Good morning, and thank you for standing by. Welcome to today's International Paper's Second Quarter 2022 Earnings Call. All lines have been placed on mute to background noise. After the speakers' remarks, you'll have an opportunity to ask question. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn today's conference over to Mark Nellessen, Vice President, Investor Relations. Sir, the floor is yours..

Thank you, Paul. Good morning and thank you for joining International Paper's second quarter 2022 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 two, including certain legal disclaimers. For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S.

GAAP financial measures is also available on our website. Our website also contains copies of our second quarter 2022 earnings press release and today's presentation slides. I will now turn the call over to Mark Sutton..

Thank you, Mark, and good morning, everyone. We'll begin our discussion on slide three. In the second quarter, International Paper delivered strong revenue growth and earnings growth on both a year-over-year and sequential basis, all while expanding our margins.

In addition, our second quarter earnings were better than our prior outlook, driven by strong price realization, solid operating performance, and cost benefits. All of this helped us overcome significantly higher input costs, especially for energy, chemicals, and distribution.

Our mills and converting system performed very well as we managed through continued logistics constraints, which negatively impacted our operating costs. We successfully executed our second highest maintenance quarter of the year and have completed about 65% of our planned maintenance in the first half of the year.

Demand for our products was impacted by a shift in consumer spending from goods to services in the quarter, while the retail channel managed through elevated inventories. In addition, our businesses continue to focus on serving our customers' needs, while navigating through a challenging supply chain and labor environment.

We made good progress on building a better IP initiatives. We achieved $65 million of earnings in the quarter for a total of $105 million during the first half of the year. Given our strong momentum, we expect to achieve the high end of our full year target of $200 million to $225 million.

We are excited by the opportunities we have identified to significantly lower our cost structure and accelerate profitable growth. On capital allocation, we returned $565 million to shareholders in the second quarter, including 395 million of share repurchases.

As a result, we've returned more than $1.1 million of cash to shareholders so far this year. This highlights the choices that our strong balance sheet and cash generation provide us. On our last call, I mentioned that we were pursuing strategic options for our equity investment in the Ilim Group, which includes possibly selling our 50% stake.

We have engaged advisors and are actively working with interested parties. We've made good progress during the second quarter and have identified serious options that we believe could be attractive. As I mentioned before, the complexity of the situation and our JV structure impacts the pace of reaching a resolution.

We will provide another update when there is more information to share. Turning to the second quarter results on slide four, revenue increased by 13% year-over-year, driven by strong price realization across our two business segments. Operating earnings per share improved by just over 50% versus last year.

And margins improved in the second quarter as strong price realization more than offset higher distribution input cost and we delivered additional benefits from our Building a Better IP initiatives.

Free cash flow was lower in the quarter due to higher working capital use as we grew revenues and replenished inventories coming out of our highest maintenance outage season. In addition, both prior periods included a dividend from our equity ownership at Ilim.

Looking to the rest of the year, we expect further margin expansion as continued realization of prior price increases outpaces higher input costs. In addition, we stepped down from our highest maintenance outage quarters of the year and also expect additional earnings growth from our Building a Better IP initiatives.

As a result, I'm confident we will achieve our full year targets for EBITDA and free cash flow, which remain unchanged. I'll turn the call over to Tim who will cover our business sector performance and outlook.

Tim?.

Thank you, Mark. Good morning, everyone. I'm on slide five which is our sequential earnings bridge. As Mark mentioned, we generated strong earnings growth in the second quarter in the prior quarter and prior year, driven by strong price realization and execution of our Building a Better IP initiatives.

Second quarter operating earnings per share were $1.24 as compared to $0.76 in the first quarter. Price and mix improved by about $206 million, or $0.40 per share with strong price realization in both business segments and across all channels.

Volume was relatively flat sequentially in our Industrial Packaging segment and Global Cellulose Fibers, fluffed up shipments continued to be constrained by ongoing vessel delays. Operations and costs improved sequentially as our mills and converting system performs well.

In the second quarter, we received $16 million of insurance recovery related to Prattville. In addition, one-time items for things like lower employee benefits costs, medical claims, and workers' comp contributed favorably to operations and cost.

These one-time items added about $80 million or $0.16 per share, which will not repeat in the third quarter. We successfully completed our second highest maintenance outage quarter of the year and 65% of our annual maintenance program for the first half of the year.

Input costs were about $100 million, or $0.20 per share in second quarter, driven by higher energy, chemicals and distribution costs, in large part because of higher diesel fuel prices. On slide 33 of the appendix, we provide details on our consumption by key inputs including natural gas, which was also a significant costs headwind and the quarter.

Corporate and other items included benefits from lower tax expense and a lower share count. Lastly, equity earnings for stable versus the prior quarter. Turning to the segments and starting with Industrial Packaging on slide six. Looking at the second quarter performance, we delivered meaningful revenue growth and margin expansion.

