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    International Paper Co (IP)

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    Business Description

    International Paper (IP) is a global producer of renewable fiber-based packaging and pulp products, with operations spanning North America, Latin America, Europe, and North Africa . The company primarily operates in two business segments: Industrial Packaging and Global Cellulose Fibers . They sell fiber-based packaging solutions and cellulose fibers used in various products, including diapers, towels, and personal care items .

    1. Industrial Packaging - Creates fiber-based packaging solutions, including linerboard, medium, whitetop, recycled linerboard, recycled medium, and saturating kraft. A significant portion of production is converted into corrugated packaging and other packaging products, with operations mainly in North America and EMEA.

    2. Global Cellulose Fibers - Produces cellulose fibers for products such as diapers, towels, tissue products, and other personal care items. Also includes specialty pulps for textiles and construction materials.

    Q2 2024 Summary

    Initial Price$38.92April 1, 2024
    Final Price$43.34July 1, 2024
    Price Change$4.42
    % Change+11.36%

    What went well

    • International Paper is implementing the 80/20 operating system under new CEO Andy Silvernail, aiming to deliver significant improvements in profitability and customer focus. Silvernail previously delivered over 500% total shareholder return at IDEX Corporation using this methodology.
    • The company sees potential to achieve $4 billion EBITDA in a mid-cycle environment by optimizing cost structure, investing in reliability and productivity, and enhancing commercial capabilities.
    • There is strong internal buy-in and capable teams committed to executing the strategic changes, with a focus on reliability and customer satisfaction to drive growth and profitability.

    What went wrong

    • International Paper expects continued volume declines in box shipments due to its go-to-market strategy adjustments and lingering issues with reliability. Management indicates that the company's performance will be "bumpy" over the next 3 or 4 quarters, making it hard to predict short-term results. This suggests that earnings may be under pressure in the near term. , , ,
    • The company's investments in reliability and implementation of the 80/20 strategy will take time to yield benefits. Management acknowledges that there will be a drag in the next few quarters due to these investments, potentially impacting profitability in the short term. ,
    • There is an expectation that International Paper may reduce capacity as part of its 80/20 operating system. Reducing capacity could lead to additional restructuring costs and potential market disruptions, which might not be favorable in the current environment where capacity reductions are not needed.

    Q&A Summary

    1. $4 Billion EBITDA Target Timing
      Q: When will IP achieve the $4 billion EBITDA target, and what's the role of the GCF business?
      A: Management stated the $4 billion EBITDA target is a mid-cycle number that's "not forever away," though they can't specify the exact timing due to legal constraints related to the DS Smith acquisition. They clarified that the Global Cellulose Fibers (GCF) business has a very small impact on this target and is under strategic review.

    2. Excluding DS Smith from EBITDA Growth
      Q: Does the $4 billion EBITDA target include DS Smith's EBITDA?
      A: No, the $4 billion EBITDA growth target is for the current IP portfolio and does not include DS Smith's EBITDA contribution.

    3. CapEx Budgeting for EBITDA Growth
      Q: Are you properly budgeting CapEx to achieve the significant EBITDA growth?
      A: IP plans to invest between $1 billion and $1.1 billion on a normalized basis, similar to historical levels. They believe they can support the strategy within this range by reallocating resources rather than increasing overall CapEx.

    4. Potential Capacity Reductions
      Q: Will there be capacity reductions as part of the 80/20 strategy?
      A: Management indicated that matching capacity with demand is necessary and adjustments should be expected. They emphasized the need to be thoughtful and appropriate in aligning structural costs with opportunities.

    5. Short-Term Challenges and Box Volumes
      Q: Why is there significant short-term pain and decline in box volumes?
      A: The decline is due to both the go-to-market strategy and reliability issues, each contributing about 50% to the volume loss. Investments in reliability will take time to yield results, causing some choppiness in the next few quarters.

    6. Reliability Spending Impact
      Q: How does reliability spending affect costs and future performance?
      A: A significant portion of the £80 million step-up in costs is tied to reliability spending. These investments are crucial for improving capability, satisfying customer needs, and opening up capacity over the next several quarters.

    7. Integration of DS Smith with 80/20 Strategy
      Q: How will you apply the 80/20 strategy to DS Smith without adding complexity?
      A: IP plans to treat DS Smith as its own platform in Europe, integrating it in three parts: simple integration in the Americas, DS Smith integrating IP's European footprint, and careful integration at the corporate level. They aim to avoid unnecessary administrative burdens while focusing on region-specific 80/20 efforts.

