International Paper Company (IP) Earnings Call Transcript & Summary

Before we get started, if you are a member of the press or media, please disconnect at this time. This is a restricted line any unauthorized party in this meeting are any unauthorized use of the information communicated in this meeting is subject to prosecution to the fullest extent of the law. Any unauthorized person, including the media who is on the line at this time, please disconnect. Please note, today's call is being recorded.

Good morning, everybody. Thanks for joining us. Gabe Hajde here, Wells Fargo Securities Research on Paper and Packaging. The next presentation with Mark Sutton from International Paper. We think this may enlighten the perspective on what it means to be a true steward of resources naturally occurring intellectual and financial. With us today is Chairman and CEO, Mark Sutton. I believe Mark has about 10 minutes of prepared remarks with the remaining 20 minutes or so dedicated to Q&A. So as a reminder, investors can send questions directly to me if you choose to do so. Apologies on the long introduction, Mr. Sutton, take it away, please.

Thank you, Gabe, and thank you to everyone participating in today's conference and on the webcast. I really do appreciate your interest in international paper. On Slide 3, you'll see the normal forward-looking statements that I think you're all familiar with. And on our website, of course, we have the U.S. GAAP and non-GAAP reconciliations. I'm going to move through those statements and go on and start on Slide 3 with my remarks. Given that we reported our first quarter earnings just last week and shared a fair amount of detail on the businesses, I thought today's conference would be the ideal time to provide an update on what IP is doing when it comes to our commitment to sustainability. Our view on sustainability is that it all begins with our strategic framework for pursuing our vision and creating value for all stakeholders for generations to come. Our vision as a company is to be among the most successful, sustainable and responsible companies in the world. And our mission is to improve people's lives, the planet and our company's performance by transforming renewable natural resources into products that people depend on every day. So our journey to achieve our vision really began with the founding of our company, more than 120 years ago in 1898. And as we look to the next century of IP while we cannot predict the future, we know we must be prepared to face new social, environmental and economic challenges. We must continue to set goals that will enable us to build a better future while responding to new external challenges and shifting expectations. So turning to Slide 4. You can see some historical content on this slide. In 2012, we launched Vision 2020, a set of 12 voluntary sustainability goals using 2010 as a baseline year for the data. Our Vision 2020 goals were aimed at improving our impact on people and the planet, and focused our -- on helping us achieve our vision and address known challenges at that time. We expect to achieve or exceed most of these goals as we wrap up our reporting for 2020, including reducing our Scope 1 and Scope 2 greenhouse gas emissions which were -- which we've reduced 22% as of the end of 2019 against our target of 21%. So on Slide 5, as we turn to the next-generation of our sustainability goals. We have a key question driving our approach. What does International Paper need to look like in 2030 to be among the most successful, sustainable and responsible companies in the world. We asked ourselves, how can we remain the supplier of choice for our customers, the employer of choice for the talent out there and the investment of choice for our owners. Ultimately, how do we build a better future for all stakeholders. And it's really important to note that when we talk about sustainability, we're not just talking about the environment, but rather the full extent of sustainable business practices, which include the interdependence between people, the planet and profit. And at IP, this extends to the products we create. A sustainable corporation is defined as one that creates profits for its shareholders while protecting the environment and improving the lives of those with whom it interacts. Driving sustainable outcomes has been and continues to be a key part of our business strategy. So on Slide 6, it's this thought process that led us to develop vision 2030. And our commitment to building a better future for people, the planet and our company. In its simplest form, Vision 2030 consists of 4 goals: healthy and abundant forest; sustainable operations; thriving people and communities; and renewable solutions. Each of these 4 goals includes a commitment, a key commitment and specific targets, which are designed to measure our progress toward delivering sustainable outcomes for people and communities, the environment and for our customers. We do that well, we'll generate tremendous outcomes for our shareholders. I'm very proud that we've integrated our Vision 2030 road maps into the strategic, operational and people planning processes throughout international paper. Building a better future extends to all areas of the company, and it's woven into all levels of the organization in order to achieve the outcomes we desire. And finally, on Slide 7. We really can't talk about Vision 2030 without mentioning the whole notion of circularity and what that means to IP. Circular business models are the opposite of a take, make and waste model of production and are instead regenerative by design. More than basic recycling, participating in the circular economy means that we will start with the design of our products from the use of renewable natural resources to the beneficial reuse of our products our byproducts in the manufacturing process and ensuring that the final product can enjoy multiple lives through repeated cycles of reuse, recovery and recycling. The forest products industry was one of the original circular manufacturing systems, relying on the use of renewable natural resources, primarily trees, designing waste out of our processes. The best example of that is burning biomass residuals to produce most of our steam and electricity and the recycling of fiber to make new products. However, there is more we can do to advance the circular low-carbon economy by designing all of our products to be 100% reusable, recyclable or compostable and working with customers, suppliers and each other to build circular processes into the work that we do every day. So we're committed to this work and looking forward to the progress we intend to make on our Vision 2030 goals. And with that, Gabe, I'm happy to take questions.

