Q3 2023 International Paper Co Earnings Call

Okay.

Yeah.

Good morning, and thank you for standing by welcome to today's international paper's third quarter 2023 earnings Conference call.

All lines have been placed on mute to prevent background noise. After the Speakers' 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 zero I'd now like to turn today's conference over to Mark Nelson Vice President Investor Relations.

Thank you Greg Good morning, and thank you for joining international paper's third quarter 2023 earnings call.

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

There is important information at the beginning of our presentation on slide two including certain legal disclaimers for.

For example, during this call we will make forward looking statements that are subject to risks and uncertainties. We will also present certain non U S. GAAP financial information a reconciliation.

<unk> of those figures to U S. GAAP financial measures is available on our website.

Our website also contains copies of the third quarter earnings press release, and today's presentation slides I will now turn it the call over to Mark Sutton.

Thank you Mark and good morning, everyone.

We will begin our discussion on slide three.

I'll highlight our results in the third quarter, our teams across international paper executed well with intense focus on optimizing our cost structure.

<unk> care of our customers.

Looking at our performance we delivered on the earnings outlook, we provided last quarter and we continued our efforts to drive out the highest marginal cost across our system.

In addition, international paper delivered $75 million a year.

Year over year incremental earnings benefits from our building a better IP initiatives year to date. This program has contributed $195 million and benefits exceeding our full year target for the second year in a row.

Our performance was driven by commercial and process improvement initiatives, which I will highlight later during the call.

We're also encouraged to see that the demand.

The environment continues to recover across our portfolio in the third quarter and we expect this trend to continue going forward.

Despite these improvements.

Satisfied with our absolute level of earnings. Therefore, we are taking additional actions to further strengthen our businesses and improve profitability.

For more details regarding these initiatives later in the presentation. However, before we move off this topic I'd like to share my perspective on the series of strategic actions, we announced last week to optimize our mill system and reduce fixed costs.

These actions include the permanent closure of our containerboard mill in Orange, Texas, and two pulp machines, including one at our <unk> North Carolina Mill any other at our Pensacola, Florida Mill.

While these actions will help us achieve our objectives. They are incredibly difficult decisions to make because of the impact on our team members and their families and surrounding communities.

Are truly grateful to our team members at Orange Regal with Pepsi Cola for their contributions to IP over the years and we are committed to supporting them through this transition while continuing to serve our customers.

I'd also like to update you on another strategic action completed in the quarter.

We completed our sale.

The sale of our ownership interest in the <unk> joint venture and <unk>.

Asia, Russia.

Proceeds from the sale totaled $508 million as expected with the completion of this sale international paper or longer.

Any investment in Russia.

I will now turn it over to Tim who will provide more details about our third quarter performance and our outlook.

Thank you Mark turning to our third quarter key financials on slide four.

Operating earnings per share increased sequentially and came in better than the outlook, we provided last quarter.

We continue to optimize our system through commercial and operational initiatives and we also benefited from lower employee benefit costs.

A lower effective tax rate.

Operating margins continued to be under pressure from macroeconomic headwinds impacting sales.

Sales price and volumes, however, margins improved quarter over quarter, driven by more favorable operating cost.

Sure outage expense.

Moving to the third quarter sequential earnings bridge on slide five third quarter operating earnings per share was <unk> 64, as compared to <unk> 59 in the second quarter.

Price and mix was lower by 35 per share primarily due to index movements across our portfolio and lower export sales prices.

Volume was relatively stable overall as higher volumes across all of our containerboard export channel and global cellulose fibers business offset one less shipping day in our North American packaging business.

Operations and costs improved earnings by $139 million or <unk> <unk> per share during the quarter. Our mill system ran very well and our teams across the businesses continued their focus on reducing marginal cost and spending.

We're accomplishing this by optimizing mix use usage of fiber and energy.

Reducing labor costs and over time.

Shifting to lower cost suppliers and driving lower distribution cost.

During the third quarter, we also had lower employee benefit costs totaling about $80 million or <unk> 18 per share.

Which was in our outlook provided last quarter and will not repeat in the fourth quarter.

The balance is primarily due to lower unabsorbed fixed cost.

Weighted to last economic downtime across our portfolio as demand improves.

Maintenance outages were lower by $36 million or <unk> <unk> per share in the third quarter.

Input costs were modestly higher as increased costs for energy on OCC were partially offset by lower cost for chemicals, and wood and corporate items benefited from a lower effective tax rate in the third quarter.

Turning to the segments and starting with industrial packaging on slide six price and mix was lower due to index movements lower export prices and higher export mix as demand improved this.

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

Operator: Good morning, and thank you for standing by. Welcome to today's International Paper's third quarter 2023 earnings conference call. All lines have been placed on mute to prevent background noise.

Volume was stable overall, despite one less shipping day in box containerboard shipments were higher across our export channels due to improved demand in our daily use box shipments were stable to slightly higher sequentially.

Operator: After the speakers remarks, you will have an opportunity to ask questions to ask a question, press one and zero on your telephone keypad to withdraw a question, press one and zero.

Demand for packaging was also impacted by customer inventory Destocking. However, based on customer feedback. We believe this is generally completed at the end of the third quarter.

Mark Nellessen: I'd now like to turn today's conference over to Mark Nellessen, Vice President and Investor Relations. Thank you, Greg. Good morning, and thank you for joining International Paper's third quarter 2023 earnings call. Our speakers this morning are Mark Sutton, Chairman and Chief Executive Officer and Tim Nicholls, Senior Vice President and Chief Financial Officer. There's important information at the beginning of our presentation on flight two, including certain legal disclaimers. For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties.

Operations and costs improved earnings by $103 million.

This includes a benefit of $68 million from the non repeat items I mentioned earlier.

In addition, often cost also benefited from lower economic downtime in the quarter as demand has improved.

Our mill system continued to run very reliably and our teams across the business businesses remain focused on reducing the highest marginal cost and spending while further optimizing our entire supply chain to align with the customer demand environment.

Mark Nellessen: We will also present certain non-USGAP financial information. A reconciliation of those figures to USGAP financial measures is available on our website. Our website also contains copies of the third quarter earnings press release and today's presentation slides.

For example by optimizing fiber energy mix and raw materials, we have reduced the cost of economic downtime.

By approximately $20 million on an annualized basis.

Mark Sutton: I will now turn it to call over to Mark Sutton. Thank you, Mark.

Mark Sutton: Good morning, everyone. We will begin our discussion on slide three where I will highlight our results. In the third quarter, our teams across International Paper executed well with intense focus on optimizing our cost structure while taking care of our customers. Looking at our performance, we delivered on the earnings outlook we provided last quarter and we continued our efforts to drive out the highest marginal cost across our citizens. In addition, International Paper delivered $75 million of year-over-year incremental earnings benefits from our building of better IP initiatives.

We also have significant efforts underway to improve distribution costs, including initiatives to minimize high cost freight carriers approved contract rates and load efficiency and shed warehouse and emerge expenses. These efforts have lowered our supply chain caused by approximately $40 million on an annualized basis.

And there's more opportunities in this area as we go forward.

Planned maintenance outages were lower by $34 million sequentially due to seasonally lower outage schedule and our efforts to further reduce outage spending in the current demand environment.

Mark Sutton: Year-to-date this program has contributed $195 million in benefits exceeding our full-year target for the second year in a row. Our performance was driven by commercial and process improvement initiatives which I will highlight later during the call. We are also encouraged to see that the demand environment continued to recover across our portfolio in the third quarter and we expect this trend to continue going forward. Despite these improvements, I'm not satisfied with our absolute level of earnings.

Input costs were moderately higher primarily due to the higher cost for energy on OCC.

Partly offset by lower cost for chemicals.

Turning to global cellulose fibers on slide seven.

And looking at our third quarter performance price and mix was lower due to price index movements, partially offset by the benefits from higher fluff mix.

Volume was higher in the third quarter as demand for fluff improved.

Mark Sutton: Therefore, we are taking additional actions to further strengthen our businesses and improve profitability. I will share more details regarding these initiatives later in the presentation. However, before we move off this topic, I'd like to share my perspective on the series of strategic actions we announced last week to optimize our mill system and reduce fixed cost. These actions include the permanent closure of our Container Board Mill in Orange, Texas and two pulp machines, including one at our Regalwood North Carolina Mill and the other at our Pensacola Floating Mill.

This was partially offset by lower sales of commodity grades as we continued to focus on strategically aligning our business with the most attractive customers and segments.

The Destocking trend continued in the third quarter is improvement across supply chains allow customers to manage more lean inventory levels.

Based on feedback from our customers and from order bookings. We believe Destocking was largely completed in the third quarter. We also believe fluff demand will continue to grow over time because of the central role that absorbed in personal care products play in meeting consumer needs.

Mark Sutton: While these actions will help us achieve our objectives, they are incredibly difficult decisions to make because of the impact on our team members, their families and the surrounding communities. We are truly grateful to our team members at Orange, Regalwood and Pensacola for their contributions to IP over the years and we are committed to supporting them through this transition while continuing to serve our customers, course. I'd also like to update you on another strategic action completed in the quarter.

Operations and costs.

Improved earnings by $36 million.

This includes a benefit of $12 million from the non repeat items I mentioned earlier.

