Q3 2025 International Paper Co Earnings Call
Speaker #3: Good morning , and thank you for standing by . Welcome to International Papers . Third quarter 2025 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 one on your telephone keypad to withdraw your question , press star one again .
Speaker #3: 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 Mandy Gilliland , senior director of investor Relations .
Speaker #3: Ma'am , the floor is yours .
Speaker #4: Thank you . Krista . Good morning and good afternoon , and thank you for joining International Paper's third quarter 2020 earnings call . Our speakers this morning are Andy , Chairman and chief Executive officer and Lance Loeffler senior vice president and chief financial officer .
Speaker #4: There is an important information at the beginning of our presentation , including certain legal disclaimers . For example , during the call , we will make forward looking statements that are subject to risks and uncertainties .
Speaker #4: These and other factors that could cause or contribute to actual results , differing materially from such forward looking statements can be found in our press releases and reports filed with the US Securities and Exchange Commission .
Speaker #4: We will also present certain non-U.S. GAAP financial information , a reconciliation of those figures to us , GAAP financial measures is available on our website beginning this quarter .
Speaker #4: Management has elected to present forward looking guidance based on adjusted EBITDA rather than adjusted Ebit . This change reflects our view that adjusted EBITDA provides a better comparative metric to use during the company's transformation .
Speaker #4: Our website also contains copies of the third quarter earnings press release and today's presentation slides . I will now turn the call over to Andy Silverdale .
While the markets are challenging, we are controlling our own destiny.
We control our customer Centric approach and that focus is working in North America. In the month of September marked. An important Milestone as we took market share and grew box shipments, that Trend will continue in the fourth quarter and 2026.
Despite software then expected market conditions, we have continued to build momentum on our transformation journey and are rapidly. Executing cost up measures that will yield additional benefits in 2026. Which I'll talk about in detail later.
In addition to our mill closures and specialty business exits, we...
Built. We still expect to close the sale of GCF by year. End pending regulatory approval.
During the balance of our time today, we'll walk through our more details, more details about our third quarter performance, our outlook for the fourth quarter, momentum into 2026 and update the targets for 2027.
Now, moving to slide 7.
Located in our overall company performance, excluding GCF our third quarter results, reflect solid progress and additional proof points, along our transformation Journey.
Third quarter revenue is slightly higher sequentially driven by continued. Strong price, realization and stable volumes.
Importantly, we delivered on our expectation of significant sequential ibaon Improvement in the quarter as a result. Our ibaa improved by 28% and our margin expanded by approximately 300 basis points,
Our adjusted ebit and EPS result included. The accelerated depreciation expense of 675 million related to our facility closures which impacted EPS by 81 cents.
For the quarter, increased sequentially to 150 million, primarily driven by strong growth, and operating cash flow. Despite of approximately 60 million dollars of direct cash costs related to our transformation.
The strength of our balance sheet allows us to invest and position ourselves to drive sustainable profitable growth.
I'm now on slide 8.
Sequentially. We saw a significant Improvement in ibida, this quarter of approximately 190 million dollars for IPs continuing operations.
with the GCF business included, we achieved more than a billion dollars of eidon in the quarter in line with our expectations
I'd like to take a moment now to acknowledge the entire GCF team for their contributions and their hard work demonstrated throughout this transition.
We wish them continued success as they team up with American industrial partners.
Now, I'll turn it over to Lance for a few additional details. Thanks Andy. Still on slide 8. Let me touch on a few housekeeping items related to GCF.
First, we've recast this year and the prior 2 years of financials, to reflect GCF. Moving to discontinued operations.
Second we've identified approximately 60 million dollars in annual stranded overhead costs, which we have reallocated to the corporate line throughout 2025.
A significant portion of these costs will be covered by our transition service agreement following the close.
As a TSA winds down, any residual stranded costs will be eliminated.
Third with the signed transaction. We've written down the GCF business to fair market value and the associated impairment of approximately 1 billion dollars is reflected in the discontinued operations line this quarter.
Metrics and maintain a strong investment grade rating.
Turning to slide 9 and our packaging Solutions, North America, third quarter results.
As a reminder, we we are using adjusted Eva do for our bridges as a better comparative metric during the company's transformation.
Looking at the data sequentially price and mix in the third quarter was higher by 28 million, primarily due to strong price, realization from prior price index movement.
Volumes were relatively stable in the third quarter.
And operations and costs were 49 million favorable.
Primarily driven by the non-repetitive, second-quarter items as we discussed on the last call and the impact of strategic cost-out initiatives.
Plan maintenance outages resulted in 86 million of lower cost than the third quarter.
In order to accelerate our mil footprint, actions we adjusted our outage schedule, accordingly.
Going forward, we will continue to optimize planned outages to align with demand and balance our Network.
Input costs were 27 million in favorable for the quarter due to higher energy costs. Including the incremental costs from the natural gas curtailment that continues at our Valiant Mill.
All of this leads to an adjusted Eva for North America of 655 million.
Following the bridges. I'd like to note our depreciation expense in the third quarter was 831 million, which includes the accelerated depreciation. Expense of 619 million associated with the closure of our Savannah, Riceboro and Red River Mills.
Turning to slide 10. Let me take a moment to put the trajectory of North American Business into prospective.
As mentioned on our last call, we finished the second quarter with a gap to Industry around -4%.