    8. Cultural Reset and Internal Buy-In
      Q: Do you have internal buy-in and the right people to execute the new strategy?
      A: Management expressed high confidence in their team's capability and willingness. There's pent-up excitement and strong engagement to embrace the 80/20 methodology, with a readiness to make tough decisions and focus on winning.

    9. Infrastructure and KPIs for Capital Allocation
      Q: Is the infrastructure in place to make informed capital allocation decisions?
      A: IP is improving clarity of metrics that drive results, focusing on key performance indicators like safety, quality, on-time delivery, productivity, and profitable growth. They acknowledge the need to better align incentives and enhance sales talent to support strategic investments.

    10. Go-to-Market Strategy Outcomes
      Q: Are you confident in the payoff of the new go-to-market strategy despite market share losses?
      A: Management is tracking the strategy closely and believes they are on track with expectations. While acknowledging a lag in reliability improvements, they are focused on investing in reliability to reduce customer attrition and are aware of the challenges ahead.

    11. Box Shipment Outlook and Constraints
      Q: What is the expected outlook for IP box shipments this year?
      A: Management could not provide specific forecasts for the fourth quarter due to legal responsibilities under the UK takeover code related to the DS Smith transaction. They anticipate some choppiness and are monitoring how negotiations and market conditions play out.

    Key Metrics

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    Executive Team

    NamePositionStart DateShort Bio
    Mark S. SuttonChairman of the Board and Chief Executive OfficerNovember 1, 2014Mark S. Sutton has been the CEO since November 1, 2014, and Chairman since January 1, 2015. He joined IP in 1984 and has held various roles, including President and COO .
    Timothy S. NichollsSenior Vice President and Chief Financial OfficerJune 2018Timothy S. Nicholls has been the CFO since June 2018. He previously held the same position from 2007 to 2011 and joined IP in 1999 .
    Clay R. EllisSenior Vice President - Global Cellulose Fibers and IP AsiaJanuary 2023Clay R. Ellis has been in his current role since January 2023. He joined IP in 1992 and has held various leadership positions .
    Aimee GreggSenior Vice President, Supply Chain and Information TechnologyJanuary 2023Aimee Gregg has been in her current role since January 2023. She joined IP in 2002 and has held various roles, including Vice President and General Manager of Containerboard and Recycling .
    W. Thomas HamicSenior Vice President - North American Container and Chief Commercial OfficerJanuary 1, 2023W. Thomas Hamic has been with IP since 1991 and assumed his current role on January 1, 2023. He has held various leadership roles within the company .
    Allison B. MagnessSenior Vice President Manufacturing and Environmental Health and SafetyJanuary 2023Allison B. Magness has been in her current role since January 2023. She joined IP in 2000 and has held various positions, including Vice President of the South Area, North American Container .
    Thomas J. PlathSenior Vice President - Human Resources and Corporate AffairsJanuary 2023Thomas J. Plath has been in his current role since January 2023. He joined IP in 1991 and has held various HR roles. He will leave the company at the end of 2024 .
    James P. Royalty, Jr.Senior Vice President - Containerboard and RecyclingJanuary 2023James P. Royalty, Jr. has been in his current role since January 2023. He joined IP in 1991 and has held various roles, including Senior Vice President and President for Europe, the Middle East, Africa, and Russia .
    Joseph R. SaabSenior Vice President, General Counsel and Corporate SecretaryJuly 2022Joseph R. Saab has been in his current role since July 2022. He joined IP in 2001 and has served in various legal roles, including Associate General Counsel for Industrial Packaging .
    Ksenia N. SosninaSenior Vice President, Europe, Middle East & AfricaJuly 2023Ksenia N. Sosnina has been in her current role since July 2023. She joined IP in 2013 and previously served as CEO of the Ilim Group .
    Andrew K. SilvernailChief Executive Officer and Executive DirectorMay 1, 2024Andrew K. Silvernail became CEO effective May 1, 2024. He joined IP with over two decades of experience in leading global manufacturing and technology-based companies .
    Jamie A. BeggsIndependent DirectorMay 21, 2024Jamie A. Beggs was elected as an independent director effective May 21, 2024. She is currently the CFO of Avient Corporation and has a background in finance .
    Scott A. TozierIndependent DirectorN/AScott A. Tozier serves as an Independent Director at IP. However, the documents do not provide specific details regarding his start date in this role.
    Clinton A. Lewis, Jr.Member of the Governance CommitteeN/AClinton A. Lewis, Jr. is a member of the Governance Committee at IP. He is the CEO of AgroFresh Solutions, Inc. since April 2021 and previously held executive roles at Zoetis Inc. .

