Q3 2024 International Paper Co Earnings Call
Good morning and thank you for standing by. Welcome to International Paper's third quarter 2020-24 earnings call. All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, you will have an opportunity to ask questions. To ask a question, press star 1.
to withdraw your question, press star one again. As a reminder to ask a question, press star one, to withdraw your question, press star one again. It is now my pleasure to turn the call over to Mark Nellessen, vice president and best of relations through the floor of yours.
Thank you, Regina. Good morning and thank you for joining International Papers, 3rd Quarter earnings call. Our speakers this morning are Andy Silvernail, Chairman and Chief Executive Officer, and Tim Nicholls, Senior Vice President and Chief Financial Officer.
Mark Nellessen: There's 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 risk and uncertainties.
Mark Nellessen: These are other factors that could cause actual results different materialies from such far-looking statements. Can be found in our press releases and reports filed with the U.S. Securities and Exchange Commission.
We will also present certain non-US gap financial formation, a reconciliation of those figures the US gap financial measures is available on our website.
Our website also contains copies of the third quarter of our interest release and today's presentation slides. With that, I'll turn it all over to Andy Silvernail.
Andy Silvernail: Good morning and good afternoon everyone. I'll be getting on slide three. After my first six months in the seat, I'm encouraged by the pace of improvement and proud of the team for aggressively engaging tonight peace transformation.
Andy Silvernail: We're building a performance-driven culture IP that will enable us to create significant value for employees, customers and shareholders. That work begins with strong alignment around a very clear and compelling strategy.
We will try a profitable growth by being the low-cost producer and the most reliable and innovative sustainable packaging solutions provider in North America and MIF.
Andy Silvernail: We're using our 80-20 approach to guide investments in aligned resources to women of most attractive customers, reduce complexity and cross and cost around the company and drive transformational performance.
Ultimately building great teams and a customer culture are foundational to our improvements. We're passionate about delivering a superior experience to our best customers and best in class returns for our shareholders.
Andy Silvernail: Let's turn this slide forward.
We're on a way to drive and transformational changes to IP. We conduct it at 80-20 train with our top leaders across the company and are actively deploying the methodology.
Andy Silvernail: We will continue to embed this practice with our commercial teams at the mills, at Bach plants, and with administrative functions. I was delighted that about 80% of our active investors joined us for the 80-20 overview session in August.
Importantly, we're completing 80-20 segmentation across the company. We're looking at portfolio, at business segments, markets, customers, products, suppliers, and assets and facilities.
We are completing zero open analysis to determine our key resource needs, and we're developing implementation plans and aligning resources to position our businesses to win customers. We have fully entered the implementation phase by engaging our teams and taking actions to accelerate our strategy and significantly improve IP's performance.
I'm now on slide five.
and I'm here to introduce you to action to take in the fourth quarter of the position IP for success.
What all these actions have in common is that they give us greater focus on strategic customers, markets, aligned resources and investments to win and simplify all aspects of IT, which reduces complexity and costs.
or cognitive disease at these actions are necessary. They include some difficult decisions that impact our team members, their families, and the surrounding communities.
Andy Silvernail: One of the great strengths of IT is our values. We make these decisions with care and compassion, ensuring that we treat people with dignity and respect while providing support, out placements and severance to help people in their transition.
Our actions at the enterprise level are centered on reducing complexity and shifting resources into the businesses and closer to the customer to accelerate strategy. This is the fundamental principle of AB20.
Andy Silvernail: We are simplifying to enable greater focus in collaboration and prone to execution, have more agility and prone to customer experience and lower cost.
Well, they don't know what the American packaging business, we're investing for outstanding service, reliability, productivity, and enhanced capabilities to win with customers while optimizing our total system and reducing structural costs.
As I mentioned on the Q2 call, we have two regional optimization pilots underway in our box system.
We are reducing complexity and investing in equipment and people to improve safety, productivity on time delivery while lowering costs. Importantly, we are seeing a 20 to 30% productivity improvement in these early stages at these pilot areas.
There's not particularly to apply this approach across their national box network. This will be a key lever for delivering profitable market share growth now and in the future.
Andy Silvernail: Recently, we now spy at Plant Cloters in Regions where we have access capacity and an opportunity to optimize our footprint or to close you with our customers to transition their business to other IP plants.
and we expect to retain 100% of our strategic customers. And we're making investments in remaining facilities for future growth.
Importantly, we have identified multiple opportunities for greenfields and brownfield box plan investments that will be industry leading in all aspects of safety and performance.
Andy Silvernail: You should expect the seed announcements and investment soon to increase our strength in strategic markets.
After the Keeter Review, we've decided to evaluate opportunities to better position GCF for long-term success.
I've ordered has authorized us to pursue strategic options. We have engaged Morgan Stanley as our advisor. GTF as a leader of Fluff Bolt is very well positioned in a growing global market. We have a talented team and a strong market position in great technical expertise.
We have a highly advanced mill system and as I mentioned in our Mark The End
2.5% of a global supply position.
Throughout the process we are fully committed to support our business and committed to serving our customers. We'll update investors when we the process is completed. Regardless of if we sell or if we keep EFF it'll be positioned to win for the long term.
We are a while while we are engaging this process, we will continue to accelerate this strategy to focus on fluff and improve business performance.
The decision to close Georgetown mill allows us to exit about 300,000 tons of commodity SBSK and low-value specialty grades across the system. This moves significantly lower as complexity and costs, improves returns and reduces earnings volatility.
