International Paper Company (IP) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Strong Financial Foundation: International Paper has a solid financial base, which provides significant freedom for value creation.
• Talented and Committed Team: The company boasts a dedicated and skilled workforce eager for change and improvement.
• North American Packaging Franchise: This segment is highly valuable with considerable upside potential, underpinned by a right strategy.
• 80/20 Operating System: Embracing this system is expected to drive significant results through focusing on customers, products, and resources that promote profitable growth.
• Potential to Double EBITDA: IP aims to deliver $4 billion of EBITDA in a mid-cycle environment, focusing on optimizing cost structure and investing in reliability, productivity, and commercial capabilities.

Pessimistic Highlights

• Underperformance on Key Metrics: Over the past decade, International Paper has seen a decline in sales, margin, and profitability, with return on invested capital also trending negatively.
• Capital Allocation Issues: Past decisions on capital and resource allocation have not yielded the expected returns, particularly in dividends, share repurchases, acquisitions, and CapEx.
• Underinvestment in Key Areas: There has been a lack of investment in box system maintenance and repair, affecting operational reliability and customer satisfaction.
• Market Share Loss: Due to underinvestment and reliability issues, IP has lost market share, which is expected to continue in the near term.

Company Outlook

• Near-Term Challenges: Performance is expected to be impacted by lower volumes and higher mill outage expenses in the coming quarters.
• Focus on 80/20 Methodology: IP is committed to applying this approach across the company to simplify operations, focus on profitable segments, and improve overall profitability.
• Investment in Reliability and Productivity: The company plans to allocate capital towards improving reliability in box plants and mills, aiming for long-term performance and cost advantage.

Q & A Highlights

• Q: Can you provide more color on the 80/20 and box strategy? (Michael Roxland, Truist Securities)

  A: The 80/20 approach will not necessarily lead to exiting business but will focus on aligning resources and improving profitability by understanding customer and product segments better.

• Q: How will 80/20 be deployed with DS Smith, considering it adds complexity? (Michael Roxland, Truist Securities)

  A: DS Smith will be treated as its own platform in Europe, with integration focused on aligning with IP's strategy without overburdening with unnecessary administrative costs.

• Q: Regarding the reliability spending increase, is this a short surge or part of an ongoing run rate? (Charlie Muir-Sands, BNP Paribas)

  A: A significant portion of the increase is tied to reliability, with the expectation of continued spending over the next few quarters to achieve sustainable reliability.

• Q: How does the go-to-market strategy impact volume and customer retention? (Charlie Muir-Sands, BNP Paribas)

  A: The strategy is on track, with about 75% of contractual deals aligned with expectations. The focus is on improving margins and mix over the long term, despite short-term volume impacts.

• Q: Can you share expectations for IP's box shipments relative to the industry? (Mark Weintraub, Seaport Research Partners)

  A: Due to legal restrictions related to the DS Smith acquisition, specific forecasts beyond the third quarter cannot be provided. The focus is on aligning with market trends and improving competitive positioning.

• Q: Does the $4 billion EBITDA target include DS Smith's EBITDA? (Gaurav Jain, Barclays)

  A: No, the target does not include DS Smith's EBITDA and is focused on the current IP portfolio.

• Q: Are there plans for additional capacity adjustments? (Gabe Hajde, Wells Fargo Securities)

  A: Adjusting capacity to match demand and opportunity is expected, with a focus on optimizing the overall cost structure.

• Q: How is the internal buy-in for the new strategic direction? (Philip Ng, Jefferies)

  A: The internal team is highly engaged and supportive of the new strategic direction, with a focus on improving reliability and aligning resources for profitable growth.

• Q: What is the timeline for achieving the $4 billion EBITDA target? (Matthew McKellar, RBC)

  A: Specific timelines cannot be provided due to legal restrictions related to the DS Smith acquisition, but the target is not considered long-term and is within a mid-cycle environment.