The operator introduces the International Paper's Second Quarter 2024 Earnings Call, and Mark Nellessen, Vice President of Investor Relations, takes over. He introduces the speakers, Andy Silvernail, Chairman and CEO, and Tim Nicholls, Senior Vice President and CFO. Legal disclaimers are mentioned, and non-U.S. GAAP financial information will be presented. Andy Silvernail talks about his background and why he joined IP.

The speaker shares their experience of finding a company with potential for improvement and significant upside. They have spent their first 90 days learning about the company and speaking with employees, customers, suppliers, and investors. The speaker then presents data that highlights the company's underperformance in the past 10 years and acknowledges that this is unacceptable. They promise to fix the issues by understanding the root cause and making significant changes.

Over the past decade, IP's performance has declined due to poor choices in capital and resource allocation. While they have made good efforts to improve their balance sheet, they have also spent a significant amount on dividends and share repurchases, which can be either beneficial or harmful depending on how they are used. In addition, their investments and capital expenditures have not generated the expected returns, and they have also underinvested in their box system and maintenance and repair, which are crucial for customer satisfaction and productivity. This has been confirmed by conversations with employees, particularly in the maintenance department.

The company has a long list of opportunities that require capital to improve performance and profitability for customers. The lack of investment in the business has led to a cost problem, but the company is taking steps to address this and control their own destiny. Reliability is crucial for customers, and the company is focusing on improving their on-time delivery and capacity to regain lost market share. The company prides itself on its strong ethical culture and commitment to working with integrity.

The speaker discusses the challenges of implementing change within an organization, but highlights the strengths of having a talented team and a strong financial foundation. They mention the potential for growth in their North American Packaging franchise and their adoption of an 80/20 operating system to improve their strategy, cost structure, and team alignment. They also mention their second quarter earnings, which were higher than the previous quarter but relatively unchanged from the previous year. The market environment is described as stable to moderately better, but the company's packaging volumes are lagging behind expectations due to repositioning and optimizing value and volume.

In the second quarter, the company's adjusted operating earnings per share increased from the first quarter due to higher prices and mix, favorable volume trends, and efforts to improve reliability in their packaging business. However, operations and costs were negatively impacted by inflation, higher S&A, and spending.

In the second quarter, maintenance outages were reduced by $16 million and input costs remained flat. The industrial packaging segment saw higher earnings due to price and mix improvements, as well as benefits from the Box Go-to-Market strategy and higher export and mix. Volume also increased, but may be impacted by the Box Go-to-Market strategy in the short term. However, this strategy is expected to improve margins and mix in the long term. The Global Cellulose Fiber segment also saw higher earnings from price and mix improvements, driven by the price index movement and optimization strategy.

The company's volume was relatively flat overall, with improved demand for absorbent pulp offset by lower sales of commodity grades. Sequentially, operations and costs were favorable due to the closure of a pulp machine and lower planned maintenance outages. However, input costs were slightly higher. In the third quarter, the company expects lower earnings due to volume decline and higher costs, but price and mix improvements are expected in the industrial packaging segment. The company also expects relatively flat earnings for Global Cellulose Fibers.

The paragraph discusses the impact of higher input costs on earnings, as well as the expected increase in earnings from switching to Global Cellulose Fibers and lower maintenance outage expenses. The speaker also mentions their use of an 80/20 operating system, which focuses on simplifying processes and prioritizing customers and products to drive profitable growth. This approach is being applied to the entire business, as well as sub segments and enterprise functions.

The second step in our plan is to segment different businesses so we can focus on winning for the customer and driving results. This involves aligning resources according to each business's unique needs and accelerating profitable growth through customer obsession. The most important insight of 80/20 is the misalignment of what drives a business and how resources are typically applied, which leads to complexity and inefficiency. We will use the 80/20 approach to simplify and focus our business, improve profitability, and invest in differentiated capabilities for the most attractive customers, products, productivity, and capital allocation. This will result in a better experience for our customers and team, with a focus on simplification, segmentation, zeroing up each business, and aligning people and investments.

The company will place authority and accountability close to the customer and decision-making in order to drive better results. They will also apply the 80/20 principle to optimize their operations and believe that their current portfolio has the potential to deliver $4 billion in EBITDA. They will focus on implementing 80/20 and plan to update investors on their progress in October, with required disclosure documents related to an acquisition being published in late summer. They will also hold an Investor Day in March.

The speaker thanks the IP team for their hard work and announces plans to share progress in the future. They have been pushing the team to tackle an important mission and have found them to be willing and able. The speaker then hands over to the operator for questions. The first question is about the 80/20 and box strategy, specifically how much unprofitable business they intend to walk away from. The speaker explains that they are not necessarily exiting business, but rather segmenting and aligning resources to win. They do not want to "peanut butter spread" overhead costs and are focused on profitability.