But expected to close our Gap by the end of this year.
Although industry numbers will not be published until tomorrow. We believe that we will be in line or above industry growth rates in the third quarter.
Importantly, we exited the third quarter with volumes up 1% year-over-year in September, and we are seeing that trend reinforced in October.
This gives us confidence in market, share gains in the fourth quarter.
As you can see, in 2024 of our volume trajectory versus the industry was a direct result of strategic actions. We took to renegotiate, low margin contracts.
While this had a significant impact on our volumes, it allowed us to shed less desirable business and refocus our capacity and commercial efforts on higher value, more profitable businesses.
You can see from the benefits of these changes, starting to take effect in 2025, where we have closed the Gap to Market and expect to have above market performance in the fourth quarter and 2026.
The current trajectory is consistent with our expectations and further affirms our strategy is working.
Turning to slide 11. Let me provide some detail, on our fourth quarter, packaging Solutions, North America Outlook.
Taking a look at volume, we expect industry demand to remain relatively stable in the fourth quarter.
However, our Outlook of an 82 million decline includes approximately 60 million of unfavorable commercial impact associated with the exiting of the 2 Straight, non-strategic, excuse me, export and Specialty markets businesses.
In addition, there are 3 less shipping days to quenchy, which we anticipate will be partially offset by the benefit of strategic customer wins and stronger seasonal volumes.
We expect operations costs. We expect operations and costs to be favorable by 44 million in the fourth quarter.
Primarily due to the $60 million of cost out benefit.
From Mill closures tied to the exit of the non-strategic export and Specialty markets.
This benefit is partially offset by seasonally higher, labor costs and reliability, spend aligned with our planned outages.
So just to be clear, the $60 million benefit, and opiates and costs related to the mill closures in the quarter.
Sets the 60 million of negative commercial impact in volume.
The fourth quarter will also include higher maintenance, outages sequentially as planned.
All in our fourth quarter, outlook for North America is approximately 600 million dollars of Ava.
Now, moving to slide 12.
Let me provide you with more details of our commercial and cost out Improvement.
This bridge reflects the expected benefits that we are realizing in the second half of 2025.
From a commercial perspective, the benefit from the February price increase will continue to ramp throughout the year as we roll out, our Lighthouse model more broadly. We expect more wins with strategic customers, both nationally and locally.
On the cost front, the evaa Improvement throughout 2025, is primarily driven by corporate overhead. Structural changes and the closure of the Red River Mill.
These actions taken earlier in the year continued to flow through in the second half and into 2026.
This quarter, we also announced the closure of Savannah and Riceboro Mills.
As I mentioned on the last line, the reduction in fixed costs favorable to Eva is offset entirely by the commercial margin loss from exiting saturated craft and low-margin export markets.
Both of these Mills had significant near-term, Capital requirements, and did not return their cost of capital through the cycle.
By taking these strategic actions, this Capital will be redeployed for stronger returns within the business.
Let me add some context here.
In light of the more challenged demand environment, we are accelerating our cost out of actions.
All these are difficult decisions. They are the right thing for the long-term success of the business.
This has been an active quarter and I want to speak to several decisions.
In North America, Lance just walked you through the mill closures announced in August, which ceased operation last month.
Earlier this month, we also agreed to sell our bag business.
And just last week we executed the decision to Outsource a large portion of our North American IT service and support functions.
A strategic move toward better scalability, cost efficiency and positioning it and our businesses to deliver operational and customer excellence.
We're grateful to all employees affected by these actions. Thank you for all of your contributions, and we wish you very well in the future.
Now let me hand it back to Lance to walk. You through a Mia's third quarter results. Thanks Andy.
so now turning to slide 13 in our packaging Solutions, Mia third quarter results,
While we continue to see soft demand in a Mia, our business grew ibaa and expanded margin sequentially.
While price and mix contributed 13 million of improvement in the third quarter. This was below our expectations.
primarily due to recent downward price index movement,
Volume was also lower than expected in the third quarter which we believe resulted from overall Market softness and D stocking in anticipation of paper price, declines.
Operations and costs were unfavorable by million dollars, primarily due to the pricing impact on the value of our inventory.
As a result of the paper price decline, we experienced lower, fiber costs of 19 million in the third quarter.
All of which resulted in third quarter adjusted, evida for Amia of 209 million.
Turning to slide 14, I'd like to discuss our fourth quarter outlook for packaging Solutions, Amia.
Price and mix are expected to improve by $12 million next quarter, primarily driven by continued box price realization due to the flow-through and timing of prior price index movement.
Turning to volume, we expect an increase of 12 million in the fourth quarter, based on improved seasonality heading into the holidays and the start of the Centrist fruit season in Morocco.
In addition, we expect operations and costs to be 24 million unfavorable primarily due to increase, cost related to the seasonally higher volume.
Finally, we expect favorable fiber costs to provide a million dollar benefit in the fourth quarter.
All in our fourth quarter, evaa outlook for me as approximately 230 million.
As I turn to slide 15 and we discussed in North America, we are showing a bridge for emia. Similarly, that reflects the 80/20 progress and the anticipated ibaa benefits. We expect to realize in the second half of this year.
For our commercial initiatives building towards our 25 apit targets. We previously, identified uplifts uplift from prior price, index moves.
