Q2 2022 International Paper Co Earnings Call
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Okay.
Good morning, and thank you for standing by welcome to today's international paper's second quarter 2022 earnings call.
All lines have been placed on mute to prevent background noise.
After the Speakers' remarks, you'll have an opportunity to ask questions to ask a question. Please press. One then zero on your telephone keypad to withdraw a question you may repeat the one zero command.
As a reminder, this conference is being recorded.
I'd now like to turn today's conference over to Mark Nelson, Vice President Investor Relations, Sir the floor is yours.
Thank you Paul Good morning, and thank you for joining international paper's second quarter 2022 earnings call. Our speakers. This morning are Mark Sutton, Chairman and Chief Executive Officer, and Tim Nicholls, Senior Vice President and Chief Financial Officer.
There is important information at the beginning of our presentation on slide two including certain legal disclaimers. For example, during this call. We will make forward looking statements that are subject to risks and uncertainties.
We will also present certain non U S GAAP financial information and.
And a reconciliation of those figures to U S. GAAP financial measures is available on our website.
Our website also contains copies of the second quarter earnings press release and today's presentation slides.
I will now turn the call over to Mark Sutton.
Thank you Mark and good morning, everyone.
We'll begin our discussion on slide three.
In the second quarter International paper delivered strong revenue growth and earnings growth.
On a year over year and sequential basis, all while expanding our margins.
In addition, our second quarter earnings were better than our prior outlook driven by strong price realization solid operating performance and cost benefits.
All of this help us overcome significantly higher input costs.
Specialty for energy <unk> chemicals and distribution.
Our mills and converting system performed very well as we manage through continued logistics constraints, which negatively impacted our operating cost we.
We successfully executed our second highest maintenance quarter of the year and have completed about 65% of our planned maintenance in the first half of the year.
Demand for our products was impacted by a shift in consumer spending from goods to services in the quarter, while the retail channel manage through elevated inventories. In addition, our businesses continue to focus on serving our customers.
Needs, while navigating through a challenging supply chain and labor environment.
We made good progress on our building a better IP initiatives, we achieved $65 million of earnings in the quarter for a total of $105 million during the first half of the year.
Given our strong momentum we expect to achieve the high end of our full year target of $200 million to $225 million.
And we are excited by the opportunities we have identified to significantly lower our cost structure and accelerate profitable growth.
On capital allocation, we returned $565 million to shareowners in the second quarter, including $395 million of share repurchases.
As a result, we have returned more than $1 1 billion of cash to shareowners. So far this year.
This highlights the choices that our strong balance sheet and cash generation provide us.
On our last call I mentioned that we were pursuing strategic options for our equity investment in the <unk> group, which includes possibly selling our 50% stake.
We have engaged advisors and are actively working with interested parties we.
We made good progress during the second quarter and have identified serious options that we believe could be attractive as I mentioned before the complexity of the situation and our JV structure impacts the pace of reaching a resolution we will provide another update when there is more information to share.
Okay.
Turning to the second quarter results on slide four.
Revenue increased by 13% year over year, driven by strong price realization across our two business segments.
Operating earnings per share improved by just over 50% versus last year.
And margins improved in the second quarter as strong price realization more than offset higher distribution input cost and we delivered additional benefits from our building a better IP initiatives.
Free cash flow was lower in the quarter due to higher working capital use as we grew revenues and replenished inventories coming out of our highest maintenance outage season. In addition, both prior periods included a dividend from our equity ownership Daniela.
Looking to the rest of the year, we expect further margin expansion as continued realization of prior price increases outpaces higher input costs. In addition, we stepped down from our highest maintenance outage quarter of the year and also expect additional earnings growth from our building a better IP initiatives.
As a result, I am confident we will achieve our full year targets for EBITDA and free cash flow, which remain unchanged.
I'll now turn the call over to Tim who will cover our business sector performance and outlook Tim.
Thank you Mark good morning, everyone I'm on slide five which shows our sequential earnings bridge as Mark mentioned, we generated strong earnings growth in the second quarter relative to both prior quarter and prior year, driven by strong price realizations and execution of our building a better IP initiatives.
Second quarter operating earnings per share.
$1.24 as compared to <unk> 76 in the first quarter.
Price and mix improved by about $206 million.
Or <unk> 40 per share with strong price realization in both business segments and across all channels.
Volume was relatively flat sequentially and our industrial packaging segment and global cellulose fibers fluff pulp shipments continued to be constrained by ongoing vessel delays.
Operations and costs improved sequentially as our mills and converting system performed well in the second quarter, we received $16 million of insurance recovery related to prattville.
In addition, one time items for things like lower employee benefits costs medical claims and workers' comp contributed favorably to operations and cost.
These one time items added about $80 million or <unk> 16 per share, which will not repeat in the third quarter.
We successfully completed our second highest maintenance outage quarter of the year and 65% of our annual maintenance program through the first half of the year.
