Q2 2023 International Paper Co Earnings Call
Twenty-three earnings call.
All lines have been placed on mute to prevent background noise. After the speaker's remarks, you will have an opportunity to ask questions to ask a question press. One then zero on your telephone keypad to withdraw your question press, one then zero.
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It is now my pleasure to turn the call over to Martin Ellison, Vice President Investor Relations, Sir the floor is yours.
Good morning, and thank you for joining international papers second corner.
23 hearings call or speakers this morning, or marks chairman and Chief Executive Officer.
Senior Vice President and Chief Financial Officer.
It was important information at the beginning of our presentation I'd fly too, including certain legal disclaimers. For example, during this call we will make a forward looking statements that are subject to risks and uncertainties.
We will also present certain non U S GAAP financial information.
Conciliation of those fingers to us GAAP financial measures is available on our web site.
Our website also contains copies of the second quarter earnings press release at today's presentations lines.
Now turn the call over to marks on them.
Thank you Mark and good morning, everyone.
We get our discussion on slide three.
Our results.
And the second Corps operations ran very well mannered.
Businesses affected Lena challenging demand environment, while I'm, taking care of our customers.
Looking at our performance.
Delivered $55 million a year over year incremental earning to benefit from our building a better I P. Initiatives. This program contributed 120 million benefits through the first half of the year.
And when we were on track to exceed our full your target for the second year in a row.
Underlying demand for our products improved throughout the corner, but remain constrained by inventory destocking as our customers and the broader supply chain work through elevated inventories other products.
Discussions with our customers and trends observed across the various N U segments for packaging and Palm products, We believe consumer priority in the second quarter remained focused on services as well as nondiscretionary goods.
This trend has been influenced by a <unk> good during the pandemic as well as inflationary pressures and rising interest rates. However.
However, based on feedback from our customers, we honestly the Destocking is finally coming to the clubs.
Margins remained under pressure due to the resulting weak volumes and lower prices across our portfolio.
However, this was partially offset by Laura input and distribution expenses as our team work to reduce our marginal cost.
Capital allocation turned $200 million to shareowners.
And the poor.
And with respect to the sale of our Elam investment I reported last quarter at the Russian buyers received an important required approval from a Russian sub commissioned overseeing exits by foreign companies.
There are still awaiting approval from the Russian competition authority.
Buyers continue to pursue this approval and we expect to close as soon as all regulatory approvals of our security.
Now turn it over to Tim.
We will provide more details about our second quarter performance and our third quarter outlook.
Thank you more good morning, everyone turning to our second quarter and keep the actual voting for.
Operating earnings per share increase sequentially, and also came and better than the outlook, we provided last quarter.
Effectively optimized of our system through commercial and operational initiatives.
Operating margins continued to be impacted by low volumes.
But improved sequentially is lower outage expense unfavorable input costs more than offset the impact from all ourselves prices.
And the second quarter, we generate a $261 million in free cash flow recall that free cash flow from the first quarter was impacted by $193 million.
Final settlement payment to the diarrhea, I R S related to our timber monetization, which allowed us to further do risk our balance sheet.
Moving the second quarter sequential earnings on slide five second quarter operating earnings per share. It was 59 cents as compared to 53 cents in the first quarter.
Price index was lower by 29 cents per share index movements across our portfolio.
Lower export prices and unfavorable product mix in our global cellulose fibers business as a result of floor absorbing pulp shipments.
Volume was sequentially was flat sequentially has improved demand an hour north American industrial packaging business was offset by weaker demand in our global cellulose fibers business.
I am in both businesses were impacted by a customer inventory destocking.
Operations in cause it was all.
Also flab as our mills continued to run very well higher ups and call center industrial packaging business, primarily due to economic downtime was offset by lower ops on cost in our global cellulose fibers business.
Maintenance outages floor by $88 million or 19 cents per share in the second quarter and we saw a significant really from input costs, which were $83 million or 18 cents per share lower primarily driven by lower energy wood and distribution costs.
Turning to the segments, starting with industrial packaging on slide six Fry. Some eggs was Lola does that's movements I'm Laura export prices. This was partially offset by benefits from commercial initiatives focused on margin improvements.
Sequentially volume was higher despite one less shipping day as demand continues to improve throughout the quarter from the March trough.
U S box shipments were down 8.3% year over year in the second quarter as demand for packaging continued to be impacted by ongoing inventory destocking by our customers.
However June was down 5.9% year over year is to quarter improved.
The lower demand environment impacted operations in cost in the quarter as we are lined up production with our customer demand, while also optimizing our inventories and taking fewer planned maintenance outages. These.
These actions resulted in approximately 622000 tons of economic downtown him across the system, which accounted for approximately two thirds of the ops impulse periods.
The remainder was primarily due to the timing of spending for materials and services.
Overall, our middle system ran very well.
Plan maintenance outages were lowered by $54 million sequentially.
Partially reflecting deferral or some outages in the second half of the year as we continue to optimize our outages.
Significantly lower input costs improved earnings by $66 million in the quarter.
Benefitted from lower energy wood and distribution costs.
Some of which was due to the relentless efforts by our business teams to call back high marginal cost, while optimizing that our systems and the current current demand environment [noise].