Price and mix was strong and better than our expectations due to a faster than expected implementation of our March price increase and higher export prices. Our volume was flat sequentially and below last year's strong comp.

As Mark mentioned earlier, we saw a shift in consumer spending from goods and services and the retail channel managed through elevated inventories which then impacted box demand across segments like e-commerce and shipping and distribution, durables, and other non-durables.

We firmly believe these segments will continue to grow over time and that IP is well-positioned to grow with them. In addition, the tight labor environment continues to constrain our box system.

We're experiencing this especially in regions where we're consistently operating our plants on weekends to serve elevated demand from segments like e-commerce and shipping and distribution that have grown significantly during the last couple of years.

Going forward, we will continue to focus on further optimizing our system by improving staffing levels and investing across the system to serve the growing demand of our customers. Operations in cost improved sequentially. Our mills and box system ran very well and we successfully executed as our second highest maintenance outage of the year.

The business also benefited from additional insurance recovery of $16 million related to Prattville and the one-time items I mentioned earlier like proximately $60 million. Operating costs remain elevated due to ongoing logistics constraints. However, we are in a much better position to navigate this environment with healthier system inventories.

Input cost were significant headwind in the second quarter and higher than our expectations due to higher costs for energy chemicals and distribution. We expect these elevated costs to persist in the third quarter.

These cost headwinds are even more significant for our Packaging business in Europe where input costs in the second quarter or $45 million higher than the second quarter of last year. About 70% of that headwind was from higher energy costs where natural gas prices have averaged about five times normal historical level.

Turning to slide seven and staying with North American Industrial Packaging, we're focused on continuing to grow earnings by restoring margins to historical levels in the low 20% range. We've made solid progress in the quarter and delivered a 19% margin, up from just over 15% in the first quarter despite higher than expected input costs.

We're still confident we can achieve our target; however, the additional input cost inflation may influence the timing. Our mills and box plants operated very well. Containerboard inventories across our system are back to sufficient levels, so we're better positioned to proactively manage through the ongoing supply chain constraints.

As I said earlier, we will deploy an investment strategy that further enhances our capabilities and footprint to grow with our customers, while generating attractive financial returns on these investments.

This is a key part of Building a Better IP and an example of this is the Greenfield Box plant that we're building in Southeast Pennsylvania which is expected to start up early next year. In addition, our Building a Better IP initiatives are also focused on structurally reducing costs and deploying commercial strategies to improve mix and margins.

Moving on to Global Cellulose Fibers on slide eight, I'll start with an update on the demand environment and supply chain. Demand for fluff pulp remains solid across all regions. Our confidence reflects the essential role of absorbent hygiene products and meeting customer needs.

In addition, we expect the supply demand environment for fluff to remain favorable near-term. Feedback from our customers continues to indicate the fluff pulp inventories are near historic lows.

Supply chains continue to remain stretched, driven by ongoing port congestion and vessel delays and we expect these challenging conditions to continue for the foreseeable future.

Taking a look at the second quarter performance, price and mix improved by $53 million due to successful execution of previously announced price increases, with solid momentum as we entered the third quarter. Volume in the quarter was stable.

I would note that backlogs remain high and are about double our normalized levels due to the logistics challenges. Our mills continue to run well, ops and costs are better in the quarter as the business benefited from one-time items I mentioned earlier by approximately $20 million. Lastly, input costs increased by $22 million sequentially.

About 65% of the additional costs was the result of higher energy prices with the remainder coming from higher chemicals and freight. Turning to slide nine, I want to reaffirm that Global Cellulose Fibers remains well-positioned to deliver cost of capital returns in the third and fourth quarters of this year.

As I said earlier, we have a favorable supply demand outlook for fluff pulp with price realization from prior increase accelerating as we move through the year.

I would also note that as part of Building a Better IP, we're focused on driving structural margin improvement by ensuring we get the paid value we provide to our customers and aligning with the most attractive regions and segments to deliver profitable growth.

We are also making solid progress in our fluff pulp contract negotiations, which we anticipate will provide additional commercial benefits as we move into 2023. Turning to slide 10, I'd like to update you on Building a Better IP set of initiatives.

We're making solid progress and delivered $65 million in earnings in the second quarter for a total of $105 million for the first half of the year. Given the strong momentum, we're on track to achieve the high end of our full year target. About half the benefits today are from our lean effectiveness initiatives.

By streaming streamlining our corporate and staff functions to realign with our more simplified portfolio, we have already offset 100% of the dis-synergies from the printing paper spend. And we have line of sight to additional savings from initiatives targeting lower overhead spending and further optimization.

We're designing the organization to support a packaging-focused company with a more focused footprint. We believe our process optimization initiatives have the potential to significantly reduce costs across our operations by leveraging advanced technology and data analytics.