Thanks for that introduction and commentary there, Mark. I think, quite frankly, maybe we sometimes don't necessarily appreciate you as business leaders are faced with a myriad of new challenges every single year. And looking back, you being a member of the business roundtable, having a quote of doing the right things for the right way and for the right reasons. It is nice way to wrap this up in terms of kind of your initiative in pioneering this within the packaging space. So we thank you guys for that. So maybe sticking with sustainability for a moment. Now that kind of CPGs have had a few years to do their own homework, formulate a plan or a more comprehensive plan, I should say. Do you feel like the discussions are more bilateral in terms of getting more sustainable packaging on the shelf and/or taking a collaborative approach to these sustainable solutions. And I have some follow-ups there.

I think they're becoming more bilateral. They're becoming more strategic. I wouldn't say we're there in all cases. Obviously, there's a lot of installed capital in the packaging world where the CPGs to use your example. So making changes in how packaging works, how the product is build, is not an easy task. It's not something that can be done overnight. And there's capital decisions and there's other cost trade-offs. I think the discussions have moved from it's convenient. When it's convenient and maybe a buyer of packaging who has an advantage to, it can be a strategic advantage for my company and most of our customers, and they're in every segment you can think of, have the same sustainability challenges and have different versions of what I described in people planted and their performance. They've got to attract talent. They've got to manage what the future regulatory environment is going to be. And what I love about our business model, renewable natural resources, carbon neutral energy generation to the tune of 80% of our energy from wood biomass and recyclability today in most of our products, and hopefully, in the future, what I described as 100% of the products coming from our company being reusable, recyclable or compostable. That is really interesting for our customers.

Okay. And then I think from an investor perspective, I think as some of the -- whether it's ESG funds or just ESG specific or educated investors, they become more sophisticated. What topics do you find yourself most engaged? Meaning do they sometimes approach you with a preconceived notion on what an advantage substrate might look like. And they've already made up their mind that paper is the long term solution, and then they dig deeper on the social and governance aspects? Or is it still sort of in a more exploratory phase at this point?

I would say, in general, our large shareholders, if you look at our roster, governance has been the main topic, and we have best practices in all of our governments from standard boards to performance-based compensation to board to shareholder access to board level interactions. It has become more -- we have become more engaging on the sustainability issues. And I think the main interest for investors is the long-term viability or fiber based packaging. There is some confusing -- confusion out there, and that's normal, not everybody's a scientist. When I talk about the fact that we generate 75% to 80% of our energy from carbon neutral wood biomass that were not a burden or connected in a big way to the fossil fuel grid, I am surprised that, that is news for a lot of our investors. And again, they follow a lot of industries. There's a lot of ground to cover for them. So I don't think there's anything wrong with it, but I think we are oftentimes very conservative in our messaging and assume people just get that stuff. And in fact, it's not common knowledge. Renewability at the beginning of life and recyclability at the end, which is the story of our corrugated packaging business, which is the majority of our company is simple, but very powerful. And investors are beginning to ask more about it and to take notice that, that's a pretty viable solution for the long term.