Andy Silvernail: We expect to retain 100% of our flood rates and customers in increased our absorbent mix to about 80%.
GCEF will continue to have plenty of capacity for growth with key customers. These actions strengthen GCEF, make them a stronger supplier of high-quality fluff pulp to the market, and for us are GCEF customers. And again, regardless of the outcome, GCEF has the potential to be an attractive business with me, for upside potential.
I'm now on slide six. This slide reflects from 80-20 early wins where scene across the company. Our teams are engaged, they've jumped in and they're not wasting any time for taking action to win with our customers, for news complexity, and improve performance.
and here are just some examples that I call out of all the great work that's happening with our teams. On safety, our intent is to assess industry standards at a great place to work, starting because we are the safest place to work.
We're using 80, 20 analytics, time to understand opportunities for safety improvement, include better root cause analysis and advanced technology. Simply put, safety must be above everything else.
I've already talked about the pilot plants in two regions, or we're seeing double digit productivity improvements.
Also, the corporate reorganization will allow us to focus on our customers and business results, we're moving from a major organization to a customer focused organization.
Importantly, we change our sales incentive programs. They are simpler and better aligned with our commercial strategy to drive profitable growth and reward those people who deliver.
Another great example is a large strategic customer who we've partnered with to look at their mixed business that was driving huge complexity. By working together, we reduced the complexity of their order patterns which saved 1,300 hours and changed over time and significantly improved service levels. These kinds of examples can be found across our corporate cost of system for more opportunities in the future.
Andy Silvernail: We also had a couple of quick-hit wins in sourcing in the US and Europe where we were able to park and with the Chiefs of Suppliers to prove costs and terms. There's more to come but we're encouraged by the level of commitment and excitement across the company as we work to deliver safe, profitable growth.
Alright, I'm on slide 7.
and his good momentum in the company, but we're just starting our 80-20 journey and needs to take hold to every part of the company. Ultimately, 80-20 is a powerful business model when it is live not only in a C-suite, but with customers at paper machines and at shipping talks to box plants.
Along with the progress that I see were very excited to complete the DSM at that position. I'm sure you've all seen the strong shareholder support.
We're bringing together two great organizations and building many positions in the attractive markets of North America and Europe. We expect to close in the early first quarter upon completion of regulatory reviews. Our teams are actively involved in planning for the integration.
Please do announce that after closing the transaction, Tim Nicholls will serve as the interim leader of the combined IP and ESMIF media teams. In addition to his responsibilities at CFL, we are fortunate to have outstanding finance teams at IP and ESMIF that are able to do this.
Finally, we're happy to announce that we will host an investor date of Mark's 25th, 2025, free to haul at the New York Stock Exchange. This will be an opportunity for us to share details about our strategy, and value creation opportunities across the company.
Now let me turn to the third quarter performance in the outlook. First I'll share some highlights, and then turn it to Tim who will walk us through the details.
Andy Silvernail: A month or nine.
Tim: At 3rd quarter earnings came in a bobby hour outlook for the quarter. Better performance was driven by strong price improvements across the portfolio. This included about $17 million benefit from our box-load of market strategy.
Violence or seasonally, lower and expected. Operating costs for higher sequentially due to lower volumes, seasonally higher labor costs, employee incentive compensation, and some reliability issues that are mils to them, which dim will address as you cover the business segment performance.
In terms of the underlying market, we continue to be stable to model the improving demand in the trends in North America across the various segments we serve. In Europe we have seen some softening however.
Andy Silvernail: and expected IP packaging volumes lagged the overall market as we restructure commercial agreements to improve overall profitability.
Andy Silvernail: Relented to prior performance. We've had higher-seal revenues, the Rob set by higher costs primarily related to inflation, employee incentive compensation, as well as some reliability issues in spending to improve future performance.
As I mentioned earlier, we are a laser focused on reducing structural costs across the company and we're taking actions.
As we look into the fourth quarter, we expect higher earnings across our packaging business as our pricing creases from the prior index movement stick. We also expect lower costs for improved operations and lower plan maintenance outages.
We expect more earnings in GTF as a result of prior price index decline in higher plan maintenance outages.
In the fourth quarter, we're also calling out significant accelerated depreciation expenses associated with the facility closest I mentioned earlier. With that, let me turn it over to Tim, we'll provide more details about a third quarter performance and our outlook.
Great thanks Andy. Now turning this flight in I'll provide more details about the third quarter as we walk through the sequential earnings bridge.
Third quarter adjusted operating earnings for share was 44 cents as compared to 55 cents in the second quarter. Price in mix was higher by 29 cents for share driven by the flow through of prior price index movements in both businesses.
Higher export prices as well as more than benefits from successfully executing our box-code market strategy.
Boy was unfavorable by 12 cents per share due to the seasonally lower box shipments and some volume trade-offs related to commercial contract restructuring actions.
Although we continue to see favorable demand trends deploying our commercial strategies across the portfolio, continues to impact volumes in the near-term as expected.
Andy Silvernail: Operations and Costs was unfavorable by 28 cents per share sequentially. This is largely from the impact of lower volumes, seasonally higher labor costs, higher employee and Senate compensation, some reliability incidents and spending, and some weather impacts.
Maynard's knowledge is required by $14 million or $3 per share on the third corner, and inputs were unfavorable squinchily with higher calls for energy and wood.
And finally, corporate items were favorably impacted earnings by 8 cents per share. So, eventually, due to the timing of corporate items and a lower effective tax risk.
