Q4 2023 International Paper Co Earnings Call
Mike: [music].
Good morning, and thank you for standing by welcome to today's International papers fourth quarter 2023 earnings 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 quest.
Press 190, as a reminder to ask a question press one zero to withdraw your question press one zero again that his press. One then zero on your telephone keypad to withdraw your question press one zero. It is now my pleasure to turn the call over to Mark Nelson Vice President Investor Relations, Sir the floor is yours.
Mark Nelson: Thank you Greg Good morning, and thank you for joining international paper's fourth quarter earnings call. Our speakers. This morning are Mark Sutton, Chairman and Chief Executive Officer, and Tim Nicholls Senior Vice President and Chief Financial Officer. There is important information at the beginning of our presentation on slide two including certain.
Mark Nelson: Disclaimers for example, during this call we will make forward looking statements that are subject to risks and uncertainties.
Mark Nelson: We will also present certain non U S. GAAP financial information a reconciliation of those figures to U S. GAAP financial measures is available on our website.
Mark Nelson: Our website also contains copies of the fourth quarter earnings press release, and today's presentation slides with that I'll now turn it over to Mark Sutton.
Mark S. Sutton: Thank you Mark and good morning, everyone. We will begin our discussion on slide three.
Mark S. Sutton: I'll touch on our full year 2023 results.
Mark S. Sutton: As I reflect on this past year I'm very appreciative of all the hard work our employees.
Mark S. Sutton: Perform and for our strong customer relationships.
Mark S. Sutton: As we manage through a challenging market environment, our teams across international paper, Keith International paper executed well, both commercially and operationally.
Mark S. Sutton: It worked closely with our customers to create value and serve their needs, while navigating uncertain and changing demand environment.
Mark S. Sutton: Teams were also focused on driving our cost in all categories of spend across our large network of nails.
Mark S. Sutton: Box plant and supply chain operations.
Mark S. Sutton: In addition, we took strategic actions to structurally reduce fixed costs in our mill system, and our industrial packaging business and our global cellulose fibers business.
Mark S. Sutton: We also made significant progress in building a better IP.
Mark S. Sutton: Levering $260 million of earnings benefits in 2023.
Mark S. Sutton: Driven by commercial and process improvement initiatives.
I am pleased to say that we've exceeded our target each year since we began this initiative.
Mark S. Sutton: Which demonstrates how building have been our IP is now mindset embedded in our culture.
Mark S. Sutton: With intense focus on maximizing value through commercial and operational excellence.
Mark S. Sutton: We also advance our strategies to improve profitability across our portfolio.
Mark S. Sutton: In our hearth business our go to market strategy is focused on improving margins and mix.
Investing in capabilities to enhance our value proposition to align with customer needs.
Mark S. Sutton: In global cellulose fibers, our strategy is focused on optimizing the business.
Mark S. Sutton: Reducing exposure to commodity pulp and aligning our mill footprint.
Mark S. Sutton: We will be sharing more about these strategies later in the presentation.
Mark S. Sutton: In addition to reinvesting in our businesses. We also preserved our solid balance sheet and returned approximately $840 million to our shareholders.
Mark S. Sutton: As we go through the rest of the presentation, we will share our perspective on the market and the trends across our portfolio. We thought this would be helpful. As you reflect on industry dynamics entering the new year.
Mark S. Sutton: I will now turn it over to Tim who will provide more details Tim.
Tim S. Nicholls: Thank you Mark good morning, everyone.
Tim S. Nicholls: If we turn to slide for the full year key financials as Mark mentioned earlier 2023 proved to be a challenging market environment with.
Tim S. Nicholls: Which impacted our financial performance.
And to your underlying demand for our products was lower slower as consumers prioritize spending on services and essential goods.
Tim S. Nicholls: This trend was influenced by the pull forward of goods during the pandemic.
Tim S. Nicholls: As well as by inflationary pressures and rising interest rates that impacted the consumer.
Demand for our products was further constrained by inventory destocking as our customers on the broader supply chain work through elevated inventories of their products.
Tim S. Nicholls: The lower demand combined with declining sales prices for our products sticky cost inflation resulted in lower revenues and earnings in 2023, when compared to prior periods.
Tim S. Nicholls: Based on shipment trends across the markets. We serve we saw demand trough in the first half of 2023, and then continued to see.
Tim S. Nicholls: Throughout the year.
Tim S. Nicholls: In addition, we benefited from the building and better IP initiatives, Mark just mentioned.
Speaker Change: And as a reminder, free cash flow for the year included a one time use of cash totaling approximately $200 million.
Speaker Change: Related to our timber monetization actions.
Speaker Change: Now I'll turn to the fourth quarter key financials on slide five.
Speaker Change: Operating earnings per share came in better than the outlook, we provided on the third quarter.
Speaker Change: Our teams executed well by optimizing costs and delivering commercial initiatives focused on margin and mix improvement.
Speaker Change: And as we announced on the third quarter, we closed our containerboard mill in Orange, Texas.
Speaker Change: Permanently idled two pulp machines in our mills and rigor with North Carolina in Pensacola, Florida.
Speaker Change: We expect to cost benefits from these closures to ramp throughout 2024.
Speaker Change: We are also encouraged to see that demand continues to recover across our portfolio in the fourth quarter and we expect this trend to continue going forward.
Speaker Change: Now turning to slide six I'll provide more details about the quarter as we walk through the sequential earnings bridge.
Speaker Change: Fourth quarter operating earnings per share was <unk> 41, as compared to 64 cents in the third quarter.
Speaker Change: Price and mix was lower by <unk> 18 per share.
Speaker Change: Primarily due to index movements across our portfolio and lower export sales price.
Speaker Change: This was partially offset by more margin and mix benefits from commercial initiatives in both businesses.
Speaker Change: Volume was favorable to earnings by <unk> <unk> per share as higher demand across our portfolio.
Speaker Change: More than offset one less shipping day in our North American packaging business.
Speaker Change: We also had lower shipments of commodity Paul as we executed our strategy focused on improving mix and optimizing that business.
Speaker Change: Operations and costs was unfavorable by <unk> <unk> per share sequentially.
Due to a non repeat of a favorable one time item, we called out in the third quarter related to lower cost of company paid benefits totaling about $80 million or <unk> 18 per share.
Speaker Change: This not hurricane was partially offset by our continued focus on reducing marginal cost and spending.
Speaker Change: We are accomplishing this by optimizing fiber and energy cost, reducing labor flavor over time.
Speaker Change: Corporate overhead expenses, driving down supply chain costs and shifting to lower cost suppliers.
Speaker Change: We also had lower unabsorbed fixed costs related to less economic downtime as demand improved across our portfolio.
Speaker Change: Maintenance outages were higher by $13 million or <unk> <unk> per share in the fourth quarter and input costs were lower overall as increased pricing for OCC was offset by lower costs for energy chemicals and wood.
Speaker Change: And finally corporate items were impacted by a higher effective tax rate in the fourth quarter offsetting lower corporate expenses.
Speaker Change: Okay.
Turning to the segments, starting with industrial packaging on slide seven price and mix was lower due to index movements lower export prices and higher export mix as demand improved.
Speaker Change: This was partially offset by benefits from commercial initiatives focused on margin improvement and our box business. Later in this presentation Mark will talk more about this go to market strategy.
Speaker Change: Volume was higher despite one less shipping day and box, we saw sequentially higher daily shipments in our box business and higher volumes across our domestic and export containerboard channels.
Speaker Change: Operations and costs was unfavorable sequentially due to the non routine items that I mentioned earlier, which benefited the third quarter in this business by $68 million.
Speaker Change: The majority of this was offset by lower economic downtime in the quarter as demand improved and reflects the intense focus by our teams to reduce cost across our mills and box plants.
Speaker Change: Planned maintenance outages were lower by $22 million sequentially due to a seasonally lower outage schedule and our efforts to optimize outage spending across the mill system.
Speaker Change: Input costs were moderately lower primarily due to lower costs for energy and chemicals, partially offset by higher OCC costs.
Turning to slide eight we thought it would be helpful to share some additional perspective on the segment trends for our North American packaging business based on feedback from our customers.
Speaker Change: As shown on the previous slide our U S box shipments in the fourth quarter were up approximately 3% sequentially.
Speaker Change: And we've continued to see demand growth in packaging such as the trough in the March of 2020.
Speaker Change: Sorry.
Speaker Change: E Commerce has been very resilient with our shipments of 2023 up approximately 30% since 2019.
Speaker Change: This continues to be an attractive channel for consumers as evidenced during the past holiday season.
Speaker Change: International paper has strategic customer relationships and a strong value proposition with scale and geographic reach to support seasonal demand surges.
Speaker Change: Shipping and distribution was significantly affected by inventory destocking efforts across its longer supply chains. As a result, we've seen improvement across the segment assess the destocking phase ran its course.
Speaker Change: Food and beverage has been relatively stable overall, the fresh fruits fresh foods segment has benefited from solid performance across the foodservice channel and consumer shifts toward making home mills in place of processed food in its convenience.
Speaker Change: The protein segment has been impacted by supply reductions in beef and poultry International paper is overweight in this segment, which has impacted our box shipment performance relative to the overall industry.
Speaker Change: We believe this is temporary and expect trends to improve in 2024.
Speaker Change: The beverage segment has been under pressure as pressure as budget conscious consumers have reduced consumption of specialty beverages, which tend to be more packaging intensive.
Speaker Change: On the other side of the spectrum segments like durables and other non durable consumer goods are more discretionary in nature and have been under pressure based on customer feedback and economic data like housing starts and consumer expectations. We expect demand in this packaging intensive segments to improve.
Speaker Change: In summary, based on these trends, we believe industry box demand will grow approximately 3% in 2024, we understand the critical role corrugated packaging plays in bringing essential products to consumers and we believe that <unk> is well positioned to grow with our customers over the long term.
Speaker Change: Turning to slide nine I'll touch on what we're seeing across our containerboard export channel.
Speaker Change: Demand for Kraft containerboard continue to improve through the fourth quarter and based on feedback from our customers inventories appear to have normalized across all regions.
Operator: Holt. Good morning, and thank you for standing by. Welcome to today's International Papers fourth quarter 2023 earnings call. All lines have been placed on mute to prevent background noise.
Speaker Change: In terms of segment performance, we are seeing solid demand in fresh fruit and vegetable markets, where we have a strategic customer.
Operator: After the speaker's remarks, you will have an opportunity to ask questions. To ask a question, press 1 and 0 on your telephone keypad. To withdraw a question, press 1 and 0. Again, that is, press 1 and 0 on your telephone keypad. To withdraw a question, press 1 and 0.
Speaker Change: Relationship in Latin America, and the Mediterranean.
Speaker Change: Demand across the industrial segments in Europe, and Asia remains soft due to the lower consumer demand for durable so non durable products.
Speaker Change: We expect these segments to recover as the broader economy improves and international paper is well positioned to grow with these segments due to their performance requirements and need for a heavyweight Kraft linerboard.