To give you an example of this.
<unk> and fiber procurement teams have made tremendous progress reducing fiber caused by optimizing megs and shedding our highest calling supplier of fiber to the mills.
Our teams across the mill Inbox plans also are driving significant reductions in distribution costs by doing things like reducing highest cost the freight carriers renegotiating contract rates, increasing weights per load reducing miles per load and chatting warehouse under merge expense.
Turning to slide seven I'll share some perspective regarding how inventory destocking is progressing for our customers based.
Based on their feedback on our own analysis, we believe inventory destocking across the supply chain is accounted for a large portion of overall demand declined to this year.
It is also lasting longer than initial expectations due to the limited visibility across the entire supply chain of excess inventories built up during the pandemic.
Feedback from some of our large larger customers suggested approximately 75% of them entered the third quarter at or below and the inventory levels target inventory levels.
The good news is that given feedback from our customers and looking at the data. We expect this destocking trend to be completed.
Quarter.
Five eight some additional data supports our current view.
We believe the majority of retailer inventory Destocking was completed in the first quarter.
However, manufacturers are still reducing inventories through the second quarter as a result of lower demand levels improved supply chain velocity and focus on working capital given higher interest rates.
Despite the current environment corrugated packaging plays a critical role in bringing a central products to consumers.
P as well positioned to grow with our customers over the long term future are reversed.
Portfolio of products and services.
And our strategic relationships with a large number of national and local customers across a broad range of attractive and new segments.
[noise] turning to global cellulose fibers on slide nine taken.
Taking a look at the second quarter performance price index was lower price index.
Higher level of commodity grades in the quarter in response to weaker fluff pulp shetlands.
As a reminder, approximately 85% of the products and this business or export it is international paper Certs major global and regional customers around the world.
As we entered the or fluffy pulp volumes came under pressure.
First consumer demand for absorbing hygiene products was lower driven by inflationary pressures and suck cause there was significant inventory destocking across the long supply chains.
This destocking trend continued into the second quarter of supply chain became more efficient and reliable.
As a result customers were able to work down safety stocks that were built up in response to the supply chain disruption during the pandemic.
This resulted in approximately 143000 tons of economic downtime across the system as we are lined up production with customer demand.
The combined impact of lower volumes and a higher mix of commodity grades continued to negatively impact business earnings.
Looking forward based on feedback from our customers and order bookings the.
The majority of Destocking should be completed in the third quarter and we believe fluff demand will continue to grow over the long term.
This is due to the central role absorbent personal products play in meeting customer needs [noise].
Coming back to the second quarter operations and cost of improved sequentially.
Lord distribution costs, and our business teams remain focused on driving down the high marginal calls going forward.
Sequentially option calls or also favorably impacted by seasonally lower energy consumption.
And higher residual energy sales.
Planned maintenance outages were lowered by $34 million sequentially and input cost, where Laura about $17 million due to the low energy and chemical costs.
[noise] I'm, turning the slide can I'll take a moment to update you on our capital allocation actions, we have a strong balance sheet, which it score two R. Capital allocation framework. Looking ahead, we have limited medium term debt maturities in our pension plan remains fully funded.
Returning cash to shareholders as a meaningful part of our capital allocation framework.
And the second quarter, we returned $200 million to shareowners going forward, we are committed to returning cash by maintaining our dividends.
Investment excellence is essential to grow on earnings and cash generation, we invested $267 billion in our businesses in the second quarter, which includes funding for cost reduction projects with attractive returns and for strategic projects the buildup capabilities in our box system.
Going forward, we plan to make additional investments of crossover box system to support long term profitable growth.
We will remain disciplined and select the front assessing M&A opportunities.
[noise] Ah slight 11th we'll take a look at the third quarter outlook.
I'll start with industrial packaging, we expect the price and medics to decrease earnings, but $95 million as a result of prior index movement in North America, and lower average export prices based on declines today.
Volume is expected to increase earnings by $5 million due to improving demand in daily shipments in North America offsetting one less shipping.
Operation has been costs are expected to increase earnings by $95 million.
More than half is due to lower cost of company paid benefits.
And I recall Smith cost management initiatives.
The balance is primarily due to lower unabsorbed fixed cost.
Lower maintenance outage expense is expected to increase earnings by $28 million and lastly.
Rising input costs are expected to decrease earnings by $15 million from higher average energy calls.
Switching the global cellulose fibers, we expect price and mix to decrease earnings by $40 million as a result of prior index movements and declines in spot pricing today.
Volume is expected to increase earnings by $10 million as demand improves from lower inventory destocking.
Operations and cost are expected to be stable relative to the second quarter.
Lower maintenance outage expenditures is expected to increase earnings by $12 million.
And lastly, declining input costs are expected to increase earnings by $10 million, mostly due to lower fibre and chemical pulse.
On slide 12 will take a look at the full your outlook.
As we entered the year, we recognize there were.
Gnomic uncertainties ahead of US and then our businesses were not immune to these risk.
These macro trends had shifted resulting in weaker than expected demand for our products and price reductions across our portfolio through the second quarter.
Including prior index changes.
That will be implemented over the remainder of the year.
I would also remind you that we that when we provide an outlook. It includes only the impact from published price changes today.