Austin costs also benefited from strong operational performance lower supply chain cost lower spending and higher energy sales as our teams remained focused on optimizing the entire value chain.

Mark Sutton: We completed our sale, the sale of our ownership interest and the Illum joint venture in Russia. Proceeds from the sale total $508 million as expected. With the completion of this sale, International Paper No Longer has any investment in Russia.

Planned maintenance outages were relatively flat sequentially and input costs were lower by $5 million, primarily due to lower wood and chemical costs.

Turning to slide eight and our fourth quarter outlook.

Start with industrial packaging.

We expect price and mix to decrease earnings by $60 million as a result of prior index movement in North America.

Tim Nicholls: I will now turn it over to Tim who will provide more details about our third quarter performance and our outlook. Tim? Thank you, Mark. Turning to our third quarter key financials on slide four, operating earnings per share increased sequentially and came in better than the outlook we provided last quarter. We continue to optimize our system through commercial and operational initiatives and we also benefited from lower employee benefit cost and a lower effective tax rate.

And lower average export prices based on declines to date.

Volume is expected to increase earnings by $20 million due to sequentially higher box volumes. Despite one less shipping day and an increase in containerboard export shipments.

Yes.

Operations and costs are expected to decrease earnings by $10 million.

This is due to the non repeat of favorable employee benefit costs that I mentioned earlier.

Tim Nicholls: Operating margins continue to be under pressure from macroeconomic headwinds and tightening sales price and volumes. However, margins improved quarter over quarter driven by more favorable operating costs and lower outage expense. Moving to the third quarter sequential earnings bridge on slide five, third quarter operating earnings per share was 64 cents as compared to 59 cents in the second quarter. Price and mix was lower by 35 cents per share. I'm primarily due to index movements across our portfolio and lower export sales prices.

Partially offset by lower unabsorbed fixed related to higher volumes and benefits from our ongoing cost management initiatives.

Lower maintenance outage expense is expected to increase earnings by $21 million.

And lastly, rising input costs are expected to decrease earnings by $10 million driven by higher OCC costs, partially offset by lower costs for energy wood and other raw materials.

Turning to global cellulose fibers, we expect price and mix to decrease earnings by $25 million as a result of prior index movements.

Tim Nicholls: Volume was relatively stable overall as higher volumes across our container board export channel and global sales fibers business all set one month shipping day and our North American packaging business. Operations and cost improved earnings by $139 million or 30 cents per share. During the quarter our mill system ran very well and our teams across the businesses continued their focus on reducing marginal cost and spending. We're accomplishing this by optimizing mix and usage of fiber energy, reducing labor cost and over time, shifting to lower cost suppliers and driving lower distribution costs.

Overall volume is expected to increase earnings by $5 million, we expect higher fluff volumes due to improving demand offset by lower shipments of commodity grades as we execute our mix optimization strategy.

Operations and costs are expected to decrease earnings by $35 million relative to the third quarter approximately half of this is due to the non repeat of favorable employee benefit costs that I discussed earlier, the remainder due to higher planned maintenance outage cost in the fourth quarter.

Higher maintenance outage expense is expected to decrease earnings by $28 million.

Tim Nicholls: During the third quarter we also had lower employee benefit cost totaling about 80 million dollars or 18 cents per share which was in our outlook provided last quarter and will not repeat in the fourth quarter. The balance is primarily due to lower unabsorbed fixed cost related to last economic downtime across our portfolio as demand improved. Main installages were lower by $36 million or 8 cents per share in the third quarter. Info costs were modestly higher as increased cost for energy and OCC were partially all set by lower cost for chemicals and wood and corporate items benefited from a lower effective tax rate in the third quarter.

Lastly, lower input costs are expected to.

Our expected to increase earnings by $5 million.

And with that I'll turn it back over to Mark.

Thank you Kevin I will start on slide nine.

As I mentioned at the beginning of the call we are making solid progress with our building a better IP program, which is which has delivered a total benefit of $195 million year to date exceeding our original target for the second year in a row.

This year most of the benefits are coming from our strategy acceleration initiatives.

Our business teams are focused on creating value for our customers, while improving the profitability of our product and service offerings are getting paid for what value we provide to our customers.

Tim Nicholls: Turning to the segments and starting with industrial packaging on slide six price and mix was lower due to index movements, lower export prices and higher export mix as demand improved. This was partially all set by benefits from commercial initiatives focused on margin improvement.

And I also growing in the most attractive.

Segments with the most attractive customers and in the most attractive geographic regions.

We've also seen meaningful benefits from our process optimization initiatives.

Leveraging advanced technologies and big data across our large system. Our teams are identifying new ways to improve productivity and lower costs.

Tim Nicholls: Department. Volume was stable overall despite one less shipping day in box. Container board shipments were higher across our export channels due to improved demand and our daily US box shipments were stable slightly higher sequentially. Demand for packaging was also impacted by customer inventory destocking. However, based on customer feedback, we believe this is generally completed at the end of the third quarter. Operations and cost improved earnings by $103 million. This includes a benefit of $68 million from the non-repeat items I mentioned earlier.

I am excited about our progress in the next couple of slides I'll share. Some examples of the actions our business teams are taking to drive profitable growth.

Now turning to slide 10, I'll start with industrial packaging.

Beginning with commercial excellence international.

International paper has a broad range of capabilities and segment tailored packaging solutions to serve our customers. Our commercial teams are leveraging these advantages to improve mix by strategically aligning with the most attractive regions segments and customers.

Our teams are also using more advanced data analytics to manage product pricing across our sales territories. This allows them to capture more value for customer tailored product and service offerings.

Tim Nicholls: In addition, Austin cost also benefited from floor economic downtime in the quarter as demand improved. Our mail system continued to run very reliably and our teams across the business businesses remain focused on reducing the highest marginal cost and spending while further optimizing our entire supply chain to align with the customer demand environment. For example, by optimizing fiber, energy mix and the raw materials we've reduced the cost of economic downtime by approximately $20 million on an annualized basis.

Tim Nicholls: We also have significant effort underway to improve distribution costs, including initiatives to minimize high-cost freight carriers, improve contract rates and load efficiency, and send warehouse and emerge expenses. These efforts have lowered our supply chain costs by approximately $40 million on an annualized basis. And there's more opportunities in this area as we go forward. Plan maintenance outages were lower by $34 million sequentially due to a seemingly lower average schedule and our efforts to further reduce outage spending in the current demand environment. Input costs were moderately higher, primarily due to the higher cost for energy and OCC, partly offset by lower costs for chemicals.

Under operational excellence, we are leveraging advanced technology and data analytics to improve efficiencies and lower cost across our large system. The mills and box plants, we are seeing benefits in areas, such as maintenance and reliability raw material consumption distribution and logistics and sourcing.

And as I mentioned earlier, we're also taking actions to optimize our mill system and reduce fixed costs. The mill closures will improve the mill closure will improve annual EBITDA for industrial packaging by about $140 million.

Turning to slide 11, I'll highlight some of the things we're doing in the area of investment excellence.

Due to the attractive long term fundamentals of our industrial packaging business. We believe we have investment opportunities to drive profitable growth and create significant value.

Strategic capital investments in our mill system have targeted productivity improvements and product capability enhancements that align with customer needs and market trends.

And in capabilities for lightweight and ultra lightweight miners and high quality Virgin White top products are examples of these investments.

Tim Nicholls: Turning to the global stimulus fibers on slide 7 and looking at our third quarter performance price and mix was lower due to price index movements, partially offset by the benefits from higher fluff mix. Volume was higher in the third quarter as demand for fluff improved. This was partially offset by lower sales of commodity grades as we continued to focus on strategically aligning our business with the most attractive customers and segments.

More recently, our strategic investments are focused on our box business.

These investments allow us to grow with customers and increase profitability by strengthening our capabilities improving productivity and leveraging automation.

We believe we can create the most value through organic investments across our large network of box plants.

<unk> does this include adding converting lines in existing plants and upgrading older equipment with newer and more advanced technology for some context. The investments we have made over the past two years in existing plants is the equivalent of adding almost three average sized box plants to our system.

Tim Nicholls: The destocking trend continued in the third quarter as improvement across supply chains allowed customers to manage more lean inventory levels. Based on feedback from our customers and from order bookings we believe destocking was largely completed in the third quarter. We also believe fluff demand will continue to grow over time because of the essential role that absorbant personal care products play in meeting consumer needs. Operations and cost improved earnings by $36 million.

We will supplement this strategy with additional investments and Greenfield box plants, and occasionally with bolt on M&A, where we can create additional value by addressing regional needs enhancing our business.

I'd also like to recognize that in September we celebrated the grand opening of our new Greenfield box plant and add Glenn, Pennsylvania, which has a great team and world class capabilities are.

Tim Nicholls: This includes benefit of $12 million from the non-repeat items I mentioned earlier. OCC also benefited from strong operational performance, lower supply chain costs, lower spending and higher energy sales as our teams remain focused on optimizing the entire value chain. Plan maintenance outages were relatively flat sequitually and input costs were lower by $5 million primarily due to lower wood and chemical costs.

Our investment will allow us to optimize our network of plants in the northeast, while providing additional capacity for future growth in.

In summary, we have significant opportunities to leverage these new investments as well as our market expertise to grow with customers improve our mix and capture additional value.

Turning to slide 12, I'll share some key opportunities in our global cellulose fibers business.