Input costs were about $100 million or <unk> 20 per share in the second quarter.
Driven by higher energy chemicals and distribution cost in large part.
Because of higher diesel fuel prices.
On slide 33 of the appendix, we provide details on our consumption by key inputs, including natural gas, which was also significant cost headwind in the quarter.
Corporate and other items included benefits from lower tax expense and a lower share count.
Lastly, equity earnings were stable versus the prior quarter.
Turning to the segments and starting with industrial packaging on slide six looking at the second quarter performance, we delivered meaningful revenue growth and margin expansion.
And mix was strong and better than our expectations due to faster than expected implementation.
Of our March price increase and higher export prices.
Our volume was flat sequentially.
And below last year's strong comp.
As Mark mentioned earlier, we saw a shift in consumer spending for goods and services and the retail channel manage through elevated inventories, which then impacted box demand across segments like e-commerce, and shipping and distribution durables and other non durables.
We firmly believe these segments will continue to grow over time and that IP is well positioned to grow with them.
In addition, the tight labor environment is continues to constrain our box plant system.
We are experiencing this especially in regions, where we are consistently operating our plants on weekends to serve elevated demand from segments like E Commerce and shipping and distribution that have grown significantly during the last couple of years.
Going forward, we will continue to focus on further optimizing our system by improving staffing levels and investing across the system to serve the growing demand of our customers.
Operations and costs improved sequentially, our mills and box system ran very well and we successfully executed our second highest maintenance outage of the year.
The business also benefited from additional insurance recovery of $16 million related to <unk> and the onetime items I mentioned earlier by approximately $60 million.
Operating costs remained elevated due to ongoing logistics constraints. However, we are in a much better positioned to navigate this environment with healthier system inventories.
Input costs were a significant headwind in the second quarter and higher than our expectations.
Due to higher costs for energy chemicals and distribution, we expect these elevated costs to persist third quarter.
These cost headwinds are even more significant for our packaging business in Europe , where input costs in the second quarter were $45 million higher than the second quarter of last year.
About 70% of that headwind.
Was from higher energy costs, where natural gas prices have averaged about five times normal historical levels.
Turning to slide seven and staying with North American industrial packaging.
We're focused on continuing to grow earnings by restoring margins to historical levels in the low 20% range we've.
We've made solid progress in the quarter and delivered a 19% margin up from just over 15% in the first quarter, despite higher than expected input costs.
We're still confident we can achieve our target however, the additional input cost inflation may influence the timing.
Our mills and box plants operated very well contained.
Containerboard inventories across our system are back to sufficient levels. So we are better positioned to proactively manage through the ongoing supply chain constraints.
As I said earlier, we will deploy an investment strategy that further enhances our capabilities and footprint to grow with our customers, while generating attractive financial returns on these investments.
This is a key part of building a better IP and an example of this is a greenfield box plant that we're building in southeast, Pennsylvania, which is expected to start up early next year.
In addition, our building a better IP initiatives are also focused on structurally reducing costs and deploying commercial strategies to improve mix and margins.
Moving on to global cellulose fibers on slide eight I'll start with an update on the demand environment and supply chain.
Demand for fluff pulp remains solid across all regions and our confidence reflects the central role of absorbent hygiene products and meeting customer needs.
In addition, we expect the supply demand environment for fluff to remain favorable near term feedback.
Feedback from our customers continues to indicate the fluff pulp inventories are near historic lows.
Apply chain continue to remain stretch driven by ongoing port congestion and vessel delays and we expect these challenging conditions to continue for the foreseeable future.
Taking a look at the second quarter performance price and mix improved by $53 million.
Due to successful execution of previously announced price increases.
With solid momentum as we enter the third quarter.
Volume in the quarter was stable.
I would note that backlogs remain high and are about double our normalized levels due to the logistics challenges.
Our mills continue to run well ops and costs were better in the quarter as the business benefited from onetime onetime items I mentioned earlier by approximately $20 million.
Lastly, input costs increased by $22 million sequentially.
About 65% of the additional cost was the result of higher energy prices with the remainder coming from higher chemicals and freight.
Turning to slide nine I want to reaffirm that global cellulose fibers remains 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 supply demand outlook for fluff pulp with price realization from prior increase prior increases accelerating as we move through the year.
I would also note that as part of building a better IP. We are focused on driving structural margin improvement by ensuring we get paid for the value we provide to our customers.
And aligning with the most attractive regions and segments to deliver profitable growth.
We are also making solid progress in our fluff pulp contract negotiations, which we anticipate will provide additional commercial benefits as we move into 2023.
Turning to slide 10, I'd like to update you on building better IP set of initiatives, we're making solid progress and delivered $65 million of earnings in the second quarter for a total of $105 million through the first half of the year.
Given the strong momentum we are on track to achieve the high end of our full year target.
About half the benefits to date are from our lean effectiveness initiatives.