Over the past year, dedicated teams have been working with outside experts to identify opportunities and develop new tools and capabilities to increase efficiency and reduce costs in areas such as maintenance and reliability, distribution and logistics, and sourcing.

We're beginning to scale these capabilities across our system, which we believe will yield significant savings as we go through 2023. And finally, strategy acceleration is about delivering profitable growth through commercial and investment excellence.

As I mentioned earlier, we're focused on profitably growing our North American Packaging business by improving margins and investing for organic growth. We're further optimizing our European operations by improving performance and increasing integration of our Madrid Mail Inbox System.

And we're well on our way to achieve cost to capital returns and our Global Cellular Fibers business by realizing more value for absorbent pulp. In summary, Building a Better IP is about driving structural margin improvement and profitable growth. Turning to slide 11, I'll cover our third quarter outlook. I'll start with Industrial Packaging.

We expect price and mix to improve by $40 million on realization of prior [indiscernible]. Volume is expected to increase by $10 million, with one more day sequentially and stable demand. Ops and costs are expected to decrease earnings by $75 million, largely due to the non-repeat of the one-time favorable items I mentioned earlier.

Maintenance outage expense is expected to decrease by $41 million. And lastly, input costs are expected to increase by $30 million. In Global Cellulose Fibers, we expect price and mix to improve by $60 million on the realization the prior increases. As a reminder, price realization in this segment has a two to three quarter lag.

We're running on the longer end of that range right now due to the ongoing vessel delays. Volume is expected to remain stable sequentially. Operations and costs are expected to decrease earnings by $30 million, due to non-repeat favorable one-time items in the second quarter and timing of spending.

Maintenance outage expense is expected to decrease by $24 million. And lastly, input costs are expected to increase by $5 million. Looking to our full year outlook on slide 12. We remain confident in our full year EBITDA outlook of $3.1 billion to $3.4 billion and our free cash flow target of $1.3 billion to $1.5 billion.

We generated strong revenue growth and margin expansion in the second quarter, exceeding our earnings outlook for the quarter, which provides solid momentum as we enter the second half of the year. We expect demand for Corrugated Packaging to remain stable and Cellulose Fibers, we see a continued favorable supply/demand backdrop for fluff pulp.

We continue to realize benefits across the portfolio from the implementation of current price increases, while distribution and input costs are expected to stabilize later this year at elevated levels. As I mentioned earlier, we are also confident in achieving $225 million of gross earnings from our Building a Better IP initiatives.

Regarding capital expenditures we have lowered our full year estimate by $100 million due to extended lead-times on equipment purchases. Despite these equipment delays, we are committed to investing in our business to support strategic growth opportunities and to structurally reduce our costs.

Let me turn to slide 13 and take a moment to update you on our capital allocation actions in the second quarter. Starting with the balance sheet, as I said last quarter, we're very pleased with the progress we've made to strengthen our balance sheet.

As a reminder, we reduce debt by $2.5 billion in 2021 and more than $4 billion over the past two years. With these actions, our 2021 year end leverage was 2.3 times on a Moody's basis, which is below our target range of 2.5 to 2.8 times and looking ahead, we have limited medium term maturities was about $900 million do over the next five years.

Returning cash to shareholders as a meaningful part of our capital allocation framework. In the second quarter we returned $565 million to shareholders, including $395 million through share repurchases, which represents 8.7 million shares or about 2.3% of shares outstanding.

As a result, we've returned more than $1.1 billion of cash to shareholders so far this year. At the end of the second quarter, we had $2.1 billion remaining in share repurchase authorization. Investment excellence is essential to growing earnings and cash.

As I mentioned, we are targeting CapEx of $1 billion, which includes funding for strategic projects and our Packaging business to build out capabilities and capacity in our box system to drive profitable growth. We also plan to increase funding for cost reduction projects with expected returns in excess of 25%.

We will continue to be disciplined and selective when assessing M&A opportunities that may supplement our goal of accelerating profitable growth. You can expect M&A to focus primarily on bolt on opportunities in our Packaging Business in North America and Europe.

Any potential opportunity we pursue must be compelling long-term value for our shareholders. The slide 14, I want to highlight the strength and resiliency of International Paper going forward. With this as a backdrop I'm confident IP will navigate any economic environment from a position of strength.

We have a very strong balance sheet, which we will preserve because we believe it's core to our capital obligation framework. Our strong balance sheet ensures financial stability and optionality and softer economic environments and it's the foundation to create significant value throughout the economic cycle.

As a result, we can continue to return cash to shareholders in a meaningful way through a sustainable and competitive dividend and through opportunistic share repurchases.

We can also proactively invest in our business throughout the cycle to create significant value by reducing costs and by developing the capabilities we need to meet the growing demands of our customers. Our large system of mills and box plants provides us with added advantage of flexibility and optionality.

We've demonstrated our ability to optimize our cost structure throughout different demand environments by making more of our costs less fixed and more variable.