Andy Silvernail: If we turn to slide 11, I'll cover industrial packaging. Price index was higher due to the realization of approximately $70 million of benefit from the prior index movement.
Additional benefits from our barcode market strategy contributed approximately $17 million to earnings and higher exports contributed approximately $18 million.
Andy Silvernail: Buying was lower by $48 million to quench the value of seasonality and one less shipping day in third quarter. In addition, we make choices based on our boxcode market strategy that will negatively impact our volume in the near term, but will allow us to improve our margins and mix over the longer term.
Operations and Cost was $89,000,000, unfavorable, sequentially, primarily due to lower volumes, seasonally higher labor costs, and higher employee incentive compensation.
Andy Silvernail: Austin costs also includes a $42 million unsavorable impact from reliability incidents that occurred at a few meals, partially offset by $20 million of insurance proceeds for the tax box planfire that occurred earlier this year.
Plan A maintenance average is required by $38 million sequentially, an input cost for $24 million unfavorable, primarily due to the higher energy and wood cost.
If we turn this way 12 and covering GCA price in next was sequentially higher by 24 million dollars due to price index movements.
volumes sequentially with lower by $4 million. Operations and costs were unfavorable, sequentially by $35 million, which includes an $18 million unfavorable impact.
from reliability incidents at a few of our meals. In addition to other items including higher employee incident compensation.
Plan maintenance outages were lower in the third quarter by $24 million and finally, Inthocholst for FLAF with lower energy and chemical costs offsetting higher wood fault.
I'm on flight 13 now and before we get into the details of the outlook I was note that accelerated depreciation expense will be a significant impact on the fourth quarter due to previously announced facility closures, so we've called that out for each business.
and in line with guidance from the SEC accelerated appreciation will be included in operating earnings.
earnings for our industrial packaging segment are expected to be higher, coincidentally, by approximately $55 million, which includes accelerated depreciation expense of $15 million.
Our names for mobile silos are expected to be lowered, which lead by approximately $275 million, that includes accelerated depreciation, expense of $220 million, as well as higher plans maintenance averages.
Now let me give you the breakdown by business segment. I'll start with industrial packaging.
We expect price in next to improve earnings by $45 million sequentially. This is primarily the result of prior index movement in North America with some benefit from previous actions under our Fox Good Market strategy.
The Sequential Improvement also includes favorable mix and our NEA packaging business given the strong fresh food and vegetable season in Morocco.
Volume is expected to decrease earnings by $15 million due to two last shipping days, partially offset by seasonally higher daily demand.
Andy Silvernail: We expect operations and costs to increase earnings by $5 million. This includes improved performance and reliability, which are partially all set by higher seasonal costs and the notarate of insurance proceeds received in the third quarter.
We expect accelerated appreciation while it's decreasing earnings.
Andy Silvernail: for the packaging business by approximately $15 million due to the five packaging facility closures in the fourth quarter.
Andy Silvernail: Lower maintenance knowledge expense is expected to increase earnings by $21 million, and lastly, lower input cost or expected to increase earnings by $15 million, primarily due to lower OCC and wood cost.
Switching to Global Solidless Fibers, we expect price and makes the decrease earnings by approximately $25 million as a result of prior index movement.
Voliam is expected to be stable. We expect operations in costs, the increase earnings by approximately $5 million due to improved performance and reliability, which is partially offset by higher seasonal and distribution costs.
Andy Silvernail: We expect accelerated depreciation of all the decrease earnings for the pulp business by approximately $220 million. Stay to the closure of the Georgetown mill in the Ford 4.
Andy Silvernail: Fireplant, maintenance knowledge expense is expected to decrease earnings in the fourth order by approximately $36 million and lastly input costs are expected to be stable.
Andy Silvernail: and with that I'll turn it back over to Andy. Thank you, Jim, and we're now turning to slide 14. Again, look for making great progress and we're well our way to building a performance driven and customer-centric culture.
and we're taking actions to control our own destiny. We're making the right choices to accelerate performance improvement.
Andy Silvernail: I'm confident that we have the right stretch and a talent and team and a concrete plan to create a great place to work, deliver customer excellence and drive profitable growth.
Our actions will drive transformational improvements in IP and create significant value for our shareholders.
with that operator. We're now ready to take questions.
Thank you. If you would like to ask the questions simply press star one on your telephone keypad. To withdraw your question, press star one again. As a reminder to ask a question, press star one and to withdraw your question, press star one again. We will now pause a moment to compile the Q&A roster.
We do ask that you limit yourself to one question and one follow-up question.
Our first question is going to come from the line of Bill Eng with Jefferies. Please go ahead.
Bill Eng: Hey guys, Andy, it's been really inspirational in terms of the progress you guys have made in this short time. So really exciting. As you kind of look at the mix of customers that you're looking to optimize.
How's that progress coming along? I know you've relined your sales on set of comp, structure for love, your employees, are you seeing any early findings? Change of behavior?
Bill Eng: And if I look at Tim's forecast or box cement, the coinslee in the U.S., it looked okay. I didn't seem like there is any more incremental leakage there. So give us enough data on how that contracting negotiations progressing. Are you seeing any more incremental churn on the customer side?
Thanks for all appreciate the question.
Look first of all, let me just recognize the team for having done a tremendous job.