Mark Nelson: It is now my pleasure to turn the call over to Mark Nelson, Vice President, Investor Relations. Sir, the floor is yours. Thank you, Greg. Good morning, and thank you for joining International Paper's fourth-quarter earnings call. Our speakers this morning are Mark Sutton, Chairman and Chief Executive Officer, and Tim Nicholls, Senior Vice President and Chief Financial Officer. There is important information at the beginning of our presentation on slide two, including certain legal disclaimers. For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties. We will also present certain non-U.S. GAAP financial information.
Speaker Change: Moving on to global cellulose fibers on slide 10.
Speaker Change: Take a look at the fourth quarter price and mix was lower due to price index movements, partially offset by benefits from higher fluff and specialty pulp mix.
Speaker Change: Volume was relatively flat overall as higher demand for fluff and specialty pulp was offset by lower sales of commodity grades as we continue to focus on strategically aligning our business with the most attractive customers and segments.
Speaker Change: Operations and costs was unfavorable sequentially.
Mark Nelson: A reconciliation of those figures to U.S. GAAP financial measures is available on our website. Our website also contains copies of the fourth quarter earnings press release and today's presentation slides. With that, I'll now turn it over to Mark Sutton. Thank you, Mark. And good morning, everyone.
Speaker Change: Due to the non repeat items I mentioned earlier, which benefited the third quarter in this business by $12 million.
Speaker Change: In addition, operating costs included a planned turbine maintenance expense of $18 million.
Mark S. Sutton: We will begin our discussion on slide three, where I will touch on our full year 2023 results. As I reflect on this past year, I'm very appreciative of all the hard work our employees have performed and for our strong customer relationships, as we've managed through a challenging market environment. Our teams across International Paper executed well, both commercially and operationally. They worked closely with our customers to create value and serve their needs while navigating an uncertain and changing demand environment. Our teams are also focused on driving costs in all categories of spend across our large network of mills, box plants, and supply chain operations.
Speaker Change: Planned maintenance outages were also higher in the fourth quarter by $35 million.
Speaker Change: Finally input costs were lower by $7 million, primarily due to lower wood and chemical costs.
Turning to slide 11, I'll talk about what we're seeing across the fluff pulp segment.
Speaker Change: Overall demand is continuing to improve through the fourth quarter and we expect this trend to continue this year.
Speaker Change: Inventories are normalized across much of our customer base.
Speaker Change: We are seeing most of the improvement to date from the developed economies driven by improving consumer demand stabilizing inflation and more stable currencies.
Speaker Change: Demand in China, and the Middle East has been stable and we expect a normal seasonal decline in those regions in the first quarter due to Chinese new year and Ramadan.
Mark S. Sutton: In addition, we took strategic actions to structurally reduce fixed costs in our mill system, in our industrial packaging business, and for our global cellulose fibers. We also made significant progress in building a better IP by delivering $260 million of earnings benefits in 2023. Driven by Commercial and Process Improvement Initiatives. I'm pleased to say that we've exceeded our target each year since we began this initiative, which demonstrates how building a better IP is now a mindset embedded in our culture, with an intense focus on maximizing value through commercial and operational excellence. We also advanced our strategies to improve profitability across our portfolio. In our box business, our go-to-market strategy is focused on improving margins and mix by investing in capabilities to enhance our value proposition to align with customer needs. In Global Cellulose Fibers, our strategy is focused on optimizing the business by reducing exposure to commodity pulp and aligning our mill footprint. We will be sharing more about these strategies later in the presentation. In addition to reinvesting in our businesses, we also preserved our solid balance sheet and returned approximately $840 million to our shareholders.
Speaker Change: Inventories are elevated however, we expect them to normalize in the second quarter.
Speaker Change: On slide on Slide 12, I'll share a few comments about 2024.
Speaker Change: Given the fluid market environment, we have chosen not to provide our full year earnings outlook.
Speaker Change: Later, we will share our view of demand trends and IP improvement initiatives as well as other financial assumptions.
Speaker Change: Overall, we believe the demand environment will continue to improve across our portfolio and we have initiatives focused on improving mix and margins in both businesses.
Speaker Change: We expect the first quarter of 2024 will be an earnings trough.
Speaker Change: Due to seasonally low volumes seasonally higher costs and unfavorable impacts from the January I Wonder what are fruits also the.
Speaker Change: Majority of prior publication declines will flow through the first quarter.
Speaker Change: Regarding demand trends, we expect packaging and fluff pulp markets to grow approximately 3% year over year.
Speaker Change: In 2020 for our North American box business May trail the market as we continue to execute our go to market strategy focused on margin and mix improvement.
Mark S. Sutton: As we go through the rest of the presentation, we'll share our perspective on the market and the trends across our portfolio. We thought this would be helpful as you reflect on industry dynamics entering the new year. I will now turn it over to Tim, who will provide more details.
Speaker Change: Given the international paper's commercial and operational initiatives, we expect more than $400 million of benefits this year.
Tim S. Nicholls: Great. Thank you, Mark. Good morning, everyone.
Speaker Change: These initiatives should ramp up through the year and include cost reduction benefits from the closure of our containerboard mill in Orange, Texas, and two pulp machine closures at our <unk>, North Carolina, and Pensacola Pensacola, Florida.
Tim S. Nicholls: If we turn to slide four, the full-year key financials. As Mark mentioned earlier, 2023 proved to be a challenging market environment, which impacted our financial performance. During much of the year, underlying demand for our products was lower as consumers prioritized spending on services and essential goods. This trend was influenced by the pull-forward of goods during the pandemic, as well as by inflationary pressures and rising interest rates that affected consumers.
Speaker Change: We also expect higher costs for OCC as demand continues to improve and general inflation on things like transportation wages employee benefits materials and services.
Speaker Change: We plan to invest between $800 million and $1 billion in capital investments for general maintenance cost improvement and enhanced capabilities in our box business.
Tim S. Nicholls: Demand for our products was further constrained by inventory destocking as our customers and the broader supply chain worked through elevated inventories of their products. The lower demand, combined with declining sales prices for our products and sticky cost inflation, resulted in lower revenues and earnings in 2023 when compared to prior periods. Based on shipment trends across the markets we serve, we saw a demand trough in the first half of 2023 and then continued to see improvement throughout the year. In addition, we've benefited from the building of better IP initiatives Mark just mentioned. And as a reminder, free cash flow for the year included a one-time use of cash totaling approximately $200 million related to our timber monetization action.
Speaker Change: Other assumptions for items like corporate expense interest expense and tax rate are included on slide 30 in the appendix.
Speaker Change: Turning to slide 13.
Speaker Change: Outline our first quarter outlook.
Speaker Change: Before I get into the details on each of the businesses. The January winter freeze is expected to negatively impact earnings for the first quarter.
Speaker Change: By approximately $40 million for the company.
Speaker Change: This impact is embedded in the numbers I will provide for each business.
Speaker Change: I'll start with industrial packaging.
Speaker Change: We expect price and mix to remain flat overall.
Speaker Change: The prior index movements in North America is expected to decrease earnings by approximately $67 million.
Tim S. Nicholls: Now I'll turn to the fourth quarter key financials on slide five. Operating earnings per share came in better than the outlook we provided in the third quarter. Our teams executed well by optimizing costs and delivering commercial initiatives focused on margin and mix improvement. And, as we announced in the third quarter, we closed our container board mill in Orange, Texas, and permanently idled two pulp machines at our mills in Regal Wood, North Carolina, and Pensacola, Florida.
Speaker Change: However, we expect this to be offset by approximately $68 million of commercial benefits.
From contract restructuring in our North American box business.
Speaker Change: This is part of our box go to market strategy that will knock that mark will discuss in a few minutes.
Speaker Change: Volume is expected to decrease earnings by $25 million due to seasonally lower daily demand, partially offset by two more shipping days.
Speaker Change: Operations and costs is expected to decrease earnings by $30 million. This is due to seasonality.
Tim S. Nicholls: We expect the cost benefits from these closures to ramp throughout 2024. We are also encouraged to see that demand continues to recover across our portfolio in the fourth quarter, and we expect this trend to continue going forward. Now turning to slide six, I'll provide more details about the quarter as we walk through the sequential earnings bridge. Fourth quarter operating earnings per share were $0.41 as compared to $0.64 in the third quarter.
Speaker Change: And some cost inflation on wages and employee benefits. These increases should be partially offset by lower fixed cost, resulting from the closure of our orange Bell.
Speaker Change: Higher maintenance outage expense is expected to decrease earnings by $31 million.
Speaker Change: And lastly, rising input costs are expected to decrease earnings by $20 million.
Speaker Change: Driven by higher OCC.
Tim S. Nicholls: Price and mix was lower by 18 cents per share, primarily due to index movements across our portfolio and lower export sales prices. This was partially offset by margin and mixed benefits from commercial initiatives in both businesses. Volume was favorable to earnings by 7 cents per share, as higher demand across our portfolio more than offset one less shipping day in our North American packaging business. We also had lower shipments of commodity pulp as we executed our strategy focused on improving mix and optimizing that business. Operations and costs were unfavorable by 12 cents per share sequentially.
Speaker Change: And seasonally higher energy costs.
Speaker Change: Switching to global cellulose fibers, we expect price and mix to increase earnings by $5 million as a result of our strategy to reduce exposure to commodity pulp.
Speaker Change: Overall volume is expected to remain stable as seasonally lower shipments during the Chinese new year are being offset by improved demand in other regions.
Speaker Change: Operations and costs are expected to decrease earnings by $5 million.
Speaker Change: Due to seasonality and cost inflation.
Speaker Change: This was partially offset by the non repeat of the turbine maintenance outage in the fourth quarter and lower fixed costs, resulting from the idling of our pulp machine, our Regal would milk as.
Tim S. Nicholls: This is due to a non-repeat of a favorable one-time item we called out in the third quarter related to lower costs of company-paid benefits, totaling about $80 million or 18 cents per share. This non-repeat was partially offset by our continued focus on reducing marginal costs and spending. We're accomplishing this by optimizing fiber and energy costs, reducing labor overtime, and corporate overhead expenses, driving down supply chain costs, and shifting to lower-cost suppliers. We also have lower unabsorbed fixed costs related to less economic downtime as demand improves across our portfolio. Maintenance outages were higher by $13 million or three cents per share in the fourth quarter, and input costs were lower overall as increased pricing for OCC was offset by lower costs for energy, chemicals, and wood. And finally, corporate items were impacted by a higher effective tax rate in the fourth quarter, offsetting lower corporate expenses.
Speaker Change: As you May recall the machine at our Pensacola Mill was already idled in the third quarter.
Speaker Change: Lower maintenance outage expense is expected to increase earnings by $16 million and lastly, higher input costs are expected to decrease earnings by $5 billion.
Speaker Change: With that I'll turn it back over to Mark.
Mark: Thanks, Jim.
Mark: Turning to slide 14, now and I'll talk about our go to market strategy and our North American box business.
Mark: During our last earnings call.
Mark: Highlighting strategic investments, we were making across our box system to create value by improving our capabilities to serve customer needs and improve productivity.
Mark: This includes adding new converting lines in existing plants.