We are now projecting full year 2000, twenty-three EBIT thought for the company to be in the range of 2.1 billion to $2.3 billion.
Despite the market headwinds, we were taking actions across the company to optimize our system by reducing high marginal cost and driving additional commercial and cost benefits from our building a better icke initiatives.
Ah Mark will share more about these opportunities in the next few slides.
Free cash flow is expected to be between 500 and $600 million, which includes a one time tax payment of $193 million in the first quarter related to our timber monetization settlement.
420, 23, we are targeting capex of $1.1 billion to $1.2 billion with the increased investments and already at us box system.
And with that I'll turn it back over to Mark.
Thanks again.
During the slide 13, now and I'd like to provide our quarterly updates on our building had been on T V.
You can see the targets and the appropriate mechanism is fine, but as I mentioned earlier on the call, we're making solid progress and delivered 55.
You're over here incremental earnings improvement in the second quarter.
Told them that they have $120 million a year to date, given this drama and then and we expect to exceed our original target again this year.
These are issues and opportunities that are unique.
That will shine through as we were receiving economic conditions improve.
Arlene effectiveness initiatives contributed $116 million the cost savings since we began our building had better I P program in 2020.
Early on by streamlining our corporate and staff functions to realign with simple.
Simplified portfolio after the spin off of our papers.
More than offset 100 per cent of the sinner.
Synergies, resulting from the spinoff.
The majority of death, it's going forward, we will come in and work coming from our strategy acceleration process optimization initiatives, where our business teams have intense focus on creating.
Good value to a commercial strategies and by leveraging advanced technologies and being paid in a crossover large system to improve productivity and lower costs.
I need to put all these opportunities and in the next couple of slides I'd like to share more examples of what our teams are working on some of the early results.
So turning to slide 14.
Start with our industrial packaging business and you can see how to fly or teams across the business are pursuing multiple opportunities to improve margins and drive profitable profitable growth.
First I'll mention that we're making good progress on reducing high mortgage will cost 10. This previously reference that input and distribution costs increased by more than $2 billion for IP over the period of the pandemic coming into the ear climbed back these high marginal cost wasn't hearing an intense focus for us.
Seen this by doing things like optimizing mix and usage of fiber and energy, reducing labor costing over time shifting to a lower cost suppliers, driving where distribution costs and reducing discretionary spending an overhead expenses.
As I've mentioned before would also investing in our box business to expand our capabilities improve productivity for future growth.
On the commercial front, we have opportunities to leverage these new investments as well as our marketing expertise to further improve mixed and capture additional value.
As we look across our system Needless inbox plants, we are seeing real potential to leverage advanced technology and data analytics. In fact, some of that work is helping us get to levels of margin will cost reduction in high economic downtime period to that we've never reached before over the past year, we've developed a pilot and.
New tunes capabilities to increase efficiency and reduced cost across a broad number of categories where.
We're starting to see that it's in areas, such as maintenance and reliability distribution and logistics as well as sourcing.
And we anticipate significant benefits as we continue to deploy new technologies across our manufacturing system.
All of this gives me confidence in our ability to drive profitable growth over the long term.
Turning to slide 15, I was curious and key opportunities global Segalas flavors business.
Over the past year, we have captured meaningful benefits from our commercial initiatives and believe that there are more opportunities to capture significant value in this business as we continue to execute a revised go to market strategy. For example, a commercial teams finalized contra.
Contract negotiations, which is contributing meaningful commercial benefit of this year.
In addition, we have earned a higher premium for fluff grades relative to commodity agreed I cantering more value and aligning with those customers in segments and regions of the world.
Differentiated product and service offerings.
The benefits of our commercial strategy are currently being masked by very challenging and unprecedented business cycle as well as our exposure to the commodity grades that are not our core pumpkins as Tim mentioned earlier.
Dan with major supply chain disruptions during the pandemic followed by significant inventory destocking actions that continued to constrained demand today.
This combination of elevated supply chain costs and lower volumes.
A substantial impact on business earnings but.
But we do not believe that these issues are structural and as I said, we have more opportunities to capture significant value moving forward and we will continue to test the strategy over the business cycle.
Fundamentally I believe there's a good business within within this business and that we can continue to grow earnings and cash flows are going to cycle.
Focused on creating value for our customers by delivering products that meet their stringent performance and product safety standards, while delivering innovation.
Over time, you have an opportunity improve our mix by reducing our exposure to commodity brains.
We can further in line.
With customers and used markets.
That allow us to maximize the value of this business, while optimizing our overall cost structure.
I will now turn to slide 16, as you can see there are several key areas of opportunity we're working on to navigate the current economic environment, while driving profitable growth over the long term.
Combined with our strong financial Foundation International paper as well positioned for success.
None of this would be accomplished or possible without our team of talented engage employees.
I will close by expressing my appreciation for all the hard work of our international paper employees and and our strong customer relationships.
And with that we're happy to move to the question and answer section in similar to last quarter. Our senior business leaders are joining me to provide you with their perspectives.
Operator, we're ready to move to the question and answer portion of the call.
Thank you if you would like to ask a question simply press. One then zero on your telephone keypad.
