Q1 2023 International Paper Co Earnings Call

April 27, 2023

23 earnings call all lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press. One then zero on your telephone keypad to withdraw a question. Please press. One then zero, we do ask that you limit yourself to one question and one follow up question. It is now my pleasure.

Or to turn the call over to Mark Nelson, Vice President Investor Relations, Sir the floor is yours.

Thank you Leo good morning, and thank you for joining international paper's first quarter 2023 earnings call.

Speakers. This morning are Mark Sutton, Chairman, and Chief Executive Officer, and Tim Nicholls, Senior Vice President and Chief Financial Officer.

Important information at the beginning of our presentation on slide two including certain legal disclaimers.

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.

Conciliation of those figures to U S. GAAP financial measures is available on our website.

Our website also contains copies of the first quarter earnings press release and today's presentation slides.

I'll now turn the call over to Mark Sutton.

Thank you Mark and good morning, everyone.

We will begin our discussion on slide three where I will touch on our first quarter results.

Yes.

Let me begin the discussion by saying, how proud and appreciative I am of all the hard work of our employees and for our strong customer relationships as we manage.

Dynamic and challenging macro environment.

Looking at our performance International paper delivered $65 million of year over year incremental earnings benefits from our building a better IP initiatives.

And our mill system continued to perform very well as we successfully executed our highest planned maintenance outage quarter of the year and continue to optimize our system, while taking care of our customers.

On capital allocation, we returned $319 million to shareowners during the quarter.

<unk> $157 million of share repurchases.

We continue to navigate a challenging demand environment as our customers and the broader supply chain work through elevated inventories of their products.

We also believe consumer priorities remain focused on services as well as non discretionary goods, which has been influenced by inflationary pressures rising interest rates and the pull forward of goods during the pandemic.

Margins were also under pressure from lower prices across our portfolio, partially offset by additional benefits from lower input cost.

Yes.

Now I'll turn to slide four and talk more about the current operating environment as well as our ongoing commitments going forward.

As we entered the year, we recognized there were macro and economic uncertainties ahead of us and our businesses are not immune to these risks.

These macro trends shifted in the quarter, resulting in a weaker than expected demand environment through the first part of this year.

Much of this was influenced by greater inventory destocking across the whole supply chain weaker export markets and unfavorable weather impacts on the fresh produce segment.

In addition, lower prices across our portfolio today have put additional pressure on margins relative to what we expected in our full year outlook.

Although we believe most of the Destocking through the retail channel has been resolved.

The Destocking continues throughout the rest of the supply chain, especially with manufacturers and many of our customers.

We believe this will run its course through the second quarter, resulting in an improved demand environment in the second half of the year.

I want to reinforce that our teams at international paper know what it takes to successfully manage through a business cycle by leveraging a wide range of options and capabilities across our large system of mills Boston.

Yeah.

Buys our costs, while continuing to take care of our customers needs.

We demonstrated our ability to do this and prior business cycles.

And our ongoing commitment is to continue operating our company the IC way.

We remain focused on our key priorities are taking care of our employees, our customers and maximizing value for our shareowners.

This includes preserving our strong financial foundation and maintaining our dividend.

Before I turn it over to Tim I also want to provide an update on Illinois.

We have made good progress towards closing the sale of our <unk> investment.

Buyers receive an important required approval from the Russian subcommission overseeing exits by foreign companies, but we are still awaiting the approval of the Russian competition authority.

We're optimistic that this final required approval will be received soon and we plan to close shortly thereafter.

I will now turn it over to Tim who will provide more details about our first quarter performance as well as our outlook Tim.

Thank you Mark turning to our first quarter key financials on slide five.

Revenue was down slightly versus prior periods, while operating earnings per share came in above prior year and better than the outlook, we provided last quarter operating.

Operating margins in the quarter were impacted by weaker demand and seasonally high planned maintenance outages.

Free cash flow for the first quarter included a use of cash totaling $193 million for the final settlement with the IRS related to our timber monetization actions, we highlighted enduring.

Our last earnings call.

The settlement allowed us to further derisk our balance sheet.

Also about 31% of our annual capital expenditures occurred in the first quarter.

Moving to the first quarter sequential earnings bridge on slide six.

First quarter operating earnings per share were 53 cents as compared to 87 for the fourth quarter.

Price and mix was lower by <unk> 10 per share due to the index movements across our portfolio.

Lower export sales prices and unfavorable product mix in our global cellulose fibers business as a result of lower absorbent pulp shortly.

Volume was flat sequentially as weaker demand and customer inventory destocking across both businesses was offset by four additional shipping days in our North American industrial packaging business and.

In our global cellulose fibers business in the first quarter was also lower due to the Chinese new year.

In operations and costs, our mills ran very well.

However quarter over quarter was unfavorable because the fourth quarter benefited from favorable onetime items totaling $71 million.

Or <unk> 15 per share related to lower employee benefit cost workers comp expenses and medical claims.

In addition, our cellulose fibers business was impacted by higher economic downtime.

Due to the lower demand environment I mentioned earlier.

Maintenance outages were higher in the first quarter as planned and we saw significant relief from input cost.

Which were $134 million or <unk> 28 per share lower than the first quarter, primarily driven by lower energy and OCC cost.

Corporate and other items was impacted by FX and timing of spend partially offset by a lower tax expense.

Turning to the segments and starting with industrial packaging on slide seven.

Price and mix was lower due to index movements and lower export prices.

This was partially offset by benefits from commercial mix initiatives focused on margin improvement.

Sequentially volume benefited from four additional shipping days, however demand for packaging weakened in March across most channels and segments from lower consumer demand and ongoing destocking across the supply chain.

Even in this dynamic demand environment International paper is well positioned due to our diverse portfolio of products and services and our strategic relationships.

With a large number of national and local customers across a broad range of attractive segments.

Sequentially operating costs were impacted by the non repeat of approximately $57 million of favorable one time items I mentioned earlier.

As well as timing of spend.

Overall, our mill system ran very well the lower demand environment impacted operations and cost in the quarter.

As we adjusted our system to align our production with customer demand.

These actions resulted in approximately 421000 tons of economic downtime across the system.

Input costs were significantly lower and improved earnings by $105 million sequentially.

Almost two thirds of the benefit was from lower energy costs in North America and Europe .

And the remainder was primarily from lower OCC and freight cost.

Overall, we continue to face very elevated supply chain cost as well as the impact from high inflation on materials and services during the past couple of years.

In a lower demand environment, we are running at full capacity. We believe there is a large opportunity to further optimize our system.

And take out high marginal cost.

This remains a key lever in 2023.

Turning to slide eight we thought it would be helpful to share some additional perspective on underlying segment trends for our corrugated packaging business.

As shown on the previous slide our U S box shipments were down eight 5% year over year in the first quarter and down almost 12% year over year in the month of March.

We saw a demand decline across all end use segments on a year over year basis and experienced another demand shift in March that impacted all segments, except for E Commerce.

Furthermore, demand declines were more pronounced in segments that generally are more discretionary in nature as consumers have to make choices, while dealing with high inflation and rising interest rates.

The yellow indicators represent segments, where the demand decline was less than our overall average of eight 5%.

And the Red indicators represent declines that were greater than the average decline.

For example, processed food and protein we're more resilient.

Down low to mid single digits as consumers focus on essentials and value and poultry serves as a low cost consumer staples.