Since then, the European market has been challenged by demand softness, and there have been several price index decreases, offsetting that original gain.
Our current view includes known adjustments to the paper Price Index.
As a result of the challenging macro and V environment in Amia, we are taking action to accelerate our cost-out initiatives.
Last quarter, we announced a proposal to D layer and remove the regional overhead structure in Europe as well as consolidate from 13 to 7 Sub regions.
Consultation on this reorganization is progressing with an anticipated Financial benefit occurring in 2026.
Finally, we are launching our Lighthouse pilots in Spain in the UK, similar to the model. We rolled out in the US with plans to expand across AMA next year.
I would also note that the input costs and Other Bar includes the additional month of Dia Smith and favorable energy costs offset by inflation.
Obviously Amia is not the position we expected this year.
While we have significantly improved our strategic positioning and competitive strength, Market softness and negative price movements have made the start to the Dio Smith acquisition challenging
That said, we have an aggressive roadmap to improve profitability invest in our strategic pillars and position the business for long-term success.
Now, let me turn it back over to Andy.
Thanks Lance. I'm on flight 16.
As we look ahead to 2026, we'll provide fully your guidance on our next call at the end of January.
The numbers on this slide show a clear line of sight to the additional benefit of actions we have announced in 2025, which equates to $ million of incremental adjusted EBITDA in 2026.
The majority of the benefits already executed come from cost actions.
We will see the impact from our footprint. Footprint optimization distribution overhead and sourcing initiatives is be realized the full benefit of our 2025 actions with approximately 500 million dollars of cost carryover into 2026.
We will also see incremental margin gains from known strategic commercial, winds in North America and Amia partially offset by exiting the non-strategic businesses related to Savannah and Riceboro closures.
We have not included in this analysis additional upside potential for market. Growth price and future cost actions including productivity as we drive improvements in our North American Mill system.
Collectively the actions we have already executed and actions. We will take going forward, our foundational to our controlling, and shaping, our future performance in a dynamic Market environment.
I'm on flight 17.
As we finalize 2025, I want to share with you our updated transformation targets.
There are a few key points.
First, our execution is on track. We have taken decisive action in North America and we are accelerating our execution in Amia.
Second Market, headwinds throughout 2025 will likely persist into 2026.
The South Market has caused more than 500 million in profit, this year alone.
importantly The Profit opportunity remains it is simply going to take a year longer to achieve, we expect to capture the full Opportunity by 2028
Third. Do the impact of the Market's softness. We are just in our targets for 2025 and 2027 compared to what we outlined at our investor day. In March. Again, we'll offer full guidance for 2026 in January.
With the market softness. Continuing in North, American Amia, our revised full year 2025 2025 targets. Our 24 billion dollars of net sales. Adjusted Eva of 3 billion and 3 cash flow of negative 100 to 300 million
Our long-term Ambitions remain IP has the ability to deliver on the targets. We laid out at investor day in the medium term.
However, the softer market this year and into 2026 has delayed our progress.
we can deliver 5 billion of ebita in 2027 and continued to accelerate our progress thereafter.
With our improving performance, cash on hand and strong balance sheet, we will continue to invest aggressively in our transformation.
I'm excited for the future as we retool International Paper through 8020 and our strategic pillars.
The team is doing y's work across the company. We are committed to delivering on our trans transformation plan.
Before we move to Q&A, I want to thank our IP team. Our people are working tirelessly to win together. We are an important journey to realize our potential as the market leader, employer of choice and value, creator for customers and shareholders.
Now operator, let's open it up to questions.
Our first question comes from the line of Mark, Winrow with Seaport research Partners. Please go ahead. Thank you for uh, congrats progress in in a tough environment. Um, thank you Mark. The kind of first question for me. I I some and I I heard Lance's um, explanation in terms of kind of the opportunities in in the uh but 1 thing, I'm just trying to really understand is the difference between what you're going to be doing in in Mia versus North America and and sort of 2 pointed or 2 points on that 1. Um, so there was a lot of opportunity in North America to take out excess capacity that had developed in the system and and you basically didn't have to walk away from any business. So there wasn't the negative commercial impact that says related with Savannah for a lot of the stuff done earlier. Are there those types of opportunities in Mia or is it more the second type where uh you know it's going to be improvement over time. Tough decisions being made and then
Second, um, in North America. There also had been commercial decisions, made, you know, a few years prior that had had hurt. And essentially, you're able to make changes and, and we've seen lots of benefits from that are there, things like that in a Mia 2 or or, or is that how how is the commercial opportunity in a Mia different from North America?
Those are both great questions. Mark, thank you. So on, on the cost front, it is a little bit different, right? We don't have the same kind of magnitude of excess uh mil capacity or paper capacity uh that we had in North America. Um,
That said there's more capacity um out in the field, as you think about the Box system and underutilization in the Box system, we did not have a ton of underutilized um uh uh, capacity in the Box system per se. We certainly found it. Uh, as we have implemented, the lighthouses
And so, those two things, um,
Were true in North America and Europe. We we definitely have xxxs box capacity um as we look at the European footprint. And then on the middle side, what we have is we have a a pretty considerable amount of our capacity that isn't going into the box business and uh and so we have to really look at the economics around that and make really good choices.
uh 1 of the things that's different in Europe um than in North America is that complexity so where we found a lot of complexity in North America was that the Corporate Center as you kind of Define it so we call it the the Memphis, you know, Corporate Center
And that really then bled into the field that added complexity from a product from a customer standpoint policies, procedures investment, slow, investment, those sorts of things.
