- Adjusted Operating Earnings per Share: $0.55, compared to $0.17 in the first quarter.
- Price and Mix Impact: Higher by $0.23 per share.
- Volume Impact: Favorable by $0.06 per share.
- Operations and Cost Impact: Unfavorable by $0.01 per share.
- Maintenance Outages: Lower by $16 million or $0.03 per share.
- Corporate Items: Favorably impacted earnings by $0.07 per share due to a lower effective tax rate.
- Industrial Packaging Segment Earnings: Expected to decrease by approximately $160 million in the third quarter.
- Global Cellulose Fibers Segment Earnings: Expected to be relatively flat in the third quarter.
- Price and Mix Improvement: Expected to increase earnings by approximately $60 million sequentially in the third quarter.
- Volume Decline: Expected to decrease earnings by approximately $65 million due to one less shipping day and seasonally lower demand.
- Operations and Costs Increase: Expected to decrease earnings by approximately $80 million in the third quarter.
- Higher Maintenance Outage Expense: Expected to decrease earnings by approximately $44 million in the third quarter.
- Higher Input Costs: Expected to decrease earnings by approximately $30 million, primarily due to higher energy costs.
- Global Cellulose Fibers Price and Mix Improvement: Expected to increase earnings by approximately $10 million in the third quarter.
- Global Cellulose Fibers Volume Decline: Expected to decrease earnings by approximately $5 million due to seasonally lower demand.
- Global Cellulose Fibers Operations and Costs Increase: Expected to decrease earnings by approximately $25 million in the third quarter.
- Lower Maintenance Outage Expense in Global Cellulose Fibers: Expected to increase earnings by approximately $25 million in the third quarter.
Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- International Paper Co (IP, Financial) reported higher second-quarter earnings compared to the first quarter, driven by higher sales prices and seasonally higher box volumes.
- CEO Andrew Silvernail emphasized a strong commitment to improving performance through an 80/20 operating system, which has historically delivered significant results.
- The company has a solid financial foundation, including a well-capitalized balance sheet and a commitment to maintaining an attractive dividend.
- IP has a strong culture of ethics and integrity, with talented and experienced employees who are willing to embrace significant change.
- The company is making strategic investments in reliability and productivity, which are expected to drive long-term performance and cost advantages.
Negative Points
- IP has underperformed on key metrics such as sales, margin, and profitability over the past decade, with a significant decline in return on invested capital.
- The company has faced challenges due to poor capital allocation and resource allocation decisions, including unproductive capacity investments and underinvestment in maintenance and repair.
- Operating costs have increased significantly, contributing to a cost problem that needs to be addressed.
- IP's packaging volumes have lagged the overall market, and the company expects near-term performance to be challenged by seasonally lower volumes and higher mill outage expenses.
- The company anticipates a bumpy transition period over the next three to four quarters as it implements its improvement plan and addresses reliability and capacity issues.
Q & A Highlights
Q: How much of the business you intend to walk away from is truly unprofitable, rather than just lower EBITDA or lower EBITDA margin business relative to other businesses?
A: Andrew Silvernail, CEO: The focus is not necessarily on exiting a bunch of business but on segmenting the business and aligning resources aggressively. By doing this, we can recover any volume loss quickly by meeting customer needs with the right amount of resources, driving real profitability and long-term returns.
Q: How do you plan to deploy the 80/20 methodology with the DS Smith acquisition, considering it might add complexity?
A: Andrew Silvernail, CEO: The integration will be treated as its own platform in Europe, with DS Smith integrating our European footprint. The Americas will see a relatively simple integration of DS Smith's small footprint into our mills and box system. At the corporate level, we will be strategic and avoid unnecessary administrative burdens.
Q: Regarding the reliability spending, how much of the $80 million step-up relates to that kind of spending, and how much should we think about being part of an ongoing run rate?
A: Timothy Nicholls, CFO: A significant portion is tied to reliability. There is some timing between quarters, but ongoing reliability spending will be necessary over the next three to five quarters to sustainably improve the system.
Q: Are you confident that the go-to-market strategy is NPV positive and that customers won't continue shopping around?
A: Andrew Silvernail, CEO: We are tracking agreements and are about 75% through the contractual deals. The negative surprise is the lag in reliability, but we are on track with expectations. We need to improve our pipeline understanding and call it based on unique insights rather than the overall economy.
Q: Why the magnitude of short-term pain, and has reliability become more significant, leading to an accelerated decline in box volumes?
A: Andrew Silvernail, CEO: The balance of go-to-market and other factors is about 50-50. Reliability hasn't worsened, but the timing of its impact is showing up now. The overall pricing environment has become more robust, leading to more shopping. The next three to four quarters will be bumpy as we work through this.
Q: Can you share what you expect IP's box shipments to be relative to last year?
A: Timothy Nicholls, CFO: It's hard to forecast the fourth quarter due to transaction issues. We expect some chop and are working with the market's 1% to 2% growth, but we need to see how negotiations and pricing play out.
Q: Does the $4 billion EBITDA target include DS Smith's EBITDA, and are you budgeting for CapEx properly?
A: Andrew Silvernail, CEO: No, the $4 billion target does not include DS Smith's EBITDA. Timothy Nicholls, CFO: We are looking at $1 billion to $1.1 billion in capital spending on a normalized basis, with potential for slightly higher investment if opportunities arise.
Q: Should we expect additional capacity coming out of the system as you work through the 80/20 process?
A: Andrew Silvernail, CEO: Yes, we need to match capacity with overall demand and be thoughtful about structural costs. We will make appropriate decisions to align capacity with market opportunities.
Q: How has the internal buy-in been for the new strategy, and when will we see positive results from reliability investments?
A: Andrew Silvernail, CEO: The team is willing and able, with a high sense of urgency. We have buy-in and are moving quickly but intentionally. Positive results from reliability investments should start showing in the next few quarters.
Q: Do you have the infrastructure to make decisions on capital alignment, and have you aligned KPIs for salesforce and box managers?
A: Andrew Silvernail, CEO: We need to improve clarity of metrics that drive results for customers and owners. We are enhancing sales talent and aligning incentives with profitable growth. We have work to do but are making progress.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
