Ladies and gentlemen, thank you for standing by, and welcome to today's International Paper Third Quarter 2020 Earnings Day Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, you will have an opportunity to ask questions. [Operator Instructions].

I'd now turn today's conference over to Guillermo Gutierrez, Vice President Investor Relations..

Thank you, Laurie. Good morning, and thank you for joining International Paper's third quarter 2020 earnings call. Our speakers this morning are Mark Sutton, Chairman and Chief Executive Officer; and Tim Nicholls, Senior Vice President and Chief Financial Officer.

There is important information at the beginning of our presentation on Slide 2, including certain legal disclaimers. For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties including the impact of COVID-19. We will also present certain non-U.S. GAAP financial information.

A reconciliation of those figures to U.S. GAAP financial measures is available on our website. Our website also contains copies of the third quarter 2020 earnings press release and today's presentation slides.

Relative to the Ilim joint venture and Graphic Packaging investments, slide two also provides context around the financial information and statistical measures presented on those entities. I will now turn the call over to Mark Sutton..

Thank you, Guillermo, and good morning everyone. We will begin our discussion on slide 3. International Paper delivered solid results and robust cash flows in a dynamic environment. We generated $1.6 billion of free cash flow through the first three quarters as we continue to demonstrate the strength and resilience of our company.

We're on track to generate $2 billion in free cash flow this year, through our early actions and strong execution. Relative to demand, recovery trends continue to vary by business and by end user consumer segments. Demand for our corrugated packaging accelerated the third quarter and that momentum continues in the fourth quarter.

In fluff pulp as expected, we experienced seasonally lower demand and destocking across most regions. In papers, we're in an early stage of recovery as offices and school activities began to restart.

Against this backdrop, our commercial supply chain and manufacturing organizations are executing at a high level to ensure we meet our customer's changing needs, leveraging the scale and flexibility of our system and optimizing our cost.

The company's solid performance in the third quarter reinforces our financial strength and commitment to our capital allocation framework. Turning now to slide four which shows our third quarter results. Operating earnings were $0.71 per share, which included an unfavorable Ilim foreign exchange non-cash impact of $0.14 in the quarter.

Sales improved sequentially and came in benign expectations, driven by strong demand in our North American packaging business. EBITDA increased by nearly $100 million sequentially, even as planned maintenance outage expenses stepped out by about $80 million.

As already mentioned, we generated robust free cash flow in the third quarter, which continue to apply in a manner consistent with our capital allocation framework. During the third quarter, we reduced debt by about $800 million bringing year-to-date debt reduction to $1.1 billion.

Earlier this month, the Board of Directors approved the fourth quarter dividend bringing the full year optimizations for our dividend to $800 million.

Moving to slide five, as I reflect on our performance this year, it reaffirms my admiration and appreciation for our 50,000 employees worldwide, who continue to perform in a high level by taking care of each other and our customers. I'm especially grateful to our front-line teams in manufacturing and converting facilities around the world.

We remained absolutely committed to our COVID-19 principles and we'll continue to focus on what we need to do to further strengthen the company for all of our stakeholders in the short term and in the long term. Now, I'll turn it over to Tim, who will cover our business performance and our fourth quarter outlook.

Tim?.

Thank you, Mark, good morning. Moving to the quarter-over-quarter earnings page on slide six. Third quarter operating earnings were better than we expected, driven by strong commercial and operating performance, as well as outstanding cost management.

Higher volume contributed to improved fixed cost absorption in the quarter, which is captured in operations and cost. Third quarter performance also demonstrated some one-time items, which favorably impacted operations and cost. Looking at the bridge, price and mix was essentially flat.

Volume was favorable driven by strong demand for corrugated packaging in North America, and improved demand for printing papers across all regions. Operations and cost benefited from improved fixed cost absorption on higher volume.

The businesses continue to maximize job managing cost and delivered strong operational performance to mitigate the impact for gains in the quarter. As mentioned earlier, one-time items contributed favorably to operations and cost, adding at up $30 million or $0.06 per share with each business seeing about $10 billion in benefits.

As expected, maintenance outage costs were a drag in the third quarter which is our highest plant maintenance outage quarter this year. I'll remind you that in response to COVID-19, we made significant adjustments to the scope and timing of our maintenance outage plant.

We now expect the full year maintenance outage expense to be $450 million compared to $585 million in the original forecast that we shared with you at the beginning of the year. Input costs were favorable, mostly due to lower recovered fiber costs.

We did experience higher energy and distribution cost as we exited the third quarter, which we see as a positive sign of an improving economy. Operating expenses were lower than expected, benefiting from about $20 million in foreign currency adjustment.

Tax expense was lower by $0.07 per share in the third quarter, with an effective tax rate of 19% compared to 26% in the second quarter. Most of this was related to adjustments to our federal tax provision after finalizing our 2019 tax return.

Equity earnings include the noncash foreign exchange loss of $0.14 in the third quarter for Ilim as compared to a $0.09 gain in the second quarter. Turning to the segments and starting with industrial packaging on Slide 7, the business performed well, driven by strong commercial and operational performance.

