Good morning and thank you for standing by. Welcome to today’s International Paper’s Third Quarter 2023 Earnings Call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, you will have an opportunity to ask questions.

[Operator Instructions] I’d now like to turn today’s conference over to Mark Nellessen, Vice President, Investor Relations..

Thank you, Greg. Good morning, and thank you for joining International Paper's third quarter 2023 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. 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 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 will begin our discussion on slide 3 where I will highlight our results. In the third quarter, our teams across International Paper executed well with intense focus on optimizing our cost structure while taking care of our customers.

Looking at our performance, we delivered on the earnings outlook we provided last quarter and we continued our efforts to drive out the highest marginal cost across our system. In addition, International Paper for delivered $75 million of year-over-year incremental earnings benefits from our building a better IP initiative.

Year-to-date this program has contributed $195 million in benefits, exceeding our full year target for the second year in a row. Our performance was driven by commercial and process improvement initiatives which I will highlight later during the call.

We're also encouraged to see that the demand environment continued to recover across our portfolio in the third quarter and we expect this trend to continue going forward. Despite these improvements, I'm not satisfied with our absolute level of earnings.

Therefore, we are taking additional actions to further strengthen our businesses and improve profitability. I will share more details regarding these initiatives later in the presentation.

However, before we move off this topic, I'd like to share my perspective on the series of strategic actions we announced last week to optimize our mill system and reduce fixed costs.

These actions include the permanent closure of our container board mill in Orange, Texas and two pulp machines, including one at our Riegelwood, North Carolina Mill and the other at our Pensacola, Florida Mill.

While these actions will help us achieve our objectives, they are incredibly difficult to make because of the impact on our team members, their families and the surrounding communities.

We are truly grateful to our team members at Orange, Riegelwood and Pensacola for their contributions to IP over the years and we are committed to supporting them through this transition while continuing to serve our customers. I'd also like to update you on another strategic action completed in the quarter.

We completed our sale, the sale of our ownership interest in the Ilim Joint Venture in Russia. Proceeds from the sale total $508 million as expected. With the completion of this sale, International Paper no longer has any investment in Russia.

I will now turn it over to Tim who will provide more details about our third quarter performance and our outlook.

Tim?.

Thank you, Mark. Turning to our third quarter key financials on slide 4, operating earnings per share increased sequentially and came in better than the outlook we provided last quarter.

We continue to optimize our system through commercial and operational initiatives and we also benefited from lower employee benefit cost and on lower effective tax rate. Operating margins continue to be under pressure from macroeconomic headwinds, impacting sales price and volumes.

However, margins improve quarter-over-quarter driven by more favorable operating costs and lower outage expense. Moving to the third quarter sequential earnings bridge on slide 5, third quarter operating earnings per share was $0.64 as compared to $0.59 in the second quarter.

Price and mix were lower by $0.35 per share are primarily due to index movements across our portfolio and lower export sales prices. Volume was relatively stable overall as higher volumes across our container board export channel and global sales fibers business offset one less shipping day in our North American packaging business.

Operations and cost improved earnings by $139 million or $0.30 per share. During the quarter, our mill system did very well and our teams across the businesses continued their focus on reducing marginal cost and spending.

We're accomplishing this by optimizing mix and usage of fiber and energy, reducing labor cost and overtime, shifting to lower cost suppliers and driving lower distribution costs.

During the third quarter, we also had lower employee benefit costs totaling about $80 million or $0.18 per share, which was in our outlook provided last quarter and will not repeat in the fourth quarter. The balance is primarily due to lower unabsorbed fixed costs related to last economic downtime across our portfolio as demand improved.

Maintenance outages were lower by $36 million or $0.08 per share in the third quarter. Input costs were modestly higher as increased costs for energy and OCC were partially offset by lower costs for chemicals and wood, and corporate items benefited from a lower effective tax rate in the third quarter.

Turning to the segments and starting with Industrial Packaging on slide 6, price and mix was lower due to index movements, lower export prices, and higher export mix as demand improved. This was partially offset by benefits from commercial initiatives focused on margin improvement. Volume was stable overall despite one less shipping day in box.

Container board shipments were higher across our export channels due to improved demand, and our daily US box shipments were stable slightly higher sequentially. Demand for packaging was also impacted by customer inventory destocking. However, based on customer feedback, we believe this is generally completed at the end of the third quarter.