Mark: Operating older equipment with newer more advanced technology and new plants like the one we opened in eastern Pennsylvania. These investments are helping us address capacity constraints in certain regions and also address productivity productivity challenges related to the tight labor markets and a less experienced workforce on average.
Mark: Our box go to market strategy is about leveraging our capabilities and strong segment base value propositions to improve margins and mix.
Tim S. Nicholls: Turning to the segments and starting with industrial packaging on slide seven, price and mix was lower due to index movements, lower export prices, and higher export mix as demand improved. This was partially offset by benefits from commercial initiatives focused on margin improvement and our box business. Mark will talk more about this go-to market strategy. Volume was higher despite one less shipping day in the box business.
Mark: It's about making choices that create value for our customers, while maximizing the profitability of our packaging business earlier, Kim called out approximately $68 million of earnings benefits expected in the first quarter as a result of this strategy in action.
Mark: So we're making the changes that will progress through 2024, as we continue to reset the business and strengthening our position for the future.
Tim S. Nicholls: We saw sequentially higher daily shipments in our box business and higher volumes across our domestic and export container board channels. However, operations and costs were unfavorable sequentially due to the non-repeat item that I mentioned earlier, which benefited the third quarter in this business by $68 million. The majority of this was offset by lower economic downtime in the quarter as demand improved, and reflects the intense focus by our teams to reduce costs across our mills and box plants. Planned maintenance outages were lower by $22 million sequentially due to a seasonally lower outage schedule and our efforts to optimize outage spending across the mill system. Input costs were moderately lower, primarily due to lower costs for energy and chemicals, partly offset by higher O
Mark: We are focusing on value over volume. Therefore, we may trail the industry for the next few quarters when measuring unit volume growth, but we expect to grow at or above market thereafter, and we expect our earnings to improve through this process.
Mark: In summary.
Mark: We have significant opportunities to leverage our strong value proposition to serve customer needs and improve our mix and capture additional value.
Speaker Change: Turning to slide 15, I'll update you on our strategy for global cellulose fibers.
Speaker Change: Let me say that I am.
Speaker Change: Not satisfied with the absolute level of earnings.
Speaker Change: Businesses can be used in our hand as I've said before I believe there is a good business within this business.
Speaker Change: And I also believe we can improve earnings and cash flows over the cycle by aligning with those customers and segments, who value our differentiated product and service offerings. We believe block is a value added product that will grow over time because of the essential roles on absorbent personal care products play in meeting consumer needs.
Tim S. Nicholls: Turning to slide 8, we thought it would be helpful to share some additional perspective on segment trends for our North American packaging business based on feedback from our customers. As shown on the previous slide, our US box shipments in the fourth quarter were up approximately 3% sequentially. And we've continued to see demand growth in packaging since the trough in the March of 2023. eCommerce has been very resilient, with our shipments in 2023 up approximately 30% since 2019. This continues to be an attractive channel for consumers, as evidenced during the past holiday season. International Paper has strategic customer relationships and a strong value proposition with scale and geographic reach to support seasonal demand surges. However, shipping and distribution were significantly affected by inventory destocking efforts across its longer supply chains.
Speaker Change: And international paper, we have talented teams with significant market expertise and a mill system a broad set of capabilities. This allows us to create value for our customers and delivering innovation and products that need.
Speaker Change: There are most stringent performance and product safety standards.
Speaker Change: To improve the financial performance of this business our commercial teams have been focused on getting paid for value that we can.
Speaker Change: Provide.
Speaker Change: And being more selective in the segments that we actually serve as a result, we have earned a higher training young for fluff grades relative to commodity pulp grades by capturing more value.
Speaker Change: We're also improving our mix by reducing our exposure to commodity grades and by serving amongst attractive customers that allow us to maximize the value of this business.
Tim S. Nicholls: As a result, we've seen improvement across this segment since the destocking phase ran its course. Food and beverage has been relatively stable overall. The fresh fruit and fresh food segment has benefited from solid performance across the food service channel and consumer shifts toward make-at-home meals in place of processed food and its convenience. The protein segment has been impacted by supply reductions in beef and poultry.
Speaker Change: So you the commodity grades will mostly consist of our bleached softwood northern bleached softwood Kraft mill that that goes really into tissue products and is produced at our low cost Grand Prairie Mill is strategically located near that fiber source in Canada.
Aligned with this optimization strategy, we took actions to rightsize, our footprint and reduce fixed cost across our Nic nail system.
Tim S. Nicholls: International paper is overweight in this segment, which has impacted our box shipment performance relative to the overall industry. However, we believe this is temporary and expect trends to improve in 2024. The beverage segment has been under pressure as budget-conscious consumers have reduced consumption of specialty beverages, which tend to be more packaging-intensive.
Speaker Change: Which we estimate will improve EBITDA for global cellulose fibers by approximately $90 million per year.
Speaker Change: Our teams are also focused on driving out costs across our supply chain by leveraging new tools and data analytics. So in summary, we're pulling a lot of levers in this business and expect to make meaningful progress toward our strategy in 2024.
Tim S. Nicholls: On the other side of the spectrum, segments like durables and other non-durable consumer goods are more discretionary in nature and have been under pressure. Based on customer feedback and economic data like housing starts and consumer expectations, we expect demand in this packaging-intensive segment to improve. In summary, based on these trends, we believe industry box demand will grow approximately 3% in 2024. We understand the critical role corrugated packaging plays in bringing essential products to consumers, and we believe that IP is well-positioned to grow with our customers over the long term. Thank you.
Speaker Change: Turning to slide 16, and I'll share. Some examples of how we are deploying technologies across the company and our manufacturing converting and supply chain operations.
Speaker Change: Over the past couple of years, we developed and piloted new tools and capabilities to reduce cost increase productivity and improve efficiencies. All of this will result in a better experience in terms of reliably providing products and services for our customers.
Speaker Change: By leveraging these new tools, we're seeing benefits in areas such as improve.
Speaker Change: Improved reliability and lower maintenance cost higher yields on fiber energy and chemical usage more optimize machine scheduling at our mills and box plants, better logistics planning across our supply chain.
Tim S. Nicholls: Turning to slide 9, I'll touch on what we're seeing across our container board export channel. Demand for Kraft's container port continued to improve through the fourth quarter, and based on feedback from our customers, inventories appear to have normalized across all regions. In terms of segment performance, we are seeing solid demand in fresh fruit and vegetable markets, where we have a strategic customer relationship in Latin America and the Mediterranean. However, demand across the industrial segments in Europe and Asia remains soft due to lower consumer demand for durables and non-durable products.
Speaker Change: And more so we're seeing opportunities for operating and repair materials due to better visibility and consolidated purchases.
Speaker Change: These new technologies also enable more collaboration by connecting teams at our facilities to enterprise specialists, allowing us to maximize the opportunities. We believe there are more opportunity going forward and this is a great example of how building a better IP is embedded into our culture.
Speaker Change: On slide 17, I want to take a moment to update you on our capital allocation actions.
Speaker Change: As I said in the past, we had a solid balance sheet, which we will preserve because we believe it is core to our capital allocation framework.
Tim S. Nicholls: We expect these segments to recover as the broader economy improves, and International Paper is well positioned to grow with these segments due to their performance requirements and need for a heavyweight craft liner board. Moving on to global cellulose fibers, on slide 10, we'll take a look at the fourth quarter. Price and mix were lower due to price index movements, partially offset by benefits from higher fluff and specialty pulp mix.
Speaker Change: Our 2023 year end leverage is at two five times on a Moody's basis, which is at the low end of our target range of $2 five to two eight times looking ahead, we have limited short and medium term debt maturities due to the risk mitigation strategies, we've taken over the past several years and we expect our qualified pension plan to remain.
<unk> fully funded.
Tim S. Nicholls: Volume was relatively flat overall, as higher demand for fluff and specialty pulp was offset by lower sales of commodity grades, as we continue to focus on strategically aligning our business with the most attractive customers and segments. Operations and costs were unfavorable sequentially due to the non-repeat item I mentioned earlier, which benefited the third quarter in this business by $12 million. In addition, option costs included a planned turbine maintenance expense of $18 million; planned maintenance outages were also higher in the fourth quarter by $35 million. And finally, input costs were lower by $7 million, primarily due to lower wood and chemical costs.
Speaker Change: Returning cash to shareholders is a meaningful part of our capital allocation framework.
Speaker Change: And last year, we returned approximately $840 million to our shareholders.
Speaker Change: And we remain committed to our dividend.
Speaker Change: We understand the investment excellence is essential to growing earnings and cash generation and as I shared with you previously we have opportunities to invest in our box system to build out capabilities and position us for future profitable growth. We also had cost reduction projects across the company with attractive returns.
Speaker Change: <unk>.
Speaker Change: Yes.
Speaker Change: So turning to slide 18, I'd like to wrap up by sharing my view that international paper is well positioned for the future as share that conviction before.
Speaker Change: After navigating another year of challenging market conditions. It bears repeating our financial foundation is strong.
Tim S. Nicholls: Turning to slide 11, I'll talk about what we're seeing across the fluff pulp segment. Overall, demand has continued to improve through the fourth quarter, and we expect this trend to continue this year. Inventories have normalized across much of our customer base. We are seeing most of the improvement to date from developed economies driven by improving consumer demand, stabilizing inflation, and more stable currencies. Demand in China and the Middle East has been stable, and we expect a normal seasonal decline in those regions in the first quarter due to the Chinese New Year and Ramadan.
Those are the principles and core values that guide our actions and decisions about how we operate I'm confident that the winning mindset of our leadership team and our employees and the agility of our employees, who drive our success as we tackle our improvement efforts and execute the go to market strategy, we talked about on today's call as we move through 2024.
Speaker Change: We anticipate continued demand recovery across the markets, we serve along with margin and mix improvement from our commercial strategies. There is no question in my mind and we are on the right path given our strategic customer relationships talented teams world class assets and market expertise, we are committed to maximizing long.
Tim S. Nicholls: Inventories are elevated, but we expect them to normalize in the second quarter. On slide 12, I'll share a few comments about 2024. Given the fluid market environment, we have chosen not to provide a full-year earnings outlook.
Speaker Change: Term value for all of our stakeholders and we intend to deliver.
With that we're happy to take your questions and similar to the last quarter.
Speaker Change: Our senior business leaders are joining me today to provide you a perspective in the Q&A session. So operator, we are ready to go to question and answer session.
Tim S. Nicholls: However, we will share our view of demand trends and IP improvement initiatives, as well as other financial assumptions. Overall, we believe the demand environment will continue to improve across our portfolio, and we have initiatives focused on improving mix and margins in both businesses. We expect the first quarter of 2024 will be an earnings trough due to seasonally low volumes, seasonally higher costs, and unfavorable impacts from the January winter freeze.
Speaker Change: Thank you if you would like to ask a question simply press. One then zero on your telephone keypad to withdraw your question press one zero, we will pause a moment to compile the Q&A roster. We do ask that you limit yourself to one question and one follow up question and one moment. Please.
Speaker Change: Your first question comes from the line of Phil <unk> from Jefferies. Please go ahead.