Across the segment, price and mix was stable. Volume improved sequentially across all regions with strong demand in North America, where demand accelerated in the third quarter in just about every segment. We're seeing the benefits of strong at-home consumption. And we're in the early stages of recovery in food service.

We continue to see very strong double-digit growth in e-commerce with increased consumer reliance on e-commerce as a buying channel. More recently, we're seeing better performance for industrial and durable goods across a broad spectrum of the end use segments. Especially those linked with construction and home improvement.

Our export containerboard shipments were lower in the third quarter, due to the strong demand in North America and the impact of weather events. With that said, underlying demand and our export channels picked up as we entered the seasonally stronger fourth quarter. Our mills and converting facilities performed well.

We managed direct and indirect cost well, while fixed costs absorption improved on higher volume, all of which helped mitigate the impact of precautionary downtime related to the hurricanes.

Maintenance outage costs were lower than expected, as we de-sculpt and shifted some outage activity to the fourth quarter to better support customer demand in the third quarter.

Input costs were favorable driven by lower recovered fiber costs, we did see higher energy and distribution costs as we exited the third quarter, along with a sharp increase in natural gas costs from the COVID related lows as economies reopened.

Lastly, an update on Riverdale 15, the white-top wider board conversion, the ramp up is progressing, ahead of schedule and qualification activities are advancing rapidly through our box system. As a reminder, this investment benefits our box customers, who value high impact graphics and strengthens our containerboard offerings.

Moving to Slide 8, we've often talked about how we're investing to enhance our capabilities. And while that is often associated with investments we make in our mills and box systems, another important investment we're making is around innovation and enhancing customer specific solutions.

It comes back to the fundamental notion that boxes are tailored to meet each of our customer's unique needs. We're accelerating innovation to further our advantages and faster growing box segments.

We developed [ph] e-box, a software platform that enables our teams of experts to work with our e-commerce customers to determine the optimal design and suite of boxes to minimize packaging waste and reduce their freight costs.

For our protein customers, we developed a recyclable moisture barrier that allows poultry, beef and pork boxes to compete - to complete the fiber cycle. For our fresh produce customers, we provide a full-service machinery platform that's tailored to meet each customer's packaging needs.

These are just a few examples of how we provide value to our customers to ensure they have the right box with the right support services for each particular application. If we look at Slide 9 a quick update on the demand outlook for containerboard export.

Demand improved as we move through the third quarter and customer inventories are currently normal to the low side. We're seeing an expected seasonal pickup in the Mediterranean region with an especially robust citrus season in Northern Africa and a solid start in Spain.

We're also seeing a nice pickup in demand in China for industrial production recovers. And in Latin America favorable weather conditions are supported to continued solid demand for banana and pineapple boxes. Our export containerboard channels provide good insight to box demand expectations across key regions given a typical 60-day lead time.

If we turn to global cellulose fibers on Slide 10, price and mix was favorable on price flow through. Volume is stable with a mix of about 75% fluff and specialty pulp. Operations and costs were impacted by unabsorbed fixed costs, which was partially offset by about $10 million a favorable one-time items, including higher seasonal productivity sales.

Maintenance outage costs increased as planned, and input cost increased on higher wood and energy costs. Taking a closer look at fluff pulp demand in the quarter, we experienced seasonally weaker demand and destocking across most regions. This follows a rather strong pull forward in demand during the first half of the year.

Overall, demand is stable going into the fourth quarter with improved fluff demand offset by weak demand for printing and writing grades, tissue demand remains healthy.

If we turn to Slide 11, and look at Printing Papers, demand improved in just about every region from COVID restriction lows in the second quarter, but remained well below than prior year levels. Across this segment, price and mix decreased primarily due to lower export pricing in Latin America, and lower pricing in Europe.

Volume improved across all regions with year-over-year demand improving from about minus 30% in the second quarter to about minus 15% in the third quarter in our key regions. Operations and costs benefited from improved fixed cost absorption and economic downtime decreased by 225,000 tonnes sequentially across all regions.

We also benefited from about $10 million of one-time items primarily related to COVID subsidies and green energy credits in Europe. The business continues to generate meaningful cash flows by focusing on cost management and working capital. We exited the quarter with our inventories at our target range based on the current demand environment.

As we think about recovery, we saw a meaningful improvement in demand in the third quarter. We know uncertainty remains while COVID restrictions persists, however, we do expect the recovery to accelerate as economies fully reopen. Looking at the Ilim results on Slide 12. We had an equity loss of $33 million in the quarter.

This includes a non-cash foreign exchange loss on Ilim's U.S. dollar denominated net debt of which IP's after-tax portion was $55 million or $0.14 a share. Volume improved sequentially and year-over-year, driven by higher softwood pulp exports to China. However, pricing mix decreased on lower pulp pricing.