Operations and cost improved earnings by $103 million. This includes the benefit of $68 million from the non-repeat items I mentioned earlier. In addition, Ops and costs also benefited from lower economic downtime in the quarter as demand improved. Our mill system continued to run very reliably.

And our teams across the businesses remain focused on reducing the highest marginal cost and spending while further optimizing our entire supply chain to align with the customer demand environment.

For example, by optimizing fiber, energy mix, and raw materials, we've reduced the cost of economic downtime by approximately $20 million on an annualized basis.

We also have significant efforts underway to improve distribution costs, including initiatives to minimize high cost freight carriers, improve contract rates and load efficiencies, and shed warehouse and demerged expenses. These efforts have lowered our supply chain costs by approximately $40 million on an annualized basis.

And there's more opportunities in this area as we go forward. Planned maintenance outages were lower by $34 million sequentially due to a seasonally lower outage schedule and our efforts to further reduce outage spending in the current demand environment.

Input costs were moderately higher, primarily due to the higher cost for energy and OCC, partly offset by lower costs for chemicals. Turning to the Global Cellulose Fibers on slide 7 and looking at our third quarter performance price and mix was lower due to price index movements, partially offset by the benefits from higher fluff mix.

Volume was higher in the third quarter as demand for fluff improved. This was partially offset by lower sales of commodity grades as we continued to focus on strategically aligning our business with the most attractive customers and segments.

The destocking trend continued in the third quarter as improvement across supply chains allowed customers to manage more lean inventory levels. Based on feedback from our customers and from order bookings, we believe de-stocking was largely completed in the third quarter.

We also believe fluff demand will continue to grow over time because of the essential role that absorbent personal care products play in meeting consumer needs. Operations and cost improved earnings by $36 million. This includes benefit of $12 million from the non-repeat items I mentioned earlier.

Ops and costs also benefited from strong operational performance, lower supply chain costs, lower spending, and higher energy sales as our teams remained focused on optimizing the entire value chain. Planned maintenance outages were relatively flat sequentially and input costs were lower by $5 million primarily due to lower wood and chemical costs.

Turning to slide 8 and our fourth quarter outlook. I'll start with Industrial Packaging. We expect price and mix to decrease earnings by $60 million as a result of prior index movement in North America and lower average export prices based on declines to date.

Volume is expected to increase earnings by $20 million due to sequentially higher box volumes despite one less shipping day and an increase in container board export shipments. Operations and costs are expected to decrease earnings by $10 million.

This is due to the non-repeat of favorable employee benefit costs I mentioned earlier, partially offset by lower unobserved fix related to higher volumes and benefits from our ongoing cost management initiatives. Lower maintenance outage expense is expected to increase earnings by $21 million.

And lastly, rising input costs are expected to decrease earnings by $10 million, driven by higher OCC costs, partially offset by lower costs for energy, wood and other raw materials. Turning to Global Cellulose Fibers, we expect price and mix to decrease earnings by $25 million as a result of prior index movements.

Overall volume is expected to increase earnings by $5 million. We expect higher fluff volumes due to improving demand, offset by lower shipments of commodity grades as we execute our mix optimization strategy. Operations and costs are expected to decrease earnings by $35 million relative to the third quarter.

Approximately half of this is due to the non-repeat of favorable employee benefit costs I discussed earlier; the remainder due to higher planned maintenance outage costs in the fourth quarter. Higher maintenance outage expense is expected to decrease earnings by $28 million. Lastly, lower input costs are expected to increase earnings by $5 million.

And with that, I'll turn it back over to Mark..

Thank you, Tim. I’ll start on slide 9, as I mentioned at the beginning of the call, we are making solid progress with our Building a Better IP program, which has delivered a total benefit of $195 million a year-to-date, exceeding our original target for the second year in a row.

This year, most of the benefits are coming from our strategy acceleration initiatives.

Our business teams are focused on creating value for our customers while improving the profitability of our product and service offerings again paid for what value we provide to our customers, and by also growing in the most attractive segments with the most attractive customers and in the most attractive geographic regions.

We have also seen meaningful benefits from our process optimization initiatives. By leveraging advanced technologies and big data across our large system, our teams are identifying new ways to improve productivity and lower costs.

I'm excited about our progress and in the next couple of slides I'll share some examples of the actions our business teams are taking to drive profitable growth. So turning to slide 10, I'll start with Industrial Packaging. Beginning with commercial excellence.