Phil: Hey, guys I appreciate all the great color on some of these commercial initiatives.
Phil: Getting valuable.
Mark: It's mark that's great.
Phil: Is much of it is pretty much locked up contractually. So that's just it just flowing through and then can you just expand a little bit what youre exactly do you do when you're effectively just walking away from lower margin business and mixing up.
Tim S. Nicholls: Also, the majority of prior publication declines will flow through the first quarter. Regarding demand trends, we expect packaging and fluff pulp markets to grow approximately 3% year over year. In 2024, our North American box business may trail the market as we continue to execute a go-to-market strategy focused on margin and mix improvements. Given International Paper's commercial and operational initiatives, we expect more than $400 million of benefits this year.
Speaker Change: And then just lastly, I think.
Speaker Change: You guys guided to like a 68 million tailwind for <unk> do we just kind of annualize that impact for the full year, sorry, a lot to unpack there no. Good good three part question, Phil and thank you for that.
Speaker Change: I'm going to have Tom <unk>, who is leading that strategy from the front.
Tom: Our four pillar strategy to improve the business.
Tom: And it's much more than just walking away from business, we don't want to walk away from any of our good customers, but what changed over the last couple of years relative to inflation and really the attractiveness of certain segments. So Tom and his team are really putting together a thoughtful strategy.
Tim S. Nicholls: These initiatives should ramp up through the year and include cost reduction benefits from the closure of our container board mill in Orange, Texas, and two pulp machine closures at our mills in Regalwood, North Carolina, and Pensacola, Florida. We also expect higher costs for OCC as demand continues to improve and general inflation on things like transportation, wages, employee benefits, materials, and services. We plan to invest between $800 million and $1 billion in capital investments for general maintenance, cost improvement, and enhanced capabilities in our box business. Other assumptions for items like corporate expense, interest expense, and tax rate are included on slide 30 in the appendix. Turning to slide 13, I'll outline our first quarter outlook. Before I get into the details on each of the businesses, the January winter freeze is expected to negatively impact earnings for the first quarter by approximately $40 million for the company. This impact is embedded in the numbers I will provide for each business. I'll start with industrial packaging. We expect price and mix to remain flat overall. However, the prior index movement in North America is expected to decrease earnings by approximately $67 million.
Tom: Reboot, if you will.
Tom: We go to market segments and customers and the goal is for it to work for our customers and for us that but for international paper improved profitability. So ton of Heath, maybe just share a bit about.
Heath: How were approaching the go to market strategy.
Heath: Good morning, Phil This is Tom Amick.
Tom Amick: Agree with what Mark said this is really a holistic strategy for the business. So this includes everything from where we invest capital.
Tom Amick: Two the metrics, we use to really run the business so customers pay for value.
Tom Amick: By value in the box business starts with reliability with quality and with shipping on time, and so we have refocused our efforts in that space.
Tom Amick: Obviously going through the pandemic.
Tom Amick: It can make that more difficult, but as we come out we feel very positive about the metrics. We're seeing in terms of improving the customer experience, we improved customer experience, we deliver more value and then we charge for that value and Youre right. There will be times when customers have a disagreement about what a fair price is.
Tom Amick: They're all most times the vast majority of times, that's really not been the case they've seen the value of IP and in some cases customers have left and then come back very quickly because box, making it difficult and their service model is often very challenging.
So that's really the equation to provide more value make customers know that you are important to their business and then get paid fairly for it and that's that really sums up the strategy.
Tom Amick: And are these wins pretty much locked in and then you gave some color in terms of the contribution for <unk> can we kind of annualize that for a full year in terms of what that.
Tim S. Nicholls: However, we expect this to be offset by approximately $68 million of commercial benefits from Contract Restructuring and our North American Box Business. This is part of our box go-to-market strategy that Mark will discuss in a few minutes. Volume is expected to decrease earnings by $25 million due to seasonally lower daily demand, partially offset by two more shipping days. Operations and costs are expected to decrease earnings by $30 million.
Tom Amick: Upside on the commercial initiatives that you have.
Tom Amick: Yes, I think annualizing it would be.
Speaker Change: That's fair.
Speaker Change: There is every customer has a different relationship there is different timing of contracts.
Speaker Change: I am.
Speaker Change: Completely confident.
Speaker Change: Number is solid and we'll maintain that margin structure going forward and I expect to improve it going forward in 2024.
Speaker Change: Okay.
Speaker Change: Yeah. That's helpful. I appreciate there's a lot of moving pieces in 2024, both on the macro fraud.
Speaker Change: And certainly there is a price increase you guys are all trying to implement in January.
Speaker Change: But any color just at least directionally, when we think about EBITDA and free cash flow.
Tim S. Nicholls: This is due to seasonality and some cost inflation on wages and employee benefits. These increases should be partially offset by lower fixed costs resulting from the closure of our orange mill. However, higher maintenance outage expense is expected to decrease earnings by $31 million.
Speaker Change: Based on the control your controllable.
Speaker Change: And how you see demand unfolding do you expect EBITDA free cash flow.
Speaker Change: Flat or down just directional color would be super helpful.
Speaker Change: Yes.
Speaker Change: Phil It's Tim So as I said in my prepared remarks, we're choosing not to give an outlook. There just there are a lot of moving pieces. We felt good about the year, we feel like we're in a good place in terms of earnings and cash flow, but we're not quantifying it or putting something out we can look at it next quarter.
Tim S. Nicholls: And lastly, rising input costs are expected to decrease earnings by $20 million, driven by higher OCC and seasonally higher energy costs. Switching to global cellulose fibers, we expect price and mix to increase earnings by $5 million as a result of our strategy to reduce exposure to commodity pulp. Overall volume is expected to remain stable as seasonally lower shipments during the Chinese New Year are offset by improved demand in other regions. However, operations and costs are expected to decrease earnings by $5 million due to seasonality and cost inflation. This is partially offset by the non-repeat of the turbine maintenance outage in the fourth quarter and lower fixed costs resulting from the idling of our pulp machine and our regal wood mill. As you may recall, the machine in our Pensacola mill was already idled in the third quarter.
Speaker Change: And maybe we'll make an adjustment.
Speaker Change: But for the moment, we're focused on.
Tim S. Nicholls: First quarter outlook and then we'll go from there.
Tim S. Nicholls: Okay.
Tim S. Nicholls: In regards to that first quarter hangover from the January or freeze do you expect any hangover effect going into <unk> like these costs lingering or any disruption or just kind of a <unk> thing and you guys are largely done.
Speaker Change: So I believe it's <unk> and we're done.
Speaker Change: Alright, thanks for the color I appreciate it guys.
Speaker Change: Your next question comes from the line of Mike <unk> from <unk> Securities. Please go ahead.
Mike: Thanks, a lot.
Mike: Tim and Mark are taking my questions.
Mike: To follow up on the focus on value.
Mike: Over.
Mike: The value over volume.
Tim S. Nicholls: Can you talk about some of the issues you've noticed in your customer contracts to sort of encourage you to revisit how you price.
Tim S. Nicholls: And could this focus on value over volume your bonds. Some maybe some additional portfolio right sizing or maybe even distancing yourself from the publication if that publication does not actually properly reflect pricing that youre seeing in the market.
Tim S. Nicholls: Lower maintenance outage expense is expected to increase earnings by $16 million, and lastly, higher input costs are expected to decrease earnings by $5 million. With that, I'll turn it back over to Mark. Thanks, Tim.
Speaker Change: So Mike Tom is going to really tackle this question, but I guess just.
Mark S. Sutton: I'm going to turn to slide 14 now, and I'll talk about our go-to-market strategy in our North American boxes. During our last earnings call, I highlighted strategic investments we were making across our box system to create value by improving our capabilities to serve customer needs and improve productivity. This includes adding new converting lines in existing plants, upgrading older equipment with newer, more advanced technology, and new plants like the one we opened in eastern Pennsylvania.
Speaker Change: Just to be totally clear, we expect long term the business earnings growth is going to come from unit volume growth and <unk>.
Speaker Change: Margin improvement on that unit volume what were doing right now and what Tom described is in the interim of resetting.
Speaker Change: With this level of.
Speaker Change: Once in a lifetime inflation in a number of other structural changes we will pick value over volume and then we're going to pick value and volume.
Mark S. Sutton: These investments are helping us address capacity constraints in certain regions and also address productivity challenges related to the tight labor markets and a less experienced workforce on average. Our box go-to-market strategy is about leveraging our capabilities and strong segment-based value propositions to improve margins and mix. It's about making choices that create value for our customers while maximizing the profitability of our packaging business. Earlier, Tim called out approximately $68 million of earnings benefits expected in the first quarter as a result of this strategy in action.
Speaker Change: Profitability and volume so our unit volume is very important in this business, it's not a high growth market, but you have to grow with the market long term and we plan to do that.
Speaker Change: And so Tom if you want to talk a little bit about.
Tom Amick: Some of the things we've seen or how we think about it we can circle back on the comment on the question about.
Tom Amick: The indexed and how prices are changed.
Tom Amick: Changed in this industry and this market share.
Tom Amick: Sure.
Tom Amick: Good morning, Mike I would say that.
Tom Amick: Everything in contracts there are contracts that don't kind of indexed contracts too.
Tom Amick: So it's really hard to draw any specifics. This is what we're seeing is an issue.
Mark S. Sutton: So we're making the changes that will progress through 2024 as we continue to reset the business and strengthen our position for the future. We are focusing on value over volume, so we may trail the industry for the next few quarters when measuring unit volume growth, but we expect to grow at or above the market thereafter, and we expect our earnings to improve through this process. In summary, we have significant opportunities to leverage our strong value proposition to serve customer needs, improve our mix, and capture additional value. Turning to slide 15, I'll update you on our strategy for global cellulose fibers.
Tom Amick: The biggest issue is that when the contract comes up.
Tom Amick: Are we clear in articulating value is that a fair.
Tom Amick: Proposal, because we don't expect contracts to go our way, we don't expect them to go to customers why we expect.
Tom Amick: Our middle and higher ground.
Tom Amick: And part of that is just getting the economics of the contract within range.
Tom Amick: And making sure that.
Customer expectation for pricing is very similar to what you asked are there are no surprises.
Tom Amick: So I would say, it's not one size fits all five really core component of this and Mark mentioned growing with market is.
A very clear local understanding of what's happening in the box business, because unlike linerboard and pulp our box business is very local and those decisions have to be very targeted around value propositions and around customer growth in that market and I think that's what's going to have turned the corner in a few quarters to get back.
Mark S. Sutton: First, let me say that I'm not satisfied with the absolute level of earnings that the business has produced. But, as I've said before, I believe there is a good business within this business. I also believe we can improve earnings and cash flows over the cycle by aligning with those customers and segments who value our differentiated product and service offerings. We believe Fluff is a value-added product that will grow over time because of the essential role that absorbent personal care products play in meeting consumer needs.
Tom Amick: Back to growing at market and the last thing I would say is that.
Tom Amick: We're not seeing customers.
Leave we've certainly picked up some business by Youre really talking about some marginal volume and local places where maybe the matches and perfect long term, maybe it's better for both parties.