Operations for solid and maintenance outages were well executed. The third quarter was Ilim's highest maintenance outage quarter in 2020. Turning to Slide 13 we'll cover the outlook. We continue to operate in a dynamic environment with demand trends varying by business and end use customer segments.

As mentioned, demand for corrugated packaging accelerated in the third quarter, and that momentum continues in the fourth quarter. Demand for fluff pulp is normalizing following the inventory destocking which occurred in the third quarter. In printing papers, we're seeing a modest recovery although demand challenges persist.

Taking a closer look at Industrial Packaging, we expect price index to be stable. Volume is expected to decrease by $5 million, with strongbox demand mostly offsetting the impact of three less shipping days in the fourth quarter.

Operations and costs are expected to lower earnings by $50 million, including the non-repeat of one-time benefits in the third quarter. Staying with Industrial Packaging, maintenance outage expense is expected to decrease by $45 million and input costs are expected to increase by $20 million, mostly due to higher energy and transportation costs.

In Cellulose Fibers, we expect price and mix to decrease by $5 million. Volume is expected to be stable. Operations and costs are expected to lower earnings by $20 million, which again includes the non-repeat of favorable items in the third quarter.

Maintenance outage expense is expected to increase by $4 million and input costs are expected to be stable. Turning to Printing Papers, we expect price and mix to be stable. Volume is expected to improve $20 million on higher seasonal demand in Latin American.

Operations and costs are expected to lower earnings by $25 million, mostly due to the non-repeat of one-time benefits in the third quarter and higher seasonal energy cost. Maintenance outage expense is expected to decrease by $16 million and input costs are expected to increase by $5 million.

Lastly, under equity earnings, you'll see our outlook for the Ilim joint venture. Turning to slide 14, as Mark said in his opening remarks, we're on track to generate $2 billion in free cash flow in 2020.

In our first quarter earnings call, we highlighted the company's financial flexibility and some of the cash levers we had available to enhance our cash generation and what has been undoubtedly one of the most uncertain environments we faced. Given the economic uncertainty at the time, we chose to pull some of these levers including capital spending.

In addition, COVID-19 changed the way we worked in 2020 and choices were made or rather planned maintenance outages and other spending priorities, which we expect will contribute about 15% of our free cash flow this year.

Our early actions and strong execution across the company are enabling us to deliver another year of strong free cash flow generation, reflecting the resilience of International Paper. Turning to slide 15, I want to take a moment to update you on our capital allocation choices in the third quarter. Debt repayment is a priority.

During the third quarter, we reduced debt by nearly $800 million, which brings debt reduction to $1.1 billion through the third quarter. We've essentially eliminated all bond maturities through the end of 2021 and improved our maturity profile over the next decade.

I'd also note that we've reduced annual interest expense by nearly $60 million on debt reduction activity through the third quarter. You can expect additional debt reduction in the fourth quarter, with an expected debt-to-EBITDA of around three times at year end on a Moody's basis.

Returning cash to shareholders is a meaningful part of our capital allocation framework. Our Board of Directors authorized the fourth quarter dividend earlier this month. With this decision, we will have returned about $800 million to shareholders through the fourth quarter.

Looking at investments, we're on track with our $800 million capital spending target in 2020, which includes the Riverdale conversion, as well as other funding priorities to ensure we have the right capabilities in our U.S. box business.

With regard to our investment in Graphic Packaging, we received $250 million in cash in the third quarter related to the second transaction. This is the maximum amount permitted for each period under the agreement. Our ownership position is now approximately 14.8%. And with that, I'll turn it back over to Mark..

Thank you, Tim for all the detail. Look, this is our third earnings call under the realities of COVID-19.

And as I said from the outset, International Paper answered this crisis in a position of strength, it really starts with the talent and commitment of our employees, that strong position is reinforced by our capabilities to provide the best solutions for our customers and by our customers themselves.

We are partnered with many of the winning customers in multiple segments across our three businesses. And our strong positions supported by our world class manufacturing and supply chain capabilities. All of which contributed once again to our solid performance and strong cash generation in quarter.

I'm pleased with our performance and really excited about our strong outlook for the fourth quarter, and the momentum we're generating especially in our packaging business. And with that, we're ready to take your questions..

Thank you. [Operator Instructions]. Our first question comes from the line of Gabe Hajde of Wells Fargo securities..

Good morning, everyone. Hope, you and your families are doing well..

Thanks, Gabe..

First question Mark, it has to do with the Global Cellulose Fibers business. And from my perspective, quite frankly, I don't think you guys are getting much credit for it. So, I recognize that where you guys play this is somewhat of a sub segment of the larger complex.

So, I'm curious if there's something unique about kind of this cycle, outside of the obvious COVID impact that we're seeing in printing tissue in total, that is negatively impacting kind of the supply demand dynamics globally? And then relatedly, I think you guys made a management change here. And given Mr.

Hammock's background would seemingly imply more of a fixes might be commercial.

But I'm curious if there's anything on the operational side that might be contemplated, we didn't see much in the way of footprint consolidation, post warehousing?.