Draw. Your question press, one then zero, we will pause a moment to compile the Q&A roster. We do ask that you limit yourself to one question and one follow up question.
Your first question will come from Mike rocks loaded with Truth Securities go ahead.
Thank you I think you're more 10 and more for taking my questions. Congrats on a good quarter.
Right.
Can you walk us through someone moving towards regarding the updated EBITDA outlook horses. Your primary target any way it kind of slides how much of that reduction is driven by industrial packaging versus.
<unk>, how much is given by changing pricing, maybe we could amend wait a minute. We're just trying to gauge how much yeah. That's a great thing.
Yeah, Hey, Mike is Tim.
I think the.
Obviously prices.
Is published out more than what we update in the last quarter. So the bulk of it is prize is both price on the index of then.
Referenced in the states speaker comments export pricing and.
Spot pricing.
Business there is some impact on volume because of the Destocking is taking a little bit longer but the bulk of it is price and you know on a proportional basis.
G C F has had.
More frequent and higher level, some price reductions on the index than than what we anticipated.
Published when when we updated last quarter.
Got it thank you Tim and they just quickly gets done in terms of some of the initiatives that you're pursuing global cellulose fibers.
I believe with me at four cause I don't think he anticipated that an additional hundred plus.
Tell them to call you pull a whole placing that let me see if it's better than we expected in that segment of wondering are no more to highlight some of the things that you're working out but was there anything in particular that occurred in the G. C up during the quarter. It allows you to you know cheetah pay below that level of EBITDA displayed it's kind of good places <unk>.
My company and ask <unk> to talk a little bit about you know.
How they're running in the business despite the soft demand and some of those improvements are religious and operational side of it.
Your body well enough reduced demand environment play if you could share a couple of things about the second quarter.
That helped you overcome some of the price headwinds.
Yeah.
Great question in mind. Thank you this is clay Ellis.
Yeah I.
I think you mentioned coming into the second quarter, what we what we thought about.
Demand or in price and amount of EDT that we took we we came into the exited the first quarter, leaving that we would see most of the inventory.
And destocking issues subside through the quarter, we did not see that as we expected we do believe Glen to see some improvement.
June being better than May July being better then June and August is also looking better so instead proving but it certainly what we're seeing now we hope to see earlier in the second quarter.
The things that were focused on maximizing cash generation managing our machine downtime, you may have seen leaf titled or and to call. The mail.
To consolidate some EDT there allow the other males to run a little bit more of a normal ray that overall better for our cost.
Supply chain aggressive supply chain costs.
Driving out cause there's Tim mentioned minimising, our fiber cause maximizing green energy fails.
And carbon credit sales and then also increasing are pulled by product.
Sales and production so pulling all of the levers to manage our cash cost in a marginal cost in the businesses, but we see we see improving through the third quarter Destocking, we'd certainly in the second half we see of.
The year to get out of that and in the meantime.
Billing everything that we can on <unk>.
Cost and.
And then also looking as Tim embark mentioned.
Around our business are mixed in.
Mitigating some of our exposure to to commodity right.
That'd be great. Thank thank you very much for that.
Your next question will come from the lineup Mark Weintraub Seaport Research go ahead.
Thank you so the site on or the the slide on page seven very very interesting slide. It's curious how how you came about to put that together is that just the conversations with customers do do some sort of survey on that.
And then are you seeing any sign in the metrics shipments b at Brookings, where this.
And to the Destocking is translating into changing business. If you look at what you <unk> you registered in July and maybe thoughts on August .
This is Marvin that's a great question. There is a qualitative piece to that slide and there's a quantitative steps that's internal and some of the other metrics, we use as Tom Henning to kind of give you a perspective on what what that slide kind of represents in terms of how we feel demand has been evolving and.
And different spots in the supply chain that had been a bit hard for anybody and everybody to call in terms of where inventory actually resides along the value chain atomic you can share bid on that for free.
Mark this time gimmick.
We take a subset of customers and that's some set of customers is consistent.
We talk to them about how they see there are too many patterns, but also what their inventory levels are for.
Not only not only boxes, but finished and so that's what you see flowing through here and if not we can we have a representative sample, but it's not.
Not 60% of the customer base, it's kind of leaders.
The segments that we look at.
I think when you talk about the stocky, it's pretty pretty consistent floating through our system like we expected.
And I think what you can see going back to Q4 is that consistency is based on customer feedback. So these pieces are matching up very well.
We're gonna.
We're gonna have we finished Q to you about where we expect it until we was up 2% sequentially in terms of.
Shipments per day.
And we're seeing an improvement.
And did you know.
Oh excuse me ended July of mid single digits. So.
I think that's very reflective of Congress curve of Destocking or overstock and going away over time.
Super intend that that's the <unk>. So the cops are getting easier to I believe so is it fair to say that on a year over year basis, it's even better than the mid single digits.
Well the mid single digits as a positive from quarter to quarter, that's sequential I think that that ties out to about.
Flat to modest 2% growth.
Third quarter.
I'm really more more of July so.
We fly through more strongly through the second quarter, that's continuing now and I think that it's a pretty good representation of how our customers are feeling it right.
Right. Thank you that that I.
My mistake. Thank you for forgetting that and then just in terms of impulse B U U idol to consolidate downtime.