That all still exists very similarly in Europe. Mark, the difference is it sits kind of in the above country structure. There's a very complex above country structure that we talked about last quarter. Lance talked about again, this quarter that we've already announced and we're in consultation, um, to address
And so, what I would say is on a proportional basis that the cost opportunity is is is as large or larger frankly. Um, it when you just look at the cost structure, um, the the difference are a little bit in the buckets that we find. My answer is something you want to add you got. Okay. Excellent Mark. Does that answer that question for you? Yeah. No that that's super helpful and then just 1 1 other um, follow up and and and Parks I'm getting this asked from some investors wanting me to ask it so I'm going to going to ask them and their behalf is um in in the bridging to 27. Uh, so I I guess we're kind of starting. If we, we need like another 1.4 billion if we have, like the 3.6 billion run rate already identified, um, is is and how how much of that uh would be cost, takeout commercial, and does commercial have to include some price. Now that prices have gone down in Europe or or how to how to think about that part of the equation.
Ashley well, Mark, first I realized, I didn't answer your second question. So let me let me get to that. So on the commercial decisions, there are not those same magnitude of commercial decisions that have to be made in in Europe, right? So the issue that we had in North America is that we had we had priced a number of contracts, you know, dramatically under underneath the market. Um, and and is
You saw the different pieces. We reversed that.
um, both in terms of the, the the
Capturing the margin. And now when the market share, which I think is very important uh, in Europe. Um, we have some commercial challenges in Europe, but it's more of actually focusing. The resource. We we have an
On those large key customers that we call our ads customers. So that, um,
So uh Mark I'm sorry remind me of the question. You asked before that of the 1.4
How much is... how much is cost and how much is... is?
Commercial. Yeah. So so of that Mark it's on a net basis. It's about 50/50 on on a growth spaces as you'd imagine, it's a it's more cost because you got an inflation.
Right? So, um, and and to your point, yes, there is some price baked into that. Um, as we have said all along, we have an expectation that we would get to mid-cycle pricing in North America, um, by 20207, we still believe that to be true. Um, that's probably I'm guessing 1 price rev away. Um, and and and I would guess in, if you receive it Improvement in the US market, that's probably, um, likely. Um, we don't have that built into as you saw in our in our Bridge of 2026. We specifically didn't talk about benefits from market growth from price, um, or from future actions that we haven't executed yet. So we don't have any of that baked into that 3.6 billion. Um, that I just outlined to get to the, to the 5. Yes, we would expect that and we would expect a modest Rebound in Europe. Um, and uh, and and, and you see that being tested constantly, right? You've seen that be tested 2 or 3 times this year. Um,
Retracted a little bit. Um you know look about the bottom 25% of paper producers in Europe are in a very very tough position right now.
All right, on a cash basis. They're in a very tough position. Uh, I'm, I'm not, uh, foolish enough to believe that there's going to be some kind of mass decision making to take out capacity. I I, you know, you see a lot of uh, resilience in terms of Holding On by privately held long-term family companies. And so
Uh, I'm not looking for a miracle there and we should not, we should be executing as we can. We would expect, however, modest price Improvement, uh, over that, uh, time frame.
Super, I really appreciate that. Thorough and clear response. Thank you. Thanks, Mark.
Our next question is going to come from the line of Matthew McKellar with RBC Capital markets, please go ahead.
Hi. Thanks very much for uh taking my questions. Um you bet to follow up on really the other side of that. Excuse me. Uh, North American box, shipments, coping positive September seemingly again in October is quite positive. Um, you made the comment that you expect above market performance in Q4 in 2026.
Could you maybe refresh us what kind of volume growth and volume performance versus Market? You've assumed in getting to the 2027 targets.
Pretty soft Market. Yeah, right. So so our assumptions um going into this year were plus 1 to 1 5 in the US. We had more robust assumptions coming in Europe which were disappointing. So far as we look forward, our expectation would be 1 to 1 and a half in North America and and 1 to 2 in Europe, uh, over time, as you know, Europe has a stronger, secular Trend around moving from other materials plastic as an example to uh to fiber and a stronger consumer component related to that. So so that's why you've seen kind of stronger growth over time in the European market. We would expect those Trends to continue.
Very importantly when when we sat and talked about um, adjusting our 2027 Target uh and and and we all recognize that, that that we've gotten some questions already on. Hey, why did you do that? Now, it just was obvious. Yeah, it was, it was obvious that the 500 million dollars that we've lost this year. Um, from the combination of volume and price.
Unless you expect a major pickup in volume um to the tune of the US, you know, you'd have to you have to claw back a couple points. Additionally and the same in Europe. Unless you expect that over a 2 year period, um those benefits are going to get pushed out and so we thought it was appropriate uh to capture that and not kid ourselves or anybody else around that and focus on what we can control. And so our expectation, uh, Matt is that we're talking.
You know, the 1 to 1 and a half in North America and the 1 to 2% in Europe.
Very clear. Thanks very much. Uh and just as a second question, last for me, could you maybe just provide a bit of a perspective on the Strategic rationale and high level economics for the Riverdale conversion and what kind of returns you might be targeting with that investment. Thanks very much.