Those are three really good questions about our Global Cellulose fibers business, first one on the cycle, I think that there's nothing unique about this particular cycle. If you think about '18, it was at the peak of pricing, the peak of demand, '19 was a somewhat normal reset.

And then as we were turning the corner in the beginning of '20, prices were moving-up, volume was moving-up, COVID hit, temporarily that was a benefit. But now with the demand decline in printing papers, a certain amount of softwood pulp has stranded. So, there's a supply issue that's unique to this cycle, but it's really COVID related.

And it's related to the demand decline in printing papers, some of that softwood pulp is finding its way into absorbing products at the margins. And that's creating what I believe, as a temporary structural issue.

On operations, I've talked before about what the business needs to be successful post the combination of IP and warehouser, and that is, moving the mix to about 85% absorbent products, so fluff and specialties, minimal position, but a small position in market pulp, to balance the system.

And then, having the cost structure of the best mills, which tended to be some of the ones we acquired, be the cost structure of most of the mills, and some of that is going to take some investment.

We've developed some of the projects and now it's a matter of timing in those investments so, improving the mix, improving the cost structure - the manufacturing cost structure, and then operating commercially in an excellent way through the normal cyclicality.

As far as the management change, you mentioned, Tim Hammock, his background suits what the business needs right now very well. He's had tremendous success commercially in different businesses in the company.

And after we did the integration, and we put the teams together, which was done very well, he does have the right skill set for where we're going forward. So, we're excited about the role he'll play in that business. And we believe in the business long term, we made this investment.

If I take you back to the end of 2016, in order to position IP in another fiber advantaged, growth-oriented market, albeit small market, it was a play for the longer term. And I think as you think about the demand drivers for diapers, adult incontinence and the other absorbent products, it's got good fundamental demand dynamics around the world.

We have to level, set and improve our supply position, mainly in the ways that I've been described..

Thank you very much, Mark. I'll try to be brief here with the follow up as it relates to the Industrial Packaging segment. Obviously, demand has been somewhat episodic with the COVID impact. But I'm curious kind of, if you can share anything, what you're hearing from your customers in terms of inventory levels.

We're hearing that things are pretty well depleted.

And really, we're just seeing the benefits itself right now, but just curious if you have any insight there?.

And it is by segment really Gabe, a story by segment and we are seeing some very positive trends in areas that we're heard a little bit. And part of it is I think inventory depletion. So, the center - processed foods center of the grocery store has picked up very nicely. We talked a lot about e-commerce, that's up a lot, and it's staying up a lot.

We began to see some improvement as restaurants open, we have to see what that looks like as we head into the fall and winter, predictable caseload of COVID moving up and what different governments do to deal with that, but really encouraging news across the board sequentially.

But even on a year-over-year basis, the e-commerce channel has an order of magnitude different than that it has been, we think some of that will stay..

Thank you. Good luck..

Our next question comes from the line of Anthony Pettinari of Citi..

Hi. Good morning..

Good morning..

You highlighted some of the investments for customer tailored solutions for e-commerce and protein, I'm just wondering from a big picture perspective, if you can talk about the kind of returns you get from those investments? And then for the products themselves if there's a margin differential or just how you get paid for those solutions when you're on the ground with the customer?.

So the examples that Tim shared, are just a few examples of addressing the needs of our box customers. And then that flows back through our value chain all the way to the type of substrates and containerboard that we would make to make those boxes.

And if it's a capital investment, we're always looking at north of 20% returns, but some of them not capital investments, they're design investments.

And that's what we tried to highlight in this particular earnings call that the talent level of our go-to-market strategy and our designers is coming up with unique products and unique services that can run on our equipment that we have. So, the capital investment is small. Where we see the payoff is two ways.

Usually there's a margin benefit, if in fact it's a total cost of ownership, meaning it lowers the customer's cost.

And two, it positions us in a differentiated way in a very competitive market to where we grow our position with a certain customer, because we have an offering that's just enough different from the competitive set that it helps us to grow our position..

Okay, that's helpful. And then just sticking with Industrial Packaging, the containerboard price hike that's been announced I'm just wondering to the extent that you can.

If you could talk about sort of the typical timing of price increases on boxes, how much maybe using history as a guide might show up in 4Q versus 1Q versus 2Q next year?.

Yeah. Hey, Anthony, it's Tim. So, we see the following a normal path. For us, we might pick up a little bit in the fourth quarter, but it's very minimal. Every contract is different, but most of our contracts allow for a one quarter lag. And so, we start seeing the real benefits in the first quarter and then continuing on in the second, next year..

Okay, that's helpful. I'll turn it over..

Our next question comes from the line of Mark Weintraub of Seaport Global..

Your packaging, obviously, demand really seems to be picking up a lot. If we could get your quarter-to-date box shipments, that would be helpful.