Speaker Change: We do a morning call as if we had to be able to talk to a bunch of folks here today and just recognize the incredibly hard work that people have done over the last six months to create momentum. So I first want to just recognize that the monument to work that's been accomplished. A specific to your question on volume.
What we're seeing there is it feels like it's the leakage has slowed and I don't want to jump the gun here and say gone because we still will have year over year volume down here for the next few quarters. But we do expect we get to the back half of the next year, we expect to turn that and we expect it to be at least back to market growth.
and so when I would say we're seeing right now is the expected losses, so if we kind of look at the band of volume losses, we are better than the bottom end of those of that range of expectations, which is positive.
Speaker Change: We have also...
and Mike Sharp were through the 80-20 work of getting clear about what segments of the market are priorities for us. And if I were to simplify that film, I'd say, look, if you just use the U.S. market. So the U.S. market is about 400 billion square feet of, from a package and stay up to the U.S. market.
Speaker Change: and there's about 60% that I put in the big metal.
Bill Eng: So 20% is on one end, which tends to be smaller, local customers, and on the other end, tends to be very priceless to do larger customers. Frankly, this week's spot for us is that big middle.
That is where we are really, really good. Obviously, we do business across the spectrum, given our market position. And frankly, if we can do business with folks on good terms of conditions, we're open for business.
but our focus is really on those people who match our strategy.
Bill Eng: and our strategy is very much again about we're going to be the look-offs for business, we're not going to be the low price player.
but we're going to be the low-cost producer.
Bill Eng: We are going to be great on service and we are going to invest where we have strength And because we're as they're really matched that in that big middle are the sweet spot for us And we really like that overall positioning
Bill Eng: Um...
in terms of the further segmentation that really starts to become regional and then super local.
and this is one of the things I love about this business is, you know, if I talked about when I first thought about doing the company, what was ringing in my head was commodity commodity commodity. And that's just not the case, right? We have a highly differentiated position and can have a highly differentiated position.
in our marketplace. So I feel good about the segmentation. I feel good about the focus.
and we've been rolling up 80, 20 training regionally. We've now done three regional commercial trainings, and we've identified you know, big chunks of opportunity.
Bill Eng: that are out there in the market place that, that, where our value proposition is highly aligned with what the customer wants. So I feel good that we're heading the right direction. It's too early to call a turn, but I do think that the leakage has certainly slipped.
Oh, wow, super.
Speaker Change: and then you talked about a few things, early wins in terms of the pilot program on the box side, kind of unlock more efficiency, your ability to kind of ramp that more broadly.
and then also highlighted a large customer where you're able to kind of reduce the complexity and really reduce the change over that's pretty exciting. So you know, you ability kind of roll that out more broadly as well.
Yeah, so I think we'll both those two things. Those are really nuanced, but I can't stress how important those examples are as you think about rolling those out across the company.
So as you think about the box pit plant pilots, you know fundamentally what's happening, let's just push this use of simple, you're in a region and you have two box plants.
and one of factedly becomes a low-mix high-volume plant and the other becomes a high mix plant.
and there can be a tendency for some to say, oh, what we've now stratified our plants. No, what we've done is we specialize our plant. And so the one that's dealing with high volume, they can capitalize, build their labor force, and build their tire plan around a certain business model that drives tremendous efficiency and why we look at the customer needs.
Bill Eng: and then the high mixed plant can get great changeovers, right? The great changeovers, even though equipment can be different, when you start thinking about what you're talking about through. So the entire capitalization, the workflow, those things can be different. So we can't do that everywhere in the country.
but we've got, you know, 20, 25 regions that I would have found called them regions.
and within that probably at least half of those half the dynamics that we're talking about.
and so we can look at that in those kind of options. So that's exciting and don't forget what comes in that is really important. So we close five plants, but someone could look at that and say, hey, you're taking capacity out of the system. That's a problem. Well, those are plants that are underutilized.
We can move 100% of the customer to someplace that we have capacity. And as we grow our overall capacity, the system by driving productivity, we open up service levels.
Bill Eng: and then put on that, you know, the green fields and the brown fields that we're looking at and we'll get more specific in the future and probably after the fourth quarter call we'll talk more about capital planning.
Bill Eng: and we can talk about what that means to be tremendously for capital. And I've said, as long as it is our strategies going in the right direction, we're not going to be scared about investing. And to where look at these green fields for look at these brown fields, you know, to really try and productivity.
Bill Eng: and hopefully a printie before a customer and a girlfriend and a girlfriend.
Bill Eng: Relatives to that one change, for example, what I love about that right is it's a total win with, to your working with a customer who, you know, service levels aren't quite what they want. They've gotten really demanding about a very specific business model, not a specific outcome.
Bill Eng: and we're able to partner with them and say, hey, what do you need? And what they want is rapid on time delivery, even same day, right? You know, even kind of down the street show up, we order it by and two and it's getting there by four. You know, that kind of stuff. Well, that's really hard to do when you have order patterns that are moving all around. And if you think about that, if you're trying to have that kind of delivery response to a customer, you either have to have inventory on hand or you have to be able to purchase just a time. You got to be able to have one or the two and what we're trying to do is find that balance.
where we can meet that customer demand, but also drive down our capital needs and our cost that we found that great win win. I mean, and you think about that, that's one customer, one facility or maybe two facilities, a 13 hundred hours of change over time. That's a big, big number when you think about how that impacts us.
Speaker Change: These are all great examples, really appreciate color andics.
Speaker Change: Thank you.
Our next question comes from the line of Michael Rockslin with truest securities. Please go ahead.