Fresh produce was impacted by poor weather conditions on the West Coast and also in Florida.

On the other side of the spectrum segments like durables and other non durable consumer goods are.

There are more discretionary in nature, along with shipping and distribution.

These segments came under the most pressure with declines in the mid teens. These.

These segments also tend to be more affected by the inventory restocking efforts across the longer supply chains.

E Commerce was down mid single digits versus last year, but showed more resilience through the quarter and is still up 50% from pre pandemic levels.

Based on feedback from our customers. We believe the majority of retailer inventory Destocking has been completed through the first quarter.

However, manufacturers are still reducing inventories as a result of lower demand levels improved supply chain velocity and focus on working capital given higher interest rates.

We also believe the majority of Destocking will be completed in the first half of the year and considering our performance in April and looking at order backlogs, we expect sequentially higher volume in the second quarter.

Despite these near term headwinds, we understand the critical role of corrugated packaging plays in bringing in central products to consumers.

I believe that IP is well positioned to grow with our customers over the long term.

Moving to cellulose fibers on slide nine.

Taking a look at our first quarter performance price and mix was relatively flat sequentially.

Our strategic initiative related to contract restructuring generated significant earnings improvement in the first quarter.

However, this was offset by a less favorable mix due to lower volumes in the quarter and a higher percentage of commodity grades as well as the unfavorable impact from index movements.

Volume was lower to customer.

Due to customer inventory Destocking in response to improvements in the supply chain velocity from less port congestion and improve vessel reliability and also impacted by the Chinese new year.

Feedback from our customers suggests the majority of Destocking will be completed in the second quarter.

That said, we believe fluff demand will continue to grow over the long term. This is due to the central role that absorbed on personal care products play in meeting consumer needs.

The lower demand environment significantly impacted operations and costs in the first quarter as we adjusted our system to align our production with our customer demand.

These actions resulted in approximately 130000 tons of economic downtime.

Across the system and accounted for approximately two thirds of the ops and cost variance.

Sequentially operating costs were also impacted by inflationary pressures as well as the non repeat of approximately $14 million of favorable one time items in the fourth quarter that I mentioned earlier.

Planned maintenance outages were higher by $11 million sequentially and represents one of the highest outage quarters of the year in.

In addition input costs were lower by $29 million due to lower energy and fiber costs.

Turning to slide 10, our global cellulose fibers business continues to make progress executing our strategy to deliver value, creating returns over the business cycle.

Business increased earnings by approximately $100 million.

<unk> 2022, and is focused on driving incremental earnings growth. This year, despite operating in a more challenging macro environment.

Our teams successfully deployed a commercial strategy focused on building strategic relationships with key global and regional customers and aligning the most attractive regions and segments.

In the fourth quarter, we finalized our fluff pulp contract negotiations, which is contributing meaningful commercial benefits this year.

Going forward, we believe there are significant opportunities to improve our cost to serve by reducing supply chain costs, which have increased significantly during the past couple of years.

We expect to see these benefits.

And we will start to show up in our second quarter outlook.

We are focused on creating value for our customers by delivering products that meet their stringent performance and product safety standards and deliver.

<unk> innovative value.

In addition, we are driving structural margin improvement by insurers, ensuring we get paid for the value we provide.

We believe this is reflected in the premium we earned for fluff pulp over commodity grades which has expanded over time.

We are committed to building on this momentum and expect to drive additional earnings growth going forward.

Turning to slide 11, I'd like to update you on the building a better IP initiatives, we're making solid progress and delivered $65 million of year over year incremental earnings improvement in.

In the first quarter.

Our lean effectiveness initiative was mostly completed early in the program generating $110 million of cost savings since we began our building a better IP program.

By streamlining our corporate and staff functions to realign with a more simplified portfolio.

We more than offset 100% of the dis synergies from the printing papers spinoff.

The most significant.

<unk> driver of the year over year results with strategy acceleration as we delivered profitable growth through commercial and investment excellence.

As I mentioned earlier, we generated solid earnings growth.

In our global cellulose fibers business on a path to deliver a value creating returns.

We are also focused on profitably growing our industrial packaging business by improving margins and investing for the long term.

Process optimization initiatives.

Has the potential to reduce costs across areas, such as maintenance and reliability distribution and logistics and sourcing as we leverage advanced technology and data analytics.

We believe these initiatives will deliver meaningful benefits going forward as we finished implementing new capabilities across our business.

Turning to slide 12, I want to take a moment to update you on our capital allocation actions.

As Mark highlighted earlier earlier, we have a very strong balance sheet, which we will preserve because we believe it is core to our capital allocation framework.

Our 2022 year end leverage was two one times on a Moody's basis, which is below our target range of $2 five to two eight times.

Looking ahead, we have limited medium term debt maturities and finally, even in this environment the risk mitigation strategies, we've taken help ensure our pension plan remains fully funded.

Turning cash to shareholders is a meaningful part of our capital allocation framework and.

In the first quarter, we returned $319 million to shareholders.

Including $157 million through share repurchases, which represents a $4 3 million shares or about one 2% of shares outstanding.

At the end of the quarter, our total authorization was approximately $3 billion.

Going forward, we're committed to returning cash through maintaining our dividend and through opportunistic share repurchases.

Investment excellence is essential to growing earnings and cash generation, we invested $341 million in our businesses in the first quarter.

Which includes funding for cost reduction projects with attractive returns.

For strategic projects to build out capabilities in our box system.

Going forward, we plan to make additional investments across our box system to support long term profitable growth and.

And we will remain disciplined and selective when assessing M&A opportunities.

Turning to slide 13, and our second quarter outlook I'll start with industrial packaging.

We expect price and mix to decrease earnings by $110 million.

Mainly as a result of prior index movement in North America, and lower average export prices based on declines in the first quarter.

Volume is expected to increase earnings by $30 million due to the normal seasonal increase in daily shipments in North America.

Offsetting one less shipping day.

Sure.

Operations and costs are expected to decrease earnings by $35 million due to the timing of spending.

Maintenance outage expense is expected to decrease by $10 million.

Second quarter should represent approximately 30% of the total planned outage cost in 2023.

And through the first half of the year, we will have completed about 70% of expected annual outages.

The second quarter includes approximately $19 million of spend associated with the Riverdale mill printing papers outage. This cost will be fully recovered as part of the charges to <unk> over the course of the year.

And lastly input costs are expected to decrease by $30 million.

From lower average cost for energy and freight.

Switching to global cellulose fibers, we expect price and mix to decrease earnings by $45 million as a result of prior index movements.

Volume is expected to increase earnings by $5 million, primarily based on seasonally higher demand.

Operations and costs are expected to increase earnings by $40 million due to lower supply chain costs, and lower unabsorbed fixed costs from higher volume.

Maintenance outage expense is expected to decrease by $33 million and lastly input costs are expected to decrease by $15 million, mostly due to lower energy and fiber costs.

Moving to our full year outlook on slide 14.

As Mark discussed earlier as we entered the year. We recognize there are macro economic uncertainties ahead of us and that our businesses are not immune to these risks.

The macro trends have shifted resulting in weaker than expected demand for our products and price reductions across our portfolio through the first quarter.

Including prior index changes that will be implemented over the remainder of the year.

As a reminder, our previous outlook represented price indexes at that time.

