investments like the Riverdale project or the Madrid mill and so that is at a high level, how we think about it and the balance of that.
Cash then goes back through share repurchases and dividends so.
We don't see a big change in those relative ratios of where we move the cash that we generate from operations.
Okay very helpful and a quick follow up where.
You know, we've been reading about Amazon, making some changes to their.
Packaging.
Requirements or requests and.
I'd say at least half the boxes I get from Amazon have your logo on the box I do look.
I get funny looks from my wife and others. So that's the first thing on the box but.
How do you see that impacting both the company and the industry sort of some of these.
Moves to streamline packaging with e-commerce .
I think the Big picture is E. Commerce is growing at a rapid rate as a way of doing commerce for consumers.
So that's the first thing and corrugated plays a really important role in a lot of those supply chain solutions. We've said often times that the packaging environment in E. Commerce is built for speed through the supply chain right now not packaging optimisation, but packaging optimization is coming and the good thing is not only with that particular company, but with most of the major E. Commerce players. We are at the table and have a very strong position and are helping them to design, we think the right size and the right type of packaging and a sustainable approach is the right answer for the market. We're not afraid of the changes that occur. The overall segment is going to continue to grow in corrugated is going to play a really important role and we have the ability to help our customers.
As they are ready to make changes in the packaging design, so that they keep the speed to supply chain, which the consumer wants one day delivery and so forth and reduce waste and reduce over packaging overtime and we have a lot of design capability to do that so we see it as complimentary to what we offer.
Terrific. Thanks for the details.
Our next question comes from the line of Anthony Pettinari Citigroup.
Good morning.
Oh man.
In containerboard export markets I think you indicated customers are destocking inventories and demand is maybe improving are expected to improve just wondering if you could sort of reconcile that with the the price erosion that we've seen in July and then do you see stabilization or maybe some inflection in export market prices and then I think last quarter you provided some detail on where you thought export.
Customer inventories were by sort of global region, I think Europe in particular was quite elevated I wonder if you just sort of update that as well.
Hey, Anthony is Tim.
Yes.
The fundamentals seem to be improving more or less as we expected. If you remember last quarter. We had said we think it's going to take a little bit longer and it did but.
Now, we see that starting to turn.
If you remember the agricultural season in Europe was particularly weak last year.
This year, it's much stronger so I think people.
Stocked up more for more containerboard than what they ultimately needed.
But the strength of the season earlier in the spring and now the big season coming up looks to be very good those inventories seem to be have been work through and.
And people are coming back to the market. So you know I think Europe's improving Latin America has continued to be strong Asia was a little bit weaker but not to the degree that.
The European region was terms the price I mean, when you get to this point in the cycle Theres a lot of fluidity, but I guess, rather than trying to forecast price, which we wouldn't do we just say we see fundamentals are improving and customers returning to you know to place orders and begin building for this upcoming season, which will be late third quarter fourth.
Okay. Okay, that's very helpful.
And then the detail that you've given on on corrugated demand trends by end market is very helpful.
When you talked about other non durables I think you said the demand might be impacted by secular trends and you mentioned the decline in print, which I think is understandable, but you also talked about I think environmental concerns around plastic consumption just wanted to get any more detail on that comment are you actually seeing lower shipments.
Of certain plastic products or is that more of a general comment I wanted to follow up on that.
I think it's more of a general comment I mean, what we would have we'd probably have to characterize it as anecdotal at this point.
But the trend seems to be there from a from a social standpoint, so probably to a greater degree in Europe , where it's getting a lot of airtime, but.
We usually follow Europe on a lot of these trends and so I think the environmental concerns or starting to pick up and we'll see what pattern what patterns develop over the next few quarters I think.
Hi, Anthony the purpose of 10, taking taking us through that detail was.
I'm trying to give some perspective from international paper on what we see through the eyes of our customers in the box market largely the domestic U.S. box market and answer the question or give some.
Perspective on the question why is demand.