International Paper has a broad range of capabilities and segment tailored packaging solutions to serve our customers. Our commercial teams are leveraging these advantages to improve mix by strategically aligning with the most attractive regions, segments and customers.

Our teams are also using more advanced data analytics to manage product pricing across our sales territories. This allows them to capture more value for customer tailored product and service offerings.

Under operational excellence we are leveraging advanced technology and data analytics to improve efficiencies and lower costs across our large system of mills and box plants. We are seeing benefits in areas such as maintenance and reliability, raw material consumption, distribution and logistics and sourcing.

And as I mentioned earlier, we're also taking actions to optimize our bill system and reduce fixed costs. The mill closures will improve annual EBITDA for industrial packaging by about $140 million. Turning to slide 11, I'll highlight some of the things we're doing in the area of investment excellence.

Due to the attractive long-term fundamentals of our industrial packaging business, we believe we have investment opportunities to drive profitable growth and create significant value.

Strategic capital investments in our mill system have targeted productivity improvements and product capability enhancements that align with customer needs and market trends. Added capabilities for lightweight and ultra lightweight liners and high quality version whitetop products are examples of these investments.

More recently our strategic investments are focused on our box business. These investments allow us to grow with customers and increase profitability by strengthening our capabilities, improving productivity, and leveraging automation. We believe we can create the most value through organic investments across our large network of box plants.

Examples of this include adding converting lines in existing plants and upgrading older equipment with newer and more advanced technology. For some context, the investments we have made over the past two years in existing plants is the equivalent of adding almost three average size box plants to our system.

We will supplement this strategy with additional investments in greenfield box plants and occasionally with bolt-on M&A where we can create additional value by addressing regional needs and enhancing our business.

I'd also like to recognize that in September we celebrate the grand opening of our new greenfield box plant in Atglen, Pennsylvania, which has a great team and world class capabilities. Our investment will allow us to optimize our network of plants in the northeast while providing additional capacity for future growth.

In summary, we have significant opportunity to leverage these new investments as well as our market expertise to grow with customers, improve our mix, and capture additional value. Turning to slide 12, I'll share some key opportunities in our Global Cellulose Fibers business.

Over the past year, we have captured meaningful benefits from commercial actions which contributed to our Building a Better IP results. Our commercial teams renegotiated large contracts to ensure we get paid for value that we provide.

In addition, we have earned a higher premium for fluff grades relative to commodity pulps by capturing more value and aligning with those customer segments and regions who value our differentiated product and service offerings.

However, the benefits of our commercial strategy are currently being masked by a very challenging and unprecedented business cycle, as well as our exposure to commodity grades. On a positive note, the market environment began recovering in the third quarter as demand for fluff pulp improved, and we expect this trend to continue in the fourth quarter.

Going forward, we believe there are more strategic levers to pull to increase the earnings potential of this business.

Through our go-to-market strategy, we have an opportunity to improve our mix by reducing our exposure to commodity grades and by serving the most attractive fluff customers and markets that allow us to maximize the value of this business.

Aligning with this strategy, we are taking actions to right-size our footprint and reduce fixed costs across the system. As I mentioned at the beginning of the call, we announced the closure of two pulp machines, which will improve EBITDA for the global cellulose fibers business by approximately $90 million.

I believe there is a good business within this business. And that we can continue to grow earnings and cash flows over the cycle. We have talented teams with significant market expertise and a mill system with a broad set of capabilities.

This allows us to create value for our customers by delivering innovation and products that meet their stringent performance and product safety standards. Now I'll turn to slide 13. We continue to see demand recovery across the markets we serve and we strongly believe in the attractive long-term fundamentals of our businesses.

At International Paper, we are taking actions to improve earnings and drive profitable growth. Given our strategic customer relationships, talented teams, world-class assets, market expertise and strong financial foundation, I'm confident in our value-creating opportunities and IP’s continued success. And with that we're happy to take questions.

And similar to last quarter, our senior business leaders are joining Tim and I to provide their perspectives as well. So operator, we're ready to move to the Q &A section of the call..

[Operator Instructions] Your first question comes from the line of Gabe Hajde from Wells Fargo..

Mark, Tim, good morning. Thank you for all the detail.

Wanted to ask a little bit about the Orange closure and I guess as we look into 2024, I guess the first one would be as the market begins to recover, would you expect than and even with this closure to kind of grow with the market and again taking into account a lot of your own commercial initiatives or is that something that might be on a little bit of a delayed timetable?.