Yeah, you bet, man?
Um, but also the opportunity of Riverdale was really around moving to lightweighting as, you know, and so that's about a $250 million investment plus or minus.
and we would expect near 20% Returns on that. Um and and so uh it's a really attractive uh uh spin from uh a a business that for the long for a very very long time and indefinitely was going to be under its cost of capital to a business that has an attractive future and attractive return on Capital.
Thanks very much. I'll turn it back. Thank you.
Our next question.
Is going to come from the line of George stefos with Bank of America. Please go ahead.
Hi. Uh, thanks for taking my call. Thanks for all the details and congratulations on the progress. Um, Andy. I guess first question I had for you,
If we look at the change in the guidance for this year and we appreciate the update, um, the free cash flow number for us, uh, from what, from our vantage point moved, uh, a decent amount. I think it was a 1 to 300 million dollar
Uh, positive for the year and it's now a comparable deficit. What were the primary areas in terms of the movement? There was it just purely the cost at the actions that you took its event Etc that moved that or were there other factors there?
Um, and then related, I just want to clarification on the the answer you were giving to to Mark earlier, as we think about the commercial and the cost out targets that you initially had in your, in your March guidance. And now in the current guidance have those figures actually change or they still the same and they had 1 follow on.
To the second.
First know those.
Question, uh, on the first question on cash flow, it's it really is. It's the vastly, the slowdown in the market, right? So that 500 million. If you look at the 500 million dollars of profit, actually it's a little more than 500 million dollars.
That we would have expected to have captured if the market had been, uh, at the expectations. We talked about our investor day, uh, we'd be, we would be right on if not a little bit better on the cash flow from a cash flow perspective. So it really is attached to to the market. There are some incremental costs that are higher than we expected, because we've been more aggressive in terms of timing of some of the actions.
But it's not a giant number. It's, it's not a, it's not a huge number on a relative basis. It's, it's probably 50 to 100 million dollars more than we had expected to to, uh, um, uh, to spend
And importantly, right? We, we have a, we have a decision to make and, and, and, and I've made that decision, which is not to back away from the transformation plan, right? We have the balance sheet, we have the proceeds from GCF, we've sold a number of smaller businesses. Uh, we have the operating improvements that we have, and I think you would be a fundamental mistake to slow down our transformation by pulling back on capex.
I I really do believe that and so as long as we're in the, the, the, the area that we're in, we need to move at full speed. You're seeing exactly what happens when we get this right in. North America. It's not, it's not linear, it's not perfect. It's not going to be perfect, and it's not going to be linear.
But the level of improvement that we can drive in this business when we get the asset balance. Correct, and we are investing in the commercial front. End of this business, you can see what happens if you just kind of put North America in perspective, you go back a year ago, we were losing market share. We were getting crushed on volume. Um, and we were seeing declining incremental margins. Right? And so therefore we were cutting Capital. We were, we were in a spiral that you cannot be in a business. We have reversed that spiral in 18 months. I mean, I it's, I am incredibly proud of that team. Ibid does a 40% year-over-year through the third quarter, 40% year-over-year, and we've gone from losing market share to winning market share, and we will finish this year, or above our cost of capital in North America.
That's a pretty awesome turnaround. Uh, Europe will be harder. I'm not I'm not a Pollyanna, right? There's more hard work to be do it takes longer and it costs more. Um, but the the Playbook is the same and we're going to go after it and so we're going to stick to this. So, um, that's that's critically important.
I appreciate that. Andy I I guess.
That the new IP approach is particularly gaining traction, uh, as we're seeing it. And then the related question, bigger picture, you know, if I look at the results you've put up,
That some of your peers have put up how the narrative is—everyone is, I shouldn't say everyone, but individually each of the companies is really trying to...
produce to Market.
You're seeing your margins, do fairly. Well, you know, 17% are better.
But there's a lot of volume being sort of reintroduced back into the market.
Which means there's another portion of the market. That's really.
Not earning a very high margin, is that a comparatively good place for IP share shareholders to be in or well off to where you were back in March, a more dangerous place for IP shareholders to be, where there's a lot of players out there with a lot of volume. And and, and not necessarily a lot of margin. Thanks and good luck in the quarter.
If I miss it, I'll see you help help me out here a little bit. We know where to find you. Yes, sir.
Good place. Um so first of all we just we don't comment on competitors ever and that's just that's not a good thing to do and so we're we we won't do that. Everyone's got to make their own choices.
Um, of course.
Relative to to our perspective. Um, in terms of of rightsizing ourselves and focusing on the right kind of markets, um, we think we're getting the balance of correct there and and in terms of of the things we're trying to utilize our strengths in the marketplace. Um and and so um where we where we are winning over Market is really on select initiatives around very specific customers in those markets that we find attractive. Now you as you imagine, we touch pretty much every Market but just our, our sheer size and scale. We tend to be, I'm going to call it medium-sized to larger customers. That tends to be, but we have lots of great smaller customers all over the world, um, our strength in, in, uh, fruits and vegetables and protein as absolutely. Uh, shown up, um, and we've gotten very, um, uh, we've gotten highly engaged on strategic customers. We're doing, we're just putting in a lot more time energy, and resource, um, into
Those customers that we believe are critical to our future. And so I'm not going to go into the specifics around those, um, but it really is customer centricity. It's about putting resource on the most attractive customers. Um,
The fit our business model.