We are now projecting full year 2023, EBITDA for the company to be in the range of $2 three to $2 5 billion.

Continue to optimize our system by reducing high marginal cost.

And driving additional benefits from our building a better IP initiatives.

This includes delivered delivering continued earnings growth in our global cellulose fibers business despite cycle headwinds.

I would also note that our outlook includes only the impact from published.

Price changes today.

Free cash flow is expected to be $800 million to $900 million, which includes a one time tax payment of $193 million in the first quarter related to our timber monetization settlement.

In addition to free cash flow. We also expect to receive approximately $500 million of cash proceeds from the <unk> sale.

For 2023, we are targeting capex of $1 to $1 2 billion.

With increased investments in our U S box system to build additional capabilities.

That position us for long term profitable growth with our customers.

We will also focus on high return cost reduction projects across our system.

With that I'll turn it back over to Mark.

Thanks, Tim No I'm going to turn to slide 15.

I want to reinforce my confidence in the resiliency of IP and our ability to navigate through this dynamic environment from a position of strength.

As I mentioned earlier, our teams at international paper mill or it takes to successfully manage through a business cycle by leveraging a wide range of options and capabilities across our large system of neil's box plants and supply chain to optimize our cost while continuing to take care of our customers.

Also we are well positioned due to our diverse portfolio of products and services and our strategic relationships with a large number of national and local customers across a broad range of attractive end use segments.

Finally, we have significantly enhanced our financial strength and flexibility.

The strong foundation that we have built makes IP well positioned for success across a wide spectrum of economic environments and to deliver profitable growth over the long term.

With that we're going to move to Q&A I'd like to note that I've invited our senior business leaders to join me for this portion of the call given the dynamic environment. We're in I thought it would be helpful. For you to hear some additional perspective from these leaders.

So operator, we are ready to go to questions.

Thank you, ladies and gentlemen, if you would like to ask a question simply press one zero on your telephone keypad. If you would like to withdraw a question press one zero, we do ask that you limit yourself to one question and one follow up question.

One moment please.

Our first question comes from the line of Anthony Pettinari with Citi. Please go ahead.

Hi, good morning.

Good morning, Anthony.

Hey, Mark Tim you talked about.

In global cellulose fibers earnings growth this year.

Assuming the list prices that have been published I guess sense of.

Today.

What gives you confidence that we won't either.

Further meaningful deterioration in fluff prices or the <unk>.

Confidence that you have the offsets like the commercial initiatives to kind of.

Offset any further deterioration I'm just wondering if you can give us kind of any sense. There and then if you can kind of remind us the lag.

From a price change.

The pulp index too.

Your contracts in earnings.

Okay, Great question, Anthony I'm going to take the first part of that and then I'm going to ask clay Alice who leads our global cellulose fibers business to give you a little perspective on some of the changes we made I mean, the source of our confidence is we've really changed the way we go to market and as we explained many times during this contract portion which is generating significant earnings.

Uplift and the contract large global multinational customer base. There is a portion of our business that is open market.

Thats traded more monthly or on a shorter term less contractual. That's also absorptions. We are a specialty business that is not tracking exactly those markets and then the last piece, which is the most volatile we still had exposure to market pulp, which is where a lot of the pricing issues.

It hit the business and will likely hit the business. So if we focus on the core that's where our confidence is around the absorbent strategic customers in the profit improvement.

And the changes we made really in the last 18 months that are coming to fruition as far as the flow through and a little bit more about how we see the year.

Happening Theres a story similar to what I described in my prepared remarks, and what Tim described with Destocking, and where we think demand real demand from the end use customers kind of go on claim I'd ask you to maybe add some color to that.

Sure Marc Anthony Good question just to hit the lag time that you mentioned.

Around a quarter, if you think about our index pricing just take around a quarter lag.

Sure.

And around what.

It gives us confidence I think mark was hitting on is there are end use demand of absorbent hygiene products, we see our customers see us as still solid I was in Geneva last week at our Index Conference, where we had many of our customers talked to many of our large global and also.

All the way to some small regional and across the board. Its the same outlook on what consumers are doing in this space on assortment is.

This is good and the outlook is strong and we think about historical levels of growth.

This inventory Destocking is the story is what's happened it's certainly.

More than we expected a little longer and deeper we do expect it to come mostly to an end in the second quarter.

So second half gives us confidence returning to normal more normal volumes improve.

Improved mix and then also the economic downtime that we're experiencing in the first half should largely be gone by then and we expect to be able to drive.

<unk> growth even know for last year.

Okay, that's very helpful.

And then.

Switching to industrial packaging, you talked about confidence that Destocking could run its course in the second quarter by the end of the second quarter I guess, that's a comment on the domestic market I'm wondering when you think about the export channel, which I think you indicated remains weak is it possible to think about sort of where customer inventories are there.

Is there any sort of light at the end of the tunnel or regions that are may be improving or maybe getting worse I don't know if theres any general comments there yes, no. That's a great question Anthony you're right. Both came in on his prepared comments, we're primarily focused on the largest market. We're in which is North America.

Jane royalties here Jay runs, our global containerboard business as well as in EMEA.

EMEA packaging business and I think Jay has been working very feverishly with the teams to try to understand just that so Jay do you want to comment a bit on Anthonys quest.

Question about export markets.

On U S phenomenon, Destocking and demand sure Marc Hi, Anthony.

So yes, I think when you look at the export channel its been and remains particularly weak.

We've seen very low demand for the last several months due to a lot of different factors, whether it's geopolitical high inventory levels low consumer activity.

As it relates to inflation and then also whether for fruit and vegetable goodness has been.

Cooperating really around the globe the U S Europe , even in places like Morocco.

We are seeing inventory levels, improving and we can start to see some stabilization there.

Terms of any signs of improvement I think those.

A few and far between maybe a little bit in Latin America, which is one of the markets. We serve but these rebound in these markets will rebound at some point.

Our positions across Europe , Latin America Asia. These are with customers, who really value Kraft linerboard heavily oriented to fruit and vegetable segments.

And those are going to grow with consumer activity and consumption over time, so we feel good about the future, but but certainly in this moment, it's particularly weak and that's putting pressure on both demand as well as pricing.

Okay. That's very helpful I'll turn it over.

And our next question is from Matthew Mckellar with RBC capital markets. Please go ahead.

Yes, thanks, very much I was wonder if you could add a little bit of color in terms of what youre seeing in demand in the industrial packaging business. The third Q2, maybe compared to both March in Q1 as a whole.

And particularly thinking about your different customer segments, and where youre seeing areas of relative strength and weakness.

That's a great question. Matthew This is mark I mean, we look at demand in two components. There is the final end use consumer.

I think we termed out our marketers turn that organic demand and then there is the demand ahead of that and the manufacturers in the supply chain ahead of the consumer those manufacturers are really our customers and then when you break it down by segment, Tim had that that colorful chart, where you look at the broad segments, but Tom <unk>, who leads our north American box.

<unk> is here and I would ask him to give some insight on your question about how we see it going forward, but gives us confidence on our comments about.

The Destocking piece and then maybe some some segment comments, Tony Thanks, Mark and good morning Matthew.

Yeah.

We exited or entered the second quarter very strong relative to March. So we've got good momentum moving from March to April you could think about shipments being up.

Maybe 5% to 6% and our backlogs are actually.

