All right. Well, welcome back, everybody. I'm George Staphos with Bank of America on paper and packaging. And we're delighted to have International Paper for our latest presentation. Tim Nicholls, who's Chief Financial Officer of the company. Also in the audience, is Mark Nellessen from Investor Relations. So if you have any questions for Mark, he's in the back of the room.
Tim was elected Senior Vice President and Chief Financial Officer of the company in June of '18. A position he had previously from 2007 to 2011, if you know anything about IP, their senior management goes through many different roles, iterations, which makes it so valuable to speak to any one of them. Mark in IR running a business not that long ago. Of course, he loves IR now, he loves IR are now. Tim has nearly 3 decades of experience in packaging and paper. He joined IP in 1999 with the Union Camp acquisition.
Tim, welcome. Thanks for being here with us.
Thank you, George. Good to be here. Yes, we move around, a little there.
I heard it's the monkey bar if you guys called it actually the monkey bar.
I haven't heard that.
Right. Okay. Somebody else told me that then.
No. But thank you, George, and thank you, all of you that are joining this morning for your interest in IP. I really appreciate that.
Just to make a couple of comments about where we are. So on our fourth quarter earnings call, we talked about the first quarter, but we talked about the full year and a $2.8 billion EBITDA target, which we still feel very good about.
And so even though we're in a very uncertain time, a lot of volatility there's a lot of very positive things happening in the company. We've got a new management team that's in place, it's excited. There's a lot of energy. We have a huge opportunity around cost and after 2 years of escalation, just getting cost out of our system, strong financial position with the balance sheet and our fully funded pension plan.
So a lot of excitement, a lot of positive momentum that we see on the things that we control in the company, and we're excited to be here today to talk about it.
Thanks, Tim. I guess maybe you've already started to answer this question. But one thing we're asking all of our companies, even IP, even though you're one of the larger companies in the sector. When we look at the sector, when the people in this audience and people on the webcast are listening in, look at the sector, it's only 0.3% of the S&P 500. So to really matter, it takes a lot just to break through versus other sectors investors can take a look at, let alone IP versus a lot of other very fine companies in the sector. So if you want people to take away 1 or 2 things in terms of why they should be buying IP today or tomorrow, what would it be?
We're focused on value, value creation. So we think we have a lot of initiatives in the company, both commercial and operational that are going to drive EBITDA growth, cash flow growth and ultimately, we think, create a lot of value.
So we've got a strong position to operate from, given the balance sheet, and we're generating a lot of cash. So for us, it's about making ourselves relevant by standing out on value creation.
Thanks, Tim. And relative to your guidance, what are the biggest supports for your outlook, the $2.8 billion of EBITDA that you're targeting? Interesting that you still feel very comfortable with it. So what are the supports? What are the upward and downward tension points that we should be mindful of and both in terms of GCF, global cellulose fibers and industrial?
Yes, it's a great question. I mean let's start with the fact that it is a very uncertain environment, and there's a lot of volatility, and we recognize that but we do have some momentum coming out of 2022, especially around GCF, where the commercial strategy that's been deployed over the past couple of years has really started to come into its own.
We had a number of contract negotiations last year that resulted in a very good outcome for the business. The business has been focused on getting paid for value and making sure we're not making commodity pulp, we're making specialty pulp and just making sure that we're targeting the customers, the channels, the segments, that are willing to pay for that value. So there's a big earnings lift in GCF.
There's a lot of positive momentum in terms of how we're running the system in IPG and industrial packaging from an operational standpoint in the mills and the box plants, but also supply chain, which has started to normalize, but the focus is going to be on getting cost out.
If you look at the past 2 years between input cost, energy, fiber, chemicals and distribution, especially our operational distribution choices in the business, we've had over $2.5 billion of cost increases over that period of time. And in this environment, we see a real opportunity to take a lot of that cost out and also in a less than run full environment, claw back a lot of marginal cost.
Is there a way to quantify out of that $2.5 billion, what could come back to you? Steady state with the current environment, right? Anything can change over the next couple of years.