Tim Nicholls: Turning to slide 8 in our fourth quarter outlook, I'll start with industrial packaging. We expect price and mix to decrease earnings by $60 million as a result of prior index movement in North America and lower average export prices based on declines to date. Volume is expected to increase earnings by $20 million due to sequentially higher box volumes, despite one less shipping day and an increase in container board export shipments.

Over the past year, we have captured meaningful benefits from commercial actions, which contributed to our building a better IP results. Our commercial teams renegotiated large contracts to ensure we get paid for value that we provide.

In addition, we have earned a higher premium for fluff grades relative to commodity pumps by capturing more value and aligning with those customer segments and regions, who value our differentiated product and service offerings.

However, the benefits of our commercial strategy are currently being masked by a very challenged challenging and unprecedented business cycle as well as our exposure to commodity grades.

Tim Nicholls: Operations and costs are expected to decrease earnings by $10 million. This is due to the non-repeat of favorable employee benefit cost I mentioned earlier, partially offset by lower unabsorbed fix related to higher volumes and benefits from our ongoing cost management initiatives.

On a positive note the market environment began recovering in the third quarter as demand for fluff pulp improved and we expect this trend to continue in the fourth quarter.

Going forward, we believe there are more strategic levers to pull to increase the earnings potential of this business through our go to market strategy, we have an opportunity to improve our mix by reducing our exposure to commodity grades and by serving the most attractive fluff customers and markets that allow us to maximize the value of this business.

Tim Nicholls: Lower maintenance outage expense is expected to increase earnings by $21 million, and lastly rising input costs are expected to decrease earnings by $10 million driven by higher OCC cost, partially offset by lower cost for energy wood and other raw materials.

Aligned with this strategy, we are taking actions to rightsize, our footprint and reduce fixed costs across the system.

Tim Nicholls: Turning to global cellulose fibers, we expect price and mix to decrease earnings by $25 million as a result of prior index movements. Overall volume is expected to increase earnings by $5 million, we expect higher flood volumes due to improving demand, offset by lower shipments of commodity grades as we execute our mix optimization strategy.

As I mentioned at the beginning of the call we announced the closure of two pulp machines, which will improve EBITDA for the global cellulose fibers business by approximately $90 million.

I believe there is a good business within this business and that we can continue to grow earnings and cash flows over the cycle.

We have talented teams with significant market expertise and our mill system with a broad set of capabilities. This allows us to create value for our customers by delivering innovation and products that meet our stringent performance and product safety standards.

Tim Nicholls: Operations and costs are expected to decrease earnings by $35 million relative to the third quarter, approximately half of this is due to the non-repeat of favorable employee benefit cost I discussed earlier. The remainder due to higher plan maintenance outage costs than the fourth quarter. Higher maintenance outage expense is expected to decrease earnings by $28 million.

Now I'll turn to slide 13.

We continue to see demand recovery across the markets, we serve and we strongly believe in the attractive long term fundamentals of our businesses and international paper, we are taking actions to improve earnings and drive profitable growth.

Mark Sutton: Lastly lower input costs are expected to increase earnings by $5 million, and with that I'll turn it back over to Mark.

Given our strategic customer relationships talented teams and world class at assets market expertise and strong financial Foundation I'm confident in our value, creating opportunities and Ip's continued success.

Mark Sutton: Thank you, Tim, and I'll start on slide 9. As I mentioned at the beginning of the call, we are making solid progress with our building a better IP program, which has delivered a total benefit of $195 million a year today, exceeding our original target for the second year in a row. This year most of the benefits are coming from our strategy, acceleration, and issues. Our business teams are focused on creating value for our customers while improving the profitability of our product and service offerings, by getting paid for what value we provide to our customers. And by also growing in the most attractive segments with the most attractive customers, and in the most attractive geographic regions.

And with that we're happy to take questions.

And similar to last quarter, our senior business leaders are joining Tim ni to provide their perspectives as well. So operator, we're ready to move to the Q&A section of the call.

Thank you and as a reminder, plus one and zero on your telephone keypad to withdraw your question press one zero again that his press. One then zero on your telephone keypad to withdraw your question. One then zero, we will pause a moment to compile the Q&A roster.

Mark Sutton: We've also seen meaningful benefits from our process optimization initiatives. By leveraging advanced technologies and big data across our large system, our teams are identifying new ways to improve productivity and lower cost. I'm excited about our progress and in the next couple of slides I'll share some examples of the actions our business teams are taking to drive profitable growth.

Your first question comes from the line of Gabe <unk> from Wells Fargo. Please go ahead.

Mark Tim Good morning.

Thank you for all the detail I wanted to ask a little bit about the orange.

Closure and I guess as we can.

As you look into 2024.

Mark Sutton: So turning to slide 10, I'll start with industrial packaging. Beginning with commercial excellence, International Paper has a broad range of capabilities and segment tailored packaging solutions to serve our customers. Our commercial teams are leveraging these advantages to improve mixed by strategically aligning with the most attractive regions segments and customers. Our teams are also using more advanced data analytics to manage product pricing across our sales territories. This allows them to capture more value for customer tailored product and service offerings.

I guess, that's the first one would be as the market begins to recover would you expect then even with this closure to kind of grow with the market and again taking into account.

A lot of your own commercial initiatives or is that something that might be a little bit of a delayed timetable.

Gabe I'll ask Jay royalty to comment, but at a high level.

Looking at all the.

Variables around demand and our recent capacity investments that I think I mentioned.

Mark Sutton: Under operational excellence, we are leveraging advanced technology and data analytics to improve efficiencies at lower cost across our lower system of mills and box plants. We are seeing benefits in areas such as maintenance and reliability, raw material consumption, distribution and logistics, and sourcing. And as I mentioned earlier, we're also taking actions to optimize our mill system and reduce fixed costs. The mill closures will improve the mill closure would improve annually but done for industrial packaging by about $140 million.

My prepared remarks, we feel good about being able to make this change.

And continue to grow with the market I mean, essentially with this level of downturn, there's been somewhat of a reset and I think the market demand signals will engage again and we have.

We have options for future containerboard investments, though Jan if you want to add any commentary on how we're thinking about the near term ability to grow share.

Good morning, Gabe Thanks, Mark.

First of all our long term view of demand has not changed so this was more about.

Mark Sutton: Turning to slide 11, I'll highlight some of the things we're doing in the area of investment excellence. Due to the attracted long term fundamentals of our industrial packaging business, we believe we have investment opportunities to drive profitable growth and create significant value. Strategic capital investments in our mill system have targeted productivity improvements and product capability enhancements that align with customer needs and market trends and capabilities for lightweight and ultra lightweight liners and high quality virgin white top products are examples of these investments.

Kind of how we see the near term and options we have.

Think about where we are we've been matching our supply to our customers demand in running the system as effectively as we can for quite a while now and all along that way we've been evaluating our options and trying to develop an informed point of view on a couple of things one is demand and the shape of the recovery and <unk>.

Secondly would be where do we think the market is headed and what capabilities do we need for the future and both of those factors influenced our decision to reset the mill system as Mark said.

Mark Sutton: More recently, our strategic investments are focused on our box business. These investments allow us to grow with customers and increase profitability by strengthening our capabilities, improving productivity and leveraging automation. We believe we can create the most value through organic investments across our large network of box plants. Examples of this include adding converting lines and existing plants and upgrading older equipment with newer and more advanced technology. For some context, the investments we have made over the past two years in existing plants is the equivalent of adding almost three average size box plants to our system. We will supplement this strategy with additional investments in green field box plants and occasionally with bolt-on M&A where we can create additional value by addressing regional needs and enhancing our business.

We have a large low cost fleet with tremendous flexibility and capability and so when you think about that we're able to close orange without compromising our ability to serve customers and we have what we need for the short term and mid term. When you think about the amount of ADT, we were taking in even with this closure we still have.

Our room to grow and then when we think about the future.

We do have options to grow in the right product ranges at the right time.

And as you heard this move in the near term allows us to run the system in a more optimized way and all and lowers our cost structure by about $140 million.

Okay, and then maybe one on the capital side on the assuming as you guys went through this exercise.

It was just as much about maybe variable production costs as perhaps investments but.

Mark Sutton: I would also like to recognize that in September, we celebrate the grand opening of our new green field box plant in Ad Glenn, Pennsylvania, which has a great team and world class capabilities. Our investment will allow us to optimize our network of plants in the northeast while providing additional capacity for future growth. In summary, we have significant opportunities to leverage these new investments as well as our market expertise to grow with customers, improve our mix and capture additional value.

Again kind of peaking around the corner to 24 this year.

Projecting to spend a little bit about DNA.

Is that something that that you envision over the next at least maybe again 'twenty four 'twenty five if youre willing to comment.

Given.

Maybe throttled back a little bit during the pandemic.

Yes, Hey, Dave.

Good morning, Dave its Tim.

So.

As you said right around DNA and on a normalized basis, I think thats, where we are for the foreseeable future some years higher some years lower.

Mark Sutton: Turning to slide 12, I'll share some key opportunities in our Global Study of Los Fibres business. Over the past year, we have captured meaningful benefits from commercial actions, which contributed to our building of better IP results. Our commercial teams renegotiated large contracts to ensure we get paid for value that we provide. In addition, we have earned a higher premium for the fluff grade relative to commodity pulps by capturing more value in aligning with those customer segments and regions who value our differentiated product and service offerings.