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 printing papers spin.
And we have line of sight to additional savings from initiatives targeting lower overhead spending and further optimization.
We are designing the organization to support a packaging focused company with a more focused footprint.
We believe our process optimization initiatives have the 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 are beginning to scale these.
These capabilities across our system, which we believe will yield significant savings as we go through 2023.
And finally strategy acceleration is about delivering profitable growth through.
Through commercial and investment excellence as I mentioned earlier, we're focused on profitably growing our north American packaging business by improving margins and investing for organic growth.
We are further optimizing our European operations by improving performance and increasing integration.
Of our Madrid mill and box system.
And we're well on our way to achieve cost to capital returns in our global cellulose fibers business by realizing more value for absorbent pulp.
In summary building a better IP is about driving structural margin improvement and profitable growth.
Turning to slide 11, I'll cover our third quarter outlook.
Yes.
I'll start with industrial packaging.
We expect price and mix to improve by $40 million on realization of price increases.
Volume is expected to increase by $10 million was one more day sequentially and stable demand.
Operating costs are expected to decrease earnings by $75 million.
Largely due to the non repeat of the onetime favorable items I mentioned earlier.
Maintenance outage expense is expected to decrease by $41 million and lastly input costs are expected to increase by $30 million.
In global cellulose fibers, we expect price and mix to improve by $60 million on the realization of prior increases.
As a reminder, price realization in this segment has a 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 remain stable sequentially.
Operations and costs are expected to decrease earnings by $30 million.
Due to non repeat of favorable one time items in the second quarter and timing of spending.
Maintenance outage expense is expected to decrease by $24 million and lastly input costs are expected to increase by $5 million.
Moving to our full year outlook on slide 12.
We remain confident in our full year full year EBITDA outlook of three 1% to $3 4 billion.
And our free cash flow target of one three to $1 5 billion.
We generated strong revenue growth and margin expansion in the second quarter exceeding our earnings outlook for the quarter, which provides solid momentum as we enter the second half of the year.
We expect demand for corrugated packaging to remain stable and.
In cellulose fibers, we see a continued favorable supply demand backdrop for fluff pulp.
We.
<unk> realized benefits across the portfolio from the implementation of prior price increases while distribution and input costs are expected to stabilize later this year at elevated levels.
Sure.
As I mentioned earlier, we are also confident in achieving $225 million of gross earnings from our building a better IP set of initiatives.
Regarding capital expenditures, we have lowered our full year estimate by $100 million due to the extended lead times on equipment purchases.
Despite these equipment delays, we are committed to investing in our business to support strategic growth opportunities and to structurally reduce our cost.
Let me turn to slide 13, and take a moment to update you on our capital allocation actions in the second 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 two 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 five to two eight times.
And looking ahead, we have limited.
Medium term maturities was about $900 million due over the next five years.
Returning cash to shareholders is a meaningful part of our capital allocation framework and.
In the second quarter, we returned $565 million to shareowners, including $395 million through share repurchases, which represents $8 7 million shares or about two 3% of shares outstanding.
As a result, we've returned more than $1 $1 billion of cash to shareowners. So far this year.
At the end of the second quarter, we had $2 $1 billion remaining in share repurchase share repurchase authorization.
Investment excellence is essential to growing earnings and cash.
As I mentioned, we are targeting capex of $1 billion, which includes funding for strategic projects and our packaging business to build out capabilities and capacity in our box system to drive profitable growth.
We also plan to increase funding for cost reduction projects with expected returns in excess of 25%.
We will.
<unk> to be disciplined and selective when assessing M&A opportunities that may supplement our goal of accelerating profitable growth.
You can expect M&A to focus primarily on bolt on opportunities in our packaging business in North America, and Europe and a potential.
Opportunity, we pursue must be compelling long term value for our shareowners.
Turning to slide 14.
I want to highlight the strength and resiliency of international paper going forward.
With this as a backdrop I'm confident we will navigate any economic environment from a position of strength.
We have a very strong balance sheet, which we will preserve because we believe it's core to our capital allocation framework.
Our strong balance sheet ensures financial stability, and Optionality and softer economic environments and has the foundation to create significant value throughout the economic cycle.
As a result, we can continue to return cash to shareowners in a meaningful way through a sustainable and competitive dividend and through opportunistic share repurchases.
We can also proactively invest in our business throughout the cycle to create significant value by reducing costs and by developing the capabilities, we need to meet the growing demands of our customers.
Our large system the mills and box plants provides us with added.
Added advantage of flexibility and Optionality.
We have demonstrated our ability to optimize our cost structure throughout different demand environments by making more of our cost less fixed and more variable.
For example, we can increase utilization across our system during strong demand environment.
And if demand moderates, we can shift production to our lowest cost operations and shed high marginal cost across the system based on regional cost for fiber energy and supply chain.
We also have levers to manage working capital needs to align with the demand signal.