Gabe, I'll ask Jay Royalty to comment, but at a high level, looking at all the variables around demand and our recent capacity investments that I think I mentioned in my prepared remarks, we feel good about being able to make this change and continue to grow with the market.

I mean, essentially, with this level of downturn, there's been somewhat of a reset and I think the market demand signal will engage again and we have options for future container board investments. So, Jay, I don't know if you want to add any commentary on how we're thinking about the near term ability to grow..

Sure. Good morning, Gabe. Thanks, Mark. First of all, our long-term view of demand has not changed. So this was more about kind of how we see the near term and options we have. If you think about where we are, we've been matching our supply to our customer's demand and running the system as effectively as we can for quite a while now.

And all along that way, we've been evaluating our options and trying to develop an informed point of view on a couple of things. One is demand and the shape of the recovery.

And secondly would be where do we think the market is headed and what capabilities do we need for the future? And both of those factors influenced our decision to reset the mill system, as Mark said. We have a large low-cost fleet with tremendous flexibility and capability.

And so when you think about that, we're able to close Orange without compromising our ability to serve customers and we have what we need for the short term and midterm. When you think about the amount of EDT we were taking and even with this closure, we still have room to grow.

And then when we think about the future, we do have options to grow in the right product ranges at the right time. And as you heard, this move in the near term allows us to run the system in a more optimized way. And all in lowers our cost structure by about $140 million..

Okay. And then maybe one on the capital side. I'm assuming as you guys went through this exercise, it was just as much about maybe variable production costs as perhaps investments. But again, kind of peeking around the corner to ’24, this year, you're projecting to spend a little bit above D&A.

Is that something that you envision over the next, at least maybe again ‘24 or ‘25, if you're willing to comment, given maybe throttling back a little bit during the pandemic?.

Yes, Hey, Gabe. Yes. Good morning, Gabe. It's Tim. So I think as you said, right around D&A and on a normalized basis, I think that's where we are for the foreseeable future. Some years higher, some years lower. We haven't finished our planning work for next year yet to have a specific thought about what the level will be there.

So we'll complete that over the next month or so. And then in January, when we release, we'll have more to say about 2024 and how we're thinking about capital at that point..

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

Good morning. I was just wondering if you had a sort of updated view on the full year adjusted EBITDA, CapEx and free cash flow guide. You provided that, I think in previous slides, if there's updated view for ‘23..

Yes, we showed it at the second quarter and then third quarter actuals, and now we've given a fourth quarter outlook. And but the short answer is there's no material change in any of the categories that we provided a full year, a full year outlook for. We're still solidly in the EBITDA range, right in line with capital and cash flow the same way..

Okay, that's helpful. And then in terms of box shipments, can you talk about the cadence of North American box volumes, maybe during the quarter and then touch on the trends in October? And then I think seasonally, there's usually like a little bit of an uptick in September.

Did you see demand that you think was stronger than normal seasonality or how would you sort of describe that dynamic?.

Hey, Anthony. This is Tom Hamic. Just in terms of demand, we troughed or had a trough in Q1 like Q4. We've seen continued improvement from that time and that lasted through Q3. So we felt very good about the improvement through Q3. A lot of segments seem to stabilize in Q3 and we think they're going to improve in Q4.

So think about beverage and processed food. Really strong stabilization in Q3, improvement into Q4. E-commerce, stabilization in Q3, improvement into Q4. So we feel good about the trend. I think you asked about October. We're very close.

If you look at the order book, which is the best way of kind of looking forward, especially when you've got a month like October that can be a little bit misleading. I would put the order book growth at about 3% to 4%. And so we think that's going to improve as we go through the quarter. That's a sequential number.

So think 4% to 5% for the quarter sequentially. So we see these segments in the market continuing to improve..

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

Thanks. Hi, everyone. Good morning. Thanks for the details. And given the announcements earlier in the quarter as well, just want to wish everyone the best during the management transition and Mark, especially to you for your leadership over this period.

I wanted to go back to the deal heatmap slide, the outlook slide, and just make sure that we've got this correctly.

So given our very quick tally of what you mentioned, Tim, are we -- are you suggesting EBITDA and I haven't done the rough and ready for cellulose fibers is, perhaps below breakeven and overall that we might be somewhere in the 400s relative to the to where we were in the third quarter.