For example, we can increase utilization across our system during strong demand environments and if demand moderates, we can shift production to our lowest cost operations and shed high marginal costs across the system based on regional costs for fiber, energy, and supply chain.

We also have levers to manage working capital needs to align with the demand signal. One last point, as I talked about our competence in delivering our Building a Better IP initiatives, we have line of sight to these opportunities and believe they are largely within our control and not dependent on economic tailwind.

In summary, the strength and resiliency at IP enables us to consistently create significant value for our shareholders over the cycle. And with that, I'll turn it back over to Mark..

Tim, thanks for covering the details on the business outlook and our capital allocation progress. This is a really exciting time for International Paper and I continue to be proud of our team and the work that they do every day in every area of the company.

Sitting here midway through the year, I'm confident in our earnings outlook for 2022 and in our ability to deliver strong earnings growth this year. I'm also very pleased with our progress and momentum in Building a Better IP and I'm confident our team is focused on taking our performance to the next level.

As Tim pointed out in his remarks earlier, these initiatives are largely within our control and will create structural earnings improvement for IP over the next couple of years. And finally, we're mindful of the uncertainty surrounding the macro environment, I'm very certain about the resiliency of International Paper.

During the past few years, we have significantly enhanced our financial strength and flexibility. This strong foundation makes IP well-positioned for success throughout a wide spectrum of economic environments. With that operator, we're ready to take questions..

Thank you. [Operator Instructions] And our first question will come from Seaport Research Partner and the line of Mark Weintraub. Please go ahead..

Thank you. Good morning. Question on what you're seeing in the corrugated box business.

I think you mentioned that retail, they were working through elevated inventories your customers, where do you think you might be in that process? Also at any more color on that that comment you made goods to services? And relatedly you talked about flattish volumes in the third quarter.

Was that a sequential relative to second quarter? Was that a year-over-year wrapping? Because I think your second quarter documents were somewhat lower than your third quarter from a year ago?.

Yes. Hey, Mark, its Tim. Yes, it is sequential down a little bit year-over-year. So, I mean, it's a good question about time to work off excess inventories. And what we're seeing, I guess our belief is hearing from customers that we think it's going to take a little bit more time.

There have been some shifts, more travel, less purchase of goods that we've noticed. Also just unit volume through retail, as people adjust given the high inflation rates, so, but it seems like that was a fairly quick shift as people are making day-to-day decisions.

And so our view is we're in the third quarter, is that it's going to be roughly flat from second to third..

Okay, and obviously did great on price and mix, just one clarification, when you had been giving us kind of expectations on cost and operations, had that been including the one-time $80 million in total, or how much of that might have been in your guidance?.

If we know about it, we included sometimes things come through just better than expected in its timing. I mean, some of it was probably expected not to hit until the third quarter. And so it happens in the second, it's not going to happen again.

So, when you think about the one time you think about two and three together, I think we're about where we thought we were going to be..

Okay, that was a mix.

Some of the you're expecting, but not all of it, is that fair?.

Yes, right..

Great. Thank you..

Thank you. Next, we go to Wells Fargo Securities and the line of Gabe Hajde. Please go ahead..

Hey Mark, Tim, good morning. Thanks for taking the question. One on CapEx, I think it came down about $100 million from what you're previously expecting.

And I'm curious, I mean, kind of given inflation that we're seeing, I would expect just maybe a little bit of a natural tendency upwards? Is this a reflection of anything that you're seeing in the business in terms of willingness to put capital to work, being conservative or are there projects that you just kind of push to the right maybe to 2023 until you get better visibility into the business?.

That's a great question Gabe. This is Mark. Its purely on ability to actually spend your money. Fair amount of our capital is investments in our Packaging business, which is new plans for new equipment. And what we're hearing from our vendors is the backlog for some of that equipment, push some of our spending out.

We do see escalation and if we could do everything we wanted to do in the calendar year of 2022, we'd probably be looking at raising our capital, but it's really just an ability to get the items we need purchased.

It's less about installation labor, it's more about new OEM equipment, which is a big part of our non-maintenance capital, and most all of it is in the box business. So, we'd spend it if we could, is a simple way to say it, no change in strategy.

No, change in our focus, just the ability to get all of that done and account for it in the calendar year 2022..

Right, thank you. And then I guess in terms of end markets within corrugated, you mentioned retail as one and I guess e-commerce is sort of moderating.

Are you seeing anything on the export markets? I mean, one of the things that they were kind of keeping an eye out for is obviously to the extent they're rolling capacity outages over in Europe because of energy availability and/or costs.

Maybe the export lever kind of ticks up for you guys, anything there?.

On export, I'll talk first and then containerboard. On pulp, as I mentioned in the comments, supply/demand fundamentals remain very strong. We try to look through by region as much as we can to gauge inventories and, of course, we talked to customers and what they're telling us and inventory levels look like they're at historic lows at the moment.