One last point as I talked about our confidence in delivering our building a better IP initiatives. We have line of sight to these opportunities and believe they are largely within our control and not dependent on economic tailwind.
In summary, the strength and resiliency of IP enables us to consistently create significant value for our shareowners over the cycle.
And with that I'll turn it back over to Mark.
Ken Thanks for covering the details on the business outlook and our capital allocation progress. This is a really exciting time for international paper and I continue to be proud of our team.
And the work that they do every day in every area of the company.
Sitting here midway through the year I'm confident in our earnings outlook for 2022 and in our ability to deliver strong earnings growth this year.
I'm also very pleased with our progress and momentum and building a better IP and I'm confident our team is focused on taking our performance to the next level as Tim pointed out in his remarks earlier. These initiatives are largely within our control and we'll create structural earnings improvement for IP over the next couple of years and finally <unk>.
Mindful of the uncertainty surrounding the macro environment I am very certain about the resiliency of international paper during the past few years, we have significantly enhanced our financial strength and flexibility. This strong foundation makes IP well positioned for success throughout a wide spectrum of economic environments.
With that operator, we are ready to take questions.
Thank you.
A reminder.
To ask a question if you have not already done. So please press one then zero on your telephone keypad.
Thank you, we will pause a moment to compile the Q&A roster.
And our first question will come from Seaport research partner and the line of Mark Weintraub. Please go ahead.
Thank you good morning.
Question on what Youre seeing in the corrugated box business.
I think you mentioned that.
Retail they were working through elevated inventories at your customers.
Where do you where do you think you might be in that process also any more color on that that comment you made goods to services and Relatedly you talked about flattish volumes in the third quarter, what was that a sequential relative to second quarter was that a year over year reference because I think your.
Second quarter approximate tourists were somewhat lower than your third quarter from a year ago.
Yes, Hey, Mark it's Tim.
Yes, it is sequential but would be down a little bit year over year.
So I mean, it's a good question about time to work off excess inventories and what we're seeing.
I guess, our belief is hearing from customers that we think it's going to take a little bit more time.
There have been some shifts.
More travel less purchase of goods.
Noticed.
Also just.
Unit volume through retail.
People adjust given the high inflation.
Right so.
But it seems like that was.
A fairly quick shift as people are making day to day decisions and so.
Our view is we're in the third quarter.
It's going to be roughly flat from second to third on volume.
Okay and.
He did great on price and mix and just one clarification.
You had been giving us kind of expectations on cost and operations had that been including the one time.
80 million in total or how much of that might have been in your your guidance.
If we know about and we included.
Sometimes things come through just better than expected and its timing I mean, some of it was probably expected not to head until the third quarter and so it happened in the second and this is not going to happen again. So when you think about the one times and you think about 2% and <unk> together I think we're about where we thought we were going to be.
Okay. So it was a mix some of it you were expecting but not all of it is that fair alright, great. Thank you.
This is mark.
Thank you next we go to the Wells Fargo Securities in the line of Gabe <unk>. Please go ahead.
Hey, Mark Ken Good morning, Thanks for taking my question.
One on on Capex I think it came down about $100 million Q from what you were previously expecting.
Curious just kind of given inflation that we're seeing I would expect just maybe a little bit of a natural tendency upwards.
Is this a reflection of anything that youre seeing in the business in terms of willingness to put capital to work being.
Being conservative or are there projects that you just kind of.
And a push to the right maybe to 2023 until you get better and better visibility into the business.
That's a great question Gabe this is mark.
Just any securely.
We're going to actually spend more money.
A fair amount of our capital is.
Investments in our packaging business, which is a new plant and equipment.
And while we're pleased with what we're hearing from our vendors is the backlog for some of that equipment pushed some of our spending.
We do see escalation.
And if we could do everything we wanted to do in the calendar year 'twenty, two we probably be looking at raising our capital, but it's really just an ability to get.
The items, we need purchased it's less about installation labor, it's more about new OEM equipment, which is a big part of our non maintenance capital and most all of it is in the box business.
We'd spend it if we could as a simple way to say it no change in strategy.
No no change in our focus just the ability to get all of that done and account for it in the calendar year 2002.
Alright, Thank you and then.
I guess in terms of end markets within.
Corrugated that you mentioned retailers wanting I guess e-commerce sort of moderating.
Are you seeing anything on the export markets I mean, one of the things that they were kind of keeping an eye out for US is obviously to the extent they're rolling.
Capacity outages over in Europe , because of energy availability indoor costs.
Maybe the export whoever kind of ticks up for you guys anything there.
Yeah. So.
On export I'll talk Paul.
First and then containerboard on Paul as I mentioned in the comments.
<unk> demand fundamentals remain very strong we try to look through.
By region as much we can gauge inventories and of course, we talk to customers and what they are telling us and inventory levels look like there.
Astoria close at the moment, so we expect underlying demand to continue to be strong globally for for fluff pulp.
