Q1 2024 International Paper Co Earnings Call

Operator: All lines have been placed on mute to prevent background noise. After the speaker's remarks, you will have an opportunity to ask questions. To ask a question, press 1 and 0 on your telephone keypad. To withdraw a question, press 1 and 0. As a reminder, to ask a question, press 1 and 0. 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. It is now my pleasure to turn the call over to Mark Nellessen, Vice President, Investor Relations. Sir, the floor is yours.

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 zero on your telephone keypad to withdraw your question press, one and zero as a reminder to ask a question press one zero to withdraw your question press one zero again that his press one in <unk>.

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 Chief Financial Officer.

Mark Nelson: There is important information at the beginning of our presentation, including certain legal 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 and a reconciliation of those figures to U S. GAAP financial measures is available on our website.

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

Mark Nellessen: Thank you, Greg. Good morning, and thank you for joining International Paper's first 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, including certain legal disclaimers. For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties. We will also present certain non-U.S. GAAP financial information, and a reconciliation of those figures to U.S. GAAP financial measures is available on our website. Our website also contains certain copies of the first quarter earnings press release and today's presentation slides. I will now turn the call over to Mark Sutton.

Mark Stephan Sutton: Thank you Mark and good morning, everyone. We will get our discussion on slide four where I will highlight our results starting off the year of homes across international paper executed well with intense focus on taking care of our customers, while accelerating our commercial and mill optimization strategies.

Mark Stephan Sutton: We're also encouraged to see positive market momentum as we continue to see signs of demand recovery.

Mark Stephan Sutton: Additionally, sales price index has improved across our portfolio and the majority of the benefits will flow through our contracts in future quarters.

Mark Stephan Sutton: Our first quarter earnings were generally in line with our outlook.

Mark Stephan Sutton: And represent a trough based on seasonally low volumes higher OCC costs.

Mark Stephan Sutton: Majority impact into 2023 sales price index declines.

Mark Stephan Sutton: Were also unfavorably impacted by approximately $38 million from the January winter freeze and approximately $14 million from a significant fire that consume our box and just have Mexico.

Mark Stephan Sutton: Fortunately no one was injured and our teams remain focused on taking care of our employees and customers as we manage through this.

Mark Stephan Sutton: Thank you, Mark, and good morning, everyone. We will begin our discussion on slide four, where I will highlight our results. Starting off the year, our teams across International Paper executed well with an intense focus on taking care of our customers while accelerating our commercial and mill optimization strategies. We are also encouraged to see positive market momentum as we continue to see signs of demand recovery. Additionally, the sales price index has improved across our portfolio, and the majority of the benefits will flow through our contracts in future quarters.

Mark Stephan Sutton: Also in the quarter our teams across international paper made significant progress executing our strategic initiatives.

Mark Stephan Sutton: We realized significant margin and mix benefits from our box go to market strategy well above our initial expectations for the first quarter.

Mark Stephan Sutton: We continue to make investments to strengthen our packaging businesses.

Mark Stephan Sutton: We also realized benefits from our optimization strategy in global cellulose fibers and from fixed cost reduction initiatives in our analysis.

Mark Stephan Sutton: These strategic initiatives across our portfolio, our focus on accelerating margin improvement and driving profitable growth.

Mark Stephan Sutton: In addition to this ongoing work last week, we announced the catalyst.

Mark Stephan Sutton: To create significant value for shareowners through a highly compelling combination with DS Smith. This additional catalysts is something we look forward to working with DS Smith team and continuing our conversations with investors regarding this opportunity.

Mark Stephan Sutton: At this time, we do not have any additional information to share so for today's call, including the Q&A session. We intend to focus specifically on international paper's performance.

Mark Stephan Sutton: I will now turn it over to Tim.

Mark Stephan Sutton: Who will provide more details about our first quarter performance and also our outlook Tim great. Thank you Mark.

Tim: Excuse me turning to our first quarter key financials on slide five.

Tim: As Mark mentioned earlier, our first quarter earnings were generally in line with our outlook and represent across seasonally.

Tim: Seasonally low volumes higher OCC costs, and the majority of impact from the 2023 sales price index declines.

Timothy S. Nicholls: Operating earnings and margins were also negatively impacted by approximately $52 million or <unk> 10 per share from the January one or freeze.

Timothy S. Nicholls: I expect box plant fire.

Timothy S. Nicholls: For the quarter, we generated $144 million of free cash flow.

Tim: As a reminder, our free cash flow in the first quarter of last year included a $193 million final settlement with the IRS related to Ip's timber monetization structure.

Tim: Looking ahead, we expect significant earnings improvement based on positive market trends.

Tim: And benefits from our commercial and cost improvement initiatives.

Speaker Change: Now I will turn to slide six I'll provide more details about the quarter as we walk through the sequential earnings correct.

Tim: First quarter operating earnings per share was <unk> 17, as compared to 41.

Tim: The fourth quarter.

Mark Stephan Sutton: Our first quarter earnings were generally in line with our outlook and represent a trough based on seasonally low volumes, higher OCC costs, and the majority impact from the 2023 sales price index declines. Earnings were also unfavorably impacted by approximately $38 million from the January winter freeze and approximately $14 million from a significant fire that consumed our box plant in Iztac, Mexico. Fortunately, no one was injured, and our team remains focused on taking care of our employees and customers as we manage through this incident.

Tim: As I mentioned earlier in the first quarter included <unk>.

Tim: <unk> per share related to the January phrase.

Tim: Sorry.

Tim: Price and mix was higher by <unk> <unk> per.

Tim: Per share driven by a significant margin and mix benefits from successfully executing our box go to market strategy.

Tim: CF optimization strategy.

Tim: This was partially offset by a majority of prior sales price index declined from 2023.

Tim: Volume was unfavorable by <unk> <unk> per share primarily due to seasonal shutdowns across both segments as well as some impact from the winter storms.

Tim: January.

Tim: Turning to deploy our commercial strategies across the portfolio focused on margin and mix improvement.

Tim: It has impacted volumes in the near term as we transition based on our strategy.

Mark Stephan Sutton: Also in the quarter, our teams across International Paper made significant progress executing our strategic initiatives. We realized significant margin and mixed benefits from our box go-to-market strategy, well above our initial expectations for the first quarter. In addition, we continue to make investments to strengthen our packaging businesses. We also realized benefits from our optimization strategy in global cellulose fibers and from the fixed cost reduction initiatives in our mail system.

Tim: Operations and costs were unfavorable by <unk> <unk> per share sequentially. This included an approximately seven <unk> per share from the January one interface and the exact box.

Tim: The remainder was primarily due to cost inflation, including the higher cost of employee benefits.

Tim: The unfavorable impact to operating cost from seasonally lower volumes was offset by cost savings savings from our mill closure and machine shutdown last year.

Tim: Maintenance outages were higher by $16 million.

Tim: <unk> per share in the first quarter and input costs unfavorably impacted earnings by <unk> <unk> per share sequentially, largely due to increased costs for OCC with the remainder from higher energy and chemicals and finally.

Tim: Corporate items unfavorably impacted earnings by seven cents per share sequentially, primarily due to FX and reserve adjustments.

Tim: We were favorable in the fourth quarter.

Mark Stephan Sutton: These strategic initiatives across our portfolio are focused on accelerating margin improvement and driving profitable growth. In addition to this ongoing work, last week we announced a catalyst to create significant value for shareholders through a highly compelling combination with DS Smith. This additional catalyst is something we look forward to working on with the DS Smith team and continuing our conversations with investors regarding this opportunity. At this time, we do not have any additional information to share, so for today's call, including the Q&A session, we intend to focus specifically on International Paper's performance. I will now turn it over to Tim, who will provide more details about our first quarter performance and also our outlook. Tim? Great

Tim: Sure.