To your second question around. What's happening in the overall Marketplace? And and margin again, I'm going to speak for us and not speak for anybody else.
I, I think what's happened in the industry just collectively?
Is is at times people have chased. Um you know the incremental cash cash benefits of getting incremental volume right? So in our in our world, if you've got excess capacity in your city on fixed cost and you bring in something, you know we we sit in North America as an example. We sit at a at a 65 to 70%, you know material, what I call material margin. So think of contribution margin not including direct labor.
That means that the next Dollar in on the on our average piece of business comes in at 70 cents or the next dollar out leaves at 70 cents of profit. Either way,
And so even if a competitor picks it up at at 20 cents off, right at a 20% off and they pick up 50 and the very short term, that Sugar, High feels good, right? And you see that and you've seen that play out a lot over the years. I've looked at this, a lot of of kind of how people have played this, and what that does is it stops us and others from actually doing the right thing. And and that means that eventually that business that you bring in, has to be invested in, it's going to require capacity. It's going to require investment at some point and all of a sudden that Sugar High goes away,
And and so and then that that kind of gets passed around. What we are doing is we are having the discipline to not do do business in that way, but other people do is up to them. Um, but we are going to have, we're going to have our own discipline to go after markets that can earn an attractive return on Capital.
Importantly, in that the 3 pillars of our strategy, they really matter in concert number 1 to have an advantage cost.
A huge piece of what we're doing is driving cost out of this system. So we have an advantage cost that is not mean that we intend to sell at the lowest price. What that means is we have optionality for margin of expansion and reinvestment the competitors can't if we have a lower cost position.
Then we had last year, we changed our paper performance, we've changed our Innovation process. All of those things are around if you really driving that customer experience. That's backed up by Major improvements in quality and on-time delivery, um, that our customers are noticing.
And then finally, you know, we want to have a relative strength in the markets that matter to us and we're going to invest in that. So if we do that, that will have that will have discipline if other competitors decide that they need to get their their house in order. That's for them to decide.
Okay. Andy, I I appreciate it. We'll turn it over and uh good luck in the current quarter. Thanks.
How our next question is going to come from the line of Mike roxland with truist Securities. Please go ahead.
Yeah, thank you, Andy, Lance, Mandy, and Michelle for taking my questions, and congrats on all the progress in additional environment.
Um, you bet, thank you. Thanks, Mike, yeah. Want to follow up with you on on the closures of Riceboro and Savannah and can you help us understand the Eva dog? Benefit associated with those closures? Because when I look at previous closures, like orange, uh, and Red River, you guys called out specific either, adjusted ebit, or adjusted ebit benefits associated with those Mills, but I don't believe anything was highlighted uh, in your recent SEC, filing. For those notes. So that's that's a question. 1 and question 2 was just, you know, are you now, at a point in your us mil?
System, where you can't reallocate tons. I need to actually make mill investing Mill Investments such as what you're doing at Riverdale. And and really what I'm trying to get at is you can't reallocate the tons from from Savannah, elsewhere in your system, then then there might be a negative I thought impacting 4 q and maybe in early 2026. So any any call you can provide would be helpful.
Yeah, you bet.
We do this, and then Lance, if you want to add some color.
do.
Uh, let me talk, let me I'm going to split Savannah in Riceboro because it's, they're different. So, with Savannah was principally shipping into the export market and and what I would call the low value piece of it, which was, you know, effectively an outlet on volume.
And and and when I, when I look at that and you look at it over a cycle, we did a ton of work on this.
What you see is that at some point in the cycle, you are making positive cash, right? You're you're, you're actually creating cash, but through the cycle, you are not right. You are actually it, it it is not a, it is, it is not generating above its cost of capital. So you are destroying, we were destroying value and it required an ever increasing capital investment to go into the system.
And shouting Savannah down and an exiting. What? I'll call that low value, export Market, it's effectively a push right on a, on an EBA de basis, it's effectively a push, but very importantly, right? You're talking about something that on a, on a replacement asset value is, is north of a billion dollars, right? Maybe quite a bit north of a billion dollars. If you had to build that Mill from scratch, you would never build that Mill from scratch to service that market, right? You'd never do that and so on an roic basis it's a huge win. However you do have that Sugar High comment that I just mentioned a moment ago that's part of the thing that you get trapped in right. You get trapped in that when the export Market gets hot like a little bit like I remember last year we had a few months where it was really good, it feels great.
And then when it comes off, you really hate it. And so and you get caught in that trap. And then you just say, no, we have to look at this from a long term return on investment. What's the right thing to do for for Capital employed. And so that that trade that I talked about with Riverdale is a really, really important trade and those are the kinds of decisions that we're making throughout the company.
Right. That's really important here. And I know,
How many moving parts are in this? And the transformations again, they're not cleaned.
But that's the kind of stuff that we're doing to drive this business. Riceboro is different. Riceboro was a was a mill that simply was never going to have the cost position um to compete and and and so it made sense to to move that volume to other Mills. Um, and so you know that that's modesty positive. But to be clear, that's a very small meal.