And maybe even more importantly, what do you think is going on assuming that you have seen some of there's really strong pickup lately that we're hearing from others as well? And now how sustainable is it? And do you think folks are rebuilding inventories that got very low? And so to a certain extent, our - what we saw before was understated? Or is it more potentially virus getting ahead of the price increase? Any color you could give would be helpful?.

Yeah, hey, Mark its Tim. I don't think it's getting ahead of the price increase; people just don't warehouse boxes. They take up too much space. I think that some of what Mark said earlier, there is some replenishing of supply chains that's going on. But there's also the continued opening of economies as well.

And so, we've seen pickups in the third quarter, August was better than July, September was better than August, is continuing in October. Right now nearing the end of the month, where we're looking at about a 6% increase on a daily basis in our box system.

But it's really strong e-commerce that continues to grow and I think that some of these other segments starting to come back. One thing that we see a little bit of a shift just on durable goods, it looks like people are substituting travel for durable goods purchases or maybe making other trade-offs like that.

So we've seen an acceleration as we come in from the third into the fourth. If you look at the market overall on a daily basis, the market stopped a little bit over a point year-to-date. So, in an upset condition, pretty good growth and I think it look like Mark said, it'll vary by segment as we go through the fourth quarter and into next year..

Okay. And just you made that comment that export market is looking strong and general demand picking up. And one area China, you mentioned industrial getting a bit better.

But I guess one of the big questions is, how is China going to be dealing with their fiber issues with no OCC going in potentially next year? And as you look at it, could China become increasingly important buyer of Kraftliner from North America? And how important a factor could this be in the global equation?.

Well, so we - our base case is we take them at their word. And we think all imports and OCC will end then like they say it will. It'll be a fiber balance equation as you suggest. I think some of it will get satisfied by market pulp for certain end uses.

And yes, I think there could be a step up in not only Kraftliner purchases, but probably recycled pulp purchases as well. That may take a little bit of time to fully play out. And as to where it comes from, I think it's going to come from a lot of different places..

And I would just add Mark that, the highest quality of covered fiber in the world comes from the U.S. market because of the high concentration Kraftliner boxes. And while China may not take any as OCC, it will probably take some of that feedstock as a version of recycled pulp or processed one-time before it goes into China.

And in the region, there are some people doing that. And I think there'll be some people doing that from the U.S. with high quality recover fiber, minimal cost input to clean it up, roll it and then I think it probably qualifies as input fiber to China. But we'll see how that plays out.

No one knows exactly how, but the simple math says that there's a tremendous fiber need for the growing Chinese economy that'll have to come from somewhere..

Thank you..

Our next question comes from the line of Neel Kumar of Morgan Stanley..

On the Riverdale project, you mentioned the startup being ahead of schedule.

I was wondering, if you can just talk about your plan to rent in volume for deployment stronger near-term demand backdrop? And are you seeing any significant differences in the supply and demand dynamics of white-top versus tradition linerboard?.

I think on Riverdale, we were really pleased with the ramp up once we started up. So the ramp up of the startup is ahead of schedule. The project itself obviously was impacted in the final stages by trying to finish a large construction project during a pandemic.

But it's running well, the quality is really, really good, in some cases exceeding our design expectations. And we will adjust that product as we said before, that white-top liner into our system in place of some lower quality white-top we were making, and then we'll just balance the brown and white.

But we don't see any significant demand shifts right now in the need for white-top other than the growth drivers we saw when we approved the project. So we're excited about it. It's going to help our box customers. It's going to help some of our open market customers, who make their own boxes.

Some of this product goes into the premium segments, premium wines, premium beverages and there's a pretty strong demand for some of that. And probably some of its related to the way people are confined to home..

Thanks. That's helpful. And there's also an article recently about Amazon, again, looking to reduce the amount of packing and uses and some shifting towards padded mailers rather than boxes. E-commerce demand has actually been very strong this year.

But I was curious to see any evidence and mailers taking share from boxes? I mean in general, how are you thinking about the efficiency of packaging in the e-commerce channel overtime and the impact of any type of initiatives?.

So, we try to look at the solution that the customer needs, whether it's a box or a mailer, we try to obviously steer customers towards a sustainable choice which is fiber based. And we see growth in both. Mailers are used for certain type of items, where it's the better solution.

Maybe some of those items were in boxes before mailers became more effective. But we see growth - in the box segment we see growth. In the mailer segment, we participated a bit on the craft paper side of that. And when Tim talked about this e-box technology, we are proactively helping all of our e-commerce customers optimize their packaging suite.

So the right size box, if it's a box, and in many cases the box is definitely the right solution given the supply chain it's got to travel through. But if it's a piece of clothing, maybe a mailer works fine.

But we are actively working proactively to get the waist down, to make the packaging experience for our customers cost effective and for the consumer to know that they are doing something that's sustainable. If they recycle that box to 92% of more recycled, that that goes back on the screen and it's just a good overall solution to commerce.

And so, we're actively involved in that Neel and view it as a positive not a negative..

All right. Thank you..

Our next question comes from the line of Adam Josephson with KeyBanc..

Mark and Tim good morning..