Tim: Turning to the segments, starting with industrial packaging on slide seven price and mix was higher due to significant benefits from our box go to market strategy, which contributed approximately $110 million of earnings benefit from improved margins and mix.

Tim: This was partially offset by the majority of prior sales price index declines from 2023.

Tim: Negatively impacted earnings by approximately $53 million.

Tim: With that said the February index Colocation of $40.

Tim: A $40 per ton increase will flow through our contracts primarily over the next couple of quarters. In addition, the commercial benefits from our box go to market strategy exceeded our expectations for the first quarter.

Tim: And the commercial teams remain focused on pursuing additional opportunities going forward.

Tim: Volume was lower as first quarter represents our seasonally lowest shipment quarter of the year and was also adversely impacted.

Tim: <unk> January freeze.

Tim: Also our box go to market strategy is about making choices that will likely impact our volume in the near term.

Tim: To allow us to improve our margins and mix over the long term.

Tim: Although we expect to trail the industry for the next few quarters when measuring unit volume growth, we fully expect the volume impacts to be temporary as we continue to transition toward our target mix of customers and invest in the business to maximize profitability.

Tim: Operations and costs included a $34 million unfavorable.

Tim: Unfavorable impact from the January one or freeze and the exact box by far in March the remainder was primarily due to cost inflation, including items, such as labor materials contracted maintenance services and.

Timothy S. Nicholls: from the January winter freeze and the Ixtec box plant fire. For the quarter, we generated $144 million of free cash flow. As a reminder, our free cash flow in the first quarter of last year included a $193 million final settlement with the IRS related to IP's timber monetization structure. Looking ahead, we expect significant earnings improvement based on positive market trends and benefits from our commercial and cost improvement initiatives. Now I'll turn to slide 6, and I'll provide more details about the quarter as we walk through the sequential earnings bridge.

Tim: And the higher cost of employee benefits.

Tim: There was also a lower fixed cost absorption from seasonally lower volumes. However, this was partially offset by $22 million of fixed cost savings from the Orange mill closure outside of the January phrase our mill system ran very well in the first quarter.

Tim: Planned maintenance outages were higher by $26 million sequentially and input costs were higher primarily due to higher OCC costs.

Tim: On slide eight we thought it would be helpful to update you on the segment trends for our North American packaging business like we did last quarter.

Tim: We continue to see stable to improving demand across all end use segments. Let me highlight some of the trends based on customer feedback.

Tim: E Commerce continues to be very resilient up mid single digits on a year over year basis in the first quarter and significantly above pre COVID-19 levels.

Timothy S. Nicholls: First quarter operating earnings per share were 17 cents as compared to 41 cents in the fourth quarter. As I mentioned earlier, the first quarter included 10 cents per share related to the January freeze and the Ixtec fire. Price and mix was higher by 14 cents per share driven by significant margin and mixed benefits from successfully executing our box go-to-market strategy and our GCF optimization strategy. However, this was partially offset by the majority of prior sales price index declines from 2023.

Tim: Food and beverage it's been relatively stable overall, the overall fresh foods segment continues to benefit from solid performance across the foodservice channel as well as consumer shifts toward make at all mills in lieu of processed food and convenience.

Tim: The process food segment is beginning to show signs of improvement as some producers some retailers are running promotions to improved sales volumes.

Tim: The produce segment was about flat in the first quarter with a drag from wet weather in the Western U S. However.

Tim: However, this segment is expected to recover in the second quarter.

Tim: In the protein segment is improving following a period of supply reductions in beef and poultry.

Timothy S. Nicholls: Volume was unfavorable by 8 cents per share, primarily due to seasonally low shipments across both segments as well as some impact from the winter storm in January. We continue to deploy our commercial strategies across the portfolio focused on margin and mix improvement, which has impacted volumes in the near term as we transition based on our strategy. Operations and costs were unfavorable by 13 cents per share sequentially. This included approximately 7 cents per share from the January winter freeze and the expected box plant fire.

Tim: Poultry remains a preferred choice by consumers based on value.

Tim: The beverage segment remains under pressure as budget conscious consumers have reduced consumption of specialty beverages, and bottled beer, which tend to be more packaging intensive.

Tim: In summary, based on these trends, we believe industry box demand will grow approximately 2% to 3% in 2024.

Tim: We understand the critical role of corrugated packaging plays and brain.

Tim: Social products for consumers and we believe that IP is well positioned to grow our customers with our customers over the long term.

Tim: Moving to global cellulose fibers on slide nine price and mix was higher due.

Tim: <unk> price index movement, and the DCF optimization strategy driving benefits from higher absorbent pulp mix.

Tim: And the reduction of commodity grades.

Tim: Volume sequentially was relatively flat overall as improved demand for absorbent 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.

Timothy S. Nicholls: The remainder was primarily due to cost inflation, including the higher cost of employee benefits. The unfavorable impact of operating costs from seasonally lower volumes was offset by cost savings from our mill closure and machine shutdown last year. Maintenance outages were higher by 16 million dollars, or 3 cents per share, in the first quarter.

Tim: Operations and costs was unfavorable sequentially due to the January freeze on cost inflation, including labor materials contracted services and higher cost of employee benefits and some timing of spend.

Tim: Most of this was offset by $12 million of lower fixed cost, resulting from the two pulp machine closures at our mills and Regal in North Carolina in Pensacola, Florida.

Tim: Planned maintenance outages were lower in the first quarter by $10 million and also included a $24 million outage related to the Georgetown White papers machine.

Timothy S. Nicholls: An input cost unfavorably impacted earnings by 7 cents per share sequentially, largely due to increased costs for OCC with the remainder from higher energy and chemicals. And finally, corporate items unfavorably impacted earnings by 7 cents per share sequentially, primarily due to FX and reserve adjustments that were favorable in the fourth quarter. Turning to the segments, and starting with industrial packaging on slide 7,

Tim: The unfavorable impact of earnings in the first quarter, but is expected to be recovered throughout the rest of the year sort of an existing supply agreement with silver.

Tim: Finally input costs were higher by $7 million, primarily due to higher energy cost during the January free.

Tim: On Slide 10, we'll take a look at our second quarter outlook I'll start with industrial packaging.

Tim: We expect price and mix to improve earnings by $65 million sequentially.

Tim: This is the result of the prior index movements in North America higher export prices to date as well as continued progress with our box go to market strategy.

Timothy S. Nicholls: Price and mix was higher due to significant benefits from our box go-to-market strategy, which contributed approximately 110 million dollars of earnings benefit from improved margins and mix. However, this was partially offset by the majority of prior sales price index declines from 2023, which negatively impacted earnings by approximately 53 million dollars. With that said, the February index publication of 40 dollars per ton increase will flow through our contracts primarily over the next couple of quarters.

Tim: Volume is expected to increase earnings by $55 million, primarily due to seasonally higher daily demands with one more shipping day.

Tim: Operations and costs is expected to decrease earnings by $70 million. This.

Tim: This includes proactive maintenance spending beyond our full scale mill annual outage program.

Tim: As when as we anticipate continued demand recovery and increased equipment utilization. This spending is focused on improving productivity and efficiencies across our mills and box plant network.

Tim: We will continue to experience additional inflation and higher SG&A, including additional commercial resources to support our box go to market strategy.

Timothy S. Nicholls: In addition, the commercial benefits from our box go-to-market strategy exceeded our expectations for the first quarter, and the commercial teams remain focused on pursuing additional opportunities going forward. Volume was lower as the first quarter represents our seasonally lowest shipment quarter of the year and was also adversely impacted by the January freeze.

Tim: Higher maintenance outage expense is expected to decrease earnings by $4 million.

Tim: Included in that total is a $19 million of outage related to the Riverdale White papers machine that will be recovered throughout the year through an existing supply agreement with silver.