Certainly supply chain is contributing to that because of the vessel delays are.
Really not much better than they have been for the past several quarters on containerboard.
I think youre referencing Europe , we are going now in the third quarter into a seasonally slower period of time in Europe , we saw solid demand and we saw a price increase.
Through the second quarter.
It may moderate a little bit just in this seasonally slow period, but we don't see any significant underlying weakness there.
Thank you good luck.
Thanks again.
Thank you Ben next we go to the Bank of America and the line of George Staphos. Please go ahead.
Hi, everyone. Good morning, Thanks for all the details and thanks for taking my question guys.
I guess the first question I had obviously.
IP has been spending more understandably on the box network and additional converting you've had mill projects like retail can.
Can you remind us on where in your capital budget.
You think youll need to spend just on fiber lines and recovery boilers. How do you see your fleet there will there be any incremental investment that's required there or not and kind of the related if you will <unk> question.
You were answering Dave's question earlier on on exports, how do you see some of your other domestic markets. In particular, what are you hearing right now from your from your AG and protein customers. What are you seeing <unk>, what's the outlook for next year, given what have been some of the drought conditions that have been discussed and I had one follow on.
Yeah.
So George on <unk> on the capital spending we take a longer term view on capital.
I think what youre talking about.
B, what we characterize as maintenance capital.
Nothing that we're looking at in terms of May.
Major.
Backend of mill types of expansions or additions so.
We've probably been a little bit lower in the past couple of years on maintenance it's.
It's up this year, but we kind of normalizes in that.
Roughly $500 million.
A year range so.
And again on maintenance, we take a five year view and so it does ebb and flow just because of timing.
When equipment need to be taken down and maintain some of that is periodic some of it's on an annual basis, but I wouldn't call out anything exceptional.
Around the capital part and then what was the second part of your question I'm, sorry, just the box markets domestically and in particular.
Probing is protein markets. What are you hearing from customers now and into 'twenty three.
Even drought conditions and what that can mean for amongst other things cattle raising.
Production as a result.
Yes, I think on protein.
We expect poultry to be strong.
Most popular form of protein and given cost increases across all of the protein.
Maybe there is a shift from beef and pork too to poultry. So we think we think generally protein.
It should be okay, poultry should probably be the beneficiary.
For the foreseeable future I think the drought comment.
George is primarily in beef issue because they'll have to process right.
That'll early but it doesn't it doesn't affect the availability as much on things like poultry and affects obviously the price of feed in the cost of those products, but it's the data issue or they will have to pull forward the.
Slaughter, a certain amount into her earlier than they would like.
Thanks, Mark My last one and I'll turn it over so overall I realize you don't want to make this to formal guidance or an algebra class our takeaway from your discussion earlier on the outlook should be that.
We added our numbers right, we're looking at sort of flattish sequential performance and industrial and we kind of a $50 million ish increase in pulp would that be correct and when do you ultimately see on the pulp side. The supply chain is normalizing is that something fourth quarter I realize it is ultimately a who knows.
But when are your context that that should normalize so thanks for that and good luck in the quarter.
Yes, I'd say you're in the ballpark in the way Youre thinking about it George on on supply chains.
I think you I think you had that right two who knows.
One port seems to improve and another port seems to deteriorate.
And we've seen it both on.
Yeah.
The East coast, where it's very important for the fluff pulp business.
West Coast ports have knock on effects for us sometimes but.
Yes, it seems to be just moving port to port in Georgia, Tim is right I mean, we look at it very very closely because of the export posture of our cellulose fibers, we honestly.
Can't see any market improvement.
Calendar year 'twenty, two so we're probably looking into 'twenty three.
Maybe there is some balanced returns to the vessel shipping and for throughput.
But.
Maybe we're wrong, but if we gasoline don't see anything on the horizon as far as we can really look.
Thank you Mark Thank you Tim.
Thank you next we'll go to the line of Mark will be bank of Montreal. Please go ahead.
Thanks, Good morning, Mark Good morning, Tim Good morning.
I wanted to just turn to <unk>.
I get a little specialties for a minute.
Trent unpack getting the cost of capital there because it sounds like first of all if youre out it essentially kind of a three quarter price lag what we saw in the second quarter is probably more indicative of what we would've seen last.
Here in the third quarter.
In terms of kind of net price and I guess I'd like to have you just sort of unpack for us that lags in pricing.
And the things Youre doing to try to improve the business because just look at the pulp prices that are posted right now they're at the high end of our historic range. So I'm just trying to get some comfort in.
Yes, if and when pulp when pulp rolls over that youre actually going to be able to maintain cost of capital returns.
Yes, I think.
The unpacking part of your question the two to three quarter lag as an all in.
Part of that is obviously spot by definition goes up immediately on the placement of an order and then there's different levels of <unk>.
Contracts with customers and when you put it all together.