Thank you, Andy Tim, Mark, for taking my questions. Great quarter. Obviously, you've all been slightly busy.
Speaker Change: I did it yet.
1 to the follow-up until the question regarding the 23% productivity improvement.
Can you talk about what that means for EBITDA on average at those box plans? And in terms of deploying this methodology at the bottom of the fence, over what timeframe do you see this rolling out? And lastly, just, you know, is this something that you can apply to your milk system as well?
Speaker Change: Yeah, great question, Michael. So if I were you, I wouldn't focus on even though by box plant. I don't think that's the great that's the right measure Because what you're really looking for out of your box plants is great customer service
and a low-cost position while doing that. And so if we can move that from Box Plan to Box Plan, it was in a region like I was talking about before, you want to have that kind of flexibility.
The way that I would think about the math and all of this and this kind of goes to your second party question which is a meal.
is, if you create a unit of productivity in our business.
Right, so if you create a unit of true productivity, meaning I can put another dollar of production over our fixed cost base. Right, that's the way to think of it.
When you do that, you drive on a contribution level 60 plus percent incremental margins. If you're able to drive productivity, it's huge. In my old world,
and you get 30 to 35%.
and now we're not going to put 60 or 65% in a pocket. Don't get me wrong because we're going to re-invest back to the business and that's where the magic starts to happen. That's where the virtual cycle starts to kick in. But if you think of it, let's go box-plant and then let's talk mill. On the box-plant side, as you do this, again, what it does is it creates local flexibility from great customer service and lowers your cost structure and it allows you to grow. That's what these things ultimately allows you and then also it lowers your capital attention to the key.
Right, so you're proving profitability, you're proving customer service, you're lowering capital intensity, so your RYC is just outstanding.
Speaker Change: and the answer to your questions, yes, you can do that in the middle of the story.
It's different, it's a different thing but philosophically it's the same. So let's just think of a, let's use an example of a wine drink. So you're making paper, you're at the wine drink.
You know, for us, liners are the most dangerous place in the company and they also tend to be bottlenecks, right? And so what that means is your people are interacting, I have you interact with the most dangerous place in your operation. So you start doing the analytics.
Speaker Change: You're focusing on what the bottlenecks are, you're focusing on the people interactions, you're introducing technology.
Speaker Change: One of the things that we're working on right now is optical technology that will actually shut down machines anytime a human gets into dangerous place Right, so we're starting to bathe, test that, and certain myths And you know, like anyone goes to an Amazon Co. look at the technology out there
and just had you put that into an industrial environment. So you can absolutely do that with Mills with Boxflintz. Very importantly, in 2025.
Speaker Change: We are going to create an I'm going to call White Houses.
and we're going to use a process called strategy deployment, those of you who are familiar with the Danner or the Toyota production system, if you think of ocean planning or Danner who would call it policy deployment.
Speaker Change: It's a very disciplined methodology of deploying strategy. So for us we're going to focus on safety, we're going to focus on 80-20 in the integration of the instrument. Those are going to be the things that we deploy next year.
Speaker Change: in that deployment will be a handful of what I call Whitehouses.
where you're trying to create vast and class examples of the strategy that we're trying to employ. So we're going to take these two pilots that we're using, the two regions of the country, those who will continue and they'll be box plant-light houses.
We're going to take two different melts. We're going to take an integrated melt and a non-integrated melt. And they're going to become lighthouses in that strategy deployment. And then we'll do so also as a couple of commercial teams.
So you get to the end of 2025 and what you have is examples of how we should do it and do it with true excellence.
Speaker Change: So my experience has been when you try to do things kind of all at all the same levels across the entire enterprise of 40,000 people, soon to be 70,000 people with the estimate.
You don't get anywhere, you get kind of a mile wide and an inch deep. And what we want to do is we want to get a mild deep and then demonstrate great results and then drive that out to different parts of the organization.
Speaker Change: God, I'm not appreciate the color, obviously as a bunch, I'm not a worker hand, but I'm the true directories, he's very positive.
and I call real quick one of the things you guys can see also. So Mark's 25th when we have the best of day, we'll definitely spend a bunch of time on these lighthouses, right? So we'll spend time on the lighthouses, we'll spend time on the DS Smith integration. So you'll get to see firsthand kind of how these things are working in practice.
Sorry I might be had on the question.
Now, so this is, I end up with great. I'll one quick follow-up. In terms of the potential for additional portfolio optimization, obviously the company closed a mill, our in-shot earlier this year.
I think at a recent conference you mentioned trying to analyze where the company is over-capacitized Your witness that Ann Ells is standing right now, and what's the potential for further portfolio exercising at the middle level?
Speaker Change: Yeah, great question. So again, we talked about this in the second quarter. We got a careful there.
and those conversations for lots of different reasons, not least which of course is to finalize the BSM attack position, right? We're going to regulatory approval, so we're being careful there. I think what's fair to say is we are looking at this stuff throughout the entire portfolio.
Speaker Change: and we're looking at some segments of business that look like the SPSK example within GCS, which is more commoditized product that has lots of capital intensity.
Those are point and high earnings volatility. Those are places that frankly aren't good business for us.
Speaker Change: What you're going to see for us is a constant march. You know, some of you who have read the Jim Collins book, they're going to 20 mile march down the path of how do we become a more integrated business with less volatility.
You know, one of the things that's been, I could just a wonderful thing for people that are seeing here, is our core packaging business isn't very volatile.