We haven't finished our planning work for next year, yet to have a specific thought about what the level will be there. So we will complete that over the next month or so and then in January when we release will we'll have more to say about.

2024, and how we're thinking about capital at that point.

Thank you.

Your next question comes from the line of Anthony Pettinari from Citi. Please go ahead.

Mark Sutton: However, the benefits of our commercial strategy are currently being masked by a very challenged, challenging and unprecedented business cycle, as well as our exposure to commodity grades. On a positive note, the market environment began recovering in the third quarter as demand for fluff pulp improved, and we expect this trend to continue in the fourth quarter.

Good morning.

I was just wondering if you had to sort of updated view on the full year adjusted EBITDA Capex and free cash flow guide.

You provided that I think in previous slides, there's a updated view.

Mark Sutton: Going forward, we believe there are more strategic levers to pull to increase the earnings potential of this business. Through our go-to-market strategy, we have an opportunity to improve our mix by reducing our exposure to commodity grades and by serving the most attractive fluff customers and markets that allow us to maximize the value of this business. Aligning with this strategy, we are taking actions to right size our footprint and reduce fixed costs across the system.

For 2003.

Yes.

We showed it at the second quarter, and then third quarter actuals Nobody's, given our fourth quarter outlook.

But the short answer is there is no material change in any of the categories.

<unk> provided a full year.

Our full year outlook for we're still solidly in the EBITDA range right in line with capital and cash flow the same way.

Mark Sutton: As I mentioned at the beginning of the call, we announced the closure of two pulp machines, which will improve even tougher the global cellular fibers business by approximately $90 million. I believe there's a good business within this business and that we can continue to grow earnings and cash flows over the cycle. We have talented teams with significant market expertise and a mill system with a broad set of capabilities. This allows us to create value for our customers by delivering innovation and products that meet their stringent performance and product safety standards.

Okay. That's helpful and then in terms of box shipments.

You talk about the cadence of North American box volumes, maybe during the quarter and then touch on the trends in October and the.

Then.

I think seasonally there's usually like a little bit of an uptick in September did you see demand that you think was stronger than normal seasonality or.

How would you sort of describe that dynamic.

Hey, Anthony this is Tom <unk>.

Just in terms of demand, we trough or had a trough in Q1 late Q4, we see continued improvement from that time and that lasted through Q3. So we felt very good about the improvement through Q3.

Mark Sutton: Now I'll turn to slide 13. We continue to see demand recovery across the markets we serve, and we strongly believe in the attractive long-term fundamentals of our businesses.

A lot of segments seem to stabilize in Q3, and we think they're going to employ to improve in Q4, So think about.

Mark Sutton: In international paper, we are taking actions to improve earnings and drive profitable growth. Given our strategic customer relationships, talented teams, world class assets, market expertise, and strong financial foundation, I'm confident in our value creating opportunities and IPs continued success.

Our beverage and process food really strong stabilization in Q3 improvement into Q4 E Commerce stabilization in Q3 improvement into Q4, so we feel good about the trend.

I think you asked about October.

Mark Sutton: And with that, we're happy to take questions. And similar to last quarter, our senior business leaders are joining Tim and I to provide their perspectives as well.

We're very close.

You look at the order book, which is the best way of kind of looking forward, especially when you've got a month like October that can be a little bit misleading I would put the order book growth at about 3% to 4%.

Operator: So, operator, we're ready to move to the Q&A section of the call. Thank you. As a reminder, press 1-0 on your telephone keypad. To withdraw your question, press 1-0. Again, that is press 1-0 on your telephone keypad to withdraw your question 1-0.

And so we think that's going to improve as we go through the quarter. That's a sequential number because I think 4% to 5% for the quarter sequentially. So we see these the segments in the market continuing to improve.

Operator: We will pause a moment to compile the Q&A roster.

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

Your next question comes from the line of George Staphos from Bank of America. Please go ahead.

Gabe Hajde: Your first question comes from the line of Gabe Haji from Wells Fargo. Please go ahead. Mark, good morning. Thank you for all the detail. I wanted to ask a little bit about the orange closure and I guess as we look in the 2024, I guess the first one would be as the market, I guess, begins to recover. Would you expect them, even with this closure, to kind of grow with the market and, again, taking due account a lot of your own commercial initiatives, or is that something that might be kind of a little bit of a delayed timetable?

Thanks, Hi, everyone. Good morning, Thanks for the details.

And.

Given the announcements earlier in the quarter as well just want to wish everyone. The best during the.

The management transition and Mark, especially to you for your leadership over this period.

I wanted to.

Let me go back to the to the heat build heat map slide the outlook slide and just make sure that.

We've got this correctly so given our very quick tally of what you mentioned Tim.

Are we are you, suggesting EBITDA and I haven't done the sort of the rough and ready for.

Mark Sutton: Gabe, I'll ask Jay Royalty to comment, but at a high level, looking at all the variables around demand and our recent capacity investments that I think I mentioned in my prepare remarks, we feel good about being able to make this change and continue to grow with the market. I mean, essentially, with this level of downturn, there's been somewhat of a reset, and I think the market demand signal will engage again, and we have options for future container board investments.

For cellulose fibers is perhaps below breakeven and overall that we might be.

Somewhere in the four hundreds relative to where we were in the third quarter.

And then the second question that I had in terms of businesses and profitability Europe is not your largest business you've been there for a while.

Generated about a 10% EBITDA margin.

Still relatively small strategically how do you see that business Mark over time are you happy with the profitability and what its real role within the IP portfolio and it had.

James Royalty: So, Jay, I don't know if you want to add any commentary on how we're thinking about the near-term ability to grow. Sure. Good morning, Gabe. Thanks, Mark. First of all, our long-term view of demand has not changed, so this was more about how we see the near-term and options we have. If you think about where we are, we've been matching our supply to our customers' demand and running the system as effectively as we can for quite a while now, and all along that way, we've been evaluating our options and trying to develop an informed point of view on a couple of things.

One or two other follow ups.

Yes, Hey, George it's Tim So, yes, I think generally speaking you're in the ZIP code of.

Of how we're thinking about the fourth quarter of course.

The IR team will will talk you through all of the essentials and everything but I think.

Ballpark it sounds like you're close.

And with Europe.

Yes.

On the EMEA question, we like the business, we don't like the absolute performance, but we have doubled the earnings from 22% to 23 <unk>.

James Royalty: One is demand and the shape of the recovery, and secondly would be, where do we think the market is headed and what capabilities do we need for the future, and both of those factors influence our decision to reset the middle system, as Mark said. We have a large low-cost fleet with tremendous flexibility and capability, and so when you think about that, we're able to close orange without compromising our ability to serve customers, and we have what we need for the short-term and mid-term.

Hit so hard with high natural gas.

And we've made some very successful single plant acquisitions over the last couple of years, that's really built the density around the Madrid.

Containerboard mill, So we view our Europe business is a regional strategy, it's mostly southern Europe, we think there's growth opportunity.

James Royalty: When you think about the amount of growth, and then when we think about the future, we do have options to grow in the right product ranges at the right time, and as you heard, this move in the near-term allows us to run the system in a more optimized way, and all along lowers our cost structure by about $140 million.

It's largely going to going to continue to come in that region.

We think it has a long term growth potential it's a very attractive market.

EBITDA margins to get good returns in Europe.

George remember it can be a bit lower than we're used to seeing in the U S because of the.

Mill structure being mostly recycled you have a lot less capital employed to generate the revenue line.

So if you like 20% EBITDA margins here.

Low to mid teens gets you the same return on invested capital so it's a different capital structure.

Gabe Hajde: Okay, and then maybe one on the capital side. I'm assuming as you guys went through the sector side, it was just as much about maybe variable production costs as perhaps investments, but again, kind of peeking around the corner to 24. This year, you're projecting to spend a little bit above DNA, so that's something that you envision over the next, at least maybe, again, 24 or 25, if you're willing to comment, given maybe fraughting back a little bit during the pandemic.

And we have 1 billion and a half dollar business from a revenue basis. There. So in the regions that we're in we have pretty significant positions like the Iberian Peninsula, Morocco, We're a leader.

Were significant in Italy, and France, So I think long term.

It fits IP and it gives us some growth factors.

The packaging business.

Obviously as most of our company now.

Understood.

My follow on question just for for the fluff pulp business.

Tim Nicholls: Good morning, David Tim. As you said, right around DNA, on a normalized basis, I think that's where we are for the foreseeable future. Some years higher, some years lower. We haven't finished our planning work for next year yet to have a specific thought about what the level will be there, so we'll complete that over the next month or so, and then in January, when we release, we'll have more to say about 2024 and how we're thinking about capital at that point.

The machine closures that you announced how quickly will that benefit the results within within Gcs and in your longer term outlook and in your view that it's still got opportunities.

Anthony Pettinari: Thank you.

To create value.

What effect if any have you thought about perhaps some of the.

I mean, it's come up in the past.

And calls the potential from Eucalyptus based fluff, which there seems to be a bit more interesting again, how much does that.

Take for the market as the market grow sufficiently so that you can keep growing and take advantage of all the commercial opportunities you have thank you gentlemen.