Where it is in 2019 versus what we saw in 2018 and obviously, we know there is a very strong correlation between nondurable manufacturing to the manufacturing of nondurable goods in the U.S. and box demand and when you dig into that detail and we serve customers in every one of those segments and Tim ran through some of those what our customers are seeing is softer demand for their products for certain reasons, but no major conclusions on that some of it. We believe for example, the agricultural Chemicals example, that Tim gave is really about the amount of rain and flooding and the delayed planting seasons that have occurred in the Midwest. So those products are delayed and they're shipping and some of them may get skip to this year because of the lack of ability to plant in the flood plains, but that's not demand destruction. That's just life happening. So that was the purpose of that to give some color around.
What might explain what we're seeing as a as a major provider of these products through the eyes of our customers.
Thanks, Mark Thats Thats very helpful perspective, I'll turn over.
Our next question will come from the line of Mark Connelly Stephens incorporated.
Thank you two things first Mark when you think about all the work that you and your customers are doing on supply chains.
Do you think there is a shift in the amount of inventory that constitutes healthy.
We're at 3.8 weeks and is that the right level or does it need to go lower.
And have you changed the way you think about the relationship between inventories and price stability.
It's a great question, Mark I think that what we've seen is when when there's ample logistics and transportation velocity in our own company and our customers supply chain, we've seen the ability the ability to operate with with significantly lower inventories last year as an example, where the.
The problems in the rail and truck and ship transportation lanes actually caused inventories to go up partially to compensate for that that's loosened up a bit now so I think part of what we're learning industrial companies are learning is that the variables aren't fixed anymore and you have tightness in transportation and how fast things flow through that you didn't have in the past wide variability on that and part of it is self inflicted with U.S. rail companies implementing their schedule changes and some of it is just supply and demand in the trucking industry that may never completely be where it used to be so higher inventories are necessary. One velocity is slower and lower inventories are possible. So that's going to take a while to figure out what condition are you in and how do you think about inventories in pricing because I don't think its a single number anymore I don't think its this many weeks. It's this many weeks against this backdrop in the supply chain.
That's helpful.
One other question, we've clearly seen fluff prices move more closely with commodity pulp prices than they used to.
Do you think that's simply the new relationship or is that just a function of all the.
Supply and demand disruptions, we've been having lately.
I think it's the latter best Best guess, we can we can look at based on our experience and customers. There's always a certain amount of a flexible capacity that can can make qualify fluff products or make market pulp what whenever the economics are better in certain parts of the market move in and out I think China is change in demand and their overall fiber influence on the world is still sorting itself out. So I don't I don't think anything's fundamentally changed other than the softwood fiber markets, a little bit disconnected right now and there's some maybe some temporary unnatural flows and so that is created a little bit more.
Dynamics around specialty fluff fluff and specialty pulps that are kind of at the top of the pyramid and the more general market.
Market grades.
Thank you.
Our next question will come from the line of Brian Maguire Goldman Sachs.
Just following on some of the earlier questions on inventories just you obviously took a lot of economic downtime in containerboard and a little bit in fibers.
In the quarter, just wonder if you could kind of characterize where your own inventories were at the end of the quarter and whether you think you'll still need to take some downtime in threeq to get them back to normal or were they in a pretty good spot.
Well, Hey, Brian we don't.
Disclose what level, our inventories are out specifically I would say that in containerboard, we were running our system as we always do we typically run a very lean supply chain.
Disruptions with transportation can cause it to fluctuate a little bit, but you know we don't like to carry any more inventory than we have to or to serve our customers' needs I'd say pulp inventories as you've seen systematic you know around around the world are a little bit higher and ours are a little bit higher too, so, but but within but within line of what you know in one mill or to slightly and higher inventories than what we would like to have over some period of time, but within a reasonable range in total.
Okay, and then just on on volume growth trends in in corrugated box shipments were because you you noted down 2.1% in the quarter.
That weaker than youre expecting but it sounds like the outlook.
For the.
Middle of the year back half of the year I think most of what I've been hearing has been pretty optimistic just wonder if you can.
Comment on anything you're seeing so far in July if there's a way to quantify.
Any kind of pickup you're seeing in any specific end markets you are seeing some strength then.
Yes, the comments that we made were focused on the second half, where we do expect to see pickup.