Better than that so we see that almost double digit improvement in backlog. So I think that indicates.

How we thought about Destocking is it's not going to go away immediately.

It is going to transition through the second quarter, because as Mark mentioned that Tim mentioned.

Current segments have different levels of destocking that theyre, having to work through it.

It's not a uniform everyone has too much inventory.

Depends on the segmented perishable goods or something like that.

Our confidence in understanding destocking.

We triangulate between macro data.

A lot of customer conversations about what theyre seeing in the near term as.

As well as our experience in these segments over time, and how they're growing and how we understand their supply chain to work.

And on a positive sense all of those point us in the same direction as this plays out through the second quarter. Obviously, there is a component of that that's demand dependent but in.

In large part we feel good about the momentum from where the box business is headed.

Great. Thanks Thats helpful.

And then shifting over can you give us a sense of how youre thinking about share repurchases here should we continue to expect them to sort of trend in line with Q4, and Q1 levels or do you maybe see more limited room for repurchases given the downward revision to free cash flow look or Steven accelerate repurchases, given where the shares are trading.

Hey, Matthew it's Tim.

So I would just step back from the specific on share repurchases and say I think youre familiar with our capital allocation framework and we take that into consideration across all the uses of cash and everything that we do as Mark said.

Starting with starting with a strong balance sheet. It gives us tremendous financial flexibility maintaining the dividend is a complete commitment.

We target opportunistic share repurchases. So we're costco when we're looking at the environment and in any moment in time, we're making.

Decisions around where is the best place to deploy deploy cash for value creation and maximization. So nothing's going to change in terms of how we think about that framework through the cycle with all parts of the cycle that comes into consideration.

Okay. Thanks, I'll turn it back.

And our next question is from Gabriel <unk> with Wells Fargo Securities. Please go ahead.

Mark Tim Good morning, Thanks for taking my question.

Hi, I wanted to revisit I think tim's prepared remarks on slide seven.

I want to make sure I heard you wanted to hear which was I think you talked about facing higher supply chain costs, and then sort of the current low environment there was.

I think Tim your words were further opportunity to optimize the system.

I'm, assuming that means take continue to take out variable cost of the system.

Has there been sort of a change.

Change in philosophy and thinking about.

On your mill system or maybe the box system overall, where you can make some permanent adjustments no you had it right I mean, we're talking about how we run the system, we have as efficiently as possible and when you are taking.

This amount of downtime.

We're constantly trying to optimize.

On the marginal costs and get out the high marginal cost and so it's something that we started with.

While we started years ago, but more recently, we started looking at marginal cost.

In the second half of last year and it continued in the first half of this year and just given the dramatic nature and shift in demand and the way we've responded.

It's taken a little bit more time than normal, but we're starting to see how it plays through and not only in inputs.

By the highest cost inputs, both now and in the transportation as well so it's a real focus on just getting out as much cost as possible, yes, Gabe sometimes this is mark sometimes we get and we may get it later in the call. We get a question about would we consider changing the way we operate in lower demand environment versus the <unk>.

Our approach to.

Running most of our system at different levels of output instead of running part and not running part and we evaluate that I mean really almost on a continuous basis.

Depending on what's happening as Tim described the supply chain environment. We're in and then the cost gradient. We have at most of the mills on fiber in OCC and other inputs. There is huge savings for eliminating the high marginal cost across.

17 different mills and you can imagine if you decided to.

Temporarily close one or two of them and you have to add back all of that marginal cost at the others because in theory, they're going to run full and then depending on geography and logistics you end up with no net savings. So we are continuing to look at that we have gotten I didn't think we could get a lot.

Better, but our teams have gotten better at marginal cost takeout across system is running.

Much lower than full capacity, but we don't take anything off the table in terms of figuring out the best way to operate.

For the quarter ahead or the two quarters ahead with the best information, we have about the demand signal, but it's really it's really.

And optimization of the total cost.

<unk> added the value and that marginal cost reduction is really powerful.

Thank you for that and then I guess.

A little bit more short term in nature here, you talked about input costs being $30 million favorable in industrial packaging.

I suspect that an element of that is maybe lower natural gas and do you have an explicit assumption for kind of OCC hovering, where we are today.

And I sort of ask the question because one of your peers talked about.

Pretty healthy.

Real price increases that came into effect April one I'm curious if that's something that that impact you and then sort of for the implied second half guidance.

Is there anything explicit in there that you would instruct us towards.

In terms of underlying assumptions for some of your bigger inputs, whether it's Tom.

Again, Virgin fiber recycled fiber or energy.

Yes, So hi, it's Jim again.

I think the headline is we're not.

Second quarter is going to be better it depends on.

Which category of input costs that you're talking about on natural gas.

Pretty much followed the strip there is some distribution charges and things like that that impacted but the movement is.

Very similar and so you can see how that plays out on OCC.

We have a modest and we believe there could be a modest increase over time, but the whole environment is so fluid and dynamic is going to depend on how it plays out over this quarter and as we go into the third quarter.

Chemicals for us are getting a little bit better and transportation I don't know the reference you mentioned on the contract these contracts.

At different points in time, and it's a mixture across all the modes of transportation that we're seeing but I would say on balance.

We get another benefit on input cost in the second quarter and depend.

Depending on the scenario.

It's kind of flattish as you go out through the second half of the year. There is a small pick up but again, it's going to depend on the backdrop.

Alright, thank you for that and good luck.

Okay.

And our next question is from Kyle White with Deutsche Bank. Please go ahead.

Thanks. Good morning, Thanks for taking the question just wanted to go to the outlook and I was wondering if you can kind of walk us through some of the moving parts.

A little bit better.

Regarding the new updated outlook versus the initial target any way to kind of size how much of that reduction is driven by the corrugated packaging Bruce packaging.

In transportation I don't know the reference you mentioned on the contract these contracts come and go.

At different points in time.

It's a mixture across all the modes of transportation that we're seeing but I would say on balance.

Packaging business versus cellulose fibers, how much is driven by the change in pricing versus maybe the weaker demand environment that we're in.

We get another benefit on input cost in the second quarter and depend.

Yes. So you are talking about the two eight versus the new range of two three to two five.

Depending on the scenario.

It's kind of flattish as you go out through the second half of the year. There is a small pick up but again, it's going to depend on the backdrop.

Yes, that's correct yeah. It is so.

March was.

There's no other way to say it was a surprise to us in terms of the demand drop off.

Alright, thank you for that and good luck.

Okay.

And the resulting economic downtime that we took to balance out our system, but.

And our next question is from Kyle White with Deutsche Bank. Please go ahead.

When you look at it we had further price.

Thanks. Good morning, Thanks for taking the question I just wanted to go to the outlook I was wondering if you can kind of walk us through some of the moving parts.

Published price decreases for Paul.

Export prices came down we had lower volume and we have more ADT, which means more cost.

Regarding the new updated outlook versus the initial target any way to kind of size how much of that reduction is driven by the corrugated packaging the packaging business versus cellulose fibers. How much is driven by the change in pricing versus maybe the weaker demand environment that we're in.

And then you look at how that how that evolves as we go through the second quarter in the second half of the year.

Those things are going to be present, but we also get.

As I mentioned, a little bit better on input cost, we have a significant drop off in maintenance outages, because we're really front end loaded front half loaded on our maintenance outages and then there are some additional costs that come out so when we looked at all of it there was some pretty significant moves in the month of March.