So, we expect underlying demand to continue to be strong, globally for fluff pulp and certainly supply chain is contributing to that because the vessel delays are really not much better than they have been for past several quarters. On containerboard, I think you're referencing Europe.

We are going down in the third quarter into a seasonally slower period of time in Europe, we saw solid demand and we saw a price increase through the second quarter. It may moderate a moment just as a seasonally slow period, but we don't see any significant underlying weakness there..

Thank you. Good luck..

Thank you. And next, we go to Bank of America and the line of George Staphos. Please go ahead..

Hi, everyone. Good morning. Thanks for all the details and thanks for taking my question, guys. I guess the first question I had, obviously, IP has been spending more, understandably, on the box network and additional converting.

You've had mill projects like Riverdale, can you remind us on where in your capital budget? You think you'll need to spend just on fiber lines and recovery boilers? How do you see your fleet there? Will there be any incremental investment that's required there or not? And kind of the related if you will corrugated question.

You were answering Dave's question earlier on, on exports.

How do you see some of your other domestic markets in particular? What are you hearing right now from your from your ag and protein customers? We're just seeing two key what's the outlook for next year, given what have been some of the drought conditions that have been discussed? And I had one follow-on..

So George, on the capital spending, we take a longer term view on capital. I think what you're talking about would be what we characterize as maintenance capital, that there's nothing that we're looking at in terms of major back ended mill types of expansions or additions.

So we probably been a little bit lower in the past couple of years on maintenance. It's up this year, but it kind of normalizes in that roughly $500 million a year range. So, -- and again, on maintenance, we take a five-year view.

And so it does ebb and flow just because of timing of when equipment needs to be taken down and maintain some of that periodic -- some of it's on an annual basis, but I wouldn't call out anything exceptional around the capital part. And then what was the second part of your question? I'm sorry..

It's just a box market domestically in particular, we're probing is protein markets.

What are you hearing from customers now and into 2023 given drought conditions, and what that can mean for amongst other things, cattle raising, and production as a result?.

Yes, I think on protein, we expect poultry to be strong, most popular form of protein and given cost increases across all the protein. Maybe there's a shift from beef and pork to poultry. So, we think we think generally a protein should be okay. Poultry should probably be the beneficiary in the foreseeable future..

I think the drought comments, George is primarily in beef issue because they'll have to process some of the cattle early. But it doesn't affect the availability as much on things like poultry. It affects obviously, the price of feed and the cost of those products.

But it's the beef issue where they will have to pull forward the slaughter of a certain amount of the herd earlier than they would like..

Thanks a lot. My last one and I'll turn it over. So, overall, I realize you don't want to make this too formal and guidance or an algebra class.

Our takeaway from your discussion earlier on the outlook should be that if we added our numbers, right, we're looking at sort of flattish sequential performance in industrial and we kind of a $50 million-ish increase in pulp, would that be correct? And when do you ultimately see on the pulp side the supply chains normalizing, is that something fourth quarter -- I realize it's ultimately a who knows.

But when are your contacts like that that should normalize? So, thanks for that and good luck in the quarter..

Yes, I'd say you're in the ballpark and the way you're thinking about it, George, on supply chains. I think you had that right too, who knows. One port seems to improve and another port seems to deteriorate and we've seen it both on the East Coast where it's very important for the fluff pulp business.

The West Coast ports have knock on effects for sometimes, but it seems to be just moving port forward..

And George -- Tim's, right, I mean, we look at it very, very closely because of the export posture of our Cellulose Fibers. We honestly can't see any market improvement calendar year 2022. So, we're probably looking into 2023 when maybe there's some balanced returns to vessel shipping and port throughput.

But we -- maybe we're wrong, but we definitely don't see anything on the horizon as far as we can really look..

Thank you, Mark. Thank you, Tim..

Thank you. And next we go to the line of Mark Wilde of Bank of Montreal. Please go ahead..

Thanks. Good morning, Mark. Good morning, Tim..

Morning..

Good morning..

I want to just turn to cellulose specialties for a minute and try and unpack getting the cost of capital there because it sounds like first of all, if you're outed essentially kind of a three quarter price lag, what we saw in the second quarter is probably more indicative of what we would have seen last year in the third quarter, in terms of kind of net price.

And I guess I'd like to have you just unpack for us that lags and pricing. And then the things you're doing to try to improve the business, because just look at the prices that are posted right now. They're at the high end at a historic range.

So, I'm just trying to get some comfort in if and when pulp rolls over, that you're actually going to be able to maintain close to capital returns?.

I think on the unpacking part of your question; the two to three quarter lag is an all-in, part of that is obviously spot by definition goes up immediately on the placement order. And then there's different levels of contracts with customers. And when you put it all together, announced price of x is actually equal to x two to three quarters later.