July has been soft we came out of June and its continued more or less in line with how we exited the quarter, but it's one of the slowest seasonal months of the year as holiday at the beginning of the month and so our expectation is that we get into the seasonally stronger periods in third and fourth quarter, we will see the pickup that were expecting.
Okay. Thanks, I'll turn it over.
Our next question will come from the line of Mark Weintraub Seaport Global.
Thank you.
On the customer de stocking.
Would you would you say were pretty much at the end of that now or are we still seeing a little bit more then.
Would you be willing to hazard, a guess as to the magnitude of impact that might have had on the box business in the first half of the year.
Mark I'd say, Tim let me just start with the export and I think that's where we are seeing in turn.
One thing that we didn't mention earlier and this is not so much an inventory question, but it is a demand question.
The reversal of tariffs into Turkey, which is a large kraft liner containerboard market and a big one for us that we had essentially pulled out of in large ways.
Has had an immediate effect of the day. After chairs were lowered we were getting calls for orders. So I think in the export markets. The de stocking is running its course and nearing its end on the back of.
A really strong agricultural season, especially in Europe .
And some of the tariff relaxation around Turkey is definitely been helpful.
On the it's a little bit harder to gauge on the bauxite and Mark may want to provide some color here, but you're dealing customer by customer with what they're telling you about their position and their demand levels and so it is anecdotal and it's it's looking across.
A lot of customers segment by segment and and and it's our best read from the conversations that Weve, having that we've had that a lot of the de stocking has seemed to work its way through and it will depend on demand levels in the second half and then an increase and nondurables.
Manufacturing activities.
I think that that keysight is going to be and we see it in some of the sub segments or not and all of them, but when we start to see order pick up that means that the honourable manufacturing is picking up and again, there's a lot of segments and there we see the pick up in some we don't see him and you can get one of the examples I gave around that.
Chemicals related to crop planting that's a gap that that's going to be hard to recover because the season as passing a sites. It's just one example, where we don't expect a quick turnaround, but we are seeing positive order pickup in some of the other segments, which means those products are now being manufactured again.
I really appreciate you highlighting the export side first because actually just mathematically the decline in exports has had a bigger impact on containerboard demand and then what weve seen domestically. So just focusing back in on that are you, suggesting that perhaps as we get things rebounding, we couldn't get the export business back to where it had been or do you think it ends up being somewhere between the quite low levels in the first half of this year and this very strong levels, we saw last year.
Yeah, I think for our business and the customer base that we're serving we think we can get back.
Great. Thank you.
Our next question will come from the line of Edlain Rodriguez TBS.
Thank you good morning, guys.
Good morning, just one just one quick one on on the printing paper market like what's your outlook.
On the market in the medium near to medium terms and also what do you think he was like so difficult for the industry to hold on into the price increases in coated freesheet.
Could you could have done something better to manage supply demand and price them.
Hi.
Head on this this is mark I think overall, we don't see a whole lot of change in the printing papers business, you know where a large producer in north American market and in the Latin American market, we don't see a major change in the overall long term demand trend, there's some ups and downs in that secular decline and when you have these kinds of issues when you're raising prices in one region and demand might be slower for example in Brazil, what their economic challenges. You. You will then see some products move around so you've got a little bit of imports coming into the U.S., we always expect that depending on economics and other places and I think all that factors into how pricing flows through that how resilient. It is but we see the business as you know in secular decline, but stable and were operating very well, we've actually improved our position with key customers and inside of grades like cut size, we've actually grown in the market based on the customers we've.
Aligned ourselves with.
Okay. Thank you that's all I have.
Our next question comes from the line of Mark Wendy.
CMO capital markets.
Good morning, Mark Good morning, Jim Good morning.
Mark I wondered if you could just help us with how you think about the economic downtime if you.
If you look at the first half.
Nearly three quarters of a million tons and I wondered is that.
Coming through just slow backs or have you taken some smaller machines and I also wonder if there's a point here, where do you think about just like indefinitely idling given mill.
It's a great question, Marc so on the how we do it.