And obviously you took huge amounts of downtime in containerboard during the second quarter and you know even with things ramping up it. It it does seem like there's a big gap between your capacity to produce and the men are you looking at idling to consolidate downtime in the containerboard business or have you done anything there yet.
And that's a really good question Mark I kind of anticipated that that question, what you're seeing is a perfect example of this specific back patterns in two different parts of international paper. While Clay described is the best cost position for Tcf was to take the Pensacola mail down.
And then maximize production at the other males that those meals are 100 per cent Virgin fiber. So the marginal cost action you have to take at the other males to load them up and the fact that you can sell green energy when you're running for those mills led us to one to set of decisions so far.
In containerboard because of the marginal cost profile. The other containerboard nails. The ones you wouldn't idol permanently are are completely involved a huge mix of where 65 35 urgent recycled ramp up recycled fiber you have physical logistics challenges based on where the other males.
So far we believed the way we've been doing it for for IP for our containerboard system as resulting from the lowest marginal cost.
There's a question Mark though about the duration of this type of mismatch between our capacity and our order book and as we learn more about that and we've now believe we've seen the bottom of the demand declining destocking, we will evaluate what does the upturn looked like.
And then if there's a different decision to be made.
And marginal cost of change through the year, where it's not as expensive to load up as other males. You would see us make a different decision and so that that's how we tried to operate and then you can see an example of two different methods in two different parts of the same company.
Different marginal cost attribute based on the products will make them.
Very clear and helpful. Thank you.
Your next question comes from the lineup George Staphos with Bank of America go ahead.
Thanks, very much everybody. Thanks for the details and great operating performance in the quarter.
Mark.
Tom a question for you so to the extent that we have data and it's it's it's really not a perfect analogue for what you'd be seeing in the box market. Nonetheless.
<unk> data retail takeaway remains relatively weak and obviously a lot of what drives the box market is consumer non-durables. It's the center of the store. So what are your customers telling you in terms of what is happening at retail and sell through and take away relative.
<unk> too.
Hopefully you know, what's an uptick now in their purchased patterns from you and and through the supply chain loading the center of the store.
Charge more expensive.
We look at scanner data as well, but we also look at we try and we try and push it down to one is box attentive to what uses boxes.
Our analysis would suggest that.
Channel that space is somewhere between minus 2% year over year and plus 1%.
The difficulty obviously is taking the revenue line, which is what you normally get and then okay. One is inflation for the set of good but if you take a broad range.
That's about where it comes out.
I would say that when.
When you look at the.
Perishability of the segments, so think of a segment.
Produce that's been the most resilient that's been our strongest segment.
Exited Q3 relative to the past, but the ones that are struggling you reached exactly what you said non-durables Endurable and I think it's because of the shelf life is so long did they built up their supply chain cover for risk and now obviously, they're gonna have to pull it down further.
But I I don't think that the health of the consumer beyond the goods recession that we've talked about.
It will negatively impact boxed man.
Okay, that's very interesting so there.
The fact that you've got such large shelf life and also I guess for that matter the supply chain opening up.
That allows customers to really take down their their inventories on you know the stuff that can stay the lungs on the shelf because they probably have the most of that and they're saying consumer you know it.
Isn't going into a shell from what you're seeing on the retail side would that be a fair summary of of what you're saying I think that's exactly right I mean, I I think about the classic motor oil and the department store that's not.
That's not gonna time out.
During the pandemic you can see people stocking that type of thing often so I think you've got multiple places where people stock.
Understood. My other question and recognizing this is a bit tricky and you're not guiding on 24, but but here comes the question. So you know we know building a better I P. What you are doing very well on congratulations will add I think you said from the slide another 150 to 125 next year.
If we look at what the price index change it occurred to date, making no further assumptions, one way or another going forward.
What would the impact of that B.
Into 24 in terms of EBITDA, we know what your guidance as we know what building a better I P. Does what is the effect of prior price changes on EBITDA for next year.
And what is the <unk>.
What do you have in the back pocket in terms of all the operating efficiencies all the optimization that you've done.
As well as you look out the 24th Thank you guys and good luck in the corner.
Hey, Georgia, you're right. That's a tricky question [laughter], but I'll I'll give it a shot and that's what the new Tim So [laughter].
Thanks, George So you know, we we look at the price care of at the carryover impact, but I hesitate to quantify it.
For a lot of reasons, but one in particular is just you know we're sorting through mix mix is going to change and.
And so the price impact won't be the same on a on a different mix than than the one that we had as the price has changed in terms of initiatives I think you've heard characterize the on the call all of the things that we're working on in the moment, but there are also strategic initiatives that we're working on that are gonna.
Drive better results on the commercial side.
And also on the call side so.
You know, we typically give our outlook when we do the fourth quarter call at the beginning of the year and I think we'll stick to that but we feel pretty good about what's going on in the company in the way of self-help that will mitigate the carryover that's that we're gonna see as we go into 24.
Okay. We appreciate it will turn it over thank you guys.
Your next question will come from Cleve brokered with you B S. Go ahead.
Great. Thanks, very much for taking the questions and worrying everybody I just wanted to follow up on on George's question. It was kind of asthma bit differently earlier as well, but you know just sort of thinking about bigger picture you know the next couple of years.