And then the second question that I had in terms of businesses and profitability, Europe is not your largest business. You've been there for a while. It generated about a 10% EBITDA margin. It's still relatively small.

Strategically, how do you see that business mark over time? Are you happy with the profitability and what's its real role within the IP portfolio? And then I had one or two other follow-ups..

Yes, hey, George, it's Tim. So yes, I think generally speaking, you're in the zip code of how we're thinking about the fourth quarter. Of course, the IR team will talk you through all of the essentials and everything. But I think ballpark, it sounds like you're close. And with your –.

Yes. On the EMEA question, we like the business. We don't like the absolute performance, but we have doubled the earnings from ‘22 to ‘23 after they were hit so hard with high natural gas costs.

And we've made some very successful single plan acquisitions over the last couple of years that's really built the density around the Madrid container board bill. So we view our Europe business as a regional strategy. It's mostly southern Europe. We think there's growth opportunity, but it's largely going to continue to come in that region.

We think it has a long-term growth potential. It's a very attractive market. EBITDA margins to get good returns in Europe. George, remember, can be a bit lower than we're used to seeing in the U.S. because of the mill structure being mostly recycled. You have a lot less capital employed to generate the revenue line.

So if you like 20% EBITDA margins here, low to mid-teens, get you the same return on invested capital. So it's a different capital structure. And we have $1.5 billion business for revenue basis there. So in the regions that we're in, we have pretty significant positions like the Iberian Peninsula, Morocco, we're a leader.

We're significant in Italy and France. So I think long term, it fits IP and it gives us some growth factors in the packaging business that obviously is most of our company now..

Understood. My follow on question just for the fluff pulp business, the machine closures that you announced, how quickly will that benefit the results within GCF? And in your longer-term outlook and your view that it's still got opportunities to create value.

What effect, if any, how have you thought about perhaps some of the, I mean, it's come up in the past and calls the potential from eucalyptus based fluff, which there seems to be a bit more interesting again.

How much does that take from the market as a market grow sufficiently so that you can keep growing and take advantage of all the commercial opportunities you have. Thank you, gentlemen..

Hey, George. This is Clay Ellis. I'll be happy to try to take a stab at your questions. Good morning. Yes, I think the machine closures will occur in the fourth quarter. We'll have some residual personnel calls that extend into the first quarter of next year as we train and move folks around in that.

But overall, that will mostly be complete in the first quarter. So I think that we'll see the benefits immediately and the benefits will ramp as you go through ‘24. And we still have, at Riegelwood, we will have a little bit of optimization work to do, very minimal cost that will have a big payback in getting our cost per ton optimized there.

That will all happen early in ‘24. You're going to -- your comment on short fiber or eucalyptus, it's fluff. So eucalyptus fluff has been out, I think, most of this decade, seven, eight years. It's been in the market and been a pretty relatively small amount of the market hasn't had significant growth.

To your point, there's interest and concern, and I think there always has been. I think as prices create, when prices got high and supply chains were constrained last year, there were probably more interest in it at that point about how do we look at a short fiber differently or more seriously. Again, we have that baked in.

We think that the long-term view of fluff pulp and the growth is consistent in the future as it has been in the past. Long fiber has, is a reason why it's 90 plus percent of the market, and we think it will relatively stay in that range, and so does it materially change our view or outlook of the future..

Your next question comes from the line of Mark Weiintraub from Seaport Research..

Good morning.

A few follow-ons, if I could just a clarification really, and hopefully I'm not splitting hairs here, but first on that question on the bridge for EBITDA for the fourth quarter, you gave us very specific numbers and if I just take the 590 you had in the third quarter, and I think there was basically $117 million difference from what you, the numbers you provided for 4Q guidance, that puts me in the upper 400 as opposed to just more generically in the 400s, is that fair?.

Yes, that's fair, Mark..

Okay. And then second on the Orange, so the $140 million, does that primarily show up in 2024 as well? Or does it start to show up in the fourth quarter? And maybe just related to that.

Is Orange down now or when does that get closed?.

Hey Mark, good morning, this is Jay. So we're working through the early stages of the transition and obviously there's a winddown that is underway as we speak. It's not down at this point. We do have to transition business and transition customers and work through all of the dynamics, but it did all of that will be complete in the fourth quarter.

So we would expect to see that type of EBITDA impact fully recognized in 2024..

Okay, super, thank you. And then maybe just a little bit of color. You talked about the export, containerboard export business getting better. And to a certain extent that sort of led us down and we have much more price erosion there than in the domestic business. Maybe if you could just provide a little bit more color on what you're seeing there.