Yes. So you are talking about the two eight versus the new range of two three to two five.

Yes, that's correct, yes, it's Tim so.

<unk> was I think there is no other way to say it was a surprise to us in terms of the demand drop off.

And the resulting economic downtime that we took to balance out our system, but.

Even though it is getting better.

Still impact the first part of the second quarter.

When you look at it we had further price pulp.

Published price decreases for Paul.

Got it and then I guess, if we go back to last quarter, you guys talked about <unk> potentially.

Export prices came down we had lower volume and we had more ADT, which means more cost.

<unk>.

Coming back to being flat for 2023 and that was.

And then you look at how that how that evolves as we go through the second quarter in the second half of the year.

Assumed and maybe the outlook that you had initially obviously destocking has been a little bit more than everyone has anticipated and provided for a weaker demand environment, but are you able to kind of.

Those things are going to be present, but we also get.

As I mentioned, a little bit better on input cost, we have significantly drop off in maintenance outages, because we're really front end loaded front half loaded on our maintenance outages and then there is some additional cost to come out. So when we looked at all of it there were some pretty significant moves in the month of March.

Help us understand what is embedded in terms of the new outlook on where you think box shipments could be for the full year now.

Thanks sure Collyn. This is Tom hammock again.

Our view on boxes, and we say this a lot is that economic activity drops box demand.

So as we see the economy recover we expect box demand to tie directly to it there really isn't a near term substitute for a box when you're thinking about delivering to our retail channel.

Even though it's getting better.

Still impact the first part of the second quarter.

Got it and then I guess, if we go back to last quarter, you guys talked about box shipments potentially.

Really any channel in the U S. So we're confident about that rebound.

<unk>.

Coming back to being flat for 2023 and that was.

I'd say in terms of the full year.

Most of the difference we have between what we thought for the full year and what we think now is happening in the first half due to this destocking.

<unk> assumed and maybe the outlook that you had initially obviously destocking has been a little bit more than everyone has anticipated and provided for a weaker demand environment, but are you able to kind of.

So it's really hard to forecast the full year exactly I think it's going to depend on.

Help us understand what is embedded in terms of the new outlook on where you think box shipments could be for the full year now.

Hi speed correct about the second quarter and the Destocking playing out because the economy is also going to be an open question, but in general we see this improving.

Thanks sure Carl this is Tom again.

Our view on boxes, and we say this a lot is that economic activity drives box demand.

Got it that makes sense I'll turn it over.

Okay.

Barb.

And next we go to Mark Weintraub with Seaport Research partners. Please go ahead.

So as we see the economy recover.

Demand is tied directly to and it really isn't a near term substitute for a box when you're thinking about delivering to our retail channel.

Thank you.

One obviously one of the concerns investors have had is about the new supply that's coming into the market in containerboard.

Really any channel in the U S.

We're confident about that rebound.

Particularly thought with trying to take advantage of the fact that you've got some industry leaders on the call just to get any update on your thoughts as to how that where that capacity. Perhaps is right now is it already being absorbed and or.

I would say in terms of the full year.

Most of the difference we have between what we thought for the full year and what we think now is happening in the first half due to this destocking.

So it's really hard to forecast the full year exactly I think it's going to depend on.

Things to think about how that might play out as you see it.

Yes, Mark. This is this is Jay royalty.

You're correct about the second quarter and the Destocking playing out because the economy is also going to be an open question, but in general we see this improving.

Talk to you.

I think that.

A few things to keep in mind relative to.

This new capacity that's coming on first of all the open market is relatively small as you know.

Got it that makes sense I'll turn it over.

Okay.

And next we go to Mark Weintraub with Seaport Research partners. Please go ahead.

Our position in that market is really made up of long term strategic relationships and including in some cases, some equity position. So.

Thank you.

One obviously one of the concerns investors have had it's about the new supply that's coming into the marketing containerboard, particularly thought we'd try and take advantage of the fact that you've got some industry leaders on the call just get any update on your thoughts as to how that where that.

Got very little spot business and it's important to remember that at the end of the day people buy boxes and you'll all they don't buy containerboard producers may buy some containerboard, but at the end of the day, it's about having an integrated system, which is what we have in and customer needs are complex and so you'd think about.

That capacity, perhaps is right now is it already being absorbed and ore.

Things to think about how that might play out as you see it.

What customers value in what they're looking for and what it brings to customers. It's about comprehensive offerings, there's a wide grade mix their geographic reach redundant capabilities, having the ability to search and flex with their needs. All of these things are important.

Yeah.

Yes, Mark this is Jay royalty.

Good to talk to you.

I think Pat.

A few things to keep in mind relative to.

This new capacity that's coming on first of all the open market is relatively small as you know.

It's really about more than a single mill.

Our position in that market is really made up of long term strategic relationships and including in some cases, some equity position. So we've got very little spot business and it's important to remember that at the end of the day people buy boxes and you'll all they don't buy containerboard producers may.

Having a system and those capabilities and that's what customers value and so when you think about our relationships. Our customers are looking for those things. That's what allows us to have these long term strong relationships and so.

The new entrants are going to be trying to compete with that in some form or fashion.

By some containerboard, but at the end of the day, it's about having an integrated system, which is what we have and customer needs are complex and so you think about what customers value in what they're looking for and what it brings to customers.

Okay. That's helpful. Thanks, Jay and just maybe if I could follow up on the <unk>.

Distinction between the shipments, which I think you mentioned were up.

Five 6% so far in April so encouraging and then backlog being up double digit.

<unk> comprehensive offerings, there is a wide grade mix their geographic reach redundant capabilities, having the ability to to surge in flex with our needs. All of these things are important so its really about more than a single mill.

What should we make of that.

The backlog does that.

A lead indicator for where shipments likely would go to.

And recognizing we've had some very very difficult demand environment. So we don't want to get ahead of ourselves but.

About having a system and those capabilities and that's what customers value and so when you think about our relationships. Our customers are looking for those things. That's what allows us to have these long term strong relationships and so.

Okay.

Could this mean that we're actually closer to being through on the Destocking, but why that's sort of the conservative in this.

Again, we've gone through good reason enough right, there, but just trying to get a little bit more color and thoughts on the shipments and the backlog data you were talking about for April to date.

The new entrants are going to be.

Trying to compete with that in some form or fashion.

Okay. That's helpful. Thanks, Jay and just maybe.

Sure Mark this is Tom again.

Just for some clarity.

Could follow up on the.

You had it right the shipments comment I had was about 6% Thats sequential from March and obviously as Tim talked about earlier March was weaker than the second quarter, but it's still a strong.

Distinction between the shipments, which I think you mentioned were up.

Five 6% so far in April so encouraging and then backlog being up double digit.

What should we make of that.

Sign of momentum.

What does the backlog does that.

Backlogs tend to be more volatile because as the market gets better you get more and more orders because customers see that lead times are normal.

A lead indicator for where shipments likely would go to.

And recognizing we've had some very very difficult.

So it's a good indicator more of the future than it is in the moment, but I think you combine shipment outlook, we have with the backlogs improving.

The environment. So we don't want to get ahead of ourselves but.

Okay.

Could this mean that we're actually closer to being through on the destock and why that's sort of the conservative in this.