What what really needs to happen to drive the earnings recovery that you've been looking for them and I think the last couple of quarters, we've talked about this the cyclicality and.
Is there a couple of times you feel like you've got the capacity in the system that that you need versus volume expectations. I mean, it sounds like that's still the case, but but you know we were talking about the pricing recovery is is a volume kind of enough to to get you. There I mean, what what are kind of the drivers that you're gonna be value.
Waiting in the second half here.
Hi, This is mark that that's a really good question. It. Unfortunately, it's not one thing I think what we need to see the earnings recovery is the kind of structure between price and cost, which obviously has a volume component to it that drives our margins structure back.
North of 20% so what we what we do to track that as we look at in the case of packaging, we used to be there a lot of the time and the cases.
DCF business, we will we're working our way to that kind of margin structure that yields returns that are well well above at least at least 200 basis points about the cost of capital and so what we do is we break that down and congestion simple EBITDA per time for everybody to focus on and there are components of that number.
That are purely commercial who'll be cell too and at what price that arm somewhat macro related I E. The amount of volume available in the market that we can compete for and then there's the wealth of areas to work on and the cost area and what what's changed for IP as the B demand.
That really ramped up and pull forward.
He was accompanied by number of price increases that it took us longer to get them through based on the customer mix, we had and contractual responsibilities, but the inflationary impact our cost structure didn't wait for that so we have the classic margin squeeze that we have to undo now so.
That's really what's gonna happen, obviously, a lot of it is is.
A market that is not declining at the rain, it's starting to decline for for all the reasons, we talked about maybe not the end consumer about the destocking effect and all of that that started about this time last year are in August of last year and Ernest and.
It's hard to get out from under that.
Quickly when you've got sticky inflation edited flowed through to Labour Koston and all of those things in your supply chain. So I think that's what's gonna happen and most of those efforts, we don't control. The overall demand, but we are confident in both product lines being.
Facing a longterm breath profile, while we do control is who we sell to and at what price.
And how we operate our manufacturing facilities to be.
First quartile type cost producer of these types of products and so we've got efforts.
And focus on all of those initiatives and I'm very confident we'll get back to the.
Back to the levels of earnings and returns and then grow from there.
Okay. That's that's.
It's pretty clear.
Vague [laughter] and for me to ask but thanks for the thanks for the clarity and it ruins the insight into your thought process and then you know maybe just one quick follow up just sort of sticking with the volumes in the packaging business I think he said sequentially on the bridge. It's it's sort of it's 5 million dollar tailwind into this.
Third quarter and star.
Starting to.
Be able to figure out when it's applied for the fourth quarter, but we just.
I correct in assuming that your expectations unbelieving growth in the second half for a relatively low I mean.
And this flat to up slightly kind of environment that we're talking about for July .
Oh, you're talking about <unk> <unk> <unk> well in the in the packaging and the packaging business well I'll ask Tom to comment on the backside and J royalties also here to talk about what we're seeing on containerboard and our other channels it'd be open market.
So you want to start I think we're going to see through the third quarter and into the fourth quarter.
Getting back to normal I think this destocking is.
So we.
We expected demand and normalize and you'll see a much better second half of the year substantially better second half of the year that the first half.
Near over a year.
Think somebody pointed out that the year over year cops get easier, but even with that B C continued strengthening through the balance of the year.
This is Jay royalties, so commenting on the the open market domestic channel and the export channel I would say that relative to the domestic channel.
Both of these have been a big drag on us from a demand standpoint, thus far this year, but we are seeing improvement in both of those channels from a domestic standpoint, we did see some modest improvement in the second quarter and based on our order books were continuing to see we're encouraged about the improvements in the third quarter. If you think about.
Those type of customers and their orientation, there are less oriented to food customers and so from a destocking standpoint, I think they've been hit harder and is that on lines.
We have the opportunity for more pick up.
So we're encouraged there from an export standpoint, the first half of the year has been incredibly weak.
As I mentioned last quarter, which started to see some stabilization that your name and Tori levels and some improvement in order patterns, particularly related to Latin America, we saw that flow through in the second quarter.
The encouraging thing is we're seeing improvement across all three regions Asia.
M B, a and Latin America, just we go into the third corner and if you look at our run rate.
Based on our current order bookings out through August .
We're seeing about 200000 ton pickup and the run rate of the second half versus the first half and that's that's evidenced in our order patterns. So we've been we've got we've got room to grow from there. So I think in both cases, we're encouraged about what we're seeing at this time and how that can flow through to the second half.
That's very clear. Thank you so much for all the color appreciate it.
Your question next question comes to the line of Anthony <unk> Pettinari with Citigroup go ahead.
Good morning.
<unk> had a question on the updated free cash flow guidance and specifically you know with regards to the dividend you you've talked about the commitment to maintain the dividend and targeting 40 to 50 per cent of I think free cash flow over time, you know with the dividend payment I think coming in.
Above the midpoint of the free cancel guide just how how do we think about you know levers that you can pull or sort of capital allocation.
Priorities or ways that you can kind of balance that you know this year and going forward and how that.
You know maybe changes the approach a little bit.