Yes. I mean, we haven't quantified it. We're after all of it. And it's not just the $2.5 billion. On top of that, you have inflation, contracted services, general materials. You have -- when you're in a run full environment or a heavier demand environment, which we had at the beginning of last year through about mid-year you're reaching for your most expensive inputs, your most expensive suppliers because you're stretching the system.
And so we're really after all of it at this point. And we've seen a big reduction in energy cost for a big consumer of natural gas. We're a big maker of our own energy. We generate probably 75% to 80% of our own energy in our mills, but it's still supplemented with a significant amount of natural gas.
So just with the spike that we saw in now recovery in gas price, that's a big mover, recovered fiber, another big mover on the cost side.
Thanks, Tim. Any questions from the audience for Tim? We'll keep moving ahead. So on the whole subject of operational improvement and cost reduction, recognizing there's a lot more to it than that. What's the latest on building a better IP? What's left to be generated there? How did building a better IP make you a better company? Give us some for instances here that we wouldn't necessarily see from the Ks or the analyst calls.
Yes. I think it's a great question because the way we think about build a better IP in the company is, it's not a program per se. It's not an episodic event it is a way of thinking about how we improve the business and using some very specific things like technologies, big data, machine learning, predictive analytics, as well as a different type of commercial approach.
I think you saw that commercial strategy and approach in GCF. It resulted in a good outcome. We think there's elements of that, that can be applied in the industrial packaging business. We've got a new team there, and so they're all about that. So build a better IP well, whatever it's called, but it will be a way of framework for how we think about improving the business through both commercial strategy and cost optimization.
We exited last year with $250 million of improvements. We've got on track another $150 million, $150 million plus for this year. But the opportunity is to keep building on that past 2023.
Tim, I know the commercial side is probably tough to talk to in terms of what you can get from it from an example standpoint. But maybe on the operations side, again, what you went through makes sense, but give us a for instance, to the extent that you can share it, how you're using the analytics to be a better IP?
Yes. Well, it's -- the general application of it might not be unique to us, but the specific application, given our footprint is very unique to us in what we do.
So as an example, on the cost side, we have over 200 converting facilities, 17 large mills supplying those converting facilities. We move a lot of product, a lot of board to converting, a lot of boxes to customers. And you're never going to have the perfect inventory in all places all the time.
So one example is it comes down to how do you arbitrage freight cost for moving roll stock that may be needed in another place with fiber cost, just consuming a role that maybe has extra trim loss and that's -- when you're shipping close to 40,000 tons a day between all of these facilities and to customers and you're working with more than 10,000 SKUs.
No 1 person, no group of people can humanly know all of those trade-offs in the moment, but big data can. And so it's how we deploy big data tools to help us not only optimize what the converting plant is consuming, but the impact back through the system to the mills in terms of what the mills need to run.
And so in turn, I assume that the algorithm or whatever you would call it, will then continue to improve on itself. And so in theory, over time, we should be able to see an even more efficient manner to your operations because of this? Is there a way to gauge what kind of productivity you get from this over time?
Yes. I mean -- so a certain amount of machine learning and data analytics is used in this. So it should get better over time. Of course, you're dealing with different circumstances period by period.
Another example of that is just how we're scheduling production to running converting facilities. We have such a large number of facilities and concentrations in different geographies that we can actually look at order patterns for a product and instead of just producing them in the facility that may be the closest to the customer look across a number of facilities and say, for production capability, it may be better to take the next plant over in terms of how you optimize the mix, just running through 5 plants or 10 plants as opposed to 1.
So that's freeing up incremental capacity. It's reducing the strain on converting facilities from an overtime standpoint, it just gives us more flexibility.
Do you have to do anything on the front end on converting and your box plant to be able to enable greater use of this?
There's some of it. I mean there's tooling and things like that, that you have to prepare for, but beyond that, not much.
Interesting. Really fascinating stuff. Any questions for Tim and IP on this topic or any other topic as we're forging ahead? We'll keep moving. Thanks, Linda.
Reflecting back on fourth quarter and your commentary, maybe relative to where you were in November, what to you was the most incrementally positive trend that you discussed either by end market customer -- well, you can't talk about customers, but broadly region or operationally?