You know, we look at our system as a system and it produces many different grades and types of containerboard based on box design requirements. So they're not all alike email each unit operation isn't exactly like so it's a combination of a at all of our mills have a throttle on them that's not on off so we can run fast.
Slow.
Faster than fast like we did last year and we can shut down and we use all of those tools, depending on the marginal cost algorithm that I've talked about quite often and whether or not we can combine it with some other things we need to do whether or not we can lower our transportation costs would cost take advantage of recovered fiber versus verge and all that goes into a marginal cost algorithm that allows us to look over our 16 mills.
Look over our order book for the coming month or two and then decide with enough time to shed the cost what to run at at what output level. A lot of it is just running less than full a full output and balancing to maximize our energy production and the integrated mills and so forth.
You know the second part of your question.
Hi, this is hypothetical in the sense that we have the system, we need it's very low cost, it's very capable and we believe the box market long term and the containerboard market globally is growing so our view is we have the right capacity in the right places for today and we don't make those kind of strategic decision in one year or one quarter, we had it for today and we have it for the future and you know we feel real good about that we've really worked hard to build a system that as you can see from the results can do really really well in a year like 2018, when we were probably running beyond our capacity at a year like 2019, where we're needing less than a 100% of it for for a period of time and we've adapted very very well to it.
Okay and then for my follow on I, just wondered if you can talk about this second quarter.
Yeah.
And I guess, what I'm wondering is a.
End of this magnitude in your planning for kind of free cash flow estimates for the year.
And then secondly does does the size of this dividend tell us anything about sort of timing and cadence on the capital projects that have been talked about for Ellen.
Oh, Hey, Mark No I don't think it.
Impacts any of their plans strategically about the types of projects that.
That they're planning the business is throwing off a lot of cash. So this was just the way of returning it to the investors and the joint venture.
We did have it in our I think we even talked about it I can't be 100% sure I didn't go back and look but I think we alluded to it on the first quarter call that we knew we were getting it. We've just not received at that point and and then it came through during the quarter.
Okay very good I'll turn it over.
Thank you.
Our next question will come from the line of George Staphos Bank of America Merrill Lynch.
Hi, everyone. Good morning, Thanks for all the details and commentary.
First question is it really more point of clarification and I just want to make sure that I heard correctly. If we go to slide 11, which is yours.
Outlook slide.
<unk> operations and cost Delta sequentially for industrial packaging was that a one $5 million negative or a five zero negative.
I thought I heard one five which in turn would mean that EBITDA, you're forecasting flat sequentially, but if you could provide just some.
Oh, yes commentary, there and remedial math I guess that'd be helpful. And then I had a bigger picture question.
Sure George you were talking about the seasonal labor cost just to make sure I heard you correctly. They offer the option costs that that Delta that you cited fits one five okay.
And driven mostly by seasonal labor costs in the box system.
Okay. So then were looking more or less flat sequentially and EBITDA threeq versus twoq that'd be fair.
Yeah Okay.
The bigger picture question and this.
In part Piggybacks on on the question that Mark just teed up.
Recognizing that you don't make decisions on your on your your mill system quarter to quarter, and you're obviously doing extremely well running the business this year and choppier demand environment.
Is there a practical limit.
That arise I don't think you'll forgive me the timing of that here.
In terms of though running to demand or can you run to demand as long as you need.
Without any kind of impact on labor your mill footprint, obviously capacity coming on when would you have to make some changes or would there be a point where you'd have to look at your mill footprint and see what you do from a running to demand standpoint, and then the related question I guess at one point in time, obviously the last couple of years, you looked at expanding geographically.
How would you guide us in terms of your latest thoughts on that.
Would.
Cycle timing and macroeconomic play into that if you could remind us where would that be independent of how you would use that or you view that as an opportunity going forward. Thank you guys. Good luck in the quarter.
Okay, that's a lot through our job well done.
Last in line here, so how to get it all in there.
No I think that's a very good use of one question and one follow up.
On the how long can you I love, we've talked about it before at a high level.