Hi Adam..

Mark, just one question on the free sheet business, you took a good bit of downtime in your North American papers business this quarter, as you did last quarter.

If you assume that current demand levels stay roughly where they are, how much oversupply would you say you have? And after having just converted Riverdale, are you more inclined to potentially convert another paper machine to containerboard? Or to shot a machine if you eventually decide that you need to take more capacity actions in that business?.

Hi, Adam. That's a lot of hypotheticals in terms. We don't - well, first of all, we don't think paper demand will stay at the level of that, it will recover probably not 100% of what the COVID impact did to it, but some of it will recover as schools and offices open to some degree more than they are now. You're right.

We took Riverdale out, not knowing that this was coming, but it actually was a benefit because it reduced our supply in the face of a real big demand decline.

I've said this before and will continue to be our guiding principle, on containerboard conversions, we'll only make investments in containerboard production whether it's a conversion or a Greenfield or anything else.

Based on the box and containerboard market, we won't do that based on the issue than another product line like uncoated free sheet in this question. Sometimes the timing doesn't match up perfectly. And you don't want to make a bad decision with an asset. But that's really what would drive it.

So right now, we've got the ability, we haven't done it in a while, because we typically run the uncoated free sheet relatively full. But we have the ability to throttle that business with the same techniques we use in our containerboard business, so that we can adjust our output to the demand we have.

And obviously, we've never thought the demand was coming back, we would make some more permanent decisions than carrying the cost of the economic downtime as we call it, but we'll cross that bridge when we come to it.

But what you need to know though is the principle for making more containerboard is about making more boxes, not about another asset that needs something to do..

Sure. And I appreciate that Mark. And just one on the box business, so you have a slide in your presentation in which you compare economic indicators to box demand, obviously, the tightest correlation is with a non-durable industrial production. And as you know, CPG volumes this year have been extraordinary, because of COVID. I think P&G had 16% U.S.

sales growth, which is almost unheard of. And we've seen that all year.

So I'm just wondering, what you would extrapolate from this years' experience in terms of box demand, if anything? I mean, obviously, consumers behavior has been so unusual in so many ways that I find it hard to extrapolate much of anything into future years unless we continue to be stuck at home for years to come.

What are you extrapolating into next year from this years' experience?.

Well, a couple of things on the non-durables. I think correlation still holds. I believe box performance is outperforming non-durables, because so much of the non-durable collection of markets segments is not box intensive. Some of those non-durable items are actually down and the box intensive portions of non-durable goods is up a lot.

So, I think the correlations been a whole, I hope, and I think we're not going to be locked in our homes. So, some of this demand and channel movement will settle out. Couple of takeaways that are just sitting here today, I didn't think we've been at this long enough.

And some of our customers are saying is that some consumer behavior changes will be pretty sticky. I think people are going to eat and go out a little different. So I think some of the demand and shifts in the food channel are going to stay with us, maybe not a 100%.

And then secondly, we have a lot of first time new adopters to doing business in an e-commerce kind of way. And I think those people have had good experiences largely. And some of the retail channel will continue to be in an e-commerce kind of channel.

And for us or IP given the investments we made and the position we have, we believe that's a positive. The rest of it's tough to call. Probably it settled out to something like we had before. But given this wasn't a one month or two-month issue, I think behaviors and habits are beginning to change. And it will probably last a while..

Thank you, Mark..

Our next question comes from the line of a George Staphos of Bank of America..

Thanks for the details. Thanks for taking our question. My first question was just kind of a tag on to Adam's question.

What we've been trying to push companies on during earnings season so far is what change and behavior has occurred that we'll be sticking to use your term's mark on a going forward basis, specifically e-commerce because of COVID? And so, I don't know that you're in a position at this juncture six months into this to determine what the incremental pickup might be from this change behavior.

But if you had any initial goalposts, that your customers are sharing with you, or again if you could affirm where you think this increase in demand will be most likely to say at this new normal level? That would be great. And then I had a quick question on operations..

Well, George, as Tim said, when you take everything into account box demand in a bit of a crazy year is upper percent. The year wasn't so crazy, maybe even normal correlations are there and box demand is about the same amount or 0.5% or 1.5% the range we've seen in the last couple of years.

I think, if some of this e-commerce activity does remain and we believe it will because of what I said about first adopters and people buying things they never bought before. That tends to drive some incremental purchases in some cases.

I think the big unknown is how fast if ever do people fully returned to the way they spent money before and the things they spent money on fuel, heavy travel, the service industry, that discretionary income tends to be now flowing into consuming goods, whether it's home improvement goods, luxury items, or basic necessities of food and supplies for your home.

And that is a much more box intensive way to spend money from our perspective. And we believe that our level of that will continue well beyond when the all clear and sounded..

Understood. We'll keep evaluating. You mentioned some of the things that you're investing in earlier in the presentation.