Tim Nicholls: Your next question comes from the line of Anthony Pettinari from City, please go ahead. Good morning. I'm just wondering if you had a sort of updated view on the full year adjusted EBITDA, CAPEX and free cash flow guide. You provided that I think in previous slides if there's updated view for 23. Yeah, you know, we showed it at the second quarter and then third quarter actuals, and though we've given a fourth quarter outlook, but the short answer is there's no material change in any of the categories that we've provided a full year outlook for. We're still suddenly in the EBITDA range, right in line with capital and cash flow the same way.

Hey, George this is clay Alice.

I'll be happy to.

Try to take a stab at your question good morning.

Yes, I think the machine closures.

Will occur in the fourth quarter.

We'll have some residual <unk>.

Personnel costs that extend into the first quarter of next year as we train and move our.

Folks around in that but.

Overall that that will mostly be complete in the first quarter.

So I think that we'll see the benefits immediately and the benefits will ramp as you go through 24, and we still have at Regal would we will have a little bit of optimization work to do.

Anthony Pettinari: Okay, that's helpful. And then in terms of box shipments, can you talk about the cadence of North American box volumes, maybe during the quarter, and then touch on the trends in October? And then, you know, I think seasonally, there's usually like a little bit of an uptick in September. Did you see demand that you think was stronger than normal seasonality or how would you sort of describe that dynamic?

Very minimal cost that'll have a big payback and getting our cost per ton and optimize their that'll all happened early in <unk> and 'twenty four.

You're going to your comment on short fiber our eucalyptus.

Tom Yamack: Yeah, I mean, this is Tom hammock. Just in terms of demand, we, we troughed or had a trough in Q1 like Q4. We've seen continued improvement from that time, and that lasted through Q3. So, we felt very good about the improvement through Q3. A lot of segments seem to stabilize in Q3, and we think they're going to improve in Q4. So think about beverage and processed food. Really strong stabilization in Q3, improvement in Q4, e-commerce, stabilization in Q3, improvement in Q4.

Fluff so.

Hugo Fluff has been out.

I think most of this decade 708 years, it's been in the market and been a pretty relatively small amount.

Of the market hasn't Hasnt had significant growth.

To your point, if there is interest and concern and I think there always has been I think as prices.

Create.

With prices got high in supply chains or constrained last year.

There were probably more interest in it at that point about how to how do we.

Tom Yamack: So we feel good about the trend. I think you asked about October, we're very close. If you look at the order book, which is the best way of kind of looking forward, especially when you've got a month like October that can be a little bit misleading. I would put the order book growth at about 3 to 4%. And so, we think that's going to improve as we go through the quarter. That's a sequential number.

Look at a short fiber differently or more seriously again, we have that baked in we think that the long term view of fluff pulp in the growth.

It is consistent in the future as it has been in the past long fiber is a reason why it's 90 plus percent of the market and we think it will relatively stay in that range and so.

Tom Yamack: So think 4 to 5% for the quarter sequentially. So we, we see these, the segments in the market continue to improve. Okay, that's very helpful.

Does that materially change our view of our outlook of the future.

Thank you Glenn Thank you gentlemen.

Your next question comes from the line of Mike Weintraub from Seaport Research Partners. Please go ahead.

George Staphos: I'll turn it over. Your next question comes from the line of George Staffels from Bank of America. Please go ahead. Thanks, everyone. Good morning. Thanks for the details.

Good morning.

Few follow ons, if I could just a clarification is really in it.

Tim Nicholls: And, you know, given the announcements earlier in the quarter as well, just want to wish everyone the best during the management transition at Mark, especially to you for your leadership over this period. I wanted to maybe go back to the heat, the old heat map slide, the outlook slide, and just make sure that we've got this correctly. So, you know, given our very quick tally of what you mentioned, Tim, are we, are you suggesting EBITDA and I haven't done the rough and ready for cellulose fibres is perhaps below break even and overall that we might be, you know, somewhere in the 400s relative to where we were in the third quarter.

Hopefully I'm not splitting hairs here, but first of all on that question on the bridge for EBITDA for the fourth quarter and you gave us very specific numbers and if I just take the debt.

$5 90, you had in the third quarter and I think there was basically a $117 million difference.

From what you did the numbers you provided for guidance that puts me in the upper 400 as opposed to just more generically in the four hundreds is that fair.

Furthermore, okay.

And then second on the.

On Orange, so the $140 million.

Or does that primarily show up in 2024 as well.

Mark Sutton: And then the second question that I had in terms of businesses and profitability. Europe is not your largest business. You've been there for a while. It generated about a 10% EBITDA margin. It's still relatively small. Strategically, how do you see that business mark over time? Are you happy with the profitability and what's its real role within the IP portfolio and that one or two other follow-ups? Yeah, I think generally speaking you're in the zip code of how we're thinking about the fourth quarter. Of course, the IR team will talk you through all of the essentials and everything, but I think ballpark sounds like you're close. And with your.

Or does it start to show up in.

The fourth quarter, and maybe just related to that is orange down now or when does that get closed.

Hey, Mark Good morning. This is Jay so.

We're working through the early stages of the transition and obviously there is a wind down that.

That is underway as we speak.

It's not down at this point, we do have to transition business and transitioning customers and work through all of the dynamics, but it did all of that will be complete in the fourth quarter. So we would expect to see that type of EBITDA impact fully recognized in 2024.

Okay Super Thank you and then.

Mark Sutton: Yeah, on the EMEA question. You know, we like the business, we don't like the absolute performance, but we have doubled the earnings from 22 to 23 after they were hit so hard with high natural gas costs. And we've made some very successful things.

Maybe just a little bit of color you talked about the export containerboard export business getting getting better and to.

Is there anything that sort of led us down.

And we've had much more price erosion there than in the domestic business. Maybe if you can just provide a little bit more color on what youre seeing there and are we I mean again pulp and paper week posted prices lower in their review.

Mark Sutton: I think we'll plan acquisitions of the last couple of years that's really built the density around the Madrid container world mill. So we view our Europe business as a regional strategy. It's mostly Southern Europe. We think there's growth opportunity, but it's largely going to continue to come in that region. We think it has a long term growth potential. It's a very attractive market EBITDA margins to get good returns in Europe. George, remember, it can be a bit more than we're used to seeing in the US because of the mill structure being mostly recycled.

What was going on with export pricing can you give us your perspective on what's happening kind of real time in those markets.

Sure Mark this is Jay again.

If you go back to the last call we spoke about starting to see some improvement in the export markets.

And that definitely continued in the third quarter. So when you think about the major markets we serve.

Latin America, Europe Asia, we've seen inventories normalize and all of those markets at this point and we'd see demand continue to improve.

Mark Sutton: You have a lot less capital that employed to generate the revenue line. So, you know, if you like 20% EBITDA margins here, load mid teens, get you the same return on invested capital. So it's a different capital structure. And we have a billion and a half dollar business for a revenue basis there. So in the regions that we're in, we have pretty significant positions like the Iberian Peninsula, Morocco, we're a leader, we're significant in Italy and France. So I think long term, you know, it fits IP and it gives us some growth factors in the packaging business that obviously is most of our company now.

Latin America continues to be very solid as we saw in the set in the second quarter and Thats being driven by.

George Staphos: Understood.

Bananas, and pineapples melons these types of products, so very resilient.

Europe, we saw a shift.

In a positive direction in the third quarter, rebounding and thats bearing fruit and vegetable driven as well really in anticipation of a much better agricultural season, beginning in early 'twenty four late 'twenty three 'twenty four versus last year.

Asia is a market that continues to lag a bit, but we're seeing recovery there as well and so when you look at all of that.

George Staphos: My follow on question just for for the fluff pulp business.

Look through the fourth quarter, we see strong.

Order books, all the way through the end of the year. So we believe we've seen demand bottom.

Clay Ellis: The machine closures that you announced, how quickly will that benefit the results within GCF? And in your longer term outlook and your view that it's still got opportunities to create value. What effect is any, how have you thought about perhaps some of the, I mean, it's come up in the past on calls, the potential from eucalyptus based fluff, which there seems to be a bit more interesting again. How much does that, you know, take from the market as a market grow sufficient so that you can keep growing and take advantage of all the commercial opportunities you have. Thank you, gentlemen.

And the outlook is certainly more encouraging.

Okay, Great and then I recognize you guys aren't going to forecast prices here, but.

It doesn't seem that this demand improvement has translated yet into better pricing is that a function of more supply out there chasing this business or any color you could help us with in that regard.

Yes.

You have to see demand.

Improvement to see the market turn.

We're seeing that.

There still is.

Supply demand imbalance, but that's that's shifting both because of actions that are being taken on the supply side as you as you know about and also this demand improvement so.

Clay Ellis: Hey, George, this is Clay Ellis. I'll be happy to take a stab at your questions. Good morning. Yeah, I think the machine closures will occur in the fourth quarter. We'll have some residual personnel costs that extend into the first quarter of next year as we train and move folks around and that. But overall, that will mostly be complete in the first quarter. And so I think that we'll see the benefits immediately and the benefits will ramp as you go through 24.

At this point, we are as I said, we think we've seen demand bottom.

Outlets more encouraging.

We will see where it goes from here.

Much appreciate it.

Your next question comes from the line of Mike <unk> from <unk> Securities. Please go ahead.