Right. Well, and even to the extent that younger tree stands and stuff like that, there's higher sequestration of carbon with those tree stands versus more mature versus kind of the public image of cutting down trees to make a certain paper-based product. So it's interesting, a journey, to say the least.

Absolutely.

So I guess, the last one, to the extent that you feel like you are ahead in some of these whether it's Scope 1, Scope 2 environmental impacts, do you see this as an advantage, either access to capital or customers relative to, I guess, maybe the broader packaging space.

Gabe, we really believe it's important and could be an advantage in all areas. So definitely, access to capital. I think about the generation that will change over time and who's making investment decisions. That generation is the same in generation that's -- we're trying to attract as talent in our company. It's the same generation, making purchasing decisions at our customers. So I think this is not a fad, and I think it's going to be important to that particular constituency. So access to capital and being the kind of company I described in our vision, I think that's where people are going to expect their money to be invested. Even if it's a portfolio manager investing it on behalf of someone, I think that's going to be more and more and more important criteria. Employee selection, retention to be able to get the best talent to work in our industry that's got this environmental and sustainability profile. It's amazing when young college technical people, engineers, find out what we do. The old status of a smoke stack industry sort of goes away, and they want to be part of something to that's making something that matters and that does it in a really responsible way. And for our customers, I think it's an access to growth and I think about some of the things we do, and I'll give you one example in our box business. We have this sophisticated software-based system we use with our e-commerce customers that manages their shipment patterns of all of other different products and then recommends a suite of packaging to limit the amount of wasted space because we can save them a tremendous amount of shipping cost by making sure every package is closely sized to the item that's in it. So less done material, less wasted space on a truck. And there's no way to do that manually, every time you get a bid or every time you do a contract, you've got to use data analytics to do that. We've developed that, and it's the kind of thing that shows we are going out saying you need a smaller box, and this is why, and we're winning new business because of that. And that's counterintuitive, in some cases, to go out and share how it can be better, even though it might be a temporary negative for you, we end up getting the growth.

That's good. Shifting gears a little bit. One topic, I think that's kind of front and center for a lot of investors is how we emerge from the pandemic. And to the extent that some of the behaviors prove permanent and then kind of others where we kind of go back to our previous behavior. So the crux of the question is, from your point of view, whether anecdotal evidence or just conversations that you had with customers, the grocery traffic, how much of that do you think could prove sticky and then maybe some of the supporting elements behind that in terms of hybrid work models or remote learning or anything else that you guys are working on internally to try to predict or understand, again, kind of what the demand quotient might look like over the next I don't know, 12 to 24 months.

I think, Gabe, it's a great question. The one we get most often, and it came up on the earnings call last week is, does anybody have a really good database answer for the channel shifts that occurred. With demand, i.e., is e-commerce going to stay as robust as it is and is it going to be at the expense of the traditional channel. The way I answered that question last week was we don't know like anyone an absolute answer. But what we do know is what our customers are saying and seeing and what some analysis that has been done says that these are a lot of first-time adopters and a lot of existing users of that channel that just really improve their demand profile. There's some belief that 80% of the new adopters are going to stay in that channel because they realize it works pretty well, and it's a type of commerce they weren't doing before. So I think there's some permanence. And definitely, the question is about the next 12 to 24 months, even if it reverts back to some extent over time, I think the next 12 months, we're going to see demand patterns very similar to what we have now obviously, that will depend on the economy. People have money right now, at least in the U.S. market. And I can imagine a robust, strong e-commerce channel remaining, whether it's consumer goods or food products and a strong foodservice channel, where people are now going out to restaurants, and that's the part of our business that got hit the hardest in our packaging business. The food supply to the restaurants and colleges and all that. That's coming back, and we're not seeing any drop-off in e-commerce. And so I think we may have a period of time here where the demand is firm and strong. And that's what our customers are telling us, and that's what we're seeing in our backlogs or order books.

Okay. And last one, I guess, as it relates to demand trends and new kind of channels, if you will. I think at home food delivery wasn't really a thing. And obviously, that's an element of e-commerce. But that sort of -- from our perspective, at least, looks like a new kind of channel for you or the corrugated industry overall. Can you talk about, again, what that kind of looked like maybe 3 years ago? And as it continues to grow, dedicating resources to it, or is it just sort of -- I don't want to say lumped in. But is it sort of included in e-commerce overall?