Gotcha. And and now you know Andy you are now it's very helpful. Just are you at out a point in your us Mill system though where you can't reallocate tons and you need to make, you actually need to make no Investments such as what you're doing at Riverdale.
Yeah. Yeah.
In terms of are we going to take more capacity out? Um not not in the near future, that's for sure. Um the if you look at the drive now you've got a few things that are real. We're very focused on in the mill system.
Of investment over 10 years.
And we started this last year, and we're going to keep going. That's why I made the comment on sticking to the strategy.
If we invest aggressively in that Mill system, we can capture a huge chunk of that kind of 400 million dollars. That I think is, is, is in that. That's kind of, you know. It's it's a, it's, it's waste in the system that when the Mills are running. Well, you can, you can get a huge chunk of that 400 million, you're not going to get all of it. There's always going to be things like the value in gas situation. It it's stinks and you hate to have it. It's taken way longer to address than we thought it would. Those things are going to happen in these big complex systems. Um,
But what you shouldn't have are things that are breakdowns and issues from maintenance that are being deferred. And I think our investments, we can go and capture a whole bunch of those, as you know, right? Those take time; you have to invest, and they take time, but over the next couple of years, we should be able to get the vast majority of that to our bottom line.
The second part of that I think is very important is the reinvestment in ongoing productivity. If you look at the last 10 years in our business,
And you are looking for any kind of what I'd call net productivity. It hasn't been there. As a matter of fact, it's gone the other way.
And we all know the math around that if you can get um if you can if the market is growing in that 1 to 1 and a half percent range and you can get modest market share gains over time. That's good if you can get that plus productivity over time
You knock the socks off.
And and so what we need to do is get that productivity Engine moving um and and and we know how to do that. It's just a matter of it is going to take some time. So as those 2 pieces together,
Yeah thank you. And this 1 1 quick 1. Um just you just mentioned accelerating cost actions in North America. You um, you sold the the bags of business. You mentioned, uh, just now. Outsourcing a large portion of your it support. Can you comment on the the EBA savings you expect to achieve from those moves and are there similar types of actions? You could potentially take in North America if the market remains challenging as you sort of indicated it would in 2026 thanks again. Yeah, we we've captured those in our in the numbers that we that we laid out. So if you look at the bridge,
Most of that.
Talked about will be realized most of it will be realized in 26.66. Yeah, that's there will be a tale of some right there will be some tail that will roll to 2027.
So, all of the different things, the the, the mill closures, the it, um, Etc. Um, those are in that bridge that I, that I put out for the most part. It's, it's probably, uh, a 3/4 or more, uh, that are in that in that bridge. And so you'll get a little, you'll get, you know, 20 25% that will roll over um into 2027, somewhere in that, in that, in that neighborhood. Um, in terms of of future actions, um, we still have a long way to go, right. We know that. Um, but, but in terms of kind of the the, the big structural stuff in North America, um, we we've got we've gotten after an awful lot of it and now, we have to drive those things to resolution. We've got to go after the cost structure in the mill system. There's still more over ahead, um, to address, and then obviously, we're just starting the journey in Europe.
Thank you very much.
Thank you.
Our next question is going to come from the line of Anthony piton which city group, please go ahead.
Uh, good morning.
Morning, morning, good morning. Hey, just following up on Mike's question. You know, with Savannah and Riceboro closed, and let's assume Riverdale comes up, what percentage of IP containerboard production in North America will go to an IP box plant? You know, what's your integration rate going to be, and then what percentage would be, you know, exported offshore? You know, understanding like kind of bounce around a little bit, but just on a normalized basis.
Can you give us any sense there?
Yeah, it's about 90% that will be consumed in our box system, plus or minus. We have we have Partners uh in in the Box World in North America. Uh, and we'll still be, um, we still have some export that goes out and uh and the export that that we have. We like that business, it's highly strategic. It's it's profitable. It earns its cost of capital and above. Um, and um, it's an attractive piece of business and obviously our, our partners. Um, they've been long-term Partners. They're great partners, and they're going to continue to be
And the export pieces, it's like 6% to 7% somewhere in there. Yeah.
Okay, okay. Okay, no, that's very helpful. And then, I guess, just looking at the Mill system exiting the year.
Command this week or are you going to be running tight until Riverdale comes online and then just given, you know, the kind of the volatility and demand and weakness and demand. How should we think about the sort of timing of Riverdale? Is that something that could get flexed?
Sooner or later or or just any thoughts there.
Yeah, we're we're okay in terms of of our capacity utilization. So if you look at operating rates, we're we're we're okay there. Um, the you know, we are going to make sure that from a paper strategy perspective, if we get a bump up in activity, we're being very mindful of, this has been a soft Market if the market bounces back and you get a quick pop back, um our paper strategy, um we want to be smart about that. Absolutely. Um as we drive as we drive productivity into the system and and look if we're driving productivity into the system,
What that does then, that allows us to...
capture that 1 1 and a half percent growth without adding fixed cost. And that's where that magic is that that's really, really important. And so, so I'm not, I'm not up to worried about that. Um, you know, we the the plan here on Riverdale is late. Next year is is where that's really going to start, uh, being up and going and and we think that that's good timing and certainly positioned well relative to a growing segment of the marketplace.
Okay, that’s very helpful. I’ll turn it over.
Thank you, Anthony.