We think we are system runs bass, when we take about 3% of our available capacity out on a scheduled basis to maintain our asset and then about another 3% for flexibility in order to serve because we're making boxes with this stuff. It's a short cycle business you need to be able to turn on a dime, sometimes and so running wide open except when you're down for maintenance usually results in higher costs and disappointed customers. So if you take three and three and you say, if we run 94% overtime strategically we're at our best but could we run lower than that for a period of time and I will define the period, you're right absolutely and then as we put more technology in our mills as we put more sensors and we have more predictive maintenance I think will change the equation on that again and so the labor piece is important but for a different reason then you're probably asking it is a cost, but we view our labor as a true asset. These are technically trained people that run and maintain our.
Equipment.
And so we do everything we can to keep them fully engaged safe and fully engaged whether we're running like last year at 100 plus percent of our capacity or whether we're running like this year at something less than that because that's a particular part of our value proposition thats really difficult to replace so we can run.
At a flexible level for quite some time.
But just to give you the high level way, we think about it flexibility maintenance and then really using our people and our marginal cost algorithm can make the best decisions that we can.
On the.
Strategic question about expansion I think every major.
Alan that is how we would make a decision including cycle time, and the macro conditions factors into it but strategic decisions like you're referring to are really about opportunities to create value over the long term by increasing international paper's intrinsic value and so if it's an acquisition that it should be clear that it has strong synergies and a strong return.
And a complimentary industrial logic, if it's organic strong returns and.
The ability to obviously, it's not doesn't have the same risk profile, but the ability to.
Generates strong returns.
Immediately with the investments so the cycle time is important obviously because it affects.
Sentence that it affects your balance sheet. It affects your cash flow, but I would say all of that is in consideration whenever we would contemplate that.
That type of action.
Thanks for the thoughts guys.
Our next question will come from the line of Steve Chercover D.A. Davidson.
Thanks, Good morning, everyone.
So it's it's good to hear that E. Commerce will continue to be a source of growth both short and long term and I had just a couple of questions on that as we think about the Riverdale White top project was this done in anticipation or maybe in consultation with your e-commerce clients so that.
Products can be placed in high graphic boxes that could also be robust enough for shipping.
I think in general it.
The need for that type of high quality printable liner. It was definitely developed in consultation with lots of customers not just ecommerce.
Okay and.
Make sure its related on e-commerce .
To the extent that some of the smaller packaging might go to poach is I don't think the plastic is the answer. So are you working on anything that might involve kraft paper.
Yes.
We work we work on almost everything that is fiber related for our customers.
And we we actually have products that are already in the marketplace that are.
Using essentially what you would refer to as craft type paper.
Thank you.
Our next question will come from the line of Adam Josephson Keybanc.
Good morning, Thanks, everyone for taking my question I appreciate it.
Tim just back to the box demand commentary for a moment just to make sure I understand it better so in the first half it was.
Weaker than you expected I guess, partly because of weather, partly because of the economy, partly because of finished goods inventory de stocking.
In terms of the latter part how do you know what kind of visibility do you have into your customers' inventory levels than I thought they only kept a few days of bogs inventory on hand, so I just I don't understand how they would be reducing their inventories throughout the first half of the year and then suddenly build it up in the second half. So can you just help me with how much of the first half shortfall was attributable to each of those factors and then why exactly you think there will be an inventory restocking in the second half.
Yeah. It's a great question that I wasn't really referring to their inventories of our product I was referring to the consumer products that they're making and working through their own supply chains. So that's really the commentary about de stocking as we look at our our set of consumer products oriented customer base and you know.
Parsing out in quantifying each one no I I mean, it's a variety of those factors where the business is looking at it segment by segment and customer by customer and understanding all the movements for.
The 10000, plus customers that we have but it's all of the things that you mentioned.
Got it and just on RCC, Tim or Mark I know I think you've been of the view in years past that those costs are biased upward over the long term obviously, we're sitting here at 25 year lows and they're not.