And are we, I mean, again, pulp and paper, we posted prices lower in their review of what was going on with export pricing.

Can you give us your perspective on what's happening kind of real time in those markets?.

Sure, Mark. This is Jay again. And if you go back to the last call, we spoke about starting to see some improvement in the export markets. And that definitely continued in the third quarter. So when you think about the major markets, we serve Latin America, Europe, Asia.

We've seen inventories normalize in all of those markets at this point and we see demand continue to improve. Latin America continues to be very solid as we sell in the second quarter and that's being driven by bananas and pineapples, melons, these types of products. So very resilient.

Europe, we saw a shift in a positive direction in the third quarter, rebounding. And that's been a fruit and vegetable driven as well, really in anticipation of a much better agricultural season beginning in early ‘24, late ‘23, early ‘24 versus last year. Asia is the market that continues to lag a bit but we're seeing recovery there as well.

And so when you look at all of that and look through the fourth quarter, we see strong quarter bucks all the way through the end of the year. So we believe we've seen demand bottom and the outlook is certainly more encouraging..

Okay, great. I recognize you guys aren't going to forecast prices here but it doesn't seem that this demand improvement has translated yet into better pricing.

Is that a function of more supply out there chasing this business? Or any color you could help us with in that regard?.

Yes, I mean you have to see demand improvement to see the market turn. We're seeing that. There still is a supply demand imbalance, but that's shifting both because of actions that are being taken on the supply side as you know about and also this demand improvement.

So at this point, we're as I said, we think we've seen demand bottom, the outlook's more encouraging. We'll see where it goes from here..

Your next question comes from the line of Mike Roxland from Truist Securities..

Thank you, Mark, Tim. And Mark for taking my questions. Just have one quick follow up on the Orange Texas closure. I do appreciate Jay's comments around that mill. But I do believe you mentioned a few quarters ago that a permanent capacity adjustment was not on the horizon.

So I'm wondering what's transpired and what's happened in the last few quarters that has changed your approach? And then to think about your portfolio more broadly, to the extent you can comment and realizing that it may be difficult on this type of forum, but are there additional similar opportunities to further rationalize your portfolio?.

Mike, I'll take the first part because I'm the one who said we didn't have any permanent closures on the horizon. I think what I said was we look at permanent closures around secular declines and we don't believe we have that. I think what's changed is the depth and duration of this downturn.

It's not like anything we've seen since we built the industrial packaging business starting in the mid-2000s. And we also, and Jay mentioned this. We also have a long-term plan for that business and the kinds of containerboard we need to make for the future, in some cases, is different than the containerboard we make today.

We invested in high-quality whitetop at our Riverdale Mill. That's a future-looking product that makes a bleached pulp container board, not using recycled. So high quality, we've got basis weight and high performance, lightweight needs that our system can't address today for the future.

So I think part of what allowed us to make this decision is the depth of this downturn and the duration and the fact that we need, over time, to change our product offering that we make boxes out of. So we're taking this opportunity to do a reset and then we have to get the timing of any future investment right. But that's what's changed.

We still believe in the long-term fundamentals, as Jay said, about growth. Two quarters ago, I would not have thought we were still in this type of demand environment taking this type of economic downtime..

Got it. And then, Mark, I appreciate the color.

Just on my second part of that question, in terms of additional opportunities you may have or similar opportunities in the portfolio, similar Orange that you can rationalize, where does that stand?.

Hey, Mike. This is Jay. We've made this announcement. We came to it through a very thorough and extensive evaluation of both the commercial side as well as our fleet and capabilities. We're very comfortable with the decision that we've made and how it sets us up for the future.

We still have room to grow and we're in this business to win and to grow, and the system that we will have moved forward will enable us to do that..

Got it. Okay. And just one quick follow-up. Mark, can you help us understand the company's approach just going forward with respect to cost takeout and driving efficiencies? Obviously, kudos to you and the entire team for doing a terrific job with building a better IP initiative.

But how do you ensure that you and the team were making laser focused on cost removal and improving efficiency, particularly as the cycle starts to inflect and demand gets to more notably improved?.

That's a great question, Mike. As part of the cost takeout is something that no one's really had to do before, meaning we had four year high inflation that's gotten stuck into a lot of our inputs. So that becomes a, not just using less, but that becomes a real commercial challenge just like with our customers on the sales side.