Mark S. Sutton: At International Paper, we have talented teams with significant market expertise and a systematic broad set of capabilities. This allows us to create value for our customers by delivering innovation and products that meet their most stringent performance and product safety standards. To improve the financial performance of this business, our commercial teams have been focused on getting paid for the value that we provide and being more selective in the segments that we actually serve. As a result, we have earned a higher premium for fluff grades relative to commodity pulp grades by capturing more value. We're also improving our mix by reducing our exposure to commodity grades and by serving the most attractive customers that allow us to maximize the value of this business. Our exposure to commodity grades will mostly consist of our Bleach Softwood, Northern Bleach Softwood Craft Mill, that goes really into tissue products and is produced at our low-cost Grand Prairie Mill that is strategically located near that fiber source in Canada.
Tom Amick: To readjust and get to the right value equation.
Speaker Change: Got it.
Speaker Change: Thank you very fluid for the color.
Speaker Change: And just I guess, one quick follow up in terms of your strategy on gcs.
Speaker Change: And really trying to enhance the mix.
Speaker Change: Do you see.
Speaker Change: In terms of the portfolio itself, obviously post Regal would post Pensacola are there other opportunities for you to rightsize your portfolio there.
Speaker Change: Typically if demand is not materializing as you would expect.
Speaker Change: Yes.
Speaker Change: Yes, Mike This is play Alice good morning.
Speaker Change: Yes, I think.
Speaker Change: As you mentioned.
Alice: Mitigating the exposure that we had to commodity or paper grade pulp at the Regal would mill.
Alice: If you look at 2024.
Alice: Post post the closure of our Regal in 'twenty.
Alice: We still having some exposure we're not at our optimized mixed although we're much further along the way toward debt.
Alice: We believe fluff will grow.
Alice: That will obviously will move Sps K or paper grade to fluff. So we think exiting 'twenty four and into 'twenty five.
Mark S. Sutton: Aligned with this optimization strategy, we took actions to right-size our footprint and reduce fixed costs across our mill system, which we estimate will improve EBITDA for global cellulose fibers by approximately $90 million per year. Our teams are also focused on driving out costs across our supply chain by leveraging new tools and data analytics. So in summary, we're pulling a lot of levers in this business and expect to make meaningful progress toward our strategy in 2024. Turning to slide 16, I'll share some examples of how we are deploying technologies across the company in our manufacturing, converting, and supply chain operations.
Alice: We'll be we'll be getting pretty close to our optimized mix there will always be a small amount of the paper grade pulp in the minutes.
Alice: But we think we will be getting to really are optimized mix here exiting 2014 to 25. So we have an improvement through all through 'twenty four.
Alice: Of course, we have levers if fluff pulp did not grow and such.
Alice: There are things that we have is all options, but that's not really what we what we believe are what we think we think absorbent hygiene products will grow and therefore, we think that fluff will grow we're excited about the trend.
Mark S. Sutton: Over the past couple years, we've developed and piloted new tools and capabilities to reduce costs, increase productivity, and improve efficiencies. All of this will result in a better experience in terms of reliably providing products and services for our customers. By leveraging these new tools, we're seeing benefits in areas such as improved reliability and lower maintenance costs, higher yields on fiber, energy, and chemical usage, more optimized machine scheduling at our mills and box plants, better logistics planning across our supply chain, and more sourcing opportunities for operating and repair materials due to better visibility and consolidated purchasing. These new technologies also enable more collaboration by connecting teams at our facilities to enterprise specialists, allowing us to maximize the opportunity.
Alice: Yes.
Speaker Change: Thank you and would you look to 'twenty four.
Speaker Change: Thanks, Mike.
Speaker Change: Your next question comes from the line of Mark Weintraub from Seaport Research Partners. Please go ahead.
Mark Weintraub: Thank you maybe first of all I'm going to follow up on Phil's question and I realize you may or may not say anything on that but it's probably the question investors are thinking about most so I'll give it a shot and that is understanding there's a lot of variability on how how pricing can play out and that can happen.
Mark Weintraub: Very large impact on where numbers ultimately end up in 'twenty for you you did provide us with an assessment on your volume you talked about a lot of the different internal initiatives et cetera.
Speaker Change: Is it possible that as you did last year, you could give us a range if we exclude impact from any price change is not yet reflected in the trade publications.
Speaker Change: Hey, Mark it's Tim we could I mean, we can look at that but we did think about it carefully.
Tim S. Nicholls: Entering to this call.
Tim S. Nicholls: Just given the size of the fluidity and.
Tim S. Nicholls: All of those factors, we just chose not to do it at this moment. So like I said a minute ago. We can we can look at it quarter by quarter and see if it makes sense, but for this quarter, we chose not to.
Mark S. Sutton: We believe there are more opportunities going forward, and this is a great example of how building a better IP is embedded into our culture. On slide 17, I want to take a moment to update you on our Capital Allocation Act. As I have said in the past, we have a solid balance sheet which we will preserve because we believe it is core to our capital allocation framework. Our 2023 year-end leverage is at 2.5 times on a Moody's basis, which is at the low end of our target range of 2.5 to 2.8 times.
Speaker Change: Okay fair enough.
Speaker Change: And then just maybe on the shifting business is getting paid for value.
Speaker Change: You've been doing for a long time.
Where are you would you say.
Speaker Change: With your customers is the vast majority now.
Speaker Change: Where you think it should be.
How much more of these negotiations is there they're yet to go and just for context. If we go back several years theres been a relatively continual decline in your market share.
Mark S. Sutton: Looking ahead, we have limited short and median term debt maturities due to the risk mitigation strategies we've taken over the past several years, and we expect our qualified pension plan to remain fully funded. Returning cash to shareholders is a meaningful part of our capital outcashing framework. And last year, we returned approximately $840 million to our shareholders, and we remain committed to our dividends.
Speaker Change: The box on your business. So what is there anything how did you can provide to us to feel like okay. Yes, we do have visibility on whether when this can turn the corner.
Speaker Change: Sure.
Speaker Change: I wouldn't I wouldn't.
Speaker Change: <unk>, we're pretty confident that we're going to come back to market and I think there are two things driving that one as we've got a strategic view of the customer base, we understand who's growing who's not growing we understand the value equation I think much better than we have in the past we've worked very hard in understanding that.
Mark S. Sutton: We understand investment excellence is essential to growing earnings and cash generation, and as I shared with you previously, we have opportunities to invest in our box system to build out capabilities and position us for future profitable growth. We also have cost-reduction projects across the company with attractive returns. So, turning to slide 18, I'd like to wrap up by sharing my view that International Paper is well-positioned for the future. I shared that conviction before, but after navigating another year of challenging market conditions, it bears repeating. Our financial foundation is strong, as are the principles and core values that guide our actions and decisions about how we operate.
Speaker Change: But I think the key is investing behind the growth so as we change the portfolio where it is.
Speaker Change: <unk> very quickly in a targeted way and so I think that positions us probably better than in the past in terms of having the right <unk>.
Speaker Change: <unk> in the right markets to grow with our customers.
Speaker Change: So if you want to if you want to look back and say how can we have improved is there is not a national strategy as much as there is.
Mark S. Sutton: I'm confident that the winning mindset of our leadership team and our employees, and the agility of our employees will drive our success as we tackle our improvement efforts and execute the go-to-market strategy we talked about on today's call. As we move through 2024, we anticipate continued demand recovery across the markets we serve, along with margin and mix improvement from our commercial strategies. There's no question in my mind that we're on the right path.
A national and a local strategy for investment and I think that positions us well to grow.
Speaker Change: So maybe just to follow on that so basically you have now the investment, whereas before maybe they hadn't been made in terms of being able to deliver what it needs to be in the last couple of years, you've made those investments and so now we're in a different place is that why.
Speaker Change: The outcome should we expect it to be different and then maybe just following up on the.
Speaker Change: And what percentage of <unk>.
Speaker Change: Contracts where volume.
Speaker Change: Do you think it's now been repositioned versus it's still in process.
Yes, that's a tough one to answer in terms of percentage I would certainly say its more than a quarter has not been renegotiated probably a little more than a third.
Speaker Change: But the hard thing about that is in many cases local customers as a constant discussion around value and what products, they're buying so that's 35% of our mix I would say that never goes away.
Mark S. Sutton: Given our strategic customer relationships, talented teams, world-class assets, and market expertise, we are committed to maximizing long-term value for all of our stakeholders, and we intend to deliver. With that said, we're happy to take your questions. And similar to the last quarter, our senior business leaders are joining me today to provide their perspectives in the Q&A section. So operator, we are ready to go to the question and answer session. Thank you. If you would like to ask a question, simply press 1 then 0 on your telephone keypad. To withdraw a question, press 1 then 0.
Speaker Change: Constant so I'm really talking about 65% that's left over.
Speaker Change: And there is still a good portion out there that.
Speaker Change: We'll have to come to a value equation with our customers.
Speaker Change: Mark just to add to that.
Speaker Change: Ara you were probing on market position and share.
Mark: Part of the way, we address some of the demand environment in the past was in.
Mark: In different regions and Tom mentioned, it really matters in the region not on average in different regions. We have the assets. We just didn't have the plant running.
Mark: More than five days a week. So we asked employees to run a six day in most cases, they really enjoy that they didn't mind doing it and it was increased income and all of that and then if you could get enough to where it's sustainable maybe add an entire shift.
Operator: We will pause for a moment to compile the Q&A roster. We do ask that you limit yourself to one question and one follow-up question. And one moment, please.
Philip Ng: Your first question comes from the line of Phil Ng from Jeffries. Please go ahead. Hey guys, appreciate all the great color on some of these commercial initiatives, on getting value over volumes, Mark, that's great. Is much of this pretty much locked up contractually, so that's flowing through, and then expand a little bit of what you're exactly doing. You're effectively just walking away from lower margin business and mixing it up. And then, just lastly, I think you guys got it like a 68 million tailwind for OneCube. Do we just kind of annualize that impact for the full year? Sorry, I have a lot to unpack there.
Mark: And then and then you invest in new plant and equipment because if there is you already have the capacity you just need people to run it and we did that for quite a while.
Mark: What what changed a bit during the 2021 'twenty two period and the workforce starting to turnover that's not a great assumption anymore that you can tackle that incremental growth with.
Mark: Your assets by adding people are asking the people you have to work a little more.
Mark: Hours and so that's just the reality of the manufacturing workforce out there for us. So if I had to do over I wish I would've spent a bunch more in physical plant and equipment in 18, 19, and 20, we were finishing some mill investments with an eye toward getting into plant and equipment investments in a big way in the box business and we got caught.
Mark S. Sutton: No, a good three-part question, Phil, and thank you for that. I'm going to have Tom Hammack, who's leading that strategy from the front. It's a four-pillar strategy to improve the business, and it's much more than just walking away from business. We don't want to walk away from any of our good customers, but a lot has changed over the last couple of years relative to inflation and the attractiveness of certain segments. So Tom and his team are really putting together a thoughtful strategy, a reboot, if you will, on how we go to market segments and customers. And the goal is for it to work for our customers and for us, but for an international paper to improve profitability. So Tom, if you'd maybe just share a bit about how we're approaching the go-to-market strategy, sure. Morning, Phil. This is Tom Hammack.