This is mark I'll start on that just on the dividend question. It's a very fair question. It's when we get if you just look at the numbers in the Bath.
The long term plan is 40% to 50% of free cash flow.
We know that occasionally that'll be tested and this is kind of a barely onset of cyclical dynamics that are really testing it but we're very confident in the medium and long term cashflow potential degeneration potential of the company and we had the dividend is nothing in upper upper end of the range for a short period of time.
We're we're comfortable with that we know we can grow back into it with with future cash flows. So his chin said in his prepared remarks.
We're committed to the debit and that's what that means it's not it's not just a formulaic commitment for international paper, we believe in talking with our shareholders.
Especially the people who hold our chairs for a long period of time to get it is very important to them. So that's that's why we're committed to it not just when it's easy and it fits into an a metric, but we're committed to it in good times and we're committed to it and stress times and as far as the levers to Paul and what happened with the guidance and what we could do that we're not doing.
Last tend to comment a little bit on on that but just just so I'm clear on how we think about the getting then we don't get.
We don't get nervous when we're at the operand just like we don't look at arbitrarily doing something more on the lower end at might be also a cyclical dynamic. It's it's something that we believe we can handle over time and that will grow very nicely back into a more normal range 10, if you would add a few comments.
The second part of this question about levers to pull I'm sure.
Sure Anthony just a couple of points that I think are important.
First of all as we reference the $5 million to $600 million includes.
The the the settlement payment for timber monetization, which was almost $200 million in the first quarter and so that's a one time item.
And not to repeat the other the other item is we're gonna invest more capital this.
This year than we have sons before the pandemic.
At the beginning of the year, we put out a range of one to one to <unk>.
Really with the you know normally were tighter than that but just given supply chain delays and difficulties we had struggled.
To invest as much as we wanted the past couple of years.
And so you know anticipating that it could be that way again, it was kind of the 1 billion in Lincoln freed up it could be as high as one two well things have freed up and so we tightened the range where later in the year of course, but we've heightened range and.
And the way projects are are being deployed you know it could push the upper limit on one too so.
I think that's important relative to the free cash flow on a go forward basis, it's back to what we were talking about earlier in terms of.
Initiatives, a big portion of the initiatives, we're working on our cost and so we we think we're getting traction on that and we think there's a lot more to call back.
Working capital is something we focus on pretty intently and and then capital if we need to we have I think we've demonstrated this over the years, we have ability to flex our capital spit in the moments and certainly that would that would be a consideration as well.
So hopefully that won't be I think that was that was exactly what I was hoping you would cover as we had the levers we can pull them if and when we want to but I'll I'll just finish that point at 10 minute about the investments a lot of the investments that we're doing now.
Unlike in the past our in our box business in our converting operations and so you ask why am I confident about future cash flows just because those investments we're making today will produce a lot of those future cash flows in 24, 25, and 26 and so.
It's not a lot of spending on normal maintenance than normal protection of current cash flows a fair amount of it is about future cash flows and that's what's different about the quality of the capital investment number that 10 sided versus maybe in the past, where we were doing some things that needed to be done but didn't have a real <unk>.
Section too a lot of future cash flows.
Okay. That's that's very helpful. That's very helpful color I appreciate that and.
And then I guess, just a question maybe somewhat related but in terms of the competitive landscape in containerboard and corrugated we've obviously seen a number of capacity additions this year, which I think most of which are up and running and I guess you know.
Without speaking about any specific competitor company.
Is it possible to talk about sort of the impact.
This capacity maybe relative to your expectations I mean has it been more disruptive less disruptive sort of as expected.
Is the impact sort of already maybe absorbed in the market is it something that is going to be felt more in the second half I'm. Just wondering if you could just generally talk about.
How this new capacity has been absorbed in the market and how you kind of see the overall competitive one escape here.
But he was a stray royalty.
Yeah.
It's it's a great question I think you know from our vantage point, we continue to.
Wonder where are these titans are going because we're not seeing a lot of evidence of it again in our space in our customer space.
You know I'll take you back to.
You know at the end of the day customers, our customers buy boxes and that requires a complex set of needs in our complex offering and so if you think about.
Some of these new entrants, they're coming out with kind of <unk>.
A single singular in a limited set of offerings in terms of one Mil limited grades.
Cannot.
Fulfill all their needs and so when we think about our relationships with our customers were bringing a more robust offering multiple grades redundancy and and our supply chain in our manufacturing system to help them fulfill all of those needs and we and we structure our relationships accordingly so.
That's that's what they're up against in terms of competing with a company like international paper.
Okay. That's that's helpful I'll turn it over.
Your next question will come from the lineup gay Pudgy with Wells Fargo go ahead.
Martin Good morning.
I apologize in advance for the along with when the question here, but I'm looking back at 21, 22, where there's a cumulative I think in in the industrial packaging business mm 2.8 billion of price realized and if I take the $24 million a year over year in the second quarter plus the 95, I think we need to talk to.
Sequential basis, I know it doesn't work exactly this way, but year over year, we're sort of implying down 125.
<unk>.
Has something changed like when I think about the 80 per cent of the businesses vertically integrated of your corrugated converted uhm, maybe 80 per cent of that as recently linked it.