In our global sourcing world, no one wants to give back any of the pricing they were going to get through ‘21, ‘22 and early ‘23.

So positioning ourselves as a large buyer of all of these inputs and to some extent having to play hardball and getting some of that cost out, we put everybody in the company on clear directions around what our EBITDA per ton needs to be to get the kind of margins that drive the kind of returns on invested capital.

And what that does for us is we need to be here and we have a gap. So everybody has a role to play in closing that gap and the cost takeout of inputs especially and I'm including distribution and logistics and things that are at levels that we've never seen before and stubbornly staying at those levels.

Can't cover all of that just with higher prices and revenue because you run into all these other strategic issues like substitutions. So we've got to work on all of it.

But that's really the approach is to take out some of the things that have found their way in and have become a bit structural but do it in a very analytical and organized way and then divide and conquer so we can close the gap. Much of what we've had success, you mentioned Build a Better IP.

That is a very focused, formal, initiative, unique to IP initiatives. They're not dependent on the market per se, but a very focused process. We plan on using that same process to continue.

We won't name it and we won't call it and we probably won't report on it, but what you should hopefully see as analysts and investors on the call is improved earnings quarter after quarter after quarter. We're going to use that same rigorous approach. We have some outside help in setting it up.

We're running it entirely in-house now and we plan on continuing to do that to get the cost takeout..

Your next question comes from the line of Phil Ng from Jefferies..

Well, first off, Mark, I want to thank you for all your great insights over the years and appreciate the leadership. So my first question is the company has always had a deep bench of senior executives that you've moved around nicely.

What's the game plan in terms of the succession plan, thought process of internal versus external? And when the board is looking for the next candidate, any characteristics that stand out that they're looking for?.

It's a great question, Phil. When we put out the announcement to notify publicly that we were moving to the kind of last phase, we have a multi-phase process like most public companies do, and it's a multiyear process for leadership succession, and CEO, but also senior leader succession.

The board is working very hard, obviously, on the board and working with them to make the best possible selection for the next leader of IP from both our internal talent, as you said, we have tremendous talent in the company. But again, good governance and a best practice is also to look at exhaustively at outside talent.

And one thing just to remember on it, we're making progress, but the board is not looking to replace me. They're looking to find the next leader for IP for the future. And we think about what the future holds with respect to technology, with respect to what's happening in markets, the changing workforce.

We built a specification about the future, the leader we think we need for the future of the company, and that's what the board is laser focused on. They're working hard on it. They're doing a great job with it.

And we will get to a point where when we have something to report, we will, but I think the process we're using, high likelihood we come out with a great choice for the next leader for IP. But that's really the focus and how we're approaching it from the process standpoint..

Okay. That's great color. Year-to-date, you guys have taken about a million and a half tons of economic downtime with containerboard. Orange, I think, is about 800,000 tons of capacity.

So when you take that capacity out, do you effectively reduce your economic downtime by half next year, assuming demands stable to growing and would that be additive to I guess the $140 million of savings you called out. I mean any color on the EBITDA impact I guess this year in the economic downtime would be helpful as well..

Hey, Phil. This is Jay Royalty. Your math is good that's how the math works but we are in a transitional situation and I think you've heard both Tom and I talk about the improving demand trajectory so obviously with this move it still leaves us some flexibility, it still leaves us some room.

We won't change anything about how we're operating to make the cost of that flexibility to minimize the cost of that flexibility but as we get our commercial analysis and we work very closely together on this in terms of the outlook.

We're very comfortable that our commercial plans and our commercial execution of what we're doing, what Tom's doing in the box business and what we're doing in the containerboard business, that we need that flexibility and we need that capacity for how we see the future. So, that's where we are..

But Jay, am I interpreting correctly any improvement in economic downtime would be added to that $140 million in cost savings and any way to size up how much of the EBITDA impact it's been this year so far?.

The $140 million is the number that we've put out there in terms of the EBITDA impact, but yes, there would be further benefit from taking up that economic downtime or eliminating that economic downtime..

And your final question today comes from the line of Matthew McKellar from RBC Capital Markets..

Hi, good morning. Thanks for taking my questions. It sounds like you're looking at opportunities to further optimize your cost structure in global cellulose fibers.