Are there areas that you can share at this juncture, capabilities that you need to further invest in to continue to participate and lead in this new world relative to corrugated? Again, maybe it's additional printing capability, maybe it's more I don't know how the small box initiative worked on e-commerce, but maybe it's more investments like that.

Is there anything that you feel from a platform standpoint and really more on converting that you need to invest in? And then on the mill side, we've seen a dramatic drop off in demand and then a dramatic resurgence in demand. You're not alone.

Other companies have also pulled in some of their maintenance, probably because you can't get people to facilities because of COVID.

What are you doing now to make sure as especially on the mill side, to keep the reliability, you avoid unplanned outages because this is a lot of stress on a very, very capital intensive and important portion of your business?.

George, those are two great questions. Let me get the investment opportunity. We basically said it's almost all in converting, it has a lot to do with small box and e-commerce configured plants the physical profile of an e-commerce blank for a box is smaller, so most efficiently run on the right size machines.

So we've actually evolved to a percentage of our several hundred box plants are becoming e-commerce-oriented plants. And they look different.

And if we ever build a new one from the ground up, which I think we probably will, it will look different physically as well building size, and you'll have more of those located right near the fulfillment centers. And that's where our investment opportunity is. There's always an opportunity and we continue to see it to improve printing capability.

And we were investing in that. And then sometimes it's just pure capacity. We don't have enough box making capacity in a certain region of the country. And we have to add it organically or inorganically and you've seen us do it both ways.

With respect to the investment question in the mills, we are blessed to have 16 containerboard mills, now 16.5 if you take out for Riverdale. We have a big system that's flexible. It is going to be wide open sometimes, like 2018. And it'll be less than that, like it was in 2019. We're always going to try to keep that balance.

So we're going to look at it over a several year period and decide whether we have too much or not enough capacity. Investing in the reliability, you set aside the recycled mills, which don't have the complexity of a pulp mill, and a power generation unit, those are pretty easy to manage in reliability spending.

It's mostly about reliability and the paper machine. And we do that through largely non-capital investments. On the integrated mills that take in wood, make their own energy and pulpwood, that's where the big maintenance capital is and that's where the risk management is.

So we have a hierarchy process, where we - when we cut back on maintenance - we don't cut back on the maintenance, that could result in multiple days down. Usually that's in power generation, for in pulping. And so we would do that work.

And we would forego some work that's in the paper machine area that even if it failed, our teams can get it back up and running with a repair albeit may be costly, but a repair within 24 hours or so. So that's how we approach that, something that we just have a risk management framework that doesn't leave our mills subject to major large outages..

Mark, that's great. I appreciate the thoughts. Good luck in the quarter. I'll turn it over..

Thank you, George..

Our next question comes from Steve Chercover of D.A. Davidson..

Just similar to what Gabe laid off with, so you guys used to talk a lot about industry structure and behavior in the context of containerboard. And I think the results demonstrate how important that is in generating good returns. And I would also think that the structure in fluff pulp or absorb fibers is equally compelling.

So when you hit your 85-15 target mix, do you think the returns in cellulose will be similar to what you're doing and Industrial Packaging?.

Steve, I think our goal is to get the Cellulose Fibers business to the cost of capital. But the Industrial Packaging businesses probably got higher returns, and probably always will. There's a couple of differences though the market in Industrial Packaging is a lot bigger. Fluff pulp is a smaller market.

So it's residing in a very large pulp ecosystem, softwood market pulp, hardwood pulp, and then specialties at the top and pure commodities at the bottom. So it's got a lot of activity around it. So inside of that segment, the structure looks really good. But outside of the segment, there's a lot of activity. And that does play out overtime.

But our goal is to get it solidly to the cost of capital through a cycle that's part of margin on the revenue and profit side on the top. And that's part on just reducing our costs and then finally, the right mix as you mentioned, on the 85-15. We see a path to getting it there that'll correspond to some level of EBITDA.

There's opportunities for us to work on the footprint, as I think Gabe asked as well. And we have plans to do all of that..

Well, I thought that IP had evolved to the point where earning your cost of capital wasn't enough, you had to be generating in excess for it to be compelling..

Yeah. That is correct. We believe that the best value creation, if you look at S&P 500 companies that perform the best and have first quartile TSR, they tend to have a 200 basis points spread from their cost of capital. So, we did that with the entire company.

And if you followed us for a while, International Paper as a whole wasn't met its cost of capital. So the first goal is get it there. And then you build the spread. And we fully expect to be able to do that. And by the way, we have a spread to our cost of capital and in the entire company now.

And that's our goal in each component of the company, but it won't be democratic and linear. There will be some parts of the company that have a five or 10 year run well above cost of capital. There'll be others that are right at cost of capital. But you've seen us take action on businesses and parts of businesses that we've concluded.

We don't think we're the right owner to get it there..

Sure, and then switching to containerboard. I was just wondering if you could quantify the financial impacts and I know that they're already calibrated into the guidance.

But how much of those hurricanes in that direct show in Iowa hurt you in the second quarter or sorry, in Q3? How would you characterize your inventories? And then finally on containerboard, are you - do you said you're going faster than the market or are you still walking away from some suboptimal business?.