So, we've got a got our business part and contract part and spot and that's why you see a unique realization, scheduled for IP that may not look like anybody else's. So, that's also what provides that dynamic of the contract.

These also provides the resilience on any kind of turnover in in pricing, just like it slowed it all the way up and slows way down. So, I think when we have the second half in the books, there'll be two quarters in a row at, you know, above cost of capital performance or right at cost of capital performance.

We've made some structural changes in our go to market strategy, regionally on the spot side, and just contractually on the large customer contract side, which will still be in effect in a different pulp market.

So, we think through a cycle, the purpose of work we've been doing is to have this business perform at the cost of capital through a normal business cycle. Tim set it in kind of strange language we are working and have made tremendous progress. We're working to get paid for the value of the absorbent pulp that it provides in the end products.

And that hasn't always been the case..

Okay. All right. That's for my follow on market. I would just like to follow-up on your comments around both on M&A in industrial packaging in North America and Europe.

I’m just curious would bolt-on rule out sort of a large deal, like you were looking at in Europe three or four years ago?.

Yes, that's not bolt -- that wouldn't be what we would consider bolt-on. Bolt on, think about this -- think about it this way Mark, in Europe, we have a smaller business a $1.5 in revenue roughly. And we've done some single and multiple plant acquisitions to build an integrated network around our new containerboard mill Madrid.

So natural synergy to an existing part of our business, but we did enter a new a new market. We entered the Portugal market. We didn't have anything there before, but it's integrated to the Madrid mill. So that would be bolt-on, and in the US a much bigger business.

So it could be more synergistic with a containerboard and box system, but not transformational. I think what we've been saying for a while is this is the first time IP has been in a position with a balance sheet like we have with a much more streamlined portfolio, and to businesses that have a right to win in their respective markets.

And we're going to run with that strategy. Now there's no need for transformational activity. We went through a lot of that. We undid some of it, and we got a company we really like right now. And now it's about getting it to its full potential..

Okay, and is there any way in North America, Mark, just that help us a little bit in thinking about sort of regulatory barriers on your growth in the containerboard business?.

It's hard to say, a lot of time has passed since the last time we made any meaningful move, but there's no real reason we can't grow our converting and box business. And you've seen how we've chosen. Everyone has seen how we've chosen to grow our containerboard system to match that box. And that's been mostly through organic activity.

And so I don't know the answer to your question, because we haven't tested it. It was an issue back in 2012, where we did get pushback on how much we were trying to acquire. But that was a long time ago. But our focus right now, honestly, is we have enough containerboard for the foreseeable future, we did to Riverdale mill.

We've gotten more opportunity in our current fleet to make more containerboard. It's really about making sure we have the box business configured both with assets and with people. And we're short on both of those right now to be able to actually grow at a minimum with the market.

Some of that's regional, but on average, we don't have enough of either to really grow with a two plus percent market. And that's what we want to do. We have the containerboard to do that..

Okay. And fair enough. I'll turn it over. Thank you, Mark..

Thank you. Then next from Deutsche Bank, Kyle White. Please go ahead..

Hi. Good morning. Thanks for taking the question. In industrial packaging in North America, you talked about some of the labor challenges, but I'm just curious how you would characterize your overall network from an efficiency standpoint versus maybe a year ago, you've had a lot of headwinds over the past year from disruption.

Is there still more to go on that front in terms of making the network more efficient, that could produce better margins in no lower marginal cost production?.

And Kyle, it's a great question. We're running very well, right now.

The issues we had in the mill system last year with the interruptions at the beginning of the year, and the end of the year, and our low inventories in our box plants, we've largely put all of that behind us, the box plants are running very well for all the efficiency metrics like throughput that the margin would generate per hour of production time, where we are challenged is in certain regions, we just don't have enough people.

So we ended up making that up with overtime, which is not a long-term sustainable solution, a certain amount is but not too much. So we need some plants that are not running as many shifts as it is they couldn't be running for the demand. That's where people come in.

And then in certain parts of the country, upper Midwest, area in Southwest Texas, we need more physical assets, as well as people. And that's what we're working on the assets through our CapEx investment plan.

And on the people side, working very hard to hire and retain new employees so that we can run out the assets we have in a more sustainable way, not just working every weekend, and run to the order book that we have. So efficiency is fine. The total available capacity we have with equipment and people is not where we want to be..

Got it. And then Georgetown mill, you have that supply agreement with the Sylvamo that can be terminated here in the next six months or so.

Any kind of early thoughts about that supply agreement?.

Yes. Not right now. I got confused. I think Georgetown may be a little bit longer. I think Riverdale is a little bit shorter, but yes, there's nothing new to report at this moment..

That's good. I'll turn it over..

Thank you. The next we go to KeyBanc and line of Adam Josephson. Please go ahead..