Are you able to provide a bit more detail on what opportunities still exist there and whether you're maybe looking to either further capacity actions or capital investments that could drive stronger cost performance? And then when you think about what can drive you from your current run rate in that business to achieving above cost of capital returns, how do you think about the relative importance of optimizing that cost structure versus other factors like achieving more favorable production mix or driving stronger pricing? Thanks..

Yes, thank you, Matthew. This is Clay. It's a great question. Part of the moves that we made with Pensacola and Riegelwood has a cost structure implication. Pensacola machine was a high cost machine. So that's part of it.

We talked about Riegelwood, although it has fluff capacity over the past couple years the majority of that machine was used for not fluff, but for market pull, softwood market pulls. So that has a cost implication as well as a mix implication. So the benefits there are both in cost and in mix.

If you think about going forward, what are the opportunities in the business? I think as we would, as I would prioritize our cost opportunities, it's first in supply chain with last year, 2022.

A lot of things were put in place as we export 90% of our volume globally to get that volume out to serve our customers between warehousing and container freight stations and various methods. It increased our supply chain costs. We are unwinding those warehousing in different modes.

Of course costs are coming down in freight rates, om ocean carrier rates. So that's very helpful, but also the things that we did uniquely that we can unwind uniquely. That's probably been a big driver, been a biggest driver and will continue to be a very big driver. We have more to optimize there.

I think capacity, I think again, as we see the growth of fluff in the kind of historical ranges, we want to continue to -- we want to optimize our machines on fluff. I think mix is the biggest opportunity, as you mentioned, what is it cost, is it prices? Mix is an opportunity and then price are bigger opportunities then.

We don't feel like we're disadvantaged in a cost of manufacturing or even a supply chain cost. So there's obviously benefit there, there's opportunity there, but mix and price would be, after we're optimizing this move, mix and prices is clearly the driver..

Great, that's helpful, thanks very much. If you're sticking with Pensacola, I think you also produce containerboard at that site. How does taking capacity down in the pulp side affect the cost profile of that mill, if at all? Thanks..

Yes, so this is Jay Royalty. So there's clearly costs there that the containerboard business has to bear as a consequence of that move. Just putting a little perspective on how we think about Pensacola. Pensacola is a unique asset within our portfolio.

It's globally competitive, lightweight, craft liner, really serving all the channels, both domestic export and as well as NAC. And if you think about the grade range that we have there, it goes from about 20 pounds to the mid-30s, so definitely differentiated from a lightweight standpoint.

If you look at it on a traditional cost curve, it's right in the middle of the pack, but that's not on a per ton basis, it's not really the right way to look at a mill like Pensacola. You have to look at it on an area basis, which is the way boxes are made and sold. And Pensacola is a very capable machine. It's a live machine.

It's a well-equipped machine. It's got significant output, about 550,000 tons, which is significant, in particular, when you consider that basis weight. And the capabilities at Pensacola, from our perspective, really match where the market is heading. Demand is high and growing for these wider weight products.

And also in the context of being a single machine mill, we have other mills that are single machine mills that are competitive and successful, and we expect Pensacola to be no different in that regard..

Great. Thanks for that detail. And then last one for me, and you touched on this as part of your response to Anthony's question, but last quarter you showed a slide that indicated where your customer inventories were versus target levels broken down by customer segment.

And it sounds like destocking is generally run its course, but if you're to run that same analysis today, do you think all customer segments would show inventories at or below target levels? Are there any segments, particularly within North America here, where destocking could still be a factor in the fourth quarter? Thanks..

Great. Hey, Matthew, this is Tom Hammack. I think you're accurate in saying that destocking is generally over. We actually went out and talked to customers. We do that quarterly to get an idea of inventory levels. And the data came back exactly like we're saying is a dramatic shift over the last three quarters in terms of stock levels.

In fact, in many cases, anecdotally, we're hearing people have oversteered a bit. And if you look at our order patterns in certain markets, it looks like that you're, we're seeing more rush orders, more volatility in orders, and so you can kind of picture them bouncing along the bottom.

So we think in many cases it's more than healthy relative to future box demand. But all indications so far are exactly what you said..

Thank you. I'll now turn the call back over to Mark Sutton for closing comments..

Thank you, operator. I want to thank everybody for your time today and for your interest in International Paper. I look forward, along with the leadership team, to updating you on our progress on our next call at the end of January. So have a great rest of the day. Thank you..

Once again, we'd like to thank you for participating in today's International Paper’s Third quarter, 2023 Earnings Call. You may now disconnect..