Thank you Mark Tim and Mark for taking my questions.

Just had one quick follow up on the Orange, Texas closure I do appreciate your comments around that mill, but I do believe you mentioned a few quarters ago, we've been a permanent capacity adjustment was not on the horizon. So I'm wondering what's what's transpired what's happening for the last few quarters that has changed your approach and then just thinking about your portfolio more.

Clay Ellis: And we still have, at Regalwood, we will have a little bit of optimization work to do. Very minimal cost that'll have a big payback in getting our cost per ton, optimize there. That'll all happen early in 24. You're going to, you know, your comment on short fiber or eucalyptus, it's fluff. So, euclefluff has been out, I think most of this decade, seven, eight years, it's been in the market and been pretty relatively small amount of the market, hasn't had significant growth.

Broadly.

To the extent you can comment and realizing that it may be difficult on this before but are there additional similar opportunities to further rationalize your portfolio.

Sure.

Mike I'll take the first part and because I'm. The one who said we didn't have any permanent closures on the horizon I think what I said was we look at <unk>.

Permanent closures around secular declines and we don't believe we have that I think what's changed is.

The depth and duration of this downturn.

Not like anything we've seen since we built the industrial packaging business starting in <unk>.

Clay Ellis: To your point, there's interest in concern and I think there always has been, I think, is prices, you know, create, when prices got high and supply chains were constrained last year, they were probably more interested at that point about how do we look at a short fiber differently or more seriously. Again, we have that baked in, we think that the long-term view of fluff, pulp, and the growth is consistent in the future, as it has been in the past long fiber, past is a reason why it's 90 plus percent of the market. And we think it will, you know, relatively stay in that range and so, doesn't materially change our view or outlook of the future.

Mid two thousands and we also and Jay mentioned this we also have a long term plan for that business and the kinds of containerboard, we need to make for the future in some cases is different than the containerboard we make today.

Invested in high quality White top Riverdale now that's a future looking product that makes blue.

Bleached pulp containerboard not using recycled so a high quality, we've got basis weight and high performance lightweight needs that our system can address today for the future. So I think part of what allowed us to make this decision is the depth of this downturn and the duration.

And the fact that we need over time to change our product offering that we make boxes on it. So we're taking this opportunity to do a reset and then we have to get the timing of any future investment right.

George Staphos: Thank you, Clay. Thank you, gentlemen.

Mike Wang: Your next question comes from the line of Mike Wang, Wine Trabbe from Seaport Research Partners. Please go ahead. Good morning. A few follow-ons, if I could just callifications really, and hopefully I'm not splitting hairs here, but first of all, that question on the bridge for EBITDA, for the fourth quarter, you gave a very specific numbers, and if I just take the 590 you had in the third quarter, and I think there was basically 117 million difference from what you, that the numbers you provided for Q-Guide, and if that puts me in the upper 400 as opposed to just more generically in the 400, is that fair?

But that's that's what's changed we still believe in the long term fundamentals as Jay said about growth too.

Two quarters ago.

I would not have thought we were still in this type of demand environment taken this type of economic downtime.

Got it and then Mark I appreciate the color.

This is my second part of that question in terms of additional opportunities you may have similar opportunities in the portfolio similar orange that you could rationalize wave.

Where does that stand.

Hi, Mike This is Jay.

Yeah.

We have made this announcement we.

Came to us through a very thorough and extensive evaluation of both the commercial side as well as our fleet and capabilities.

Mike Wang: Yes, fair or more. Okay. And then second on the orange, so the 140 million, does that primarily show up in 2024 as well? Does it start to show up in the fourth quarter, and maybe just related to that? Is orange down now or when does that get closed?

We're very comfortable with the decision that we've made and how it sets us up for the future. We still have room to grow and we're in this business to win and to grow and the system that we will have moving forward will enable us to do that.

Got it Okay, and then just one quick follow up.

Mark.

Can you help us understand the company's approach going forward with respect to close taking in driving efficiencies, obviously kudos to you and the entire team for doing a terrific job of building a better IP initiatives, but how do you make sure that as the.

Jay Royalty: Hey Mark, good morning, this is Jay, so we're working through the early stages of the transition, and obviously there's a wind down that is underway as we speak. It's not down at this point. We do have to transition business and transition customers and work through all of the dynamics, but all of that will be complete in the fourth quarter. So we would expect to see that type of EVA.Impact fully recognized in 2024. Okay, super, thank you.

How do you make sure that the team will be laser focused on cost removal and improving efficiency, particularly as the cycle starts to inflect and demand gets to more notably improved.

That's a great question, Mike as part of the cost take out is something that no. One has really had to do before meaning we had 40 year high inflation, it's gotten stuck into a lot of our inputs so that becomes.

Not just using last but that becomes a real commercial challenge just like with our customers on the sales side and our global sourcing World No. One wants to give back any of the pricing they were able to get through 'twenty. One 'twenty two in early 'twenty three so positioning ourselves as a large buyer of all of these inputs and to some extent having to play hardball.

Mike Wang: And then maybe just a little bit of color, you talked about the export, continued export business, getting better, and to certain extent that sort of led us down, and we have much more price erosion there than in domestic business. Maybe if you can just provide a little bit more color on what you're seeing there, and again, Paul from Paper Week posted prices lower in their review of what was going on with export pricing.

And getting some of that cost out.

We put everybody in the company on clear directions around what our EBITDA per ton needs to be to get the kind of margins that drive the kind of returns on invested capital and what that does for US is we need to be here and where we have gaps. So everybody has a role to play in closing that gap and the cost take out of <unk>.

Jay Royalty: Can you give us your perspective on what's happening kind of real time in those markets? Sure, Marcus, this is Jay again. If you go back to the last call, we spoke about starting to see some improvement in the export markets. And that definitely continued in the third quarter. So when you think about the major markets, we serve Latin America, Europe, Asia. We've seen inventories normalize in all of those markets at this point, and we see demand continue to improve.

It's especially in him, including distribution and logistics and things that are at levels that we've never seen before and stubbornly staying at those levels.

Can't cover all of that just with higher prices in revenue because you run into all these other strategic issues like like substitution. So we've got to work on all of it but.

Jay Royalty: Latin America continues to be very solid. As we saw in the second quarter, and that's being driven by bananas and pineapples, melons, these types of products. So, you know, very resilient Europe. We saw a shift in a positive direction in the third quarter, rebounding. And that's made for the rest of the driven as well. Really an anticipation of a much better agricultural season, beginning in early 24, you know, late 23, early 24 versus late 24.

But that that's really the.

The approach is to is to take out some of the things that have found their way in.

A bit structural but do it in a very analytical and organized way and then divide and conquer until we can close the gap.

Much of what we've had success you mentioned build a better IP.

That is a very focused formal initiative unique to IP initiatives, it's not they're not dependent on the market per se, but a very focused process. We plan on using that same process.

Jay Royalty: Last year, Asia is the market that continues to lag a bit, but we're seeing recovery there as well. And so, you know, when you look at all of that and look through the fourth quarter, we see strong order box all the way through the end of the year. So we believe we've seen demand bottom and the outlook is certainly more encouraging.

To continue we won't name it and we won't call it and we probably won't report on it but what you should hopefully see as analysts and investors on the call is improved earnings quarter after quarter after quarter, where we're going to use that same rigorous approach. We had some outside help in setting it up we're running it entirely in house now and we plan on continuing to do that to get the cost.

Mike Wang: Okay, great. I recognize you guys aren't going to forecast prices here, but it doesn't seem that this demand improvement has translated yet into better pricing. Is that a function of more supply out there chasing this business or any color you could help us with in that regard? Yeah, I mean, you have to see demand improvement to see the market turn. We're seeing that. There still is a supply demand imbalance, but that's shifting both because of actions that are being taken on the supply side as you know about and also this demand improvement. So, you know, at this point, we're, we're, as I said, we think we've seen demand bottom. The outlook's more encouraging. We'll, you know, we'll see where it goes from here. Okay, much appreciated.

Kyle.

Very helpful. Good luck in <unk>.

Thank you.

Your next question comes from the line of Phil Inc. From Jefferies. Please go ahead.

Yeah.

Well first off Mark wanted to thank you for all.

Great insights over the years and I appreciate the leadership.

My first question is you know the company has always had a deep bench of senior executives that you've moved around nicely.

What's the game plan in terms of the succession plan that prices of internal versus external.

When the board is looking for the next candidate any <unk>.

Characteristics that stand out that Youre looking for.

It's a great question, Phil when we only put out the announcement.

Notify publicly that we will move into the kind of last phase we have a multi phase process like most.

Public companies do and it's a multiyear process for leadership succession CEO had also senior leader succession.

Mike Roxland: Your next question comes from the line of Mike Rockland from two of securities. Please go ahead. Thank you, Mark Tim and Mark for taking my questions. Just have one quick follow up on the orange Texas closure. I do appreciate James comments around that mail. But I do believe you mentioned a few quarters ago that a permanent capacity adjustment was not on the horizon. So, I'm wondering what's, what's going to happen in the last few quarters that has changed your approach. And then to think about your portfolio more broadly to the extent you can comment and realizing that, you know, maybe difficult on this platform. But are there additional similar opportunities for the rationalize your portfolio?

Our board.