Tim: And lastly input costs are expected to be stable overall is higher OCC costs are expected to be offset by lower energy costs.

Tim: Switching to global cellulose fibers, we expect price and mix to increase earnings by $15 million as a result of prior index movements.

Tim: Volume is expected to remain flat as we reduce exposure to commodity grades and grow with absorbent pulp.

Tim: Operations and costs are expected to increase earnings by $20 million, primarily due to lower fixed costs, resulting from the pulp machine closures in our Regal would in Pensacola Mills.

Tim: Non repeat of the January freight and time of spending.

Timothy S. Nicholls: Also, our box go-to-market strategy is about making choices that will likely impact our volume in the near term but will allow us to improve our margins and mix over the long term. Although we expect to trail the industry for the next few quarters when measuring unit volume growth, we fully expect the volume impact to be temporary as we continue to transition toward our target mix of customers and invest in the business to maximize profitability. Operations and costs included a 34 million dollar unfavorable impact from the January winter freeze and the exact box plant fire in March.

Tim: Lower maintenance outage expense is expected to increase earnings in the second quarter by $19 million.

Tim: This sequential improvement reflects the $24 million.

Tim: George sales pay for outage that occurred in the first quarter, which we expect to recover throughout the rest of the year.

Tim: And lastly input costs are expected to be stable.

Tim: With that I will turn it back over to Mark.

Mark: Thanks, Tim I'll turn to slide 11, and give you some additional perspective on our progress we're making on our business strategies.

Tim: Our teams across international table are advancing our strategies and capturing significant value in.

Mark: In the packaging business, which is on the left hand side of this slide our box go to market strategy is focused on enhancing our capabilities and strong value propositions to improve margins and mix.

Tim: We are making choices that create value for our customers, while maximizing the profitability of our packaging business.

Tim: Earlier, Tim called out approximately $110 million of price and mix benefits realized in the first quarter and we expect additional opportunities as we go through the year in.

Tim: In addition, we continue to make investments across our box network to improve our capabilities to serve customer needs and increase productivity.

Timothy S. Nicholls: The remainder was primarily due to cost inflation including items such as labor, materials, contracted maintenance services, and higher costs of employee benefits. There was also lower fixed cost absorption from seasonally lower volumes, however, this was partially offset by 22 million dollars of fixed cost savings from the orange mill closure. Outside of the January freeze, our mill system ran very well in the first quarter.

Tim: These projects have attractive financial returns.

Tim: Positioning our packaging businesses for profitable growth in the future.

Tim: In our global cellulose fibers business. We are we also realized benefits from our optimization strategy.

Tim: By aligning our resources with the most attractive customers and segments and reducing exposure to commodity grades. This shows up as margin and mix improvements in the first quarter.

Tim: Across the enterprise.

Tim: We also optimize our mill system and realized $34 million of fixed cost savings in the first quarter.

Tim: These strategic initiatives across our portfolio are focused on accelerating margin improvement and driving profitable growth and will remain a high priority for our teams at IP.

Speaker Change: Moving to slide 12, and given our CEO transition I'd like to take a moment to express my personal gratitude for my journey with international paper.

Speaker Change: It has been a privilege to be part of the IP finally for my entire career.

Timothy S. Nicholls: Plant maintenance outages were higher by 26 million dollars sequentially, and input costs were higher primarily due to higher OCC costs. On slide A, we thought it would be helpful to update you on segment trends for our North American packaging business, like we did last quarter. We continue to see stable to improving demand across all in-use segments. Let me highlight some of the trends based on customer feedback. eCommerce continues to be very resilient, up mid single digits on a year over year basis in the first quarter and significantly above pre-COVID levels.

Speaker Change: <unk> really goes by fast when you work with outstanding people and a great company.

Speaker Change: I enjoyed all the various roles and opportunities I'm truly humbled and honored to have served as Ip's leader for the past decade.

Speaker Change: During this time, we have become a more focused company.

Speaker Change: Our financial Foundation is strong.

Speaker Change: Those are the principles and core values that guide our actions and decisions about how we operate.

Speaker Change: Our team knows our mission matters.

Speaker Change: We improve peoples lives by using renewable resources to make products people depend on every day.

Speaker Change: We understand how important it is to help our customers solve problems and achieve their goals.

Speaker Change: We are laser focused on the things that are improving the company and making it a very well positioned company for the future.

Speaker Change: I'm incredibly proud of our employees.

Timothy S. Nicholls: Food and beverage has been relatively stable overall. The overall fresh food segment continues to benefit from solid performance across the food service channel, as well as consumer shifts toward making at home meals in lieu of processed food and its convenience. The processed food segment is beginning to show signs of improvement as some producers and retailers are running promotions to improve sales volumes. The produce segment was about flat in the first quarter with a drag from wet weather in the western U.S.

Speaker Change: I have seen them demonstrate time and time again their resilience and agility to overcome challenges this was particularly evident during the global pandemic.

Speaker Change: Our team showed up to work every day to get the job done their dedication ensured people around the world had access to a variety of essential goods.

Speaker Change: To everyone on the team and all of our operate our operations and offices around the globe for what you do each day and for making a difference. Thank you and to our shareowners. Thank you for your continued confidence and investment in international paper.

Speaker Change: It has been a remarkable journey for me being part of it is 126 year legacy.

Speaker Change: Proud of how far our company has come and I'm looking forward to seeing how far international paper with logos.

Speaker Change: And with that we're ready to move to Q&A.

Speaker Change: Thank you if you would like to ask a question simply press <unk> 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. As a reminder, today's Q&A is intended to focus specifically on <unk>.

Timothy S. Nicholls: However, this segment is expected to recover in the second quarter, and the protein segment is improving following a period of supply reductions in beef and poultry. Poultry remains the preferred choice by consumers based on value.

Timothy S. Nicholls: The beverage segment remains under pressure as budget-conscious consumers have reduced consumption of specialty beverages and bottled beer, which tend to be more packaging-intensive. In summary, based on these trends, we believe industry box demand will grow approximately 2-3% in 2024. We understand the critical role corrugated packaging plays in bringing essential products to consumers, and we believe that IT is well positioned to grow with our customers over the long term.

Speaker Change: National papers performance one moment. Please for your first question.

Speaker Change: Your first question comes from the line of Matthew Mckellar from RBC capital markets. Please go ahead.

Matthew McKellar: Hi, good morning, Thanks for taking my questions.

Matthew McKellar: I was hoping you could start with just reconciling the benefits from the changes in your go to market strategy in the box business.

Matthew McKellar: Versus what you were expecting to start the year and then it sounds like youre expecting some incremental benefits will flow through in Q2 and beyond I was wondering if you could help us just quantify that.

Timothy S. Nicholls: Moving to global cellulose fibers on slide 9, price of mix was higher due to price index movement and the GCF optimization strategy driving benefits from higher absorbent pulp mix and the reduction of commodity grades. Volume sequentially was relatively flat overall as improved demand for absorptive 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 January freeze and cost inflation, including labor, materials, contracted services, and higher costs of employee benefits and some timing of spend.

Speaker Change: So Matthew I think Youre, asking we had outlook closer to maybe 70 million and we overachieve that Tom had asked I think can walk you through a lot of moving parts on that but.

Tom: I think he can walk you through how we how we basically over achieved our outlook sure. Thanks, Mark and good morning Matthew.

Tom: I would say we exceeded the price component for two reasons first of all.

Tom: At a local level, we had better than expected improvement as we were starting Q4.

Tom: These are customers that are really the decisions are made in the field.

Timothy S. Nicholls: Most of our forecast and thinking about the improved that was focused on very large customers that are across the country.

Tom: We.

Timothy S. Nicholls: Expectations, there, but the big mover was our investment in our commercial teams in the field.

Tom: Training execution driving benefit for our customers and frankly getting a fair price that maybe we didn't in the past.