    Questions to Ask Management

    1. Given the history of underinvestment leading to cost problems and loss of market share, can you provide specific timelines and milestones for your planned investments to improve reliability and regain market share?
    2. You mentioned adopting the 80/20 operating system to drive superior results; what specific measurable targets have you set, and how will this approach address the previous challenges that the company faced?
    3. With packaging volumes continuing to lag the overall market and expected to decline in the near term, what concrete steps are you taking to reverse this trend and prevent further volume losses?
    4. Over the past decade, significant capital was allocated to dividends and share repurchases without generating the expected returns; how will your future capital allocation strategy differ to ensure value creation for shareholders?
    5. Regarding the DS Smith acquisition, how do you plan to integrate their operations effectively without adding unnecessary complexity, and what specific synergies do you expect to achieve from this acquisition?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateOctober 11, 2022
    End Date/DurationNo expiration date
    Total additional amount$3.35 billion
    Remaining authorization$2.96 billion (as of 2024-12-21)
    DetailsPart of capital allocation framework for long-term value creation

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: N/A (The documents do not provide specific guidance for Q3 2024)
    • Guidance:
      • Industrial Packaging Segment:
        • Earnings expected to decrease by approximately $160 million.
        • Price and mix to improve earnings by $60 million.
        • Volume to decrease earnings by $65 million.
        • Operations and costs to decrease earnings by $80 million.
        • Higher maintenance outage expense to decrease earnings by $44 million.
        • Higher input costs to decrease earnings by $30 million.
      • Global Cellulose Fibers Segment:
        • Price and mix to increase earnings by $10 million.
        • Volume to decrease earnings by $5 million.
        • Operations and costs to decrease earnings by $25 million.
        • Lower maintenance outage expense to increase earnings by $25 million.
        • Input costs expected to be stable .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024
    • Guidance:
      • Industrial Packaging Segment:
        • Earnings expected to decrease by approximately $160 million.
        • Price and mix to improve earnings by $60 million.
        • Volume to decrease earnings by $65 million.
        • Operations and costs to decrease earnings by $80 million.
        • Maintenance outage expense to decrease earnings by $44 million.
        • Input costs to decrease earnings by $30 million.
      • Global Cellulose Fibers Segment:
        • Earnings expected to be relatively flat.
        • Price and mix to increase earnings by $10 million.
        • Volume to decrease earnings by $5 million.
        • Operations and costs to decrease earnings by $25 million.
        • Lower maintenance outage expense to increase earnings by $25 million.
        • Input costs expected to be stable .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024
    • Guidance:
      • Corporate Expenses: Expected to be between $60 million to $80 million for the year.
      • Industrial Packaging:
        • Price and mix to improve earnings by $65 million.
        • Volume to increase earnings by $55 million.
        • Operations and cost to decrease earnings by $70 million.
        • Maintenance outage expenses to decrease earnings by $4 million.
        • Input costs expected to be stable.
      • Global Cellulose Fibers:
        • Price and mix to increase earnings by $15 million.
        • Volume expected to remain flat.
        • Operations and costs to increase earnings by $20 million.
        • Maintenance outage expense to increase earnings by $19 million.
        • Input costs expected to be stable.
      • Industry Box Demand: Expected to grow approximately 2% to 3% in 2024 .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: Q1 2024
    • Guidance:
      • Earnings Outlook: No full-year earnings outlook due to market environment.
      • Demand Trends: Packaging and fluff pulp markets expected to grow 3% year-over-year in 2024.
      • First Quarter of 2024: Expected to be an earnings trough.
      • Commercial and Operational Initiatives: Expected benefits of more than $400 million.
      • Capital Investments: Planned between $800 million and $1 billion.
      • Input Costs: Expected higher costs for OCC and general inflation.
      • First Quarter Specifics:
        • January winter freeze to impact earnings by $40 million.
        • Industrial Packaging: Price and mix flat, volume decrease by $25 million, operations and costs decrease by $30 million, maintenance outage expense decrease by $31 million, input costs decrease by $20 million.
      • Global Cellulose Fibers:
        • Price and mix to increase earnings by $5 million.
        • Operations and costs to decrease earnings by $5 million.
        • Lower maintenance outage expense to increase earnings by $16 million.
        • Higher input costs to decrease earnings by $5 million .