Announced price of X is actually equal to X two to three quarters later, so we've kind of got.
<unk> got our business are in contracts are in spot and Thats why you see a unique realization schedule for IP that may not look like anybody else's.
And so that's also what provides that dynamic.
The contract piece also provides the resilience on any kind of turnover and pricing.
Just like it slowed it all the way up as far as on the way down. So I think when we have the second half in the books there'll be two quarters in a row at.
Above cost of capital performance are right at cost of capital performance. We've made some structural changes in our go to market strategy regionally on the spot side and just.
Tracks really on the large customer contract side, which will still be in effect and a different pulp market. So we think through a cycle purpose.
Work, we've been doing is to have this business perform at the cost of capital through a normal business cycle. Tim said it is kind of strange language.
We are working and have made tremendous progress we are working to get paid for the value of the absorbing call debt.
Provides any end products and that hasn't always been the case.
Okay, Alright, that's it for my follow on Mark I would just like to.
Follow up on your comments around bolt on M&A and industrial packaging in North America, and Europe I'm just curious.
Would would bolt on rule out sort of a large deal like you were looking at in Europe , three or four years ago.
Yes, that's not that wouldn't be what we would consider bolt on bolt on think about this think about it this way mark in Europe , we have a smaller business $1 billion five in revenue roughly and we've done some single and multiple planned acquisitions to build an integrated network around our new containerboard mill in Madrid, So <unk>.
Natural synergy to an existing part of our business, but we did entering a new market. We entered the Portugal market, where you didn't have anything there before but its integrated to the Madrid mill, so that would be bolt on and in the U S. A much bigger business. So it could be more synergistic with our containerboard and box system, but not transformational.
I think what.
What we've been saying for a while as this is the first time it has been in a position with a balance sheet like we have with a much more streamlined portfolio and to businesses that have a right to win in their respective markets and we're going to run with that strategy. Now there is no need for transformational activity. We went through a lot of that we.
Did some of it and we got a company, we really like right now and now it's about getting it to its full potential.
Okay and is there any way in North America, Mark just to help us a little bit and thinking about sort of regulatory barriers on your growth in the containerboard business.
It's hard to say a lot of time has passed since the last time, we made any meaningful move but there is no real reason, we can't grow our converting and box business and you've seen how we've chosen everyone has seen how we've chosen to grow our our containerboard system to match that box and that's been mostly through organic active.
And so I I don't know the answer to your question because we haven't tested it.
It was an issue back in 2012, where we did get pushed back on how much we were trying to acquire but that was a long time ago, but our focus right. Now honestly is we have enough containerboard for the foreseeable future. We did the Riverdale mill, we've got more opportunity in our current fleet to make more containerboard.
It's really about making sure we have the box business configured both with assets and with people and we're short on both of those right now to be able to actually grow at a minimum with the market some of Thats regional but on average we don't have enough of either to really grow with a 2% Mark.
And that's what we want to do we have the containerboard to do that.
Okay Fair enough I'll turn it over thank you Mark.
Thank you Ben next from Deutsche Bank Karl White. Please go ahead.
Hey, good morning, Thanks for taking the question.
<unk> packaging in North America, you talked about some of the labor challenges, but I'm just curious how you would characterize your overall network from an efficiency standpoint.
No versus maybe a year ago, you've had a lot of headwinds over the past year from disruption.
Is there still more to go on that front in terms of making the network more efficient that could produce better margins.
Lower marginal cost of production.
And Kyle it's a great question, we are running very well right now the issues. We had in the mill system last year with the interruptions at the beginning of the year and the end of the year and our low inventories at our box plants, we've largely put all of that behind us. The box plants are running very well from a all the efficiency metrics like throughput.
The margin we generate per hour of production time, where we are challenged as in in certain regions. We just don't have enough people. So we ended up making that up with over time, which is not a long term sustainable solution of certain ideas, but not too much. So we need some plants that are not running as many.
These shifts to zinc is they could be running for the demand that's what people come in and then in certain parts of the country Upper Midwest.
And in the southwest, Texas, we need more physical.
Assets as well as people and that's what we're working on the assets through our Capex investment plan and on the people side.
Working very hard to hire and retain new employees. So that we can run on the assets we have in a more sustainable way not not just working every weekend and run them to the order book that we have so efficiencies fine the total.
Available capacity, we have with equipment and people is not where we want it to be.
Got it and then the Georgetown mill you'd have that supply agreement with Saddam, though that can be terminated here in the next six months or so any kind of early thoughts about that the supply agreement.
No not right now.
I get confused.
I think Georgetown, maybe a little bit longer I think riverdale, it's a little bit shorter but.
But yes, there is nothing new to report at this moment.
Sounds good I'll turn it over.
Thank you and next we go to Keybank and the line of Adam Josephson. Please go ahead.
Mark and Tim Good morning, Thanks, very much hope you're well.