We would include it in our overall e-commerce approach. So when you think about 3 years ago, the majority of corrugated uses -- usage in home delivery of food primarily was in the meal kits and those types of prepared meals pre pandemic. A little bit in the urban centers where you have city residents that it's really convenient to get some grocery delivery. That's not as common in suburban areas and rural areas definitely not. I often laugh with my kids about this notion of grocery delivery being new. And I can -- I'm old enough to remember my grand cards getting their groceries delivered from a little grocery store down the street. And it was like 7 items, but anyway, it's not new. But I think what we've seen in the pandemic really exposed it was the ability to deliver groceries, not meal kits and not prepared foods. And that will -- time will tell whether that's something people will continue to do. The challenge in that whole area and this is what the grocery companies and everything are looking at the challenges is managing the fresh food portion of it. And that's just a technical challenge. It's a preference challenge, all of that type of thing. And so people did it during the pandemic because they had to, but I think going in and selecting your own seafood and your own vegetables and fruits, looks like it's something that when people did go to the grocery store, the physical store that's primarily what they went for. And it looks like that will probably continue.

Right. Okay. Moving on, I guess, the business conditions. Overall. I think early in the year, you discussed kind of 3 key milestones to define kind of what you would think of as a successful year, not necessarily in terms of priority but: number one, building the foundation to achieve the $350 million to $400 million of savings by 2023; number two, I think the Sylvamo transaction getting over the finish line; and then number three, customer service. So again, notwithstanding, obviously, all the disruption that we had from Winter Storm Uri and other things within the market, are you ahead or behind on any of these topics? And then what are the biggest challenges to delivering on those as you see it today?

Well, I think we're on track for the Sylvamo spin-off of our paper business. As you know, all of you know that are on this webcast, it spin-offs have a lot of behind the scenes work that you're on track and so you're not a lot of filings, a lot of carve out financials, but all of that is on track. So I feel good about that. The management team is in place. The next level down is in place. The name is chosen. So a lot of progress, and I feel good about our original target for that. On the $350 million to $400 million in earnings improvement, we've got a great start. On -- if you remember, you probably don't, but in December, we described some categories. We highlighted a little bit on our fourth quarter call in January about the technology-based ones. We are feeling really good about getting traction on some of those, a portion of the front-end loading of that $350 million to $400 million was cost reductions related to simplifying the company. I'm not saying those are easy, but those are the easiest ones to do. The hard order piece comes later, which is that sustainable, profitable growth in relatively low growth markets, which is where the customer focus fits. So I think we're on track with Sylvamo. We're on track to develop and begin to implement the earnings improvements at least the front end in the earnings improvements. The last piece on the customer -- culture and customer focus, that's the kind of thing I don't know if you ever get there because it is a culture change. We're good with customers in our company, we're not great with customers, and that's where we want to be. We want to match our manufacturing capabilities, our process orientation, to being absolutely excellent with customers. So we've invested in learning and new skills. We also have a laser focus in the company. We're not integrating a bunch of acquisitions and doing all that hard work. We're laser-focused on creating a customer culture in our company, and we're doing things that are -- they're simple, but their culture change items. Like every employee in the company is filling out my role, if you're running a machine in one of our mills or one of our box plants, let's talk about what your role is as a machine operator in developing a customer-centric company. And we're having a lot of fun with that. And we're talking about the customers, we're sharing more information. It's an internal culture change, but the lens we're looking at the company through is from the customers back into the company. And everybody does that, but I want us to be talked about and I want us to be performing in the customer space, like everybody talks about as performing in the operational space. We need to do both to be where I'd like us to be.

That's -- it sounds inspiring, I guess. It takes a lot of humility to look in and say, "Hey, we're doing well, but we'd like to do great." So we like that. As it relates to the Sylvamo transaction, in light of some of the news that kind of hit over the past couple of days, the larger domestic peer here and given even your own success in divesting the quiz and mill. I was curious, and I appreciate there are a lot of different people listening to the call, but if you're willing to share with us how it was determined that has been -- was kind of the best avenue to online value for the printing paper operations?