Tom: I guess I can say that the volume.

Tom: GAAP to market.

Tom: Almost exactly where we expected it. So these trade offs are playing out the way we expected, but the margin improvement is more significant.

Tom: Yes.

Timothy S. Nicholls: Most of this was offset by $12 million of lower fixed costs resulting from the two pulp machine closures at our mills in Regalwood, North Carolina, and Pensacola, Florida. Planned maintenance outages were lower in the first quarter by $10 million and also included a $24 million outage related to the Georgetown White Papers machine that unfavorably impacted earnings in the first quarter but is expected to be recovered throughout the rest of the year through an existing supply agreement with Silbama. Finally, input costs were higher by $7 million, primarily due to higher energy costs during the January freeze. On slide 10, we'll take a look at our second quarter outlook. I'll start with industrial packaging.

Speaker Change: Great. Thanks for the color there.

Speaker Change: And then.

Speaker Change: It's a pretty marginal change, but can you talk about what youre seeing in the market either in Q2, so far and more generally.

Speaker Change: Led you to revise your expected North American industry box shipment growth.

Speaker Change: The 2% to 3% and 24, 3% previously.

Speaker Change: Sure Matthew this is Tom again.

Tom: I would say that the second quarter is going to be close to plus 2%.

Tom: For the industry, So thats an improvement from four one to two.

Timothy S. Nicholls: We expect that improvement to continue.

Tom: I would say 2% is.

Tom: Probably in line with a fairly high.

Tom: Economic second half.

Tom: And obviously when youre forecasting the toughest thanks to protect our when you have a turn.

Tom: And we are going to have a turn our customers do not have enough inventory and at some point theyre going to have to reinvest in that base as the economy improves.

Tom: And so our forecast if you go down to 2% that makes that suggests no improvement at all in probably a fairly tough retail sales environment I think closer to three and I would not take four off the table. So.

Tom: Minor adjustment to be conservative as what I would say.

Tom: Yes.

Timothy S. Nicholls: We expect price and mix to improve earnings by $65 million sequentially. This is the result of the prior index movement in North America, higher export prices to date, as well as continued progress with our box go-to-market strategy. Volume is expected to increase earnings by $55 million primarily due to seasonally higher daily demand with one more shipping day. Operations and Cost are expected to decrease earnings by $70 million.

Speaker Change: Great. Thanks for the color there.

Speaker Change: Thats all for me Mark Congratulations on the retirement I'll turn it back to Matt. Thank you Matthew.

Speaker Change: Your next question comes from the line of Mark Weintraub from Seaport Research Partners. Please go ahead.

Mark Adam Weintraub: Thank you first question just wanted to understand.

Mark Adam Weintraub: Operations and costs in the packaging business I think you talked it being a negative $70 million to Q <unk> and I think at the same time, we should have about $50 million positive because we don't have the fire and we don't have the winter freeze issues. So that seems to me like a $120 million.

Timothy S. Nicholls: This includes proactive maintenance spending beyond our full-scale mill annual outage program. As we anticipate continued demand recovery and increased equipment utilization, this spending is focused on improving productivity and efficiencies across our mills and box plant network. We will continue to experience additional inflation and higher S&A, including additional commercial resources to support our box go-to-market strategy. However, higher maintenance outage expense is expected to decrease earnings by $4 million. Included in that total is a $19 million outage related to the Riverdale white paper machine that will be recovered throughout the year through an existing supply agreement with Silvano.

Mark Adam Weintraub: It swings so was hoping to get kind of more specifics as to why that number would be so large.

Timothy S. Nicholls: Mark Hi, this is mark that's a great question I think its too far it fits the value chain, starting with containerboard and all the way through box our prepared remarks talked about generically preparing for what we believe will be higher utilization as well as some of the spending is.

Timothy S. Nicholls: Maintenance cost, but it really is in the box business to improve productivity and throughput.

Mark Adam Weintraub: Not as a capital cost level so.

Mark Adam Weintraub: We'd like to do is ask Jay royalty to talk a little bit about the containerboard part of the value chain and then Tom to add some comments on the converting embark sites a J.

Timothy S. Nicholls: And lastly, input costs are expected to be stable overall, as higher OCC costs are expected to be offset by lower energy costs. Switching to global cellulose fibers, we expect price and mix to increase earnings by $15 million as a result of prior index movements. Volume is expected to remain flat as we reduce exposure to commodity grades and grow with absorbent pulp. Operations and costs are expected to increase earnings by $20 million, primarily due to lower fixed costs resulting from pulp machine closures at our Regal Wood and Pensacola mills, the non-repeat of the January freeze, and time of spending.

Timothy S. Nicholls: Thanks, Mark and good morning, Mark Thanks for the question.

Jay: I think speaking to the containerboard side of the equation.

Speaker Change: There's a couple of things going on too to keep in mind one is.

Jay: The inflationary situation. So if you step back and think about what's happened in the last couple of years and how to think about that in the context of where we are the cost to deliver the same value to customers has really increased dramatically over the last couple of years and we see that again.

Timothy S. Nicholls: As we step into 2024, and we saw it we saw meaningful impact in our <unk> numbers.

Jay: You'll see and this is related to all of this inflation.

Timothy S. Nicholls: We will see another step and <unk> and that and you can really think about that kind of leveling out from there.

Jay: And why that is the case is.

Jay: A lot of this inflation is labor related when you think about labor flowing through all of these different things, but it's also front end loaded as these contracts reset at really the beginning of the year and so labor and benefits maintenance services operating supplies and materials.

Jay: Housing costs, and even some kind of benign overhead expenses like insurance and property taxes, we all see those meaningfully up as we come into 'twenty four and so thats one thing thats impacting the numbers in <unk> and then again in <unk>.

Timothy S. Nicholls: Lower maintenance outage expense is expected to increase earnings in the second quarter by $19 million. This sequential improvement reflects the $24 million Georgetown paper outage that occurred in the first quarter, which we expect to recover throughout the rest of the year. And lastly, input costs are expected to be stable. With that, I'll turn it back over to Mark. Thanks, Tim.

Mark Nellessen: The other thing and Tim spoke to it in terms of the proactive maintenance spending.

Timothy S. Nicholls: Think about how we've been operating for the last several quarters in light of the lower demand environment, we've been modulating our spending in reaction to that but as you heard us talk about we're seeing more and more evidence of the recovery really across all the channels.

Jay: And we need to be ready.

Mark Nellessen: Before that you were in the early stages, but it is kind of continue to ramp and we need to be ahead of that so.

Timothy S. Nicholls: Tom will talk about the box side on the mill side I would characterize it as a modest very modest step up but given our size and scale the numbers are not insignificant.

Jay: But it's really about trying to get ahead of that and these are things like ongoing maintenance and repairs to support productivity efficiency reliability across all facets of the mill pulp areas for power areas and the paper as well so it's really about increasing increasing that cadence and then depending on how the demand plays out from here.

Mark Nellessen: Modulate that accordingly.

Mark Stephan Sutton: Thanks, Tim. I'll turn to slide 11 and give you some additional perspective on the progress we're making on our business strategies. Our teams across International Paper are advancing our strategies and capturing significant value. For the packaging business, which is on the left-hand side of this slide, our box go-to-market strategy is focused on enhancing our capabilities and strong value propositions to improve margins and mix. We are making choices that create value for our customers while maximizing the profitability of our packaging business. Earlier, Tim called out approximately $110 million of price and mix benefits realized in the first quarter, and we expect additional opportunities as we go through the year.

Timothy S. Nicholls: Hey, Mark this is Tom here Mike.

Speaker Change: I think Jay and Mark laid it out very well I would say the one difference when the box business, because we are increasing maintenance spending.

Mark Stephan Sutton: Is that it's very targeted to places where we.