Mark: There was a change in the workforce.
Mark: We're working both on getting our new labor up to speed and putting physically in new equipment and upgrading the old equipment. Some of the legacy IP box plants that were pre the big acquisitions. We made are really old and some of the equipment is still running but it may be running at 80% of it its design capacity. So all.
Mark: That is part of being able to address the market by region by by by kind of Metropolitan market and so that's why I feel good about our ability to do this we hadn't made all of those physical investments in the past we did it with our employee teams.
Mark: Working different schedules and it works for a while.
Mark: Not.
Mark: It's not a sustainable way to do it now.
Mark: Hello.
Speaker Change: I appreciate all the color. Thank you.
Speaker Change: Your next question comes from the line of Matthew Mckellar from RBC capital markets. Please go ahead.
Tom Hammack: I would agree with what Mark said. This is really a holistic strategy for the business. So this includes everything from where we invest capital to the metrics we use to really run the business. And customers pay for value.
Matthew Mckellar: Hi, good morning, Thanks for taking my questions.
Matthew Mckellar: Just to follow up on one of Michael excellent questions.
Matthew Mckellar: Is there and B S K Millen Grand Prairie core for IP over the longer term given your greater focus on fluff.
Tom Hammack: But value in the box business starts with reliability, with quality, and with shipping on time. And so we have refocused our efforts in that space. Obviously, going through the pandemic can make that more difficult.
Clay: Hey, Matthew this is clay.
Clay: I think our MBS came in Italy.
Tom Hammack: But as we go out, we feel very positive about the metrics we're seeing in terms of improving the customer experience. We improve the customer experience, we deliver more value, and then we charge for that value. And you're right, there will be times when customers have a disagreement about what a fair price is. But most times, the vast majority of times, that's really not been the case.
Clay: As a strategic now we do have.
Clay: Very strong customer base on that mill, obviously, it goes into tissue, but we also have a lot of.
Clay: Of.
Clay: Both fluff customers, an MBS Kay customers being the same.
Clay: So it creates a bundle value there and so.
Tom Hammack: They've seen the value of IP, and in some cases, customers have left and then come back very quickly because box making is difficult and their service model is often very challenging. So that's really the equation. Provide more value, make customers know that you are important to their business, and then get paid fairly for it.
Clay: It's a good it's a very good mill as Mark mentioned in the comments, we like it it provides value.
Clay: It is not in our core fluff, but we think of it differently.
Clay: S K in that market and the contract relationships that we have we think of it a bit differently than more of the commodity Sps K. So.
Tom Hammack: And that really sums up the strategy. And are these wins pretty much locked in, and then you gave some color in terms of the contribution for 1Q. Can we kind of annualize that for a full year in terms of the upside on the commercial initiatives that you have? Yeah, I think annualizing it would be fair. You know, every customer has a different relationship. There's different timing for contracts. I am completely confident that that number is solid and that we'll maintain that margin structure going forward, and I expect to improve it going forward in 2024. Okay, that's helpful.
Clay: It's so.
Clay: So good mill, but we like it it's not absolutely core to what we do but it provides value.
Speaker Change: Great Thanks for that.
Speaker Change: Just one more for me I was wonder if you could provide an update on your process to identify a successor to the CEO position and what we should be expecting in terms of a timeline there.
Speaker Change: Good question that no nothing new to report our board is working very deliberately on the process that we announced that we would kind of undergo back in September.
Speaker Change: I can say, we're closer to a decision now than we were in September but there is no timeline to report, but we are making really good progress on our boards, putting a lot of effort into it. It's obviously an important decision and they are taking it very very seriously. So as we get closer and we have something tangible to report.
Tom Hammack: Appreciating there's a lot of moving pieces in 2024, both on the macro front, and then certainly there's a price increase you guys are all trying to implement in January. But any color, just at least directionally, when we think about EBITDA and free cash flow, based on the control, your controllables, and how you see demand unfolding, do you expect EBITDA and free cash flow to be up, flat, Just directional color would be super helpful.
Speaker Change: We will we will be out with that information.
Speaker Change: Okay. Thank you I'll turn it back.
Speaker Change: Your next question comes from the line of Gabe <unk> from Wells Fargo. Please go ahead.
Gabe: Good morning, everyone and thanks for all the detail I'm going to try to take one more stab because I feel like I need to wash myself. The past 10 years of knowledge I feel like I've acquired.
Tim S. Nicholls: Yeah, Phil, it's Tim. So, as I said, in my prepared remarks, we're choosing not to give an outlook. There are just a lot of moving pieces, we feel good about the year, and we feel like we're in a good place in terms of earnings and cash flow. But we're not quantifying it or putting something out; we can look at it next quarter, and maybe we'll make an adjustment. But for the moment, we're focused on, you know, the first quarter outlook, and we'll go from there. Okay. In regards to that first quarter hangover from the January freeze, do you expect any hangover effect going into 2Q, like these costs lingering or any disruption, or is it just kind of a 1Q thing, and you guys... I believe it's 1Q and we're done.
What we heard from one of your peers as well as yourself.
Gabe: Is that maybe youre trying to decouple yourselves from index based pricing.
Gabe: And if in fact that is the case, maybe the outlook that you gave us for Q1 and the $68 million of positive benefit to you or you are talking about.
Maybe that's associated with with renegotiating maybe half of it.
Gabe: It was national contracts that I think Tom Hey, Mike referenced.
Gabe: And if it's in fact that is the case.
Speaker Change: Or maybe asked differently.
Speaker Change: If the price.
Speaker Change: It's being pushed in the marketplace right now had been reflected.
Speaker Change: On the January 19th publication would that in any way change the.
Speaker Change: The guidance that Youre, giving us today for Q1.
Speaker Change: So gabe at.
Valeant: Valeant try let me let me just see if this helps you and other analysts and our investors. So.
Philip Ng: Okay. All right. Thanks for the call. Your next question comes from the line of Mike Roxland from Truist Securities. Please go ahead.
Speaker Change: On pricing is always the prices, we charge and the mechanisms we use a really between IP and our customers and we're not going to comment on those specifics I'll provide forecasting on pricing for the future. As you know we never do that but I will I will refer you to.
Mike Roxland: Thanks, Mark, Tim, and Mark for taking my... I just wanted to follow up on the focus on value. Can you talk about some of the issues you noticed in your customer contracts that sort of encouraged you to revisit how you price? And could this focus on value over volume involve either maybe some additional portfolio right sizing, or maybe even distancing yourself from the publication if that publication does not actually properly reflect pricing that you're seeing in the market?
Speaker Change: The Citibank conference that I spoke out publicly in November.
Speaker Change: In response to a question about the $20 publication down at that time.
Speaker Change: We did that we didn't feel that it was reflective of our experience with our customers and in terms of the experience over the last two months with our containerboard customers. The fact that the index stayed flat in January again is not reflective of the pricing we have been invoicing.
Mark S. Sutton: So Mike, Tom is going to really tackle this question. But just, just, just to be totally clear, we expect long-term business earnings growth is going to come from unit volume growth and Margin Improvement on that combined volume. What we're doing right now and what Tom described is, in the interim of resetting with this level of once-in-a-lifetime inflation and a number of other structural changes, we will pick value over volume, and then we're going to pick value and volume or profitability and volume. So volume, union volume, is very important in this business.
Speaker Change: So if you get to your question about the relevancy of the index.
Speaker Change: True the indexes surveying what is increasingly a very small.
Speaker Change: Open market and.
Speaker Change: And because of that it feels like there is any movement.
Some subjectivity in that process in addition to what's actually happening.
Speaker Change: So based on what we have been charging our customers as well as other public data.
Speaker Change: We don't feel the index over the last few quarter a couple of quarters has been.
Tom Hammack: It's not a high-growth market, but you have to grow with the market long-term, and we plan to do that. And so Tom, if you want to talk a little bit about some of the things we've seen or how we think about them, we can circle back on the comment on the question about the index and how prices are changing in this market. Sure. Good morning, Mike.
Speaker Change: Reflective of what's really happening in the industry and as I said city do we use this index, it's not perfect, but it works for the supplier.
Speaker Change: And it works for our customers because corrugated packaging is not something our customers want to work on weekly or monthly with pricing, it's really important to their business, but it's not their core product its running on high speed, finishing line and it needs to work and they don't want to deal with economics. This index to history has worked as a starting.
Tom Hammack: I would say that we see everything in contracts. There are contracts that don't tie to the index, and there are contracts that do. So it's really hard to draw out a specific, this is what we're seeing that's an issue. The biggest issue is that when the contract comes up... Are we clear in articulating value? Is that a fair proposal?
Speaker Change: Point for discussions up or down it doesn't set the price as you know so we will continue to evaluate and we are evaluating with our customers is it still working for us are not as two parties in a business relationship.
Tom Hammack: Because we don't expect contracts to go our way. We don't expect them to go the customer's way. We expect, you know, a middle ground. And part of that is just getting the economics of the contract within range and making sure that the customer's expectation for pricing is very similar to what you have. So there are no surprises.
Speaker Change: Concludes not we will work on doing it a different way and that's probably all I can say about that at this point.
Speaker Change: No Mark listen I think that was.
Speaker Change: Very clear and helpful at least for me.
Speaker Change: Secondarily the <unk>.
Speaker Change: $400 million that you mentioned in terms of I don't know if it was newly identified cost savings.
Tom Hammack: So I would say it's not one-size-fits-all, but the really core component of this, and Mark mentioned growing with the market, is a very clear local understanding of what's happening in the box business, because, unlike line reward and pulp, the box business is very local. And those decisions have to be very targeted around value propositions and around customer growth in that market. And I think that's what's going to get us to turn the corner in a few quarters to get back to a growing market. And the last thing I would say is that, you know, we're not seeing customers. We've certainly picked up some business, but you're really talking about some marginal volume in local places where maybe the match isn't perfect long term. Maybe it's better for both parties to readjust and get to the right value equation. Got it. Thank you very much for the color.
Speaker Change: Maybe a second turning the crank on Unbilled, a better IP and then I think the $240 million or so of cost savings from the two or three machine closures.
Speaker Change: Yes.
Speaker Change: Can you maybe delineate between the legacy build and I better IP I think the net of that was plus $5 40.
Speaker Change: And then we've got the 230 to $2 40 from the two plant closures.
Speaker Change: Where does this $400 million number that you referenced how does that fit into the equation. So we're not double or Triple County.
Speaker Change: Yes no.
Speaker Change: Good question.
Speaker Change: This is Tim I mean, if you just look at the the major items that I called out in my prepared remarks around the go to market strategy.
Mike Roxland: And just, I guess, one quick follow-up in terms of your strategy on GCF. I'm really trying to enhance the mix. Do you see, in terms of the portfolio itself, obviously post-Regalwood, post-Pensacola, are there other opportunities for you to right-size your portfolio there if demand is not materializing as you would expect? Yeah, Mike, this is Clay Ellis.