For either of you can you help me with what your box shipment expectations were heading into the quarter compared to the down three 6% that you experienced in <unk> can.
Can you walk us through the progression of demand trends during the quarter and then into July and how that's informing your expectation that shipments excluding the one extra shipping day will be flattish sequentially.
Yes, I think.
Obviously, we thought they were going to be a little bit stronger as we were going through the quarter. It seem to the adjustment seem to take place.
I would say.
The second half of May and a little bit into June I think it's a reaction to the things we talked about earlier inflation is real people are making choices.
And there as we've read and heard and heard from our customers. There is a lot of inventory and pipelines that needs to be worked off so but it seemed to stabilize and it seems to stay stable.
Around the same level as we go through July so our view is.
Sequentially.
B.
Roughly flat quarter on quarter, obviously down a little bit versus last year, but stable quarter on quarter.
Alright, I appreciate that but just the inflation obviously these pressures haven't gone away at all in fact, if anything.
All of these CPG companies are just raising prices, even more everyone's raising prices more it seems like.
So and obviously Walmart just guy.
Got it down and said they still have too much inventory of general merchandise because people are under so much pressure the cost of food and consumables is up so much so.
Those pressures don't seem to be abating in the lease so I guess why.
Why would box demand stabilize now.
Well, we look at our mix of business and we talked to our customers and then we have the experience of how we ended the quarter and how it has continued in July and so based on that.
We have a view that through the third quarter and Theres always some seasonal puts and takes but we have a view that.
Within a margin of error it should be roughly flat with what we had in the second quarter.
Got it thank you Tim.
Thank you the next truest securities like Rosslyn. Please go ahead.
Thanks, Mark and thanks for taking the questions.
Just wanted to get a sense you mentioned finish the implementation of the March price increase what are what's driving that.
Faster implementation I think it's consistent with the prior increases that were implemented this just.
<unk>.
Yes.
The security of supply and people one of you.
For the longest time wanted to make sure they had boxes.
Just making sure that.
There is no disruption to their operations so.
We.
The first price first several price increases were the fastest we've seen on any historical comparison and this last one seems to be going at the same pace.
By the end of the third quarter, we will have most of it done theres, a little bit of residue or residual that falls over into the fourth quarter, but.
So far.
It's continuing as the prior increases.
Got it.
And then just one follow up from some of the prior questions on your commentary regarding some inventory destocking.
And I realize there are puts and takes and some of which will make the durable items versus non durable, but ultimately you.
Do you guys see some benefits from Omnichannel as well, so maybe youre getting some wins from increase maybe in store activity. So can you talk about any shifts that you may be making your own data.
The decline in e-commerce in terms of the markets you mentioned.
I'm sorry, you broke up just a little bit could you just repeat the last part of that please Jim.
No problem at all I'm, just wondering if you're making any shifts in your business.
To account for some of the weakness that youre seeing in your end markets.
I think that there is.
There are puts and takes with some of this inventory destocking durable items versus non durable. So I'm wondering if you're making any shifts in Europe as a tool to offset.
That weakness at the capitalized possibly growth areas.
Yes.
Great.
On the durables is really a very small part of our mix.
We're always looking we manage a very active <unk> process and we're always looking at how we.
Our system I would say that.
Demand softened a little bit as we went through the second quarter.
And our view is for it to be stable quarter to quarter.
Apply chain constraints are real and it's extending supply chains and so.
Part of the effort over the past years with those difficulties is to get inventories back to a sufficient level.
Which may be elevated to historical levels I mean, we're looking at 456 days additional.
Time to move product between mills and box plants. So.
It's very dynamic at the moment and we're just trying to make sure that.
The inventory levels, we have are sufficient for this type of service requirements that we have to our customers.
Thank you good luck in the quarter.
Yes.
Thank you Ben next from Jefferies. We'll go to the line of Phil.
Go ahead.
Hey, guys, Tim I appreciate you highlighting the strength of your balance sheet.
Free cash flow profile of your business.
Just curious from a returning cash back to shareholders, which you guys have done a great job. This year. How are you guys kind of balancing between stock buybacks, just given where your stock is and then growing that dividend and I guess.
We kind of look out to 'twenty two 'twenty three if there is a recession your level of confidence of maintaining your dividend through a potential downturn.
Yes, we want the dividend to be sustainable that is first and foremost.
Attractive, but also sustainable so we take a look at it we're just starting the process now and we look at it on an ongoing basis, but in more depth.
Over the summer and we usually if there are any changes or if it remains the same.
We communicate that.
And the third and fourth quarter.
I think right now.
That's work to be done in the conversation with our board and our board is very active in terms of how we how we think through total capital allocation.
So there'll be more to come on that later I think we feel good about share repurchases, we've tried to be very opportunistic.
And yes, so powerful number that we've returned so far through six months. This year, Phil if I could just add to Tim's comments, we really haven't changed.
The guidelines for our dividend after the.