Mark Stephan Sutton: We struggled with reliability or we have an opportunity to grow so as you look across the country. It's not that we're spreading the maintenance dollars, we're really reacting to the marketplace and the strength of demand.

Mark Stephan Sutton: And then we're targeting maintenance spending to improve reliability for those customers while at the same time, we're improving our margin. So this real focus on reliability and delivering on time is going to pay off.

Tim: Okay. Thank you so.

Mark Nellessen: Or would you say that what we're going to see in the second quarter is cut back to what you think to be your normal type of.

Mark Stephan Sutton: Given where the world is today your normal levels of maintenance type spending et cetera et cetera.

Mark Stephan Sutton: Or are we.

Mark Stephan Sutton: Spending even a bit extra now to make up for maybe having spent a little bit before.

Mark Stephan Sutton: In addition, we continue to make investments across our box network to improve our capabilities to serve customer needs and increase productivity. These projects have attractive financial returns and position our packaging businesses for profitable growth in the future. In our Global Cellulose Fibers business, we also realized benefits from our optimization strategy by aligning our resources with the most attractive customers and segments and reducing exposure to commodity grades. This shows up as margin and mix improvements in the first quarter. Across the enterprise, we also optimized our bill system and realized $34 million of fixed cost savings in the first quarter.

Mark Stephan Sutton: Or is there even further increases that we might do it didn't sound like there would be further increases going forward, but maybe just clarify or are we just kind of a normalized spend levels in the second quarter and we were just a bit below previously that the way to think about it.

Mark Stephan Sutton: Hey, Mark this is Tom Hammock again, I think that so I think there was a large part of it is adjusting but I think the key is what I talked about earlier as we've kind of respond to the market and.

Mark Stephan Sutton: And we can't wait for the market.

Mark Stephan Sutton: And then respond and so there is a bit of that is getting ready as Jay talked about what we see is an expansion in box demand going forward.

Mark Stephan Sutton: And one of the really positive things about maintenance expense in the box plants.

Mark Stephan Sutton: What we've seen is a very short payback.

Mark Stephan Sutton: So we're seeing the results were tracking the results and I feel very good it really is our fastest way to react to customer needs and so I feel very confident what we're spending is going to pay off.

Mark Stephan Sutton: So mark I think what what Jay described on the mill side is as true in packaging. It's also true in cellulose fibers modulating our spending over the last let's say four to five quarters as we were running both businesses as less than <unk>.

Mark Stephan Sutton: These strategic initiatives across our portfolio are focused on accelerating margin improvement and driving profitable growth and will remain a high priority for our teams at IP. Moving to slide 12, and given our CEO transition, I'd like to take a moment to express my personal gratitude for my journey with International Paper. It has been a privilege to be part of the IP family for my entire career. 40 years really go by fast when you work with outstanding people at a great company.

Mark Stephan Sutton: Target output, which would be somewhere in the 94%, 95% output it's been much lower than that as you know based on the on the demand environment and so we stretch those dollars.

Mark Stephan Sutton: Over a longer period of time, because we didnt need our plants to run at maximum output. So.

Mark Stephan Sutton: Now we are preparing to be running more toward our target output. The only thing I would call out that's maybe a little bit of an abnormality in the mill system as it just so happens timing of some of these projects that are related to power generation. So in some of our integrated mills, we have major.

Mark Stephan Sutton: While I enjoyed all the various roles and opportunities, I'm truly humbled and honored to have served as IP's leader for the past decade. During this time, we have become a more focused company, and our financial foundation is strong, as are the principles and core values that guide our actions and decisions about how we operate. Our team knows our mission matters, that we improve people's lives by using renewable resources to make products people depend on every day. We understand how important it is to help our customers solve problems and achieve their goals.

Mark Stephan Sutton: <unk>.

Mark Stephan Sutton: Preventive maintenance shutdowns in some of the turbine generators that generate our steam and electricity.

Mark Stephan Sutton: Arent done every year, they're sequenced.

Mark Stephan Sutton: You have to get them done in a certain window, there's a few extra turbine generator major scheduled maintenance.

Mark Stephan Sutton: Rolls jobs in this in this period of time that we would normally have so if you take that out then I think the.

Mark Stephan Sutton: The rest of it is preparing to be add anymore.

Mark Stephan Sutton: I don't like to call. It one fall by a more targeted Brian environment.

Speaker Change: Got it thanks, guys and thank you Mark for your clear explanation there in for your clarity last.

Mark Stephan Sutton: <unk> been working and.

Speaker Change: Congrats on retirement.

Speaker Change: Thank you Mark.

Speaker Change: As a reminder, if you'd like to ask a question. Please press one zero.

Mark Stephan Sutton: Next we'll go to the line of Charlie Muir Sands from BNP Paribas. Please go ahead.

Mark Stephan Sutton: And we're laser-focused on the things that are improving the company and making IP a very well-positioned company for the future. I'm incredibly proud of our employees. I have seen them demonstrate time and time again their resilience and agility to overcome challenges. This was particularly evident during the global pandemic, when our team showed up for work every day to get the job done. Their dedication ensured that people around the world had access to a variety of essential goods.

Mark Stephan Sutton: Yes.

Speaker Change: Good morning, Thank you very much for taking my questions.

Mark Stephan Sutton: It's going to stay with two please.

Mark Stephan Sutton: Firstly, just in terms of the market prices and the recognition of the $40 per tonne.

Speaker Change: <unk> that.

Mark Stephan Sutton: It received put through in March followed by the change in April.

Mark Stephan Sutton: Is it your expectation that they run.

Mark Stephan Sutton: Let's move to the higher numbers that you and others announced that start the year.

Mark Stephan Sutton: To everyone on the IP team, in all our operations and offices around the globe, for what you do each day and for making a difference, thank you. And to our shareholders, thank you for your continued confidence and investment in International Paper. It has been a remarkable journey for me being part of IP's 126-year legacy. I'm proud of how far our company has come, and I'm looking forward to seeing how far International Paper will go. And with that, we're ready to move to Q&A. Thank you.

Mark Stephan Sutton: We won't see any further recognition of <unk>.

Mark Stephan Sutton: Price increases made.

Speaker Change: And then the second question just relates to the.

Mark Stephan Sutton: Corporate expenses.

Mark Stephan Sutton: $24 million in the first quarter compared with 60 to 80 million guided for the year have you got any any view on how.

Mark Stephan Sutton: Q2 might shape out specifically for the full year, you might now be perhaps looking towards the upper end of that range given the large number in Q1.

Operator: Thank you. If you would like to ask a question, simply press 1 and 0 on your telephone keypad. To withdraw a question, press 1 and 0. We will pause for a moment to compile the Q&A list. We do ask that you limit yourself to one question and one follow-up question. As a reminder, today's Q&A is intended to focus specifically on International Paper's performance. One moment, please, for your first question. Your first question comes from the line of Matthew McKellar from RBC Capital Markets. Please go ahead.

Mark Stephan Sutton: Charlie This is mark set and thank you for your questions I'll take the first one and our CFO, Tim Nicholls will take the second one on the corporate expenses on the on the pricing we don't comment on forward looking pricing we obviously.

Matthew McKellar: We had an announcement of $70 $40 recognize there's lots of reasons for that and the way that the index discovers priced through the analytics. So I.

Matthew McKellar: I think we would just stop there and say that's what we have that will flow through in the next few quarters, but we really don't we don't forecast.

Matthew McKellar: Caster are talk about forward pricing that hasnt.

Matthew McKellar: Kind of published publishing an index, Tim do you want to take the corporate expense questions, Yes, great Hi, Charlie So.

Matthew McKellar: We don't break it out quarter by quarter, there's a lot we keep the corporate theres a lot of things that can have some volatility, but we still feel good about the $60 million to $80 million for the year, but we capture things like FX movements.

Matthew McKellar: There is some unallocated subs and things like that so there's a lot of moving parts running through.