Tim S. Nicholls: And how thats playing out and then the mill closures to fixed cost savings.
Tim S. Nicholls: I think you can get pretty close to the 400 Theres. Obviously other initiatives. That's why we say more than 400, we've got any number of initiatives across all of our businesses and at the center.
Clay Ellis: Good morning, um Yeah, I think, as you mentioned, mitigating the exposure that we have to commodity or paper grade pulp at the Regal Wood Mill. If you look at 2024, post the closure of Regal Wood 20, we still have some exposure; we're not at our optimized mix, although we're much further along the way toward that. We believe fluff will grow, and that will obviously move SBSK or paper grade to fluff. So we think exiting 2024 and into 2025, we'll be getting pretty close to our optimized mix. There will always be a small amount of paper grade pulp in the mix.
Tim S. Nicholls: But we thought it was a good reference point given the significant items that are happening and happening late last year.
Speaker Change: Understood. Thank you guys. Good luck.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Anthony Pettinari from Citi. Please go ahead.
Anthony Pettinari: Good morning.
Anthony Pettinari: I am wondering if hey, I was wondering if you could talk a little bit more about January box shipment trends and specifically on the freeze.
Speaker Change: Did that.
Anthony Pettinari: Delay shipments or destroy shipments and if theres any kind of quantification there either way.
Clay Ellis: And we think we'll be getting to really our optimized mix here, exiting 2024 to 2025. So we're having improvement all through 2024. Of course, we have levers. If fluff pulp did not grow and such, there are things that we have as options, but that's not really what we believe or what we think.
Anthony Pettinari: And just anything you'd say about sort of customer inventories in your inventories as we start out February.
Anthony Pettinari: Sure Anthony this is Tom.
Tom Amick: You pointed out the winter storm and that is a very big impact on January so I'll start with the court.
Clay Ellis: We think absorbent hygiene products will grow, and therefore, we think that fluff will grow. We're excited about the trend. Thank you. Good luck. Love you.
Tom Amick: And we see continued improvement in the corner in terms of demand.
Tom Amick: You subtract out our experience with go to market. We think the market is going to grow about 2% year over year in the first quarter.
Mike Roxland: Thanks, Mike. Your next question comes from the line of Mark Weintraub from Seaport Research Partners. Please go ahead.
Mark Weintraub: Thank you. Maybe, first of all, I'm going to follow up on Phil's question, and I realize you may or may not say anything about this, but it's probably the question investors are thinking about most, so I'll give it a shot. And that is, you know, understanding there's a lot of variability in how pricing can play out, and that can have a very large impact on where the numbers ultimately end up in 24. You did provide us with an assessment of your volume. You've talked about a lot of different internal initiatives, etc. Is it possible that, as you did last year, you could give us a range if we exclude the impact of any price changes not yet reflected in the trade publication? Hey Mark, it's Tim.
Tom Amick: Continued momentum that Tim talked about and we're very pleased with that growth.
Tom Amick: In terms of January it really does mask exactly what's happening the thing I can confidently say to you is nothing about the winter storm and the subsequent business activity would suggest we're off a forecast for Q1.
Tom Amick: In terms of January it really does mask exactly what's happening the thing I can confidently say to you is nothing about the winter storm and the subsequent business activity would suggest we're off a forecast for Q1.
Just really hard to look through this way we had planned closures customers have plant closures.
Tom Amick: And then the last thing I would add is that anecdotal feedback from our specially local customers has been surprisingly positive about the first half of the year, we'll see how it plays out but so far very good.
Tom Amick: Last piece, you asked about inventory I'm sorry, Ed.
Tom Amick: Yes.
Tom Amick: Sorry.
Speaker Change: No no go ahead please.
Speaker Change: We have not seen restocking yet broadly that's our estimate of whats happening in the marketplace and so we think destocking is obviously over or are there certain segments that may be bouncing back and forth.
Tim S. Nicholls: We could, I mean, we can look at that, but we did think about it carefully before entering this call. And just given the size and the fluidity and all of those factors, we just chose not to do it at this moment. So, like I said a minute ago, we can look at it quarter by quarter and see if it makes sense. But for this quarter, we chose not to.
Speaker Change: If you look at last year's demand for boxes, and you take what is always a pretty good referenced.
Speaker Change: Consumer spending retail spending and box demand.
Speaker Change: So a lot of ground to be made up and so I feel very good about the inventory levels in the market.
Speaker Change: Okay, that's very helpful.
Tim S. Nicholls: Okay, fair enough. And then maybe on this, the changing businesses, getting paid for value, a process you've been doing for a long time. Where are you, would you say, with your customers? Is the vast majority now where you think it should be? How much more of these negotiations is there yet to go? And just for context, if we go back several years, there's been a relatively continual decline in your market share in the box volume business. So is there anything added you can provide to us to feel like, okay, yes, we do have visibility on when this can turn the corner? Sure.
Speaker Change: And then I'm just curious on the go to market initiatives have you changed anything around incentive structures. How the sales force is compensated or how box plant managers are compensated it sounds like there's sort of an asset underinvestment problem that maybe you'll turn the corner on this year.
Speaker Change: I'm just wondering if.
Speaker Change: There has been a real change in incentives.
Speaker Change: Understanding it's maybe difficult to talk about that in too much detail on the call, but just wondering if that's a significant component of the go to market initiatives.
Speaker Change: It is a significant.
Speaker Change: Component.
Speaker Change: Hard to talk about but I think some pretty easy which is from a soft incentive standpoint does everyone understand this strategy did I understand the metrics that we're going to focus on like I talked about service and profitability.
Tom Hammack: I would portray it as we're pretty confident that we're going to come back to market, and I think there are two things driving that. One is we've got a strategic view of the customer base; we understand who's growing, who's not growing, and we understand the value equation, I think, much better than we did in the past. We've worked very hard at understanding that. But I think the key is investing behind the growth. And so as we change the portfolio, we're investing very quickly in a targeted way. And so I think that positions us probably better than in the past in terms of having the right capacity and the right markets to grow with customers. And so if you want to look back and say, how could we have improved, there's not a national strategy as much as there is a national and a local strategy for investment.
Speaker Change: <unk> capital effectiveness.
Speaker Change: That's very much underway and I would say in many cases complete.
Speaker Change: You are correct, we've changed the sales compensation.
Speaker Change: And so far anytime you change compensation processes, you can always have a little bit of noise. So far it is.
Speaker Change: Our expectations and I think exceeded the expectations of the people of yield so I feel very good about that but you bring up a very good point executing this strategy.
Not in a silo with across the business everything has to be a lot.
Speaker Change: Okay. That's very helpful I'll turn it over.
Speaker Change: And as a reminder, please limit yourself to one question and one follow up question next we'll go to the line of George Staphos from Bank of America. Please go ahead.
George Leon Staphos: Hi, everyone. Good morning, Thanks for the details.
George Leon Staphos: My remaining question I, just wanted to piggyback on what Anthony was getting at so.
George Leon Staphos: Obviously U S capacity these capabilities or technology.
Tom Hammack: And I think that positions us well to grow. So maybe just to follow on that, so basically, we have now the investments, whereas before maybe they hadn't been made in terms of being able to deliver what it needs to be, in the last couple of years you've made those investments, so now we are in a different place, is that why the outcome should be expected to be different? And then maybe just following up on the, in what percentage of contracts or volume do you think it's now been repositioned versus is still in process? Yeah, that's a tough one to answer in terms of percentage.
George Leon Staphos: But do you not only need to address as you discussed incentives.
George Leon Staphos: With sales, but do you need to maybe add more people more feet on the street in terms of executing what you hope to do and go to market with box and corrugated or not.
George Leon Staphos: And what would be the reasons why the related question again I'll stick to two.
Speaker Change: Just be mindful of the time.
Speaker Change: When you look at your end markets and your customers historically IP has been larger with larger account and national account businesses do.
Tom Hammack: I would certainly say it's more than a quarter has not been renegotiated, probably a little more than a third. But the hard thing about that is, in many cases, local customers, that's a constant discussion around value and what products they're buying. So that's 35% of our mix. I would say that never goes away.
Speaker Change: Do you think those customers because they're more sophisticated potentially.
Speaker Change: We'll be more able to understand the kpis and the whole process at IP and now bringing in terms of its go to market, where do you think that will be perhaps across your end markets a little bit more challenging relative to your local account business and how you see your end markets over time evolving with the new go to.
Tom Hammack: That's a constant. So I'm really talking about the 65% that's left over. You know, there's still a good portion out there that, you know, we'll have to come to a value equation with the customers. Mark, just to add to the area you were probing on market position and share, part of the way we addressed some of the demand environment in the past was in different regions, and Tom mentioned it, it really matters in the region, not on average. In different regions, we had the assets; we just didn't have the plants running more than five days a week.
Speaker Change: We get larger with local account or larger with larger account. Thank you guys and good luck in the quarter.
Speaker Change: Great. Thank you George Good question I'll see if I can address that so I will start with the number of salespeople you're absolutely correct.
Speaker Change: We need a significant number of new salespeople and we're making progress in that space I can tell you. The compensation plan estimate our position is much more attractive than it has been in the past so we feel pretty good about that.
Mark S. Sutton: So we asked employees to run a six-day week, and in most cases, they really enjoyed that, they didn't mind doing it, and it was increased income and all that. And then if you get enough to where it's sustainable, maybe you add an entire shift. And then you invest in new plant and equipment because, in theory, you already have the capacity; you just need people to run it. And we did that for quite a while.
Speaker Change: In terms of the local versus national.
Speaker Change: I think it would be.
Speaker Change: As I kind of gets back to my local versus national comment in terms of ox plant that it really depends on the customer.
Speaker Change: We're going to have some customers that are.
Speaker Change: Professional buyers and Theyre going to look at these metrics, one way and local customers I would say this.
Speaker Change: That we expect to grow higher margin local customers and.
Mark S. Sutton: What changed a bit, though, during the 2021-22 period, and the workforce started to turn over, that's not a great assumption anymore that you can tackle that incremental growth with your assets by adding people or asking the people you have to work a little more hours. And so that's just the reality of the manufacturing workforce out there for us. So if I had to do it over, I wish I would have spent a bunch more on the physical plant and equipment.
Speaker Change: And we expect to keep and grow our national customers are leaning us more of a balance and not too Brian too hard in one direction, but to really evaluate.
Speaker Change: The profit equation as we make those decisions so youll see some rebalancing.
Speaker Change: Understood. Thanks for the question. Thanks for the comment Tom Good to hear your voice talked you guys.
Speaker Change: Thanks George.
Speaker Change: <unk>.
Speaker Change: I'll now turn the call back over to Mark Nelson for closing comments.
Speaker Change: This is mark Sutton. Thank you operator, I'll go ahead and wrap up I want to thank everyone for your time today for your continued interest in international paper and we look forward to updating you on our progress on our next call at the end of the first quarter.