So our inventories were pretty low at the moment and I think we referenced that in some of the prepared remarks just in terms of how we manage the channels during the quarter. Where we had to, we pulled back in some areas around to export, because we had such strong demand in North America.

And now, we've given the flexibility of the system and the ability to recover, we're on a better footing. And so, we're increasing volume to the export channels in the fourth quarter, which is good, because it's seasonally stronger anyway.

On the first part of your question, just in terms of the storms, through all of our operations and everything and being able to flex back and forth and move our widgets around, we feel like we offset us the impact. So, on a net-net basis not much..

And the final question was, were you walking away for some business, it's just not lucrative enough?.

We always manage our mix. We don't talk about how we handle segments or customers. But yeah, we're always trying to improve the quality of our mix across all of our businesses..

Great. Many thanks..

Thank you..

Our next question comes from the line of Mark Wilde of Bank of Montreal..

Great. Good morning, Mark. Good morning, Tim.

I wondered, could either of you just help us in kind of unbundling sort of what the activity in your box business has been by different markets this year? And in particular, I guess, how much that e-commerce business has grown for IP year-to-date?.

Well, Mark we don't give absolute numbers on that. But if you remember what I said last quarter, it was a cumbersome way to say it, but I think I said orders of magnitude double-digit growth. So, we were growing in double-digit percentages with a one in front of it, for 2020. And we are significantly higher than that in growth.

And that number, or that range that I talked about in the second quarter - on the second quarter call continues to be in the same range and a little bit stronger. So, this is significant uptick from let's say '19 and '18 and '17, where we were at double-digit levels and it's just several times that..

Okay. And then just on supply in both the container board and boxes.

Can you talk about how you're managing, particularly that Newport Indiana mill, because I think I had heard that you might be shifting that out of containerboard and back to gypsum basic diaper? And then also just where you're at on the box capacity, because I'm getting some reports from people who say, IP is so full right now, but they're farming out business independent converters..

I'm going to ask Tim to cover some of that detail. Yeah, it's a pretty dynamic environment. Your memory is pretty good on Newport.

So Tim, why don't you take us through that?.

Yeah. Thanks Mark. Mark, Newport was the facility that produced not only white-top liner - recycled white-top liner, but also just some facing board. So if you remember, when we decided to make the investment in Riverdale, not only did we get a better sheet, divergent sheet, better brightness, color and smoothness, but it frees up the Newport facility.

Overtime, we've dedicated to the gypsum product fully. And we like that market, and we really appreciate the customers we have in it and we think its good business for us..

On your question about the box business, we - as you know, Mark, we provide containerboard primarily to our own box system, but also to the open market where we have long-term partners, whether they're making sheets and then feeding the sheet plant network. And so, if that's what your farming outcome it makes, that's not new for us.

We have partners in every type of channel that ultimately gets to a box. And I would say all of those channels are very busy and very strong right now for us. So, that may be what you're picking up I'm not sure..

Okay. And last one for me, Mark. Just to help us with modeling as we think about this price increase.

Is it reasonable to assume that all your corrugated volume has some lengths to the pulp and paper weak indexes? And if not, what percent of the business might be on other mechanisms?.

Yeah. There's a big part of the market that is linked to our references, it's not direct, but references movement in the published price lists or index. But we don't talk publicly about what those percentages are.

We have a variety of customers where prices, its set on a time increment basis and contracts are written around those types of price mechanism. So, not 100% varies by customer and sometimes by segment as well..

Okay, that's helpful. Tim, I'll turn it over..

Thanks..

And ladies and gentlemen, our last question comes from the line of Mark Connelly of Stephens..

Thanks. I'll try to keep this quick. You mentioned the higher wood and energy costs in the pulp segment.

Was the wood cost mostly weather related or was there something else there?.

No, I think it was mostly weather, Mark..

Okay. Okay. And then just very last question. I'm just trying to do a little bit of math.

In North America, did your containerboard system run full if you exclude the impacts you had with Hurricane maintenance?.

Yeah. I mean like I said, inventories are on the low side right now. And we're working hard to cover customer commitments, we even pulled back and redirected from the export channel, where we could. So yeah, we're running as hard as we can right now..

That's perfect. Thank you very much..

Thanks Mark..

And ladies and gentlemen, that was our final question. I'd like to turn the floor back over to Chairman and CEO, Mark Sutton for closing remarks..

Thank you, operator. What I'd like to do just to wrap up is first, thank everyone for joining the call today. I really want to thank our employees, as I mentioned earlier especially our frontline employees who are showing up every day, taking care of themselves, each other and our customers. I'm pleased with our performance in the third quarter.

And I'm really excited about our strong outlook and the momentum that we're building as we finish up 2020 when we start to look into 2021. So again, thank you for your interest in International Paper and have a great day..

Thank you for participating in today's International Paper's third quarter 2020 earnings day call. You may now disconnect..