Operator: Generally.

Matthew McKellar: Estimated for a full year it can bounce around quarter by quarter.

Matthew McKellar: Hi, good morning. Thanks for taking my question. I was wondering if you could start with just reconciling the benefits from the changes in your go-to-market strategy in the box business versus what you're expecting to start the year. And then it sounds like you're expecting some incremental benefits to flow through in Q2 and beyond. I was wondering if you could help us just quantify that.

Speaker Change: Alright. Thanks.

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

Speaker Change: Thank you Mark Andy Tim and more for taking my question Mark I, just wanted to echo what everybody else Congrats on your retirement.

Speaker Change: Thanks, Mike.

Mark Stephan Sutton: So Matthew, I think you're asking, we had an outlook closer to maybe $70 million, and we overachieved that. Tom Hamick, I think, can walk you through a lot of moving parts on that, but I think he can walk you through how we basically overachieved our outlook. Sure. Thanks, Mark.

Matthew McKellar: Just wanted to get a sense.

William Thomas Hamic: You're going to use commercial we are margin improvement in industrial packaging.

William Thomas Hamic: What type of EBITDA margin that youre looking to achieve and over what timeframe and can you help.

William Thomas Hamic: Frank how this should play out within the next year or two.

William Thomas Hamic: Sure. Thanks, Mark. And good morning, Matthew.

William Thomas Hamic: I think the the.

William Thomas Hamic: The number we've always thrown out there was EBITDA margin.

William Thomas Hamic: I would say we exceeded the price component for two reasons. First of all, at the local level, we had better than expected improvement as we were starting Q4. So these are customers that really, the decisions are made in the field. Most of our forecast and thinking about the improvement was focused on very large customers that are across the country. We exceeded the expectations there. But the big mover was our investment in the commercial teams in the field, training, execution, driving benefits for our customers, and frankly, getting a fair price that maybe we didn't get in the past. I can't say that the volume gap to market was almost exactly where we expected it. So these trade-offs are playing out the way we expected, but the margin improvement is more significant.

William Thomas Hamic: Let us to a really strong.

William Thomas Hamic: Oh, I see several hundred basis points above our cost of capital.

William Thomas Hamic: At Yesterdays revenue line that used to be in the <unk>, but I think for us thats, an aspirational target to get back into that area, but.

William Thomas Hamic: Even at today's revenue, an 18% margin generates very strong ROIC similar to what a 21% margin used to generate so I think that's sort of.

William Thomas Hamic: We're working towards now is getting up into those high teens 18 ish percent on our way to 20, and if you kind of take that to an ROIC you've got.

William Thomas Hamic: Really strong.

William Thomas Hamic: Kind of mid teens ROIC in the packaging business and then you put some growth on top of that and I think the value creation can be pretty powerful.

William Thomas Hamic: Before where you stand today Mark.

William Thomas Hamic: That 18% margin that you will see that occurring is that something that goes next year.

William Thomas Hamic: The next two years and how you see that unfolding in the near term.

William Thomas Hamic: Yes, I think.

Speaker Change: The answer to that question is going to depend a lot on what Tom has talked about and that is this.

William Thomas Hamic: Betty improvement in demand.

William Thomas Hamic: The consumer and when this turn of cars, obviously, those margins would be indicative of a.

William Thomas Hamic: Healthy economy, which leads to a healthy box market. So we would we would think it's several quarters before where we're sitting at that point.

William Thomas Hamic: But we should see a step change and improvement in the margins as we go through quarter by quarter by quarter.

William Thomas Hamic: I'd like to say a point in time in 25, but it's really going to depend on the demand environment, but it's not that far in the future.

Speaker Change: Got it and just one quick follow up.

William Thomas Hamic: At a recent conference you mentioned.

Matthew McKellar: Great, thanks for the color there. And then I realize it's a pretty marginal change, but can you talk about what you're seeing in the market either in Q2 so far, or more generally, that led you to revise your expected North American Industry box shipment?

William Thomas Hamic: The change in your customer mix pre COVID-19 versus kind of post COVID-19 in the different margin profiles.

Matthew McKellar: So can you provide more color about the JV.

Speaker Change: So your mix pre COVID-19.

Matthew McKellar: Covid has any real impact, but that mix has had as well.

William Thomas Hamic: Sure, Matthew. This is Tom again.

Speaker Change: Yes, that's a good question Mike at that conference what I was what I was discussing was during COVID-19 on some of our large <unk>.

William Thomas Hamic: You know, I would say that the second quarter is going to be close to plus 2% for the industry, so that's an improvement from 4 to 1 to 2. We expect that improvement to continue. And so, if you go down to 2%, that suggests no improvement at all and probably a fairly tough retail sales environment. I think of it closer to three, and I would not take four off the table. So, you know, a minor adjustment to be conservative is what I would say.

William Thomas Hamic: Contractual type customers that are in certain types of venue segments their growth rate was so astounding and we we had.

William Thomas Hamic: An obligation if you will to support their demand either as a percentage of thereby or or some other metrics inside of our contracts and they grew at an outsized rate to some of the other segments and some of the smaller customers and as it absorbed.

William Thomas Hamic: Basically all of our capacity.

William Thomas Hamic: We had to.

William Thomas Hamic: Leave certain customers and certain segments, where we didn't have those contractual obligations because we just had no more room in our converting system. So that's what I was trying to describe these are not bad customers are all great customers is not it's not average customer's fault. They grew very fast and we met their demand, but it cost us in margin.

William Thomas Hamic: Because some of the customers that we didn't have room for actually more profitable they were regional and local type customers. So.

William Thomas Hamic: The mix ended up shifting more toward very large what we would call national accounts as a percentage of our total business and what we're doing now is in those large national accounts, improving the economics now that the contracts are open post COVID-19. Some of them were two years some of them are three year contracts and where.

William Thomas Hamic: We can we're improving the economics and Thats, what Tom has been describing that was a portion of a large portion of the $110 million in the first quarter, where we're not able to work with our customer to improve the economics and they may have a better alternative we will we will lose that amount of volume free up.

William Thomas Hamic: That capacity and retarget, the original segments and customers that we disappointed a few years ago and the good news is we've been suppliers to most of these people for very long periods of time and while it was painful we're getting we're getting opportunities to go back into these customers that we service for so many years so.

William Thomas Hamic: Real external shock created demand profiles that we're very have normal we did our best to meet all our obligations ended up in a spot, especially with post COVID-19 inflation and demand declines in contractual limits spot economically we didn't like and so what we're doing.

William Thomas Hamic: Getting back to the most profitable mix that we can have if you think about converting Mike. It's basically hours of time, you have on your converting machinery to add value to containerboard.

Matthew McKellar: Great. Thanks for the color there.

Matthew McKellar: That's all for me. Mark, congratulations on your retirement. I'll turn it back. Thank you, Matt.

Matthew McKellar: Form of making a package.

Matthew McKellar: Maximizing the profitability per hour of converting time, you have to offer to the market is always.

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

Matthew McKellar: The challenge in the equation the value creation algorithm that the box business uses and that just got skewed for us not necessarily because we wanted it to but because we did what we thought was the right thing to do for our customers during that period of time based on the commercial contracts, we signed pre COVID-19.

Mark Adam Weintraub: Thank you. First question: I just wanted to understand the operations and costs in the packaging business. I think you talked about it being a negative 70 million 2QV1Q, and I think, though, at the same time, we should have about 50 million positive because we don't have the fire, and we don't have the winter freeze issues. So that seems to be like a hundred and twenty million dollar negative swing. So I was hoping to get kind of more specifics as to why that number would be so large.

Mark Adam Weintraub: Got it. Thank you very much grateful Larry good luck in retirement.

Mark Adam Weintraub: Thanks.