Mark and Tim, good morning. Thanks very much. Hope you're well. For either of you, can you help me with what you're box shipment expectations were heading into the quarter compared to the down 3.6% that you experienced.

And can you walk us through the progression of demand trends during the quarter and then into July and how that's informing your expectation that shipments excluding the one extra shipping day will be flattish sequentially?.

Yes, I think, obviously, we thought there were going to be a little bit stronger as we were going through the quarter seem to -- the adjustments seems to take place. And I'd say, the second half of May and a little bit into June, I think it's a reaction to things we talked about earlier. Inflation is real. People are making choices.

And there's -- as we've read and heard, heard from our customers, there's a lot of inventory and pipelines that needs to be worked off. So but it seems to stabilize and seems to stay the stable around the same level as we go through July. Our view is sequentially.

It should be roughly flat quarter-on-quarter, obviously, down a little bit versus last year, but stable quarter-over-quarter..

Right. And I appreciate that. But just the inflation, obviously, these pressures haven't gone away at all. In fact, if anything, all these CPG companies are just raising prices even more, everyone's raising prices more, it seems like so. And obviously Walmart just got it down.

And so they still have too much inventory of general merchandise because people are under so much pressure, the cost of food and consumables is up so much. So with those pressures don't seem to be abating in the least.

So I guess why would box demand stabilized now?.

Well, we look at our mix of business, and we talk to our customers. And then we have the experience of how we ended the quarter. And how’s continued in July.

So based on that we have a view that through the third quarter, and there's always some seasonal puts and takes, but we have a view that within a margin of error, it's a roughly flat what we have the second quarter..

Got it. Thank you, Tim..

Thank you. And next Truist Securities, Mike Roxland. Please go ahead..

Thanks, Mark and Tim for taking the questions.

Just like to understand, you mentioned faster implementation of the March price increase, but what's driving that?.

Faster implementation, I think it's consistent with prior increases that were implemented, it's the security of supply. And people want to get that, for the longest time wanted to make sure they had boxes and just making sure that there's no disruption to their operations.

So we -- the first price for several price increases were the fastest we've seen on any historical comparison. And this last one seems to be going at the same pace. By the end of the third quarter, we'll have most of it done.

There's a little bit of residue or residual that falls over into the fourth quarter, but so far, it's continuing as the prior increases..

Got it. Makes sense. And then just one follow-up from some of the prior questions in your commentary regarding some inventory destocking. Obviously, I really got to put and takes it's in the details. This will make the deadlines versus long variable.

But ultimately, they need -- I assume understand you guys need to see some benefits from omni-channel as well. So maybe you're getting some wins from increased maybe interactivity.

So can you talk about any shifts that you'd be making your own business to offset the decline in e-commerce and some of the markets you mentioned?.

I'm sorry. You broke up just a little bit.

Could you just repeat the last part of that, please?.

Sure. I'm just wondering -- no problem at all. I'm just wondering, if you're making any shifts in your business to account for some of the weakness that you're seeing in your end markets. And realizing that there is -- there are puts and takes with some of the inventory stocking durable items versus nondurable.

So, meaning, if you're making any shifts in your business to offset those that weakness to capitalize on positive yield growth areas..

Yeah. Okay. Appreciate that. Yeah. On the durables, it's really a very small part of our mix. And we're always looking -- we manage a very active S&OP process, and we're always looking at how we run our system.

I would say that while demand softened a little bit as we went through the second quarter and our view is for it to be stable quarter-to-quarter, the supply chain constraints are real, and it's extending supply chains.

And so part of the effort over the past years with those difficulties to get inventories back to a sufficient level, which may be elevated to historical levels. I mean, we're looking at four, five, six days additional time to move product between mills and box plants. So it's very dynamic at the moment.

We're just trying to make sure that the inventory levels we have are sufficient for this type of service requirements that we have to our customers..

Thank you. Good luck on the quarter..

Thank you. And next from Jefferies, we'll go to the line of Phil Ng. Please go ahead..

Hey, guys. Tim, I appreciate you highlighting the strength of your balance sheet and the free cash flow profile of your business.

Just curious from a returning cash back to shareholders, which you guys have done a great job this year, how are you guys kind of balancing between stock buybacks just given where your stock is and then growing that dividend? And I guess, as we kind of look out to 2023, if there is a recession, your level of confidence of maintaining your dividend through a potential downturn..

Yeah. Well, we want the dividend to be sustainable. That is first and foremost attractive, but also sustainable. So we take a look at it. We're just starting the process now. We look at it on an ongoing basis, but -- and more depth over the summer.

And we usually, if there are any changes or if it remains the same, we communicate that in the third and fourth quarter. I think right now that's work to be done, and the conversation with our Board and our Board is very active in terms of how we how we think through total capital allocation. So there'll be more to come on that later.

I think we feel good about share repurchases. We've tried to be very opportunistic. And yes, it's a powerful number that we've returned so far through six months this year..