I would point you to we're probably pretty close on the second quarter play out to Mark and Tim talked about because if we're not seeing it in this month.

Again, we've gone through good reason enough right, there, but just trying to get a little bit more color and thoughts on the shipments and the backlog data you were talking about for April to date.

You, probably havent been of a July .

Feels like to me it all fits together and that's what we're hearing from customers.

Sure Mark this is Tom again.

One real quick follow up and then have you seen in the last say six months when we've been in this really difficult demand environment have you seen where the shipments and backlog went up and then they just rolled back over again or is this the first time, you've really seen this.

Just for some clarity you Havent, Brian Shipman comment I had was about 6% and that sequential from March and obviously as Tim talked about earlier March was weaker than the second quarter, but it's still a strong.

I think this is the first time, we've seen a significant shift from what you would think about seasonally you certainly can have a segment that changes might affect if it's big enough it might affect your total mix.

Sign of momentum.

Backlogs tend to be more volatile because as the market gets better you get more and more orders because customers see that lead times are normal.

So it's a good indicator of more of the future than it is in the moment, but I think you combine shipment outlook, we have with the backlogs improving.

I'd say we have.

Thinking about it.

I don't have the numbers in front of me I don't think we found a false start.

Okay Super I appreciate it.

Once you two were probably pretty close on the second quarter play out to Mark and Tim talked about because if we're not seeing it in this month.

Next we go to the line of George Staphos with Bank of America. Please go ahead.

Yes.

You, probably havent been of a July feels.

Hi, everybody. Good morning, Thanks for the details Jain Tom good to hear your voices hope Youre doing well.

Feels like to me it all fits together and that's what we're hearing from customers.

One real quick follow up have you seen in the last say six months when we've been in this really difficult demand environment have you seen where the shipments and backlog went up and then they just roll back over again or is this the first time, you've really seen this.

I had some technical difficulties getting on the call and you may have mentioned this but.

The last call in our Q&A you had suggested that.

Fluff Gcs could see roughly a couple hundred million dollar improvement in profitability is there an update to that and then kind of the granularity if I look at the waterfall and your outlook.

I think this is the first time, we've seen a significant shift from what you would think about seasonally you certainly can have a segment that changes.

Might affect if it's big enough it might affect your total mix.

I'd say we have.

And I look at what maintenance is going to look like sequentially. The next couple of quarters in gcs.

Thinking about it.

Don't have the numbers in front of me I don't think we've had a false start.

Get much of an improvement in earnings this year.

Okay Super I appreciate it.

And so just thinking about what is the embedded in your guidance for Gcs, where should we see earnings.

Next we go to the line of George Staphos with Bank of America. Please go ahead.

Hi, everybody. Good morning, Thanks for the details Jay and Tom Good to hear your voices hope Youre doing well.

Move and as we sit here today, realizing destocking has been a big factor and hopefully the revision of that.

I had some technical difficulties getting on the call and you may have mentioned this but.

We will allow earnings to improve talk about why you still see this as a real good business to have for IP to be and for its shareholders Mark structurally and I had a question on containerboard.

The last call in our Q&A you had suggested that.

Fluff Gcs could see roughly a couple hundred million dollars improvement in profitability is there an update to that and then kind of the granularity if I look at the waterfall and your outlook.

Hey, George Thanks, Great question, Let me just hit the headline and then I'll ask <unk> to comment on what's embedded in our outlook and really.

Ask Ken to remind and separate the.

Absorbing and specialty core part of the business and then the rest of the business, which tends to be more volatile on commodity.

When I look at what maintenance is going to look like sequentially. The next couple of quarters in gcs.

Get much of an improvement in earnings this year.

200 had certain assumptions in line with it some of those assumptions have changed we still see line of sight is somewhere in the neighborhood of 50 plus million improvement in the business and so there is still going to be earnings improvement in the business and.

And so just thinking about what is the embedded in your guidance for Gcs, where should we see earnings.

Move and as we sit here today, realizing destocking has been a big factor and hopefully the revision of that.

We just have to.

Just what the timing of those improvements are given the change in some of the pricing assumptions in the way. We're operating so clean you might want to talk a little bit about the puts and takes that make up that that full year outlook.

We will allow earnings to improve talk about why you still see this as a real good business to have for IP to be and for its shareholders Mark structurally and I had a question on containerboard.

Yes, Thanks, Mark Hey, George.

Hey, George Thanks, Great question, Let me just hit the headline and then I'll ask <unk> to comment on what's embedded in our outlook and really.

So you mentioned.

You mentioned you may have missed some of the early part, but just to just to read.

Ask him to remind and separate the.

Kind of tread a minute on what we see causing the issue in the first half.

Absorbing and specialty core part of the business and then the rest of the business, which tends to be more volatile on commodity.

Is almost all Destocking, we do have a lot of confidence in the end use consumer demand of absorbent hygiene products, and we see that future being lot like historical and growth and so it.

200 has certain assumptions align with it some of those assumptions have changed we still see line of sight is somewhere in the neighborhood of 50 plus million improvement in the business and so there is still going to be earnings improvement in the business and.

While we are confident about it are excited about it is this is a very.

We just have to.

In the moment, China current issue really an unprecedented issue with the with the inventory flow through.

We believe we will come out of that well have a stronger second half and you made mention of the $200 million from the last call. Those changes have been made and they're flowing through in the pricing. So that's there.

Yes, Thanks, Mark Hey, George.

So Glenn you mentioned you.

You mentioned you may have missed some of the.

But with the with the low volume that we've had the low customer order rate.

The early part, but just to just to re.

Kind of tread a minute on what we see causing the issue in the first half.

Taking the EDT that we're taking.

And the price moves it has.

Almost all Destocking, we do have a lot of confidence in the end use consumer demand of absorbent hygiene products, and we see that future being lot like historical and growth and so it.

Eroded about $150 million of the 200 as we see as those prices flow through the year, so to Mark's point.

The 50 million still accretive to last year earnings is what we see on top of $100 million in 'twenty two versus 21. So.

While we're confident about it are excited about it is this is a very.

And the moment, China current issue really an unprecedented issue with the with the inventory flow through.

We're confident as we get the consumer demand is there we get through this issue.

We will get our volumes more normalized our mix more normalized get away from the EDT.

Cost that Kevin had mentioned.

And we feel confident we feel strong about it moving forward.

But.

George I'll just wrap.

With the low volume that we've had the low customer order rate.

Question you asked the last part about why why we still believe it's a good business and a good thing for IP shareholders. I mean, when you look at the business that we're in now coordinated packaging cellulose fibers for absorbent products, we've got to.

Taking the EDT that we're taking.

And the price moves it has.

Eroded about $150 million of the 200 as we see as those prices flow through the year, so to Mark's point of the $50 million deal.

Natural resource based businesses, both facing growing end use markets.

<unk>.

Accretive to last year earnings is what we see on top of $100 million in 'twenty two versus 21. So.

Directly in our wheelhouse from a manufacturing and process standpoint, and when you then layer out forget about the product and look at the customer and the supply chain you layer all the types of customers and what they value solutions technical design.

We're confident as we get the consumer demand is there we get through this issue.

Yet our volumes more normalize our mix more normalized get away from the EDT.

Same kinds of things they value in the box business day value in the cellulose fibers business, it's a more global customer base in cellulose fibers than it is in our box business, but we believe that starting with that softwood fiber renewable.