You guys talked about commercial initiatives has anything changed with respect to that lag in the past through and and maybe it's shorter or longer than it used to be.
And I guess Relatedly Uhm will we be at a sort of <unk> based on what <unk> transpired at run right.
Negative price in Q3.
And and I'll take one stab at it and if I were to summarize what you guys have said thus far.
We make an assumption about what the negative price will three for next year might look like.
Based on.
What you see in terms of maybe an improvement in volumes and improving not bleeding rates.
And cost out.
That industrial packaging.
<unk> B flattish with 2023.
So <unk> I appreciate.
The <unk> the <unk> the long question I usually.
These questions and I gave up halfway through [laughter] Big picture, what what was different about the last price changes in the market and for IP is that that was different from what you would consider more normal is the.
The rate of price movement, meaning three in a 12 month period that type of thing was gift for for US some of our commercial arrangements.
<unk> and.
And constructed anticipating more like one price increase a year with maybe two but limits on how fast you can go through so in some cases, we were still getting price increases this year.
Some customers that the last price increase was early last year and it started declining in the fall that was a typical in terms of a set of conditions. So the flowing through and the relocation scheduled.
Fry P than it has in the past and balance of your question about going forward I couldn't keep up with all of that I would ask maybe just following up with with Mark and I are to try to kind of model out what you were talking about in terms of the falling through <unk>. Thank you use the term when we go price negative.
But I'm not sure I, followed all of that but that's the one critical thing to think about is the the rate increases in the type of next we have with a portion of our our customer base, which you know in that same customer base is more resilient right now which is one of the reasons, we are performing pretty well in the market on an absolute basis.
Because those types of customers tend to be market leaders.
Miss that come some additional challenges on on abnormal commercial times like rapid price increases.
And those kind of things.
Okay. Thank you and appreciating that it's it's tough to talk about it like like like this but southern article yesterday talking about some.
Some of the differences are <unk>, how paper businesses are performing in Russia.
Again to the thing you can comment uhm could anything change with respect to the process there and if things go sort of as planned can you give us an update in terms of timing as to when the catch my come in.
Thank you.
Really really hard to give you an update on the tiny we as we said we lack one approval from the competition authorities and that's a multi point multipart approval we've got.
Part.
And so I think with what's been going on in Russia, that's unrelated to.
Foreign companies exiting and all that that things had happened with with with the with the government and the military issues I think.
A distraction factor for getting these kinds of jobs completed I will I will say no to the I P. L and transaction is or the larger end of things that have occurred. So it gets it gets higher levels of scrutiny and and you know people do any problems are at a higher level of neat.
Obviously been really busy with other things not related to this so I wish I could give you a better timing are our partners who are the potential buyers are working at constantly their their work and their their normal contacts with the government trying to get it to the finish line.
If I gave you a prediction it would just it would just be an educated guess, which we know is not is not worth much time, if you want to add something to that just I mean March right. The timing of the approval is is impossible to gauge once.
Work to be obtained the flow through on closing the transaction of receiving the cash is very quick.
You a final question today comes from the line of Matthew Mcculler with R. A b C.
One moment, while we open your line.
Go ahead please.
Alright, Thanks, good morning, I'd like to ask about your global cellulose fibers business. So recognized need to talk to put your focus on customers who value of the attribute severe pulp.
Thinking about the market more broadly can you talk about any in fact, you've seen over the past few quarters from certain consumers. So stealing lower cost grades and then maybe whether you're seeing any changes in that substitution behavior.
With <unk> pricing coming off peak thanks.
That's that's a good question client is Tina all over really understanding this whole substitution phenomenon plant comment on what we know about that and how it.
Yeah sure total madness is clay Ellis.
Yeah, I think it's a good question.
There's always been some level of substitution in local markets in areas of China stick in the supply chain disruption in 22 really drill.
More of that I mean, he's our customers in some geography's segments and then these were customers who were very very Caitlin with a supply chain couldn't actually get the product and so I think that drove a higher rate of substitution. These are these are segments and <unk>.
Some geography's Grands in high quality product performance are not as critical.
Take about an example that might would be like pet pet and parts of China.
These are not our core customer base in this part of the market, we take what will ebb and flow with substitution over time as their economics.
You know allow with a little less regard to quality and product performance technical spec says the.
Broader fluff market. So again, we think it's a it's a very small segment of the fluff market clearly it went up in the first half of the year. We saw that increase but also it's nearing the end of the second quarter as you mentioned as prices change in spot market prices change.
We also saw a lot of that come back out. So again, we think it's there we understand if we know where it is and and how it's done we don't think it's it's likely to grow very broadly, but it's not a new phenomenon, but clearly it it increase due to the supply chain.
Been stickier during the price differential in their economics.
Great. Thanks, very much that's all from me I'll turn it back.
Thank you and I'll now turn the call back over to embark certain for closing remarks.
Thank you operator, I want to thank everyone for your time today and for your continued interest in international paper.
We outline some exciting initiatives that are focused on the future of the <unk>.
Company and the catalyst for some of our future rooms. So I look forward to updating you on our progress during the next bill have a great day.
But once again, we'd like to thank you for your participating in today's international pay per second quarter, 20th twenty-three earnings call. You may now disconnect.
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