Yeah. Phil, if I could just add to Tim's comments, we really haven't changed the guidelines for our dividend after the changes in our portfolio. We still target the 40% to 50% of free cash flow, and we think that's the right amount. We continuously evaluate that with our Board. We listen to what investors have to say about it.

What's different in our capital allocation, of course, is the ability to consistently at the right value have a share repurchase flow of cash back to shareholders. That's not episodic. It can be more consistent when it makes sense. The cash is there.

And Tim talked about it in his prepared remarks around our ability to operate our system in different economic conditions. So wide open when it needs to be less than wide open and shedding marginal cost. And so when we think about potential downturns, there's always a question of how long and how deep.

But just say a potential normal downturn, we have no concerns about the cash generation, the dividend or any of the real important capital allocation.

Even CapEx, I mean, we've not been in a position to just say we're going to go and we're going to do what's right for the long term of the company even in a slowdown, and we feel very good about that right now..

There are -- and I don't know if we're officially in a recession or not or what will come, but there are countercyclical benefits that offset sometimes downdrafts and economic activity, month for earnings and cash, when you think about input costs, so on the earnings side and you think about working capital on the cash side..

Super. And then, Mark, I mean, your point about how you guys have kind of retool the footprint and manage that fixed cost. Variable cost dynamic is important. It was actually my next question.

Remind us if you had to take economic downtime to kind of keep the market balance, how should we think about that flow through? I mean, I think I have a pretty dated number, but I thought it was roughly in that $150 per tonne range if you had to take downtime to kind of keep things balanced. But give us an update that would be super helpful..

I think that's still a reasonably good number. I mean there's obviously some noise in the variable cost side of given all the inflation. But I think that's probably still a good number from a modeling or planning standpoint. It obviously won't be exactly that, but it's in the neighborhood..

Okay. Super. Thank you. Appreciate the color..

Thank you. And our last question will come from UBS and the line of Cleve Rueckert. Please go ahead..

Hey, great. Good morning, everybody. Thanks for taking the question. Appreciate it.

I don’t want to split hairs here, but I did notice on the margins in Industrial Packaging, it looks like there was a slight change in the slides on the timing of that sort of 20% target, the 20% plus target that you're laying out there seem to be highlighted in the second half anymore. First of all, I'm just wondering if that was intentional.

And if it was, given the pricing and the confidence in the Build a Better IP, how should we take that to mean that the ongoing cost inflation is just resulting in a little bit more uncertainty on the margin?.

Yeah. I think that we had more input cost pressure in the second quarter, and we see that continuing at a slower pace. But continuing in the third we think it does stabilize, level out as we go through the second half of the year.

But I think it's just -- it's not anything more than just timing based on swift movement of inputs, and it takes a little bit longer to recover as we continue to implement the price increase..

All right. Okay. That makes sense. And then I guess just following up quickly on the costs. The prepared materials, you say distribution stabilized at elevated levels. I think in the quarterly bridge, you talked about another $100 million of sequential headwinds going into Q3. I mean, just to clarify that.

Ultimately, as you're thinking about it right now, does that -- when we're thinking about the bridge from Q3 to Q4, is that input cost sort of flat, which I think you're sort of alluding to, but just clarify on that.

And then just be curious if there are any areas where you're starting to see costs release?.

Not significant amounts of cost release. It seems some things flatten out and moderate just a little bit as we went through the second quarter and now that we're in July. But I think the way that you framed it up is how we're thinking about it.

We see some more input cost pressure at a slower rate of increase in the third quarter than we saw in the second. And then I think as we go through late third quarter through the fourth quarter, we see more stabilization at these elevated levels..

All right. Thank you very much appreciate it..

Thank you. Then I will now turn the call over to Chairman and CEO, Mark Sutton, for closing remarks..

Thank you, operator. And thank you for being with us today. As you could tell from our remarks and some of the Q&A, we're very confident and optimistic about the future of IP. We've reaffirmed our 2022 earnings outlook. We're making strong progress. We have a lot of momentum as we focus on Building a Better IP.

We'll be at the upper end of that savings and earnings commitment for this year and we'll be well on our way into the targets we set for 2023 on that initiative. We've got a balance sheet and an overall financial strength of the company that we haven't had in a long time. That gives us a lot of flexibility.

It also gives us a lot of ability to manage through the different economic scenarios that everybody is kind of trying to predict and plan for right now. We think we're ready for just about anything that can come, and we're going to perform very well through any scenario that we have in front of us.

We think this all leads to our ability to really break through and accelerate value creation for our shareholders with a strong company, with a great employee team and the right -- and the ability to invest in the right ways without regard for any kind of temporary economic changes really positions us very well.

So again, I thank you for your interest in International Paper, and we look forward to speaking with you again at the next quarterly update. Thanks..

Thank you for your participation in International Paper's second quarter earnings call. You may now disconnect..