Well, we think -- you look at the options of a spin or other ways to create value with becoming 2 companies. The challenge of saying we're selling the businesses, you still have that option. If you try to spend, there could be some interest that comes. But we believe the business starts out on day 1 as the world's best uncoated freesheet company and highest quality. And that process, we believe, creates the most value long term. It helps international paper from a simplification and focus area, and it helps that business, be able to pursue the appropriate strategy for an uncoated freesheet company, which is increasingly difficult for a company like IP to do when it's 15%, 16% of our business. And the backdrop is a slow secular decline. Quids in -- we -- it's in our uncoated free sheet business. But if you remember the numbers and dig in, a big portion of quids in its coated Board. We capture that in our packaging earnings, but the rest of it is uncoated free sheet. So the quids in story is really about an interested party in the packaging Board side of that operation and the ability to further convert that in the future. So I don't look at that as selling an asset out of the unquoted freesheet. That's a technicality. That's a packaging focused mill, and it's a packaging mill in the future, I think, when the new owners probably execute their strategy. So I saw that the company you're talking about confirmed the discussions with the interested party. I don't know any more than anybody else has read on that. But obviously, given the nature of the people they're dealing with and their track record of looking for high-quality fiber around the world and their operations in Asia, at least on first blush, if you just ask me, it seems to make strategic logic in terms of finding good fiber and being able to have that access, whether it's in North America or Latin America, and making finished products in the Greater Asia region.

Thank you for that. Actually, I think some investors might be surprised, quite frankly, when you dig into the consistency of Sylvamo and specifically the Brazilian mills and then East over being extremely low cost, but that business is positioned pretty well despite kind of the overall kind of macro conditions that face printing paper. So I'm curious, one of the piece of feedback that we did get, and I apologize, I do appreciate we reported earnings last week, but piece of feedback that I got was kind of the sequential earnings guidance as it relates to volumes in the industrial packaging business. And I think you guys called out maybe a $10 million drag. And it seem more seasonality related -- as it related, I'd say, Spain and Morocco. So I was curious -- but those are obviously much smaller pieces of the pie relative to your North American ops. So I was just curious if you could expand upon that. If there's anything else going on there. And again, I maybe feed you a couple of answers, one of which is seasonality is probably less pronounced today than it was, call it, 3 years ago and looking at the business. And then two, you guys did, in fact, push off some maintenance. So perhaps you're still somewhat sort of hamstrung in terms of what you can do?

Yes. If you connect 3 points that we made last week, I think astute investors will understand there is nothing wrong with our packaging business, and there's nothing wrong with demand. We were asked a question about inventories. I answered it as they're not where we would like them to be. We were asked the question about our export business. And I said we are disappointing export customers. And we were asked about the maintenance outages, and it's exactly what you said. In order to run reliably and to have the best overall performance we need to take these maintenance outages in this year. We pushed them off in some cases because during the pandemic, it was possible to execute that. We couldn't get the workforce, skilled labor to usually bring in outside contractors to help you shorten the time. And some of that was just not possible early in the pending so that's the confluence of issues plus that small item we called out in Europe, will be fine in the packaging business. But balancing the ability to serve our customers has a lot to do with how much containerboard you have ready to convert in your box plants. I think Tim made a comment, sometimes when you get this low in inventory, you end up having to use the wrong containerboard. Meaning you have to upgrade. The customer will take it, but it costs more, you can't charge more or you have to move it and add additional freight from one plant to another. And I would be explaining in future earnings calls, why are our costs up so much. So it's about taking care of the customer and making the most money we can make over the -- not the quarter, the second quarter is important, but not the quarter, but over the full year and heading into '22, and that's what we're trying to balance. So think about those 3 or 4 points, and you should come up with a pretty clear conclusion on what's happening with our packaging business in the second quarter.

Excellent. I think we're out of time. I do very much appreciate your participation here today.

Thank you, Gabe, and thanks, everyone, again, for your interest in International Paper.

Bye-bye now.