Mark Adam Weintraub: And your final question for today comes from the line of Gabe Poggi from Wells Fargo. Please go ahead.

Speaker Change: Mark I'll Echo everyone's comments I think we told you also last call congratulations okay.

Mark Adam Weintraub: At the time.

Speaker Change: Thank you.

Speaker Change: I'm going to try to come back to that.

Mark Adam Weintraub: Maintenance and investment question I looked at average maintenance outage expense.

Mark Stephan Sutton: Mark, hi, this is Mark, and it's a great question. I think it's two parts. It's the value chain starting with Container Board and all the way through Box. Our prepared remarks talked about generically preparing for what we

Mark Nellessen: Pre pandemic average about $250 million.

Mark Stephan Sutton: During the pandemic over the past four years, including 2024, I think it was averaging about $3 80.

Mark Nellessen: $130 million more maintenance expense that we're investing.

Mark Stephan Sutton: Thanks, Mark. And good morning, Mark.

Mark Nellessen: And now we're talking about some costs additional costs running through the P&L I.

Unknown Executive: Thanks for the question. I think, you know, speaking to the container board side of the equation, there are a couple of things going on to keep in mind. One is the inflationary situation. So, you know, if you step back and think about what's happened in the last couple of years and how to think about that in the context of where we are, the cost to deliver the same value to customers has really increased dramatically over the last couple of years.

Speaker Change: Don't know if you quantified it for us, but it seems like it's maybe at least $100 million in the second quarter correct me if I'm wrong.

Speaker Change: So maybe just help us with.

Unknown Executive: Dimensionalize some of these costs.

Unknown Executive: Where maintenance would go next year.

Unknown Executive: Sort of in an ordinary environment.

Unknown Executive: And what sort of return are you expecting on the capital or the extra costs that are flowing through the P&L.

Unknown Executive: And we see that again as we step into 2024. And we saw it, we saw a meaningful impact in our 1Q numbers. We'll see, you know, and this is related to all of this inflation. And we'll see, you know, another step in 2Q.

Unknown Executive: Gabe Let me let me start just at a high level. So the $2 50, you talked about you could probably put a 40% inflation number across that spend.

Unknown Executive: Typically maintenance is half materials and have labor some of the labor is an annual outages and its labor that we don't provide specialty work. So we hire that labor during those two week outages and so that 250 automatically jumps up in the neighborhood of 40% more now the numbers you quoted at 384 <unk>.

Unknown Executive: That's more like 50% more some of that as additional targeted spending and a lot of that is in the box business. It shows up as maintenance spending not capital expense because box plant projects tend to be small enough in many cases, where we don't need a new machine. We just upgrade an existing machine that flows through the P&L as an expense.

Unknown Executive: A lot of the mill projects are so expensive in large OEM equipment is of a scale that it ends up flowing through our capex in that in that $1 billion of Capex. So the way, we think about it and I'll ask Jay and Tom maybe to give you some.

Unknown Executive: Particularly when you look at the cash investment in our business, whether its a maintenance expense or whether it flows through capital as the investment.

Unknown Executive: In protecting today's cash flows via reliability and generating Tomorrow's cash flows in the box business.

Unknown Executive: New capacity and capability and in the mail business by lowering our cost and change in grade structures and those types of things, but the 40% ish inflation in that neighborhood is the part that I think a lot of people Miss and while inflation isn't going up as much there is no deflation in any of that stuff.

Unknown Executive: Some deflation in a few energy inputs and all that there is no deflation in what drives maintenance cost, it's just going up less fast and it was so Jay and Tom If you want to add a little bit of color.

Speaker Change: I think the implied some comments are right on it's it's very extraordinary I'm curious Brian.

Unknown Executive: And then you can really think about that kind of leveling out from there. And why that is the case is that, you know, a lot of this inflation is labor related. You think about labor flowing through all of these different things, but it's also front-end loaded as these contracts reset at the beginning of the year. And so, you know, labor and benefits, maintenance services, operating supplies and materials, warehousing costs, and even some kind of benign overhead expenses like insurance and property taxes, we all see those meaningfully rising as we come into 2024.

Unknown Executive: Versus the last decade, or a couple of decades, and so certainly a step change in that regard.

Unknown Executive: The other thing to keep.

Unknown Executive: Keep in mind Gabe is.

Unknown Executive: We have been intentionally.

Unknown Executive: We've been intentionally spending at lower levels for the last several quarters to match, the lower demand environment and as we see the early stages of recovery and making sure that we're ready to ramp with that as it comes.

Unknown Executive: We're stepping up so that's the other piece I think to keep in mind.

Unknown Executive: In terms of these comparisons comment on what you're sure and I think mark.

Unknown Executive: Well.

Unknown Executive: I would say the increase if youre.

Unknown Executive: There is an increase in the box spending that is focused on reliability.

Unknown Executive: If theres any change in our focus I would say that in the past we were comfortable running overtime.

Unknown Executive: And so that's one thing that's impacting the numbers in 1Q and then again in 2Q. The other thing, and Tim spoke to it in terms of, you know, the proactive maintenance spending. If you think about how we've been operating for the last several quarters in light of the lower demand environment, we have been, you know, modulating our spending in reaction to that. But, as you have heard us talk about, we're seeing more and more evidence of the recovery.

Unknown Executive: Two Saturdays in masking and box plants.

Tim: But that doesn't that much you get the orders made but it doesn't satisfy the reliability. So we've become very focused on on time delivery and quality and there is a significant amount of this maintenance spending that were targeting towards that shift.

Unknown Executive: Frankly and supports our margin structure going forward.

Speaker Change: Okay. Thank you thanks for that Tom.

Unknown Executive: Okay.

Unknown Executive: You guys did outperform if I go back to the bridge on a sequential basis, you talked about kind of flattish pricing.

William Thomas Hamic: Oh, hey, Mark, this is Tom Hamick. I think Jay and Mark laid it out very well.

William Thomas Hamic: It was about 57, so it's clearly showing up.

William Thomas Hamic: I would say the one difference with the box business, because we are increasing maintenance spending, is that it's very targeted to places where either we've struggled with reliability or we have an opportunity to grow. So as you look across the country, it's not that we're spreading the maintenance dollars. We're really reacting to the marketplace and the strength of demand. And then we're targeting maintenance spending to improve reliability for those customers, while at the same time, we're improving our margins. So this real focus on reliability and delivering on time is going to pay off.

William Thomas Hamic: We didn't.

William Thomas Hamic: Build a better IP in this presentation.

William Thomas Hamic: Formerly.

William Thomas Hamic: Talked about it.

William Thomas Hamic: Is it incorrect to annualize that one pin number or is there a reason why it's more pronounced here in the first quarter.

William Thomas Hamic: I guess again any way to think about that because it.

William Thomas Hamic: I mean that in and of itself was I think a big part of building a better IP.

William Thomas Hamic: And it's showing up in pretty big numbers now here.

William Thomas Hamic: Dave This is Mark I think you broke up on the first part of your question, but I think we get the Jess just of it on the.

Speaker Change: <unk>, yes, it's a fair it's a fair assessment to say you can annualize that number and a portion of that is definitely inside of the build a better IP, but I didn't hear the very first we didn't hear the very first part of your question. When you were referencing the bridge.

Mark Adam Weintraub: Okay, thank you. Would you say that what we're going to see in the second quarter is a cut back to what you think to be your normal type of in this given where the world is today, your normal levels of maintenance type spending etc, etc, or are we

Mark Adam Weintraub: One of the bridges.

Mark Adam Weintraub: It just the sequential price bridge you guys outperformed I think by $57 million. So yes, yes, yes, that's the part we didn't hear yes, that's correct.

Mark Adam Weintraub: And based on where he's been today, Mark, what do you think that 18% margin will occur? Is that something that happens in the next year, next two years? How do you see that unfolding in the near term?