Mark S. Sutton: In 18, 19 and 20, we were finishing some mill investments with an eye toward getting into plant and equipment investments in a big way in the box business. And we got caught a bit there with a change in the workforce. So we're working both on getting our new labor up to speed and putting in physically new equipment and upgrading the old equipment. Some of the legacy IP box plants that were prior to the big acquisitions we made are really old. And some of the equipment is still running, but it may be running at 80% of its design capacity.
Speaker Change: For the second quarter for the end of the first quarter call. So thanks.
Speaker Change: Thanks, everyone for joining us today.
Speaker Change: Once again, we'd like to thank you for participating in today's international papers fourth quarter 2023 earnings call you may now disconnect.
Mark S. Sutton: So all of that is part of being able to address the market by region by by by kind of metropolitan market. And so that's why I feel good about our ability to do this. We hadn't made all those physical investments in the past. We did it with our employee teams, working different schedules, and it worked for a while. But it's not the sustainable way to do it now. Appreciate Overcolor.
Mark Weintraub: Thank you. Your next question comes from the line of Matthew McKellar from RBC Capital Markets. Please go ahead. Hi, good morning.
Matthew Mckellar: Thanks for taking my questions. First to follow up on one of Mike Roxon's questions. Is your NBSK Mill in Grand Prairie core for IP over the longer term, given your greater focus on flux? Hey, Matthew, this is Clay Ellis.
Clay Ellis: I think our NBSK mill is a strategic mill. We do have a very strong customer base at that mill. Obviously, it goes into tissue, but we also have a lot of both fluff customers and NBSK customers being the same.
Clay Ellis: So, it creates a bundle value there. And so, it's a good, it's a very good mill, as Mark mentioned in the comments. We like it because it provides value. It is not in our core of fluff, but we think of it differently being NBSK and that market and the contract relationships that we have; we think of it a bit differently than more of the commodity SBSK. So, it's a good mill. We like it.
Matthew Mckellar: It's not absolutely core to what we do, but it provides value. Great. Thanks for that. Just one more from me.
Matthew Mckellar: I was wondering if you could provide an update on your process to identify a successor for the CEO position and what we should be expecting in terms of a timeline there. Thanks.
Mark S. Sutton: No, no, nothing new to report. You know, our board is working very deliberately on the process that we announced that we would undergo back in September. And, you know, I can say we're closer to a decision now than we were in September, but there's no timeline to report. But we are making really good progress, and our board is putting a lot of effort into it. It's obviously an important decision, and they're taking it very, very seriously.
Mark S. Sutton: So as we get closer, and we have something tangible to report, we will be out with that information. Okay, thank you. I'll turn it back. Your next question comes from the line of Gabe Hajde from Wells Fargo. Please go ahead. Good morning, everyone.
Gabe S. Hajde: Thanks for all the detail. I'm going to try to take one more stab because I feel like I need to wash myself of the past 10 years of knowledge that I feel like I've acquired. What we heard from one of your peers as well as yourself is that maybe you're trying to decouple yourselves from index-based pricing. And if in fact that is the case, maybe the outlook that you gave us for Q1 and the $68 million of positive benefit that you're talking about. Maybe that's associated with renegotiating maybe half of the national contracts that I think Tom Hamick referenced. And if, in fact, that is the case, or maybe asked differently, if the price that's being pushed in the marketplace right now had been reflected in the January 19th publication. Would that in any way change the guidance that you're giving us today for Q1? So Gabe, it's a valiant try.
Mark S. Sutton: Let me just see if this helps you and the other analysts and our investors. So on pricing, as always, the prices we charge and the mechanisms we use are really between IP and our customers. And we're not gonna comment on those specifics or provide forecasting on pricing for the future. As you know, we never do that.
Mark S. Sutton: But I will refer you to the Citibank Conference that I spoke at publicly in November. In response to a question about a $20 publication down at that time, I stated that we didn't feel that it was reflective of our experience with our customers. And in terms of the experience over the last two months with our container board customers, the fact that the index stayed flat in January again is not reflective of the pricing we have been invoicing. So when you get to your question about the relevance of the index, You know, it's true, the index is surveying what is increasingly a very small open market. And because of that, it feels like there's a movement of some subjectivity in that process in addition to what's actually happening.
Speaker Change: We're sorry your conferences ending now please hang up.
Mark S. Sutton: So based on what we've been charging our customers, as well as other public data, we don't feel the index over the last few quarters, a couple of quarters has been, reflective of what's really happening in the industry. And as I said at Citi, we use this index. It's not perfect, but it works for the supplier, IT, and it works for our customers because corrugated packaging is not something our customers want to work on weekly or monthly with pricing. It's really important to their business, but it's not their core product. It's running on high-speed finishing lines, and it needs to work, and they don't want to deal with economics.
Mark S. Sutton: This index has worked as a starting point for discussions up or down. It doesn't set the price, as you know. So we will continue to evaluate, and we are evaluating with our customers, is it still working for us or not as two parties in a business relationship? And if we conclude it's not, we will work on doing it a different way. And that's probably all I can say about that at this point.
Mark S. Sutton: No, Mark, listen, I think that was very clear and helpful, at least for me. Secondarily, the $400 million that you mentioned in terms of, I don't know if it was newly identified cost savings, maybe a second turn of the crank on building a better IT, and then I think the $240 million or so of fixed cost savings from the two or three machine closures. Can you maybe delineate between the legacy build and the better IP?
Gabe S. Hajde: I think the net of that was plus 540. And then we've got the 230 or 240 from the two plant closures. Where does this $400 million number that you referenced fit into the equation? Just so we're not double or triple-crossing. Yeah, no, good question. This is Tim.
Tim S. Nicholls: I mean, if you just look at the major items that I called out in my prepared remarks around the go-to-market strategy and how that's playing out, and then the mill closures to fix cost savings, I think you get pretty close to the 400. There are obviously other initiatives, that's why we say more than 400. We've got any number of initiatives across all of our businesses and at the center, but we thought it was a good reference point given the significant things that are happening and happened late last year.
Tim S. Nicholls: Understood. Thank you guys. Good luck. Your next question comes from the line of Anthony Pettinari from Citi. Please go ahead. Good morning.
Anthony Pettinari: I'm wondering if you could talk a little bit more about January box shipment trends and specifically the freeze. Did that, you know, delay shipments or destroy shipments? Any kind of quantification there either way and just anything you'd say about sort of customer inventories and your We start, Sure, Anthony, this is Tom. You point out the winter storm, and that had a very big impact on January.
Tom Hammack: So I'll start with the quarter. And we see continued improvement in terms of demand. If you subtract out our experience with going to market, we think the market is going to grow about 2% year over year in the first quarter. So that's the continued momentum that Tim talked about. And we're very pleased with that growth. In terms of January, it really does mask exactly what's happening.
Tom Hammack: The thing I can confidently say to you is, nothing about the winter storm and the subsequent business activity would suggest we're off the forecast for Q1. It's just really hard to look through because we had planned closures, and customers had planned closures. And then the last thing I would add is that anecdotal feedback from our customers, especially local customers, has been surprisingly positive about the first half of the year. We'll see how it plays out, but so far, very good. Last piece, you asked about inventory. I'm sorry. I'm, yeah, Liam Nye. I'm sorry.
Tom Hammack: No, no, go ahead. We have not seen restocking yet, broadly speaking. That's our estimate of what's happening in the marketplace. And so we think destocking is obviously over, or there are certain segments that may be bouncing back and forth. But if you look at last year's demand for boxes and you take what is always a pretty good reference for consumer spending, retail spending, and box demand, there's still a lot of ground to be made up. And so I feel very good about the inventory levels in the market. Okay, that's very helpful.
Anthony Pettinari: And then I'm just curious, you know, on the go-to-market initiatives. Have you changed anything around incentive structures, you know, how the sales force is compensated or how box plant managers are compensated? You know, it sounds like there's sort of an asset under investment problem that maybe we can turn the corner on this year. I'm just wondering.
Tom Hammack: There's been a real change in incentives. And, you know, understanding it's maybe difficult to talk about that in too much detail on a call, but just wondering if that's... significant. It is a significant component.
Tom Hammack: You know, some hard to talk about, but I think some pretty easy, which is, from a soft incentive standpoint, does everyone understand the strategy? Do they understand the metrics that we're going to focus on? Like I talked about, service and profitability, and capital effectiveness, that's very much underway, and I would say, in many cases, complete. You are correct. We've changed the sales compensation. And so far, anytime you change compensation processes, you can always have a little bit of noise.
Tom Hammack: So far, it has exceeded our expectations and, I think, exceeded the expectations of the people in the field. So I feel very good about that. But you make a very good point. Executing the strategy is not in a silo.
Tom Hammack: It's across the business. Everything has to be aligned. Okay, that's very helpful. I'll turn it over to you. And, as a reminder, please limit yourself to one question and one follow-up question. Next, we'll go to the line for George Staphos from Bank of America. Please go ahead. Hi, everyone. Good morning.
George Leon Staphos: Thanks for the details. My remaining question: I just wanted to piggyback on what Anthony was getting at. So obviously, there's capacity, there's capabilities, there's technology. But do you not only need to address, as you discussed, incentives for sales, but do you need to maybe add more people, more feet on the street, in terms of executing what you hope to do and going to market with Box and Cargated or not? And what would be the reasons why?
Tom Hammack: The related question, again, I'll stick to two, and just be mindful of the time. When you look at your end markets and your customers, historically, IP has been larger with larger account, national account businesses. Do you think those customers, because they're more sophisticated, potentially, will be more able to understand the KPIs and the whole process that IP is now bringing in terms of going-to-market, where you think that will be, perhaps, across your end markets a little bit more challenging relative to your local account business? How do you see your end markets evolving over time with the new go-to-market? Will you get larger with a local account or larger with a larger account?
Tom Hammack: Thank you guys and good luck on the course. Great. Thank you, George. Good question.
Tom Hammack: I'll see if I can address it. So I would start with the number of salespeople. You're absolutely correct. We need a significant number of new salespeople. We're making progress in that space. And I can tell you the compensation plan has made our positions much more attractive than they have been in the past. So we feel pretty good about that. And in terms of local versus national.
Tom Hammack: I think it would be, it kind of gets back to my local versus national comment in terms of box plants, that it really depends on the customer. We're going to have some customers that are, you know, professional buyers, and they're going to look at these metrics one way. And local customers, I would say this, that we expect to grow higher-margin local customers, and we expect to keep and grow our national customers. Our leaning is more of a balance and not to run too hard in one direction but to really evaluate the profit equation as we make those decisions. So you'll see some rebalances.
Tom Hammack: Okay. Thanks for the question. Thanks for the comment, Tom. Good to hear your voice. Talk to you guys soon. Bye, guys. Thanks, George. Thank you. I'll now turn the call back over to Mark Nelson for closing comments.
Mark Nelson: Thank you, Operator. I'll go ahead and wrap this up. I want to thank everyone for their time today, for your continued interest in International Paper, and we look forward to updating you on our progress on our next call at the end of the first quarter, or the second quarter for the end of the first quarter call. So thanks, everyone, for joining us today. Once again, we'd like to thank you for participating in today's International Paper fourth quarter 2023 earnings call. You may now disconnect. We're sorry, your conference is ending now. Please hang up.