The paragraph discusses the negative impact of traditional accounting systems on profitability and the importance of segmenting customers and products to align resources and increase profitability. The analogy of farming different crops with different resource needs is used to illustrate the concept. The author believes that aggressive segmentation can lead to quick recovery of any initial volume loss and drive long-term returns.

The speaker explains that the 80/20 approach will be deployed differently for DS Smith, as it is a separate platform in Europe. The integration process will be divided into three parts, with a focus on implementing 80/20 in specific regions where it is most relevant.

The third part of the integration plan involves the corporate level, which requires a small team to work on shared tasks in order to achieve savings. The company wants to avoid overburdening its employees and creating unnecessary administrative tasks. The reliability spending is expected to increase in the third quarter, with a significant portion of it being dedicated to improving reliability. Some of this spending may bleed into the following quarter.

The speaker discusses the importance of improving reliability in the company's operations and how it will benefit both profits and customer satisfaction. They mention the 80/20 methodology and how it will help them to use their existing resources to fund this improvement. The speaker emphasizes that reliability is the top concern for most customers and that the company has not met expectations in this area in the past. However, they believe that with increased focus on reliability spending, improvements are already being seen.

The speaker discusses the three key components of their company's success: reliability, reach, and innovation. They believe that investing in these areas is crucial and that they need to self-fund these investments. The speaker also addresses the company's go-to-market strategy and states that they are confident in its success, with 75% of deals already signed. However, they warn of a potential negative surprise in the coming quarters due to a lag in reliability and market share loss.

The speaker discusses the current state of the business pipeline, noting that it is not as strong as in previous quarters. They acknowledge the need to improve understanding and management of the pipeline and are working towards that goal. The next question addresses the recent decline in box volumes, and the speaker attributes it to a combination of go-to-market strategies and other factors, such as investments in reliability. They note that the balance between these factors is about 50-50 and they believe they are on track with their go-to-market plans. Lastly, they mention that the pricing environment has become more competitive.

The speaker discusses the company's focus on reliability and the investments they are making to maintain their leadership position. They expect the industry to grow 1-2%, but cannot provide a forecast for the fourth quarter due to legal restrictions. The next few quarters may be challenging, but they are confident in their long-term strategy.

The speaker apologizes for not being able to provide more specific information due to a responsibility to keep certain details confidential. They confirm that the projected increase in EBITDA does not include DS Smith's EBITDA and that there will be a normal level of capital spending, with the possibility of slightly higher spending to support the strategy. The speaker also mentions that the focus of capital spending will be on the right assets and geographies, specifically box plants and mills in the U.S.

The speaker discusses the importance of location in driving change and making strategic choices, using the example of IDEX. They emphasize the need for courage and resource allocation to achieve sustainable competitive advantage and drive productivity. The following question asks about the 1.5 point differential in CapEx compared to peers, which the speaker attributes to maintenance costs. This will likely be reflected in operating costs rather than capital investment.

The speaker discusses the company's plans to become self-funded and free up resources, which may result in some additional capacity being removed from the system. They also mention the importance of focusing on what is important and matching capacity with demand. The speaker acknowledges that there may be some initial drag on performance due to investments in reliability, but expects to see positive results in the future. They express confidence in the company's ability to make strategic decisions and address long-term issues.

The speaker is impressed by the team's capability and willingness to improve the company. He has seen them embrace the 80/20 concept and move at a fast pace. He believes the team is filled with great people, from top to bottom, and has a personal connection to the maintenance department. He believes the team needs the resources and support to succeed. They have gone through the initial phase of gaining buy-in and are now entering into tougher phases.

The company's recent performance and events have solidified the team's understanding of the stakes and created a sense of urgency. The team is capable and ready to do the hard work ahead, but they must also move intentionally and strategically to win with customers. The company is working on aligning KPIs and metrics to drive results for customers and owners.

The company mentioned in this paragraph is a leader in terms of reliability and production capabilities. They are also highly efficient and demonstrate the importance of measuring cause and effect. They are working towards tying incentives to profitable growth rather than just volume, while still remaining competitive in the market. They are improving their sales talent and have room to grow. The company aims to achieve a $4 billion EBITDA target, but there is no specific timeline given. The contribution from the Global Cellulose Fibers business to this target is not specified, but the company is working towards improving metrics and incentives for all aspects of the business. The company did not provide an update on whether the Global Cellulose Fibers business is considered core to the company's future.

The company has been considering the impact of the DS Smith process and has consulted with lawyers. They cannot disclose any information about it as it may trigger a forecast. The company is currently reviewing their whole portfolio and will make decisions soon. The goal is to make decisions sooner rather than later. The impact of GCF on the overall number is small and more details will be provided in the upcoming proxy filing and road show.

The speaker discusses the company's plans for the next 90 days leading up to the third quarter earnings call. They mention the importance of data analysis and making decisions based on facts. They also emphasize the control they have over their business and the potential for outstanding results. The speaker thanks everyone for their time and partnership and looks forward to future communication.

This summary was generated with AI and may contain some inaccuracies.