Cost that Kevin had mentioned.

And we feel confident we feel strong about it moving forward.

George I'll just wrap.

Question you asked this at the last part of outline why we still believe it's a good business and a good thing for IP shareholders. I mean, when you look at the business that we're in now coordinated packaging cellulose fibers for absorbent products, we've got to.

Very very good well positioned manufacturing base.

Turning that into products that are facing growing markets.

Is giving IP, a higher quality of value creation that single product line type of company and we believe that that's valuable in the long term.

Natural resource based businesses, both facing growing end use markets.

And we don't we don't think about just single elements like one year or a couple of quarters. We look at this down the road over the next decade, where things had.

<unk>.

The types of products that both businesses are making.

And we think that's exciting for investors as they sort out where sustainable natural resource type companies fit in their portfolios.

Same kinds of things they value in the box business they value in the cellulose fibers business, it's a more global customer base in cellulose fibers than it is in our box business, but we believe that starting with that softwood fiber renewable.

Thanks Mark.

On packaging, recognizing ultimately customer spec boxes.

Very very good well positioned manufacturing base.

Box back then dictates the substrate and the sheet of paper Youre going to run on the corrugate or to make the box and everything else that follows.

Turning that into products that are facing growing markets.

Is giving IP, a higher quality of value creation that single product line type of company and we believe that that's valuable in the long term.

Given that we've seen the cost curve shift a bit towards recycled versus Virgin in terms of who is lower on the cost curve right now and also given the shifts that are occurring in the end markets where.

And we don't we don't think about just single months like one year or a couple of quarters. We look at this down the road over the next decade, where things had where the types of products that are both businesses are making.

Realizing this is really kind of a one quarter issue not a structural issue. Nonetheless, we are seeing weakness in durable goods weakness.

Agg.

Is there anything we should take away about what your mix might look like in industrial over the next two to three quarters were more structurally or do you think.

Got it and we think thats exciting for investors as they sort out where sustainable natural resource type companies fit in their portfolios.

Relative to the mill fleet relative what Youre doing on converting do you think your mix of business will be as rich if not richer overtime.

Thanks Mark.

On packaging, recognizing ultimately customer spec boxes.

And what we've seen the last couple of years, Thanks, and good luck in the year.

Box back then dictate the substrate and the sheet of paper Youre going to run on the corrugate or to make the box and everything else that follows.

Sure George this is Tom.

Hey, Tom can you talk you talked about Hey, how are you.

Talked a little bit about different substrates, and I think as a customer of the containerboard system. That's a huge advantage for us because we've got this huge base manufacturing different products different grades.

Realizing this is really kind of a one quarter issue not a structural issue. Nonetheless, we are seeing weakness in durable goods weakness.

And so since we have direct access to those we can design the box and the box plant mix directly around that.

In terms of.

AG is.

Is there anything we should take away about what your mix might look like in industrial over the next two to three quarters, where more structurally or do you think.

The Destocking and how we feel about these different segments.

I think we're going to see different levels of Destocking by segment like we talked about.

Relative to the mill fleet relative what Youre doing on converting do you think your mix of business will be as rich if not richer overtime.

I think we shouldn't expect a normalization of demand because of the U S economy is going to recover that may take a little longer given economic conditions.

But certainly it's coming and then maybe a little bit of a specific piece of your question is.

And what we've seen the last couple of years, Thanks, and good luck in the year.

One of the biggest improvements we've seen coming into April is going back.

Sure George this is Tom.

Hey, Tom can you talk you talked about Hey, how are you.

So that has been a really tough business because of weather over the last couple of quarters and we're starting to see that pop back up which I think is a very good time, George I'll, just and Toms comments with the long term question you asked about do we see a mix, it's a richer mix for the whole value chain.

So since we have direct access to those we can design the box and the box plant mix directly around that.

<unk>.

Packaging paper, the containerboard, we make and the types and then the ultimate box and packaging solution, we provide and our strategy has pointed to a richer mix over time and our mill system will evolve in the type of products, we make where we make Tim.

In terms of.

The Destocking and how we feel about these different segments.

I think we're going to see different levels of Destocking by segment like we talked about.

I think we Shouldnt expect a normalization of demand because of the U S economy is going to recover that may take a little longer given economic conditions.

Got a heavy concentration in the southeastern part of the U S. But we've got a market that covers the entire.

But certainly it's coming and then maybe a little bit of a specific piece of your question is.

North America, really and so youll, probably see in the future slightly different locations over time, and probably definitely higher quality recycle being feathered into our mix and I'll point to our most recent containerboard investment is a game changing level of quality white top liner that brings us into a whole.

One of the biggest improvements we've seen coming into April is going to act.

You set of segments, where we were purchasing some of that paper before it was good paper.

We were making some ourselves which was second tier and now we have some of the best clinical white liner and so you'll only see investments that incrementally improve us on quality and product capability, which again to Jay's point only matters. If you turn it into a box that people want and are willing to pay for so that's the folks.

Jane.

Got a heavy concentration in the southeastern part of the U S. But we've got a market that covers the entire.

We see the business getting better over time with a richer mix and a good end.

End to end from natural resource to finished product value chain that we can be the best at every part of that for our customers.

North America really.

So youll, probably see in the future slightly different locations over time, and probably definitely higher quality recycle being feathered into our mix and I'll point to our most recent containerboard investment is a game changing level of quality white top liner that brings us into a whole new set of segments, where we were.

Thank you very much.

And our final question for today comes from the line of Phil <unk> with Jefferies. Please go ahead.

Hey, guys. Thanks for fitting me in.

Despite a pretty challenging backdrop, Tim the free cash flow still shown to be pretty resilient here.

Purchasing some of that paper before it was good paper.

We were making some ourselves which was second tier and now we have some of the best white liner and so you'll only see investments that incrementally improve us on quality and product capability, which again to Jay's point only matters. If you turn it into a box that people want and are willing to pay for so that's the phone.

And you should be gaining it.

At least 500 million cash proceeds from Ella Im curious whats the game plan and deploying that excess cash.

Hopefully coming very soon.

Hey, Phil It is Tim.

It's like we always do it's been we have our capital allocation framework.

Look at where we are at the moment and then make decisions on how to best deploy cash for value. So it'll be the same type of construct.

Because we see the business getting better over time with a richer mix and a good end to end from natural resource to finished product value chain that we can be the best at every part of that for our customers.

Free cash flow comes in and the incremental cash for mill.

Got you Okay. That's helpful.

Thank you very much.

And from a pulp side of things market pulp prices certainly seeing some pressure curious your confidence in maintaining that large premium versus fluff.

And our final question for today comes from the line of Phil <unk> with Jefferies. Please go ahead.

Hey, guys. Thanks for fitting me in.

And supply chain logistics, certainly was very choked up last year, so it being mindful how hard it was to kind of see through the destocking containerboard your level of confidence that the destock will be done in <unk>.

Despite a pretty challenging backdrop, Tim the free cash flow still shown to be pretty resilient here.

And you should be getting at I believe 500 million cash proceeds from Ella Im curious whats the game plan and deploying that excess cash.

Just curious have you started seeing any lift in China starting.

Hopefully coming very soon.

Starting to reopen here.

Hey, Phil this is Tim.