Oh I see prices don't appear to be moving anytime soon and obviously, what China is doing is playing a major role in that do you have any reason to think that RCC is going to go up much from here and and if it does and what impact do you think that will have on the domestic supply demand situation considering how much of the new capacity has been of the recycle variety not only domestically, but also in other markets. Thanks, very much and Adam that's it that's a great question. It's a strategic question you're right. We had have been had the long term view that if you just look at fiber balances around the world, where the growing markets are tend to need to use recovered paper as their fiber source and the producing regions of the world that are making that a virgin fiber that becomes recovered fiber are slower growing we don't see a major change in that I think China is.
Position on recovered paper has definitely created dislocation. The question is how long it lasts but our long term strategic view that fiber based products, especially packaging and get it going to continue to grow which would lend itself to.
Demand for recovered paper overtime.
The supply of recovered paper is Virgin paper. So if in any scenario you can think of it results in.
The world taking out Virgin paper in a few months, you've just taken out recovered paper because one is the parent of the other so I think if you look at the way the system works together it may take longer and it may not be the timeline. We had we had been discussing earlier, but we think over time. The two types of fiber original tree fiber and it's recovered a sibling are going to work hand in hand.
There will be some temporary dislocation why one is an excess supply, but if the way you solve that is by reducing though the original supply it corrects itself pretty quick.
Thanks, a lot mark.
Our last question for today will come from the line of gave her day Wells Fargo Securities.
Good morning, two quick ones for you one is.
I guess pricing mechanisms are a little more opaque and the cellulose fibers business.
And given sort of the decline that we've seen since late 2018 can you talk about how that might flow through I mean, you gave us third quarter, obviously, but maybe.
Thoughts on 2020 in terms of.
How these price declines that we see I must may impact the business and then maybe bigger picture.
Appreciating that the long term growth for those types of products.
Something in the 2% to 4% range.
How you think that business trajectory could be to get to that.
$600 million EBITDA figure that you guys had been targeting prior to some of them are called global malaise.
Yeah, Doug that we're not going to try to project the 2020 pricing.
But.
The growth rate is accurate, which is what you talked about in that 2% to 4% range and we think that this year is and this is a disconnect for the industry and also for our company specifically, but we don't see any reason why with that growth rate and the role that these products play for the consumer products companies that are making them that we can't get on that back on that trajectory, it's just going to take a little bit longer.
I'm, sorry, Mark I was more referencing just.
Changes in price that we've already seen how that plays through from a contractual standpoint, given again some of the discounting factors that occur as well as timing lags.
Okay. So that the contract pricing is customer by customer and some of what you've seen in the marketplace doesn't always affect that.
And then the balance of the customers that are using indexes and it's not it's not as predominant as you would see and on the containerboard side of the index is the pricing a driver for the discussion. So it's it's a bit of a different market and again not I'm not going to end up.
July of this year to try to forecast.
What effects.
From what has already happened is going to have in 2020, it's it's not it's not.
You know appropriate to do that.
Okay. Thank you and then the last question.
Revolves around an initiative by one of the large e-commerce .
Providers.
To charge folks back for.
Not being qualified for frustration free packaging or what have you I think it takes effect in a few days.
Is it your view or have you I'm, assuming the answer is yes, but maybe elaborate on any magnitude of dialogue you had with your customers to respond to that or do you think that's something that is still on the come.
When it actually goes into effect in stars and peoples wallet.
I think it's going to be a little bit of both I think that the the amount of product set that were designed to packaging with design for a retail display.
It probably isn't capable of navigating the supply chain for e-commerce direct to someone's house, so that packaging will change and we see more unlikely it will change more toward the corrugated or Michael corrugated side, we see some benefit there, but I think people got to figure it out there's some tooling cost.
And there are some design changes and then the supply chain is complicated you know can you make a product and put it in your package and guarantee that its going in one supply chain e-commerce versus the retail channel that's not as easy to do for some companies as it sounds, but it'll take a while to work through this.
Thank you.
Thank you that concludes the Q and a portion of today's call I will turn the call back over to Gary Mcclatchy Harris for closing comments.
Thank you again for joining international paper's second quarter earnings call as always Michele and I will be available for your follow up questions. Thank you.
Once again, we'd like to thank you for participating on today's second quarter 2019 International paper earnings Conference call you may now disconnect.