Speaker Change: And Thats, the right way to right way to think about it. Thanks Gabe.

Mark Adam Weintraub: You have one last question that question comes from the line of Phil <unk> from Jefferies. Please go ahead.

Unknown Executive: You know, I think the answer to that question is going to depend a lot on what Tom Hamick talked about, and that is this steady improvement in demand, the consumer, and when this turn occurs. Obviously, those margins would be indicative of a healthy economy, which leads to a healthy box market. So we would think it's several quarters before we're sitting at that point, but we should see a step change and improvement in the margins as we go through quarter by quarter by quarter. I'd like to say a point in time in 2025, but it's really going to depend on the demand environment, but it's not that far in the future.

Speaker Change: Hey, guys.

Speaker Change: Glad I got to get on this call because I wanted to thank you Mark for all the help over the years really appreciate it.

Speaker Change: Thanks, Phil.

Speaker Change: I guess first off Youre, certainly seeing a lot of inflation and you guys are putting real dollars here to be positioned to capitalize on a better demand environment. So my question is really do you think youre getting paid for these investments.

Speaker Change: So is there another opportunity we should be mindful of it.

Unknown Executive: It did not too distant future and as you implement these latest box price increases are.

Unknown Executive: Levers here, where you could potentially drive more than the $40 linerboard increase that went through in February.

Unknown Executive: Dimensionalizing some of these costs, where maintenance will go next year. And what sort of return are you expecting on the capital or the extra costs that are flowing through the P&L?

Unknown Executive: Especially as you move forward with this go to market strategy of yours.

Unknown Executive: Yes, Phil this is Tom.

Unknown Executive: Sure, and I think Mark summed it up well. I would say the increase if you're, you know, there is an increase in box spending that is focused on reliability. If there's any change in our focus, I would say that in the past, we were comfortable running overtime. So, say two Saturdays a month in a box plan. But that doesn't that lets you get the orders made, but it doesn't satisfy reliability. So we've we

Unknown Executive: I think we can comfortably separated too so the improvement you saw in Q1 as Mark said is sustainable.

Unknown Executive: $40 I expect to be.

Speaker Change: Well I can always yes, I mean, if you think back to previous price increases you should feel confident that it's going to flow through the same way, but I would see those separate.

Unknown Executive: In terms of continuing the margin expansion.

Unknown Executive: There is a lot that gives me confidence piece one is we're investing significantly in our commercial capability and thats.

Unknown Executive: That's a shift we've always focused on commercial but not as much as we are.

Unknown Executive: Going forward and I think the other piece of it.

Unknown Executive: That's where we really understand segments and we are very close to those segments and the value proposition.

Unknown Executive: We are very successful in terms of market growth and in terms of margin structure.

Unknown Executive: And so our job is to take that capability and this is what we're doing and build a better.

Unknown Executive: Hey go to market is expanding that to other segments. So there is no how in the company. This is really the change process of driving that across the entire business.

Speaker Change: Got you Okay. That's helpful color.

Unknown Executive: And that's the right way to think about it. Thanks, Gabe.

Unknown Executive: I guess.

Philip H. Ng: You have one last question. That question comes from the line of Phil Ng from Jeffries. Please go ahead. Hey guys.

Speaker Change: My question. My next question is just really on the operations front I know they are in the Covid years, you had some operational headwinds that perhaps limited your ability to kind of grow with the market, you're obviously going through.

Unknown Executive: Sure, that's a great question. I'll take a couple of pieces from it.

Unknown Executive: I think in terms of the investments, if you look at the first quarter, we still have a bit of a weighting of new employees, and that's why we're very focused on retention. But new employees are not as productive as experienced employees.

Unknown Executive: A stretch here with the go to market strategy, but when we kind of think going forward are you set up properly now to kind of growth and market on the operations right.

Unknown Executive: However, when we look at the productivity across our machines, even though we have a few extra people in place, it's not significant to the financials, but with a few extra people, we are seeing productivity improvements for the first time in a long time. And so I feel like those investments are at a very good payback rate. And we're, you know, it's not insignificant, these are two, 3% improvements in throughput. And I think the most positive shift we've made in terms of our capital process and our maintenance expense is that we have spent a lot of time and put a lot of people in place to make sure that the local decisions are primary.

Unknown Executive: Because of production and in some of the investments you've made on the box side give us an update there.

Unknown Executive: Are you starting to see that take hold and be well received in the marketplace.

Unknown Executive: As you kind of pivot to.

Unknown Executive: Maybe a better mix in customers give us a little perspective on is there a target percentage in terms of regional customers versus national.

Unknown Executive: It's a medium to longer term timeframe.

Speaker Change: Sure that's a great question.

Unknown Executive: Take a couple of pieces of it I think in terms of the investments. If you look at the first quarter, we still have a bit of a wave of new employees and that's why we're very focused on retention.

Unknown Executive: New employees are not as productive as experienced employees. However, when we look at the productivity across our machines, even though we have a few extra people in place it's not significant to the financials, but a few extra people. We are seeing productivity improvement for the first time in a long time.

Unknown Executive: What's happening in that market? Why? Tie that back to the national piece, and make sure that we're reacting to the market. Because I said, not all 120 plants are in the same position; you've got to be very targeted in where you spend the money, which is what we're doing.

Unknown Executive: So I feel like those investments are at a very good payback rate.

Unknown Executive: And we are.

Unknown Executive: It's not insignificant these are two 3% improvement in throughput.

Unknown Executive: And I think the most positive shifts we've made in terms of our capital process in our maintenance expense as we have spent a lot of time put a lot of people in place to make sure that the local decisions our primary what's happening in that market why.

Greg: Thank you, Greg, and I'd like to wrap up today's call by sharing my conviction that International Paper is well positioned for the future. Andy Silvernail steps into the CEO role next week on May 1st. I'm very confident that his leadership experience and proven track record, combined with the industry expertise of our senior leadership team, will amplify the company's success going forward. When I provided updates along the way about the CEO succession process, I said the board was looking for the right leader for the company's next chapter, and I am confident that Andy is that leader.

Greg: Add back to the national piece.

Greg: And make sure that we're reacting to the market because I've talked not all 120 plants are in the same position you've got to be very targeted in where you spend the money, which is what we're doing.

Speaker Change: And then to your last question.

Greg: I expect that as a percentage of our business.

Greg: Local business will grow over the next couple of years.

Greg: It's improving faster right now than the national business, and we know that when you have the capability to match local demand and is much more profitable than the national.

Greg: So I don't see some huge swing, we're abandoning national accounts.

Greg: But I do see a rebalancing similar to what Mark talked about in the segment discussion.

Speaker Change: Okay. Okay. Appreciate the color. Thank you.

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

Greg: Thank you, Greg and I'd like to wrap up today's call by sharing my conviction that international paper is well positioned for the future.

Greg: Andy and his team will look forward to sharing updates with you starting on next quarter's call. Thank you for your time today and for your continued interest in International Paper. Once again, we'd like to thank you for participating in today's International Paper's first quarter 2024 earnings call. You may now disconnect.

Greg: Andy Silvernail is Texas.

Greg: Overall next week on May 1st I'm, very confident that his leadership experience and proven track record combined with the industry expertise of our senior leadership team will amplify the company's success going forward.

Greg: When I provided updates along the way about the CEO succession process I said the board was looking to the right leader for the company's next chapter and I am confident that Andy is that leader.

Greg: Andy and his team and look forward to sharing updates with you starting on next quarter's call. Thank you for your time today and for your continued interest in international paper.

Operator: Once again, we'd like to thank you for participating in today's International Paper's first quarter 2024 earnings call. You may now disconnect.

Operator: Sure.

Operator: Once again, we'd like to thank you for participating in today's to international paper's first quarter 2024 earnings call you may now disconnect.

Operator: Okay.

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