Changes in our portfolio, we still target the 40 or 50% of free cash flow.
And we think we think that's the right amount, we continuously evaluate that with our board, we listen to what investors have to say about it what's different in our capital allocation of course is the ability to consistently at the right value.
Have a share repurchase flow of cash back to shareholders that's not.
Episodic it can be more consistent when it makes sense of cash is there and Tim.
Tim talked about.
In his prepared remarks around our ability to operate our system in different economic conditions are wide open when it needs to be less and wide open and shedding marginal costs and so when we think about potential downturn there's always.
A question of how long and how deep, but just let's just say a potential normal downturn, we have no concerns about the cash generation of dividend or any of the real important capital allocation, even capex I mean, we've not been in a position to just say, we're going to go and we're going to do what's right for the long term of the company even in a slow down in <unk>.
We feel very good about that right now.
Got it that's great color.
There are.
I don't know if we are officially in a recession.
What will come but.
There are counter cyclical benefits that offset.
Sometimes.
Downdrafts in economic activity.
Both for earnings and cash when you think about input cost on the earnings side and you think about.
Working capital on the cash side.
Super and then Mark I mean, your point about how do you guys have kind of retool the footprint and manage that fixed cost variable cost dynamic.
As important I was actually my next question.
So if you had to take economic downtime.
To keep the market balance how should we think about that flow through I mean, I think I have a pretty dated number but I thought it was roughly about $150 per ton.
Range, if you had to take downtime to kind of keep things balanced, but it gave us an update that'd be super helpful.
I think that's still a reasonably good number I mean, there's obviously some some noise in the variable cost side of given all the inflation, but.
I think thats, probably still a good number from a modeling a planning standpoint, it obviously won't be exactly that but it's in the neighborhood. Okay. Super. Thank you I appreciate the color.
Yes.
Thank you and our last question will come from UBS and the line of Cleve Rueckert. Please go ahead.
Hey, great. Good morning, everybody. Thanks for taking my questions I appreciate it.
I don't want to split hairs here, but I did notice on the margins in industrial packaging. It looks like there was a slight change in the slides on the timing of the 20% target 20% plus.
You're laying out there you don't seem to be highlighted in the second half any more first of all I had.
Wondering if that was intentional and you know if it was given the pricing and the confidence in that.
Build better IP and should we take that to mean that the ongoing cost inflation, resulting in a little bit more uncertainty on the margin.
Yes, I think thats it.
We had more input cost.
Pressure in the second quarter, and we see that continuing at a slower pace, but continuing in the third we think it does stabilize level out.
As we go through the second half of the year, but I think it's just it's not it's.
There's not anything more than just timing based on Swift movement of inputs.
It takes a little bit longer to recover.
As we continue to implement the price increase.
Okay that makes sense. Thanks for that clarity and then I guess just following up quickly on that on the costs.
In the prepared materials distribution and stabilize at elevated levels.
I think in the quarterly bridge, we've talked about another 100 to 100 million of sequential headwinds going into Q3, I mean, just to clarify that ultimately.
We're thinking about it right now is that when we're thinking about the bridge from Q3 to Q4 is the input cost.
Flat, which.
I think you're sort of alluding to would just.
Clarify that and then it just be curious if there are any areas, where you're starting to see cost relief.
Not significant amounts of costs, releasing some things flatten out.
And moderate just a little bit.
As we went through the second quarter and now that were in July .
I think the way that you've framed it up is how we're thinking about it we see some more.
Input cost pressure at a slower rate of increase in the third quarter than we saw in the second and then I think as we go through.
Late third quarter through the fourth quarter, we see more stabilization at these elevated levels.
Yeah.
Alright, Thank you very much I appreciate it.
Okay.
Then I will now turn the call over to chairman and CEO , Mark Sutton for closing remarks.
Thank you operator.
Thank you for being with US today as you can tell from our remarks and some of the Q&A, we're very confident and optimistic about the future of IP. We have reaffirmed our 2022 earnings outlook, we're making strong progress we have a lot of momentum as we focus on building a better IP will be at the upper end of that.
Savings and earnings commitment for this year and will be.
Well on our way into the targets, we set for 'twenty three on that initiative.
We've got one.
Balance sheet and overall financial strength of the company that we haven't had in a long time that gives us a lot of flexibility. It also gives us a lot of.
<unk> ability to manage through the different economic scenarios that everybody's kind of trying to predict and planned for right. Now. We think we are ready for just about anything that can come and we're going to perform very well through through any scenario that we have in front of us.
Think this all leads to our ability to really break through and accelerate value creation for our shareowners with a strong company with a great employee team and the right and the ability to invest in the right ways.
Without regard for.
Any kind of temporary economic changes really positions us very well. So again I. Thank you for your interest in international paper and we look forward to speaking with you again at the next quarterly update.
Thank you for your participation and international paper's third quarter earnings call you may now disconnect.
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