Is working very hard and obviously on the board and working with them to make the best possible selection for the next leader of IP from both our internal talent as you said, we have tremendous talent in the company, but again, good governance and best practices also to look at exhaustively at outside talent and one thing just to remember right.

We're making progress but the board is not looking to replace me Theyre looking to find the next leader for IP for the future and when you think about what the future holds with respect to technology with respect to what's happening in markets. The changing workforce, we failed to specification about the future. The leader, we think we need for the future of the company and that's what the <unk>.

Mark Sutton: Mike, I'll take the first part and because I'm the one who said we didn't have any permanent closures on the horizon. I think what I said was we look at permanent closures around secular declines and we don't believe we have that. I think what's changed is the depth and duration of this downturn. It's, it's not like anything we've seen since we built the industrial packaging business starting in the mid 2000s. And we also, and Jay mentioned this, we also have a long term plan for that business and the kinds of container board we need to make for the future.

Laser focused on and working hard on it theyre doing a great job with it.

We will get to a point, where when we have something to report we will and I think the process. We're using high high likelihood we come out with a great choice for the next leader for IP, but that's really the focus and how we're approaching it from from the process standpoint.

Mark Sutton: In some cases is different than the container board we make today. We invested in high quality white top at our Riverdale Mill. That's a future looking product that makes bleached pulp container board not using recycle. So a high quality we've got basis weight and high performance lightweight needs that our system can't address today for the future. So I think part of what allowed us to make this decision is the depth of this downturn and duration and the fact that we need over time to change our product offering that we make boxes out of.

Okay, that's great color.

Year to date, you guys have taken about a million and a half tons of economic downtime in containerboard Orange I think it's about 800000 tons of capacity. So when you take that capacity out do you effectively reduce your economic downside by half next year, assuming demands stable to growing.

And would that be additive to I guess, the $140 million of savings you called out I mean any color on the EBITDA impact I guess this year and economic downtime would be helpful as well.

Hey, Phil This is Jay royalty your math is good.

That's how the math works, but we are in a transitional situation and I think you've heard both Tom and I talked about.

The improving demand trajectory.

Mark Sutton: So we're taking this opportunity to do a reset and then we have to get the timing of any future investment right. But that's, that's what's changed. We still believe in the long term fundamentals as Jay said about growth two quarters ago. I would not have thought we were still in this type of demand environment taking this type of economic downturn. Thank you. And then Mark, I appreciate the color. This is my second part of that question.

So obviously with this move it still leaves us some flexibility it still leaves us some room.

We won't change anything about how we're operating to.

To make the cost of that flexibility to minimize the cost of that flexibility, but as we get our commercial analysis and we worked very closely together on this in terms of the outlook, we're very comfortable that our commercial plans and our commercial execution of what we're doing what Tom is doing in the box business and what we're doing in the containerboard business.

Jay Royalty: In terms of additional opportunities, you may have or similar opportunities in the portfolio, similar orange, that you can rationalize, where does that stand? Hi, Mike. This is Jay. You know, we've made this announcement. We came to it through a very thorough and extensive evaluation of both the commercial side, as well as our fleet and capabilities. We're very comfortable with the decision that we've made and how it sets us up for the future. We still have room to grow. And you know, we're in this business to win and to grow and the system that we will have moving forward will have us to do that.

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We need we need that flexibility and we need that capacity.

For how we see the future.

So that's that's where we are with J am I interpreting correctly any.

Improvement in economic downtime would be additive to that $1 40 and cost savings in any way to size up how much of the EBITDA impact it's been this year so far.

The 140 is the number that we've put out there in terms of the EBITDA impact, but yes, there would be.

There would be further benefit from.

From taking up that economic downtime or eliminating that economic downtime.

Okay I appreciate it.

And your final question today comes from the line of Matthew Mckellar from RBC capital markets. Please go ahead.

Mark Sutton: Okay, and then this one quick follow up, Mark, can you help us understand the company's approach, just going forward, with respect to cost take out and driving efficiencies. Obviously, you know, close to you and the entire team, the terrific job with building a better IP initiative.

Hi, good morning, Thanks for taking my questions.

Sounds like you are looking at opportunities to further optimize your cost structure in global cellulose fibers.

Mark Sutton: But how do you ensure that as the, as you, that are you sure that you, the team, were made later focused on cost removal and approving efficiency, particularly as the cycle starts to inflect and demand gets more notably improved. That's a great question, Mike, as part of the cost takeout is something that no one's really had to do before, meaning we had four year high inflation, it's gotten stuck into a lot of our inputs.

To provide a bit more detail on what opportunities still exist there and whether you may be looking to either further capacity actions or capital investments that could drive startup cost performance and then when you think about what can drive you from your current run rate in that business to achieving above cost of capital returns.

How do you think about the relative importance of optimizing that cost structure versus other factors like achieving more favorable production mix or driving stronger pricing.

Mark Sutton: So that becomes a, not just using less, but that becomes a real commercial challenge, just like with our customers on the sales side in our global sourcing world. No one wants to give back any of the pricing they were able to get through. 21, 22 and early 23. So positioning ourselves as a large buyer of all of these inputs and to some extent having to play hardball and getting some of that cost out, we, we put everybody in the company on clear directions around where are you picked up or kind needs to be to get the kind of origins that drive the kind of returns on invested capital.

Yes. Thank you Matthew this is clay.

It's a great question.

Part of the moves that we made.

With Pensacola, and Regal has a cost structure implication Pensacola.

<unk> machine was a high cost machine so.

That's part of it when we talk about Regal wood.

Although it has fluff capacity over the past couple of years. The majority of that machine was used for not fluff, but for market pulp softwood market pulp.

Mark Sutton: And what that does for us is we need to be here and we're, we have a gap. So everybody has a role to play in closing that gap and the cost takeout of inputs especially and including distribution and logistics and things that are at levels that we've never seen before and, and stubbornly staying at those levels can't cover all of that just with higher prices and revenue because you run into all these other strategic issues like, like substitution.

So that has a cost implication.

As well as a mix implication.

So the benefits there are both in costs.

And in mix.

If you think about going forward what are the opportunities in the business I think as we would prioritize our cost opportunities its first and supply chain with last year 2022, a lot of things were put in place as we explore 90% of our volume globally to get.

Mark Sutton: So we've got to work on all of it, but that's really the, the, the approach is to, is to take out some of the things that have found their way in and, and have become a bit structural, but do it in a very analytical and organized way and then divide and conquer so we can close the gap. Much of what we've had success, you mentioned, build a better IP, that is a very focused, formal, initiative, you need to IP initiative is not, they're not dependent on the market per se, but a very focused process.

That volume out to serve our customers.

Between warehousing and container freight stations and various methods. It increased our supply chain costs, we are unwinding, those warehousing and different modes.

Of course cost are coming down.

Freight rates the ocean carrier rates. So that's very helpful. But also the things that we did uniquely that we can unwind uniquely that's probably been the big driver being the biggest driver and will continue to be a very big driver, we have more to optimize there.

Mark Sutton: We plan on using that same process to continue, we won't name it and we won't call it and we probably won't report on it, but what you should hopefully see as analysts and investors on the call is improved earnings quarter after quarter after quarter after quarter. But we're going to use that same rigorous approach. We have some outside help in setting it up, we're running it entirely in house now, and we plan on continuing to do that to get the cost take out. Thank you.

I think capacity I think again as we see the growth of fluff.

And the kind of historical ranges.

Fluff pulp we want to continue to and we want to optimize our machines on fluff I think mix is the biggest opportunity. As you mentioned is it cost is it prices. It makes makes us opportunity and then and in price are bigger opportunities. Then we don't feel like we're disadvantaged in a cost of many.

Phil Ng: Your next question comes from the line of Phil Ng from Jeffreys. Please go ahead. Well, first off, Mark, I want to thank you for all your great insights over the years and appreciate the leadership. So my first question is, you know, the company's always had a deep bench of senior executives that you've moved around nicely. What's the game plan in terms of the succession plan, thought process of internal versus external? And when the board is looking for the next candidate, any characteristics that stand out that they're looking for?

Factoring or even a supply chain costs.

So that's there's there's obviously benefit there there's opportunity there but mix in price would be after we're optimizing this move mix and price is clearly the driver.

Great. That's helpful. Thanks very much.

Just sticking with Pensacola, I think he also produce containerboard at that site.

Mark Sutton: It's a great question, Phil. When we put off the announcement to notify publicly that we were moving to the kind of last phase, we have a multi-phase process like most public companies do, and it's a multi-year process for leadership succession and CEO that also senior leader succession. The board is working very hard, and I'm obviously on the board and working with them to make the best possible selection for the next leader of IAP.

How does taking capacity down in the pulp side effect the cost profile of that mill if at all thanks.

Yes. So this is this is jay royalty so there.

There is clearly there.

They are clearly costs there that the containerboard business has to bear as a consequence of that move just putting a little perspective on how we think about Pensacola Pensacola is a unique asset within our portfolio, it's globally competitive lightweight kraft liner.

Mark Sutton: We brought both our internal talent, as you said. We have tremendous talent in the company, but again, good governance and best practices also to look at exhaustively at outside talent. And one thing just to remember on it, we're making progress, but the board is not looking to replace me. They're looking to find the next leader for IAP for the future. And when you think about what the future holds with respect to technology, with respect to what's happening in markets, the changing workforce, we fail to specification about the leader we think we need for the future of the company. And that's what the board is laser focused on. They're working hard on it, they're doing a great job with it, and we will get to a point where when we have something to report, we will.