Phil Let me quarterback here claim is going to take the question on that.

It's like we always do is we have our capital allocation framework.

Premium and the work we've done to change our go to market and flat and our confidence in maintaining that and then I'll ask Jay to comment on the containerboard.

Look at where we are in the moment and then make decisions on how to best deploy cash for value. So it'll be the same type of construct.

Actually the question on supply chain. It really covers both businesses may be even more cellulose fibers in terms of getting things through the port and the velocity has improved that does get better visibility, but you asked specifically about containerboard in China J I'll take that one so clay if you would answer the question about.

Free cash flow it comes an increase.

Incremental cash for mill.

Got you Okay. That's helpful.

And from a pulp side of things market pulp prices certainly seeing some pressure curious your confidence in maintaining that large premium versus fluff.

Mark My question on the supply chain was really more on fluff I just made the point on containerboard because it was pretty hard to see through that so just your confidence just kind of see just sorry, Phil sorry, I misunderstood. Your question, So clay will take both of them.

And supply chain logistics, certainly was very choked up last year. So it being mindful of how hard it was to kind of see through the destocking containerboard your level of confidence that the destock will be done in <unk> and I'm. Just curious have you started seeing any lift in China.

Okay.

Just trying to reopen here.

Hey, Phil This is clay Alice good to talk to you.

Phil Let me quarterback here claim is going to take the question on <unk>.

Your first point on on market pulp.

Premium and the work we've done to change our go to market in fluff and our confidence in maintaining that and then I'll ask Jay to comment on the containerboard action.

Yes pricing on market pulp.

Paper grade pulps.

They were down in the first quarter some somewhat resilient.

Actually the question on supply chain. It really covers both businesses may be even more cellulose fibers in terms of getting <unk>.

In Q1, and then in April .

We've seen here.

Things through the port and the velocity has improved that does get better visibility, but you asked specifically about containerboard in China J I'll take that one so clay if you would answer the question about.

Huge decline and you can see that in the publications through the month of April .

And so over overtime.

Over time, you can see the fluff pricing being resilient, keeping a pretty high premium over market, Paul we expect that to continue.

I think when you look at the whole ecosystem of the fibers in the pulp.

Clearly clearly going down through the first quarter and paper grade as we've said on through April .

Okay.

Hey, Phil this is clay.

Good to talk to you.

Your first point on foreign market pulp.

<unk>.

Fluffy isn't immune to that of course.

Yes pricing on market pulp.

Fluff prices had moved down some as well, but I think.

For grade pulps.

They were down in the first quarter some somewhat resilient.

I think that fluff prices will continue to be less volatile they'll continue to maintain a premium.

In Q1, and then in April .

We've seen a.

But to be realistic in the whole ecosystem.

Huge decline and you can see that in the publications through the month of April .

Of the five versus when they when they go down Theres a gravity on fluff too. So it's why it's more important for us to be higher.

And so over over.

Over time, you can see the fluff pricing being resilient, keeping a pretty high premium over market, Paul we expect that to continue.

Higher integrated into fluff to add the capacity to grow with our customers future growth in that space.

I think when you look at the whole ecosystem of the fibers in the pulp.

<unk>.

Remove or mitigate some of our susceptibility to the more paper greater to the market and commodity costs.

Clearly clearly going down through the first quarter.

And then your confidence of working through the supply chain and seeing through the destock.

And then paper grade as we said on through April .

Yes, very good confidence again, I mentioned on the call earlier last week with a lot of customers the Geneva Conference.

Fluffy isn't immune to that of course.

Fluff prices have moved down some as well, but I think.

I think the fluff prices will continue to be less volatile they'll continue to maintain a premium.

Yes.

Even our customers. So it did not see the level of stocks and when I talk about stuff is not just fluff.

But to be realistic in the whole ecosystem of the fibers when they when they go down.

For the third of the.

The entire absorbent hygiene supply chain, so all the way from retailers converters our customers.

There is a gravity on fluff too so it's why it's more important for us to be.

Higher integrated into fluff to have the capacity to grow with our customers future growth in that space.

And then all the way back into the raw materials like fluff.

It was higher more.

And then anyone saw.

Remove or mitigate some of our susceptibility to the more paper greater to the market commodity pulse.

So we see our customers are they're seeing the retailers order more get more normal so they're seeing that slack has come out of the road, we're seeing our inventories of fluff getting.

And then your confidence of working through the supply chain and seeing through the destock.

Really down to historically lower than historical so we see also part of this I think has been lowering the inventories across the supply chain the targets from where they were in the past so I think that's.

Yes, very good confidence again, I mentioned on the call earlier last week with a lot of customers the Geneva Conference.

Yes.

Even our customers. So it did not see the level of stocks and when I talk about stuff is not just fluff.

That's caused even prolonged this a bit more but everybody sees more of the slack out of the system now and they see it coming out and everyone seeing their orders no matter, where they are under supply chain begin to pick up.

For the third.

Tire absorbent hygiene supply chain, so all the way from retailers converters our customers.

And then all the way back into the raw materials like fluff.

And moving into the second half.

Has that China reopening dynamic.

It was higher more.

Giving you a little more confidence or hasn't really had much of an impact quite yet.

Then anyone saw.

But so.

So we see our customers are they're seeing the retailers order more get more normal so they're seeing that slack has come out of the road, we're seeing our inventories of fluff getting.

Yes, it gives us it gives us more confidence that one it's not a it's not a consumer demand issue than it is destocking in that.

We can see that we can see the end.

Really down so historically lower than historical so we see also part of this I think has been lowering the inventories across the supply chain the targets from where they were in the past so I think that's.

So again that gives us confidence.

Okay. Thanks, a lot great great color.

Thank you I will now turn the call back over to Mark Sutton Chairman and CEO for closing comments.

Thank you Leah and I'd like to thank everyone for your time today and for your continued interest in international paper I look forward to updating you on our progress as the year unfolds and again I would just like to thank our employees for their hard work through these challenging times, which really you can argue started a couple of years ago. They continue to show up.

And moving into the second half.

Has that China reopening dynamic.

Giving you a little more confidence or hasn't really had much of an impact quite yet.

<unk> taken care of our customers running safe and efficient plants, and selling and delivering products to our customers and I couldnt be prouder or happier to be leading this great team of people International paper. So thanks again for your interest in our company and have a great day.

Yes, it gives us it gives us more confidence that one it's not a it's not a consumer demand issue than it is destocking in that.

We can see that we can see the end.

So again that gives us confidence.

And once again, we'd like to thank you for your participating in today's international paper's first quarter 2023 earnings call you may now disconnect.

Okay. Thanks, a lot great great color.

Thank you I will now turn the call back over to Mark Sutton Chairman and CEO for closing comments.

Thank you Leah and I'd like to thank everyone for your time today and for your continued interest in international paper I look forward to updating you on our progress as the year unfolds and again I would just like to thank our employees for the hard work through these challenging times, which really you can argue started a couple of years ago. They continue to show up here.

Every day, taking care of our customers running safe and efficient plants, and selling and delivering products to our customers and I couldnt be prouder or happier to be leading this great team of people International paper. So thanks again for your interest in our company and have a great day.

And once again, we'd like to thank you for your participating in today's international paper's first quarter 2023 earnings call you may now disconnect.

Q1 2023 International Paper Co Earnings Call

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