And our final question today comes from the line of Phil, with Jeffrey's, please go ahead.
Hey guys.
Hey, how you guys doing? Uh, Europe's clearly more challenging than expected company? In a year, I think you and your peer of both talked about perhaps 50 to 75% of the non-integrated, uh, tons in Europe are operating at uneconomic levels. Maybe even not, not even cash flow positive. Uh, I believe you're Europe business about 40 to 50%. You of the paper, you make, you're selling into the open market or you trade tons. So can you kind of, let us know if that business 1 is cash flow positive or ebita positive at current levels, is that a business you want to be in in the medium term and is there a good way to think about your unintegrated integrated business in Europe? Is there like a massive spread in terms of margins?
Yeah, good, good question. So
Specifically to to the non um internally consumed. Uh product. We're we're evaluating that whole thing. We're we're going through that right now and and uh um and and and frankly it's not even necessarily tied to the economics of it. Just tied to the economics of it because it's really thrown on the strategy, how it fits with our with our business.
Um, in terms, I mean, if you look at it right now, Europe in total is is from a cash flow basis, right is is using cash and and because of the restructuring that we're going to going to entail on it, so we do have to restructure that. So we're going to we're going to do that. Um, I I do believe, however, I know however that we have pockets of our business, both in the mil system, and in our box system that are losing money on a cash basis, there's no doubt about that. And
And so as we go through that, that has to be rectified, um, and and through commercial Andor cost actions to get to an attractive return on Capital. And so, in, in terms of the split, we haven't, we haven't talked about that, we haven't gone into that level of detail and I don't think it's good to do that. I don't think competitively it's good to share that kind of information. Um, and so so but we we know where the pockets of profit and loss are. Um, we know we have a road map that we're working on obviously anything and everything we do in Europe has to have the discipline around the consultation process. Uh and we we need to follow that appropriately. Um and so so we'll do that in all of our public comments and all of our, our of all of our private engagements.
Uh, that's helpful. And then, you know, preaching to Europe's a little newer for all of us. Lance, did you mention on the, uh, prepared member marks that, uh, you're going through a work Council process, um, in Eastern Europe, Nordic and Italy. Um, can you give a little more perspective? What what's out there in terms of potential closures? Are those box plans? Is that
Mills just kind of helped a size. How quickly could you see that in in perhaps Andy as you can accelerate this restructuring in Europe um you know how quickly you're going to move in and could we see some you know uplift uh perhaps in 2026 or just more of a 20 something event where you see the the big inflection in terms of cost health savings?
Yes, so, so Phil, we have to dance carefully on this topic, right? And the reason I say that is there is a highly defined process in Europe around consultation.
And so what that means is we're working hand in hand with the work councils uh and with The Regulators to go through that process.
Happen. That is different than the US. And so what I'll say and then Lance, you can add any color that you want is. Um, we are going to move aggressively toward right sizing, um, Europe, we we have to write as does everybody else given the market conditions? Everyone's got to make their own choices around that but the marketplace um, is is going to have to decide what they're going to do. We are going to be um aggressive about getting ourselves in the right economic position. That being said, it has to be in conjunction with the regulations and the laws and the practices in Europe.
Yeah, I don't have anything to add. I think you covered it in terms of being aggressive about the actions that we take.
Under the appropriate circumstances. Um,
Without getting wrapped around the axle. That's probably as much as we can say. Yeah, yeah. Got it but just just expect it. Phil we we're we're going to move right? The stuff that we have. We have talked about already that's in consultation. Um we're going to go through that process the right way but we know the magnitude of of what we have to address.
Okay, and, and sorry to take 1 more and, uh, something perhaps, you could talk about a little more freely, uh, good to see, uh, progress on box events. Uh, and you're calling up 1%, that's certainly appears to be outpacing the market, um, given the line of sight and perhaps in the wins you've already have uh, in North America in the Box side, is there a good way to think about you know um relative outperformance that we could?
To expect North America for you guys next year. And some of the ones you've had in terms of what type of customer makes a business.
yeah, so so so based on what we're looking at right now with known wins and losses,
We think that number is kind of 2%. Um so you you pick your market number but but we think we can outpace the market by a couple of points in 2026 in North America.
Okay. Super appreciate the color. Thank you so much.
Thanks Bill.
Thank you. I'll now turn the call.
Over to Angie silver nails for closing comments.
Well, thank you very much. Thank you everybody for, for being with us on this transformation Journey. Um, the, the, the the work, and the focus on 8020. And on the 3rd of our strategy, our critically important, and we're working it and we're working it hard. Um, delighted to see the progress in North America. Um and uh, and what that team is doing, obviously the North American team is facing headwinds that we didn't expect, um, but we're being aggressive with the realities of that. And so, so we're getting after it uh, in Europe. It's been a tough Market, no doubt about it. Right? If we look at the the both in terms of volume and price,
It's been meaningfully more difficult than we had expected, but the same thing holds true. We are moving forward with the same playbook and the same level of aggressiveness that we have in North America. We understand the challenge, and we understand the need to get that business in the right place. So I want to thank you for your support. I want to thank you for your attention. And very importantly, I want to thank the IP team for the incredible work that they're doing in North America and in AMEA. So thank you very much, everybody.
Once again, we'd like to thank you for participating in international papers, third quarter, 2025 earnings call. You may now disconnect