When you actually look at the demand patterns, they're not very long.
at We In Does, a lot of our authority.
and to that business and therefore uncertainty.
and being on your side at the table right at volatility uncertainty.
You're going to value with Lover. I mean, you're just, that's just going to be what you do. And I would, too.
and I think as we go forward what you're going to see as do is look across our portfolio at the kind of businesses integrated high value businesses that we want to be in and you'll see as de-emphasize things that are not that.
Speaker Change: Well, this is a thanks for and much in English like in the quarter in the 25th.
Michael: Thank you Michael.
Speaker Change: Our next question comes in a line of Mark Wine Drop with Seaport. Please go ahead.
Speaker Change: Thank you.
Congrats on all the progress of far.
Speaker Change: So you're sort of a big picture 2 billion to 4 billion. You talk about a billion dollars from cost and opts if I'm remembering correctly.
and we certainly see some of the actions now being laid out of the strategic and now you're 230 which I don't know, I soon that would be something you'd consider on that one billion.
and then I guess what I'm trying to understand a little bit is particularly I'm thinking about even 25 that obviously be on that too.
Speaker Change: If I have this base of, let's say, a $2 billion run rate entering into the year, and then I can layer in the strategic actions you've identified.
How much more from what you're doing 80-20-wise?
Speaker Change: could potentially flow in.
in 2025 and then beyond.
Abubbing beyond say labor and benefits or something that you would be the typical offset. I realize that's a mouthful I just threw there but hopefully you understand that. Mark, let me just make sure I understand what you're asking. Are you asking what the benefits could be in 25 over above inflation? Is that what I'm trying to tell you? It's at the heart of it, yes.
Speaker Change: Okay, okay. The way that I look at this right is the numbers that I talk about are net numbers.
and I think by the way Mark, I think it'll be...
More like a 60-40 split of cost versus commercial. And hopefully, that's something that there's a lot more near-term control of that.
Speaker Change: Um...
and I do think it's a multi-year journey, right? So it's not going to all happen in 2025. Obviously, we want to pull as much forward as we can. You know, I had the wonderful opportunity very early in my career to work for a gentleman by name at York Sherman.
and George was the first CEO of Danahur at the Railroad Brothers, as they started to build that business, they brought to origin.
Speaker Change: and I had the privilege of being an intern in the Cross for his office and what an awesome opportunity. One of the things that George would say is, get ahead.
Right, get ahead. So what we're trying to do right now is we're trying to get ahead. We're trying to get ahead on getting our cost-bees right. And frankly, it's great to improve the cost-drucks of the profitability.
Speaker Change: You know guys to be candid with you, that's a benefit right now, what that gives us is the ability to invest back in the business.
and we need to invest back in the business. We're going to do two things at once, but so Mark, I apologize. I'm not being as specific as I'm sure you'd like, but we're going to try to pull as much forward as we can in the 25 will be responsible. Organizations.
Speaker Change: or their white-be-human body.
when you don't exercise them, they get flabby and they start to fall apart. At the same time when you're trying to get fit, you can't just go run a marathon tomorrow. You have to work yourself into it. And we're running hard today, but we're trying to do it in ways by dividing and conquering having different people at different parts of the organization focus on different things. So we can run this marathon. We can really run this marathon.
Speaker Change: and so we'll move as quickly as we can but not so that we are irresponsible.
I appreciate that is it conceptually fair to say though that the benefits from 80-20
Even in the earlier stages, like in 2025, should out distance inflation and provide we set those months. Oh, I'm sorry. I'm sorry, Mark. Yes. Absolutely. We should, my expectation is that the cost and inflation equation will be positive in 25.
Speaker Change: Okay.
Speaker Change: Super, thank you very much. Thank you.
Our next question comes from a line of Matthew McCuller with RBC. Please go ahead.
Thanks for your morning. It's a good one.
Speaker Change: This concept of regional box plant specialization that you've talked about on this call already exists across the BSNet box plant system or how do you characterize the opportunity to bring this approach to their system as well.
Yeah, I mean look, the estimate is they are a terrific company and they've done some things really, really, really well, they're frankly better than us. They're better than I.P. commercially.
There's no doubt about it.
and so I think they are further ahead of us in some regards commercially, there's no doubt, but yeah, there will be opportunities.
I think you probably have fewer.
on a proportionally, probably fewer density plays in Europe than you have in the US. I think there's probably that's probably true. You know, fewer than that, and part of that's due to country boundaries. Even though you theoretically have a union.
and practice how it works if you don't work like that. And so you have uniqueness in Europe around country boundaries that will be different. That being said, the segmentation in sites.
The ability to think about how we focus on our most important customers, but we call our 80s. It's absolutely going to be there. The ability to improve productivity is going to be there. And obviously we've called out a bunch of that.
Speaker Change: and the synergies that we outlined. So we outlined $514 million synergies, $500 of which are cost.
and we think there's potentially upside from there. But again, we want to be responsible and we want to be able to deliver and get ahead there. So, yes, there will be opportunities, but it will be different. I think the estimate is in a different place than IP. And that doesn't mean always a better place, but some things are clearly better. Commercial, they are clearly better.
They already have a decentralized corporate structure, which actually...
Frankly, makes it easier. We have one of the big reasons for...
and moving so quickly.
with the decentralization of the corporate structure of Memphis. Isn't for the cost benefit? I mean, yes, there are some cost benefits.