Really serving all the channels.

Domestic export and as well as Nash.

And if you think about the grade range that we have there. It goes from about 20 pounds to the mid 30, so definitely differentiated from lightweight standpoint, if you look at it on a traditional cost curve.

It's right in the middle of the pack, but thats not on a per ton basis is not really the right way to look at a mill like Pensacola, you have to look at it on an area basis, which is the way boxes are made and sold in Pensacola is a very capable machine. It's why machine. It's a well equipped machine. It's got significant outflows of about 550.

Phil Ng: And I think the process we're using, high likelihood we come out with a great choice for the next leader for IAP, but that's really the focus and how we're approaching it from the process standpoint. Okay, that's a great color. You know, you guys have taken about a million and a half tons of economic downtime, a container board, orange I think is about 800,000 tons of capacity. So when you take that capacity out, do you effectively reduce your economic downtime by half next year, assuming demands to be able to grow? And would that be additive to, I guess, the 140 million of savings you called out? I mean, any color on the EBITDA impact, I guess, this year, the economic downtime would be helpful as well.

<unk> thousand tons, which is significant particularly when you consider that basis weight and the capabilities at Pensacola from our perspective really match, where the market is heavy.

Demand is high and growing for these lighter weight products.

And also in the context of being a single machine mill.

We have other mills that are single machine mills that are competitive and successful and.

And we expect Pensacola to be no different in that regard.

Great Thanks for that detail.

Then last one for me and you touched on this as part of your response to Anthonys question, but last quarter. You showed a slide that indicated where your customer inventories were versus target levels broken down by customer segment and it sounds like Destocking is generally run its course, but if you were to run that same analysis. Today do you think all customer segments, which show inventories at or below target levels.

Jay Royalty: Hey, Phil, this is Jay Royalty. Your math is good. That's that's how the math works, but we are in a transitional situation. And I think you've heard both Tom and I talk about, you know, the improving demand trajectory. So, you know, obviously with this move, it still leaves us some flexibility. It still leaves us some room. We won't change anything about how we're operating to, you know, to make the cost of that flexibility to minimize the cost of that flexibility, but as we get our commercial analysis, and we worked very closely together on this in terms of the outlook.

Are there any segments, particularly within North America here.

Destocking goods there'll be a factor in the fourth quarter.

Great Hey, Matthew this is Tom <unk>.

I think you're accurate in saying that the Destocking is generally over we actually forecast, we actually went out and talked to customers. We do that quarterly to get an idea of inventory levels and the data came back.

Jay Royalty: We're very comfortable that our commercial plans and our commercial execution of what we're doing, what Tom's doing in the box business, and what we're doing in the container board business, that we need, you know, we need that flexibility and we need that capacity for how we see the future. So that's where we are. But Jay, am I interpreting correctly any improvement in economic downtime would be additive to that 140 in cost savings in any way to size up how much of the impact it's been this year.

Exactly like we're saying yes.

<unk> shift over the last three quarters in terms of stock levels. In fact in many cases anecdotally, we're hearing people have overseen a bit.

And if you look at our order patterns in certain markets.

Looks like that you're we're seeing more rush orders more volatility in orders and so you can kind of picture.

Bouncing along the bottom we think in many cases, it's more than healthy relative to future box demand.

Phil Ng: Park. You know, the 140 is the number that we've put out there in terms of the the even die impact, but yes, there would be, there would be further benefit from, you know, from taking up that economic downtime or eliminating that economic downtime. Okay, appreciate it.

But all indications so far.

What you said.

Yes.

Great. Thanks, very much that's all from me I'll turn it back.

Thank you I'll now turn the call back over to Mark Sutton for closing comments.

Matthew Mckellar: And your final question today comes from the line of Matthew McKellar from RBC Capital Markets. Please go ahead. Hi, good morning. Thanks. Take my questions. It sounds like you're looking at opportunities to further optimize your cost structure in global cellulose fibers. We're able to provide a bit more detail on what opportunities to exist there, and whether you're maybe looking to either further capacity actions or capital investments that could drive stronger cost performance.

Thank you operator, I want to thank everybody for your time today and for your interest in international paper.

Forward, along with the leadership team to updating you on our progress on our next call at the end of January So I have a great rest of the day. Thank you.

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

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Matthew Mckellar: And then when you think about what can drive you from your current run rate in that business to achieving above cost of capital returns. How do you think about the relative importance of optimizing that cost structure versus other factors like achieving more feeble production mix or driving stronger pricing. Thanks. Yeah, thank you, Matthew. This is clay. Great question. You know, part of the moves that that we made with Pensacola and Regalwood has a cost structure implication, Pensacola machine was a high cost machine.

We're sorry your conferences ending now please hang up.

Matthew Mckellar: So that's part of it. We talk about Regalwood. Although it has fluff capacity over the past couple of years, the majority of that machine was used for not fluff, but for market pole, softwood market pole. So that has a cost implication as well as a mix implication. So the benefits there are both in cost and in mix. If you think about going forward, what are the opportunities in the business? I think as we would, as I would prioritize our cost opportunities, it's first in supply chain with last year 2022.

Matthew Mckellar: A lot of things were put in place as we explore 90% of our volume globally to get that volume out to serve our customers. Between warehousing and container freight stations and various methods, it increased our supply chain cost. We are unwinding those warehousing in different modes. Of course, costs are coming down in freight rigs and ocean carrier rigs. So that's very helpful, but also the things that we did uniquely that we can unwind uniquely.

Matthew Mckellar: That's probably been a big driver, been a biggest driver and will continue to be a very big driver. We have more to optimize there. I think capacity, I think, again, as we see the growth of fluff in the kind of historical ranges, fluff, but we want to continue that we want to optimize our machines on fluff. I think it makes us the biggest opportunity, as you mentioned, what is it cost? Is it prices?

Matthew Mckellar: It makes us an opportunity and then price are bigger opportunities than we don't feel like we're disadvantaged in a cost of manufacturing or even a supply chain cost. So there's obviously benefit there, there's opportunity there, but makes and price would be after we're optimized and this makes and prices is clearly the drive. Great, that's helpful. Thanks very much. You're just speaking with Pensacola. I think you also produced container board at that site.

Matthew Mckellar: How does thinking capacity down in the pulp side affect the cost profile of that mill, if at all. Thanks. Yeah, so this is this is J Royalty. So, you know, there's clearly, clearly cost there that the container board business has to bear as a consequence of that move. You know, just putting a little perspective on how we think about Pensacola. Pensacola is a unique asset within our portfolio. It's globally competitive lightweight craft liner, really serving all the channels.

Matthew Mckellar: You have both domestic export and as well as NACC. And if you think about the grade range that we have there, it goes from about 20 pounds to the mid-30s. So definitely differentiated from a lightweight standpoint. If you look at it on a traditional cost curve, it's, you know, it's right in the middle of the pack, but that's not, you know, on a per-time basis is not really the right way to look at a mill like Pensacola.

Matthew Mckellar: You have to look at it on an area basis, which is the way boxes are made and sold. And Pensacola is a very capable machine. It's a wide machine. It's a well equipped machine. It's got significant output about 550,000 tons, which is significant, particularly when you consider that basis weight. And the capabilities at Pensacola, from our perspective, really match where the market is heading. Demand is high and growing for these, you know, lighter weight products.

Matthew Mckellar: And also in the context of being a single machine mill, we have other mills that are single machine mills that are competitive and successful. And we expect Pensacola to be no different in that regard. Great. Thanks for that detail.

Matthew Mckellar: And then last one for me, and you touched on this as part of your response to Anthony's question, but the last quote you showed is slide that indicated where your customer inventories were versus target levels broken down by customer segment. And it sounds like these stockings generally run its course.

Matthew Mckellar: But if you were to run that statement analysis today, do you think all customer segments would show inventories ask for the low target levels?

Matthew Mckellar: Are there any segments, particularly within North America here, where these stockings could still be a factor in the fourth quarter? Thanks. Great.

Tom Yamack: Hey Matthew, this is Tom Yamack. I think you're accurate in saying that these stockings generally over. We actually forecast. We actually went out and talked to customers. We do that quarterly to get an idea of inventory levels. And the data came back exactly like we're saying is a dramatic shift over the last three quarters in terms of stock levels. In fact, in many cases anecdotally, we're hearing people have overseered a bit.

Tom Yamack: And if you look at our order patterns in certain markets, it looks like that you're we're seeing more rush orders, more volatility in orders, so you could kind of picture them bouncing along the bottom. So we think in many cases it's more than healthy relative to future box demand. But all indications so far is exactly what you said. All right. Thanks so much. It's all for me.

Matthew Mckellar: I'll turn it back.

Mark Sutton: Thank you.

Mark Sutton: I'll now turn the call back over to Mark Sutton for closing comments. Thank you, operator. I want to thank everybody for your time today and for your interest in International Paper.

Operator: I look forward along with the leadership team to updating you on our progress on our next call at the end of January, so I have a great rest of the day. Thank you. Once again, we'd like to thank you for participating in today's international papers. Third quarter, 2023 earnings call. You may now disconnect. We're sorry. Your conference is ending now. Please hang up.