But what it allows you to do is allow you organization to focus on the right things, right? So the business is become highly focused on the customer, not on managing the matrix.
The estimates they've already done, that's a great thing. So what that means is we can kind of get to the fun of which is around customers and products and growth.
and so there's lots of 80-20 insights that will have there, but it's going to be a fundamentally different path.
and thanks for all that helpful color. And then just one quick one on GCF. As part of your review of strategic options there, are you evaluating options other than a sale? And then in the case of the sale, how do you think it about appropriate value for that business?
and then just any color around time line to reach completion of your process. Thanks.
Yes, so I understand why you're asking those questions, and some of it's pretty tough. I mean, yes, are we evaluating other options? We will evaluate every option, frankly. You know, I think the most likely option is a sale. That's the most likely option. There are certainly interested parties. We've had a lot of people who have reached out to us and have expressed interest.
We think the process will be very robust.
Speaker Change: We have no doubt about that. In terms of value, I'm not going to speculate on values, I don't want to go see it against myself. But very importantly, right, and I want to, I think this is important, because more than just investors listen to these calls, right?
One of the things that has impressed me, this is a good business.
One of the things that people have failed to understand here, or failed to recognize. I don't mean recognized, you didn't see something that was true. Meaning we didn't make it so, this is a good business. We've got a 35% supply position in a highly valued global commodity.
Speaker Change: Our customers, specifically on the flush side, our customers absolutely trust us to provide them with the best absorbent products, right? They absolutely trust us to do so. And we have a great team in great assets that make that so. So whether we own it or somebody else owns it, the performance of that business is going to be mainly different than what it's been.
Thanks very much, I'll turn it back.
Our next question comes on the line of Charlie Muir Sand's with B&P Perry, please go ahead.
Speaker Change: Good morning. Thank you for taking my questions.
First one is just staying with the Global Cellulose Fibes business. Now that...
and I say it is very much potential auction and he just give us a bit more detail on how much of the are left in group of a large four billion in the targets.
You had in this space is coming from that is also a meaningful part of the $3,3 million Ebbitt's opportunity to identify so far and then sorry is a bundling into that $3,3,3 million Is the $20 million?
Speaker Change: I think it was 25 million from procurement with this number as well. Thanks.
I don't think I've got it and make sure I catch it, right? So, relative to GCF, it's a pretty small part of the kind of...
is getting to 4 billion. It's a relatively small part of that. And relative to the trade-offs of the capital that we've expected to bring in, I would don't think that would be fully impact our point of view.
So that would be my perspective there.
and the procurement savings, no, those are not part of that. Those are two great wins that frankly, you know what I love about 80-20 is. It's once you kind of provide people to insight and give them the guidance to go.
They started dating and the procurement team here specifically on Cossack had a couple of great opportunities where we were able to partner with suppliers and look, this isn't about beating down suppliers. I actually think that's a really stupid strategy.
Speaker Change: I think what you're trying to do is you're trying to partner with the suppliers. You're trying to find win wins just like we did with our customers on changeovers.
Speaker Change: and where you're getting better service, better terms, and they get to profitably grow with those who can really play ball. And so you're trying to create those partnerships. So those two examples, one in the US, one in Europe, know they were not included in the two thirds.
and just returning to the 20 to 30% productivity improvement you've talked about achieving in the pilots. Can you just clarify what that actually means to that?
Speaker Change: 23% lower total variable costs, including all right, screening more materials or...
Yeah, well, yeah, well, how are you measuring this? Yeah, the simple way to think of it is, in this example is think of it as square feet, you know, per, per unit, I mean, that's kind of the way to think of it. So it's, it's output over a fixed base.
and then from there you have choices, right? So you can either grow and that's the ideal thing, right? You're going to grow faster and you're going to draw through at very, very high levels of contribution margin.
and I'm going to allow you to consolidate other facilities into certain facilities. So in our case we kind of have two different stories. If you look in the US you've got parts in the US.
and are frankly, you know, that they're over-utilized. Right? This is the man that can't be satisfied, and so we're trying to aggressively free capacity up to do that. And then he got part of the country that did a too much capacity.
and you need to take a pass out so that the five plants that we've closed, so far have been about being in parts of the country that have too much capacity.
and so you get very specific fixed cost savings as the volume from those plants that exist and moves to other facilities. But the real objective rises to free capacity for growth and recognize much higher variable contribution merchants.
Speaker Change: are so some of the five plant closures are kind of tied into the pilots and therefore that's the...
Speaker Change: Yes, I think it's not in the case so far, but we'll certainly see opportunities as time goes on. So you'll see a mix of that as we go forward.
Speaker Change: Thank you.
Speaker Change: Thanks John
Our final question will come from the line of gay Paggy with Wells Fargo. See you, go ahead.
Thank you for taking the question.
I wanted to ask Andy a little bit of what you started to address here in the last question, which is you're talking about freeing up maybe some capacity in certain parts of the system. And maybe the question is like...
Speaker Change: How much of what you're seeing across your converting systems is more about increasing productivity. I think about it maybe, you know, per employee basis, so you know, the square foot per employee or something like that, you took a very well cost.
Speaker Change: versus freeing up capacity because when we look across what's been added from other players, it doesn't seem like there's a shortage of converting to passing in the market place.
It's a clean, cool, little circular to pre-at the past week.
So how do you think about that balance, or maybe even like a quantified rut? Oh, this many plants we see is there's cost savings and productivity on the cost items and here's where we have a...
Bond Nefes, you. Yeah, it's so, I, you're touching on something that's very, very important. And one of the conjurings when you look at it at the highest level.
So when you look at converting capacity on the highest level, you're absolutely right. There's not a shortage of converting capacity in the United States.
Speaker Change: However, region by region is not true. So as you look region by region, you have places that have way too much capacity and you have places that do not have enough. And one of the mistakes that we have made over time.
is we have not made the talk choices and then the aggressive choices about finding that right balance. So taking capacity out of places where we shouldn't have it.
and then investing aggressively in places that we should have. I think that's what we're trying to do. You're trying to find that right balance.
and really look very importantly, you know, the places that we have real strength and a really different G-to position.
We need to play ball there, right? We've got to play and we've got to play the win.
Speaker Change: and the places that we're a little bit on our heels, we had a retrench.
and we got a sub segment and we got to get to places where we can win. And so we've got to be very thoughtful. I mean this again, one of the most exciting things about this business in the US and in Europe is that this is a local business.
I mean this is a very, very local business which actually then it ends up looking a lot more like what I would like to add to I-Dex, right, which is you can be highly decentralized. You can build strategies that are around working with local customers because...
When you think about the local businesses, is that the overlay of that is there tend to be very specific market segments that are in those locations, right? There's general market segments and then their specific market segments.
and the Performatory Requirements of those Markly segments are different. And so while the general strategies are the same.
Speaker Change: When you think about low-cost position, when you think about service experts, when you think about investing in strength locally.
How has actually executed based on the needs of the market is very different. And we should be different. We should allow our people to be entrepreneurial and allow them to drive that differentiation in the market.
Speaker Change: Thank you.
Speaker Change: We talked a lot about early wins and stuff you're encouraged by and maybe this is just the...
Speaker Change: I'm always cautious or if I lean that way, I'm sure I'm sure
Are there examples or things when you've walked across the organization and have been meeting with looking at assets and things like that where, I don't want to say, stub your toe, but it's a lot more of your attention or things that could trip us up.
Yeah, there are a few things that I look at that I know we've got a, they are potential bottlenecks a roadblock to success, I think that's what you're getting it. So again, one of the reasons I'll be early focused on Memphis.
Speaker Change: and this is no one's fault. I can be clear. The people who live and work here at Memphis are working their tails off and they're doing exactly what they're being asked to do and they're trying to do with excellence.
But the bottom line is we create a matrix structure that's really, really, really hard to work through. That's what we had. It makes it very complicated. It makes it difficult to understand what the priorities are and who your boss is.
and the other day the boss is the customer.
Speaker Change: Right to cut to her is the boss.
and we need to be aligned to the customer. Not to the CEO, not to the board of directors, not to you folks, the investor's sorry.
Speaker Change: but it's two customers.
and we need to be alive there and you work.
and so the reason for the early focus around that is working through that. The reason I mention this is that I am not a polyana here, just because we've made the announcements and we've made the structural changes.
Speaker Change: People are used to decades of work.
and there's a lot of institutional memory. We have to change how we actually work.
and that is a potential assembly block, is that we don't change how it worked.
Speaker Change: and one of the reasons of bringing the strategy to employment process in and deploying 8020.
and every single function. And I'll give it a goofy example of this.
Our earnings prep.
Right? So we 80-20 are earning to prep. I don't even guess how much time we took out of earnings for a 50-60%. You know, just of the prep, you know, because frankly guys, we were trying to answer every potential question that could ever come out of anything you would ever ask. Well,
Speaker Change: We're not going to let us. And so, let's get to the 80% let's get to the things that really matter. We know the general questions you guys are going to work on.
and let's get answers to that with excellence. And I know that sounds like a goofy example, but the downstream work that gets caused by stuff like that, things like how we do capital, things like how we do budgets, those things map, and so we have to change how those things happen.
and let's remember four weeks ago, say we're 2,600 people who you would define as working in the corporate sector. That's what you would have defined as a corporate center. Today it's 226.
Right? That doesn't mean all those people went away, that is not what happened. You saw the number of people that we announced that are leaving the organization. And again, we're doing everything to make sure that those folks land in a good place on their feet.
Speaker Change: But the reality is that we don't need 2,600 people in the center. We need 226 at the center because we did a zero up and that's what we need. We need to be excellent at the functions of running a public corporate company.
Everybody else is in the business, so everybody else is now aligned with the boss and the boss is the customer.
Speaker Change: Thank you for that.
Speaker Change: Awesome.
and down now from the call back over to Andy Silvernail for any closing comments.
Well, I want to thank all of you for taking your time and spending your time listening today to our journey. Again, just a tremendous amount of work that has gone in in the last six months. I'm incredibly proud of this team for all they've done.
Also, let's remember that organizations are made of people.
and the things that we're doing are tough. We are having to do the tough stuff so we can get to the good stuff.
and those that means that people are impacted and I'm really mindful about that and we are going to move with pace. We are going to move with excellence.
Speaker Change: We are going to do the right things and even though it's difficult we are doing the right things and we're doing the right things because the goal is to build a great organization that delivers for our customers
It delivers for our owners, and when that happens, we deliver for our people.
Speaker Change: and so as we move through this, and turn this into something very special. We're going to do it through our people and I'm proud to be part of this team, I'm proud of what we have here and I feel great about the direction we're heading. So thank you very much.
Once again, we'd like to thank you for participating in International Paper's 3rd Quarter 2020 for earnings call. You may now disconnect.