Operationally, we were running better. I think Mark said it at the end of the earnings call back in January, and I totally agree. We're not -- we were not and we're not satisfied with how we were performing given a series of events in '21 and through '22. But we're back on focus. And operational reliability has been an issue due to some external events.
But I think the big positive is what we talked about earlier, I mean, just seeing this commercial strategy in GCF play out to a large extent, the way we thought it would and wanted it to was a big lift for the company as we come into '23. And it applies not just the GCF. It applies to the packaging business in the U.S. and in Europe.
Yes. Tim, just to ask you a question and forgive the elemental nature of it, all right? So I think of Global Cellulose Fibers, obviously, it's a pulp business. Yes, I know it's fluff, it's value added. But at least in my deep recesses I'm still thinking it's pulp, and it's going to go up. It's going to go down. Yes, you're going to -- you're doing your best to make your commercial arrangements better, more value-add. But at the end of the day, it's just a commodity and it's got going to bob up and down with the tide and the waves. Tell me why I'm wrong.
Well, it will go up and down. You're right about that. It's not immune to economic cycles and supply/demand. So it's a competitive market, and it will go up and down. Our belief was the other part of what you said, that it's not a commodity. It's a specialized pulp. It's value added. It's a Class I medical device. It has to go through rigorous qualification test.
And we believe that for the product and the services that we provide, there was a value equation there that maybe was not fully recognized. And so we were all about -- the team was all about focusing on the channels, the customers, the segments where that value would be recognized. And so we've opened up a spread to commodity pulp, which we believe was necessary to do, and it will go up and down, as you said, but we think with not as much variation as it has in the past.
Thanks, Tim. That makes sense. And if we think about destocking and really more so in corrugated and industrial from what you can see and what you can share. Do you think we're done with the destocking or your customers are done with destocking, recognizing there's no one who's going to be total -- there's always going to be somebody who's got to get their inventory down?
I don't think it's much different than what we said back in January on the call. A lot of destocking in the fourth quarter, we thought there was going to be some carryover into the first. I think we see that. Our customers talk about that. It is mostly on the packaging side. But given retailers and what they're going through, it's not -- the fluff pulp market is not immune from it. There's some degree of destocking there. But I think that it's probably close to running out.
I think the question that everybody has in their mind is what's the restock going to look like and how cautious are buyers and retailers going to be as they think about the next few quarters of economic performance.
And can you comment at all in terms of what volume trends you're seeing into the first quarter beyond what you said on the fourth quarter call? If the answer is no, we totally respect it.
No, I think generally -- so I think overall, it's about like we thought. We're in the first quarter on balance where it's a decline rate on a daily basis, much like the fourth quarter. But we do see strength in nondiscretionary goods versus discretionary. Processed foods has shown some resilience, protein looks okay, produce looks like it's in good shape.
But I think that we saw the shift last year from goods to services as people were free to travel and they had bought a lot of goods during the height of the pandemic. And I think now with inflation the way it's been, it's been more of a choice between how much to spend, what to spend it on, discretionary versus nondiscretionary.
Thank you, Tim. You touched on this a little bit. IP had uncharacteristic operating issues through much of '21. Yuri kind of kicked it off and then it was bookended with Prattville. Some of these things you were out of your control but what were the learnings from that period? And when we look at the historical performance of IP during that time. EBITDA for Industrial was about $3 billion in 2018. We ended last year at $2.5 billion, partly because of these operating issues Again, what are the learnings? What are the observations? And how does that then make you get better beyond building a better IP?
Sure. Well, it's maybe not a lesson learned, but a lesson reminded. And so having flex capacity, having recovery capability through a cycle is important. And so the winter storm took a lot of productive capacity off-line. We lost close to 150,000 tons of roll stock capacity because of the storm.
I don't -- I'm not sure it's fully appreciated, but Prattville was actually a bigger impact in terms of getting the mill back to a capability of a run full type of mode. And so -- and it was exacerbated by the supply chain situation that everybody found themselves in, rail availability, truck availability, even for GCF, ocean freight.
I mean, it's not that long ago that we can all remember 100 vessels sitting off almost every major port in the world waiting -- and so in that type of environment, you are using premium freight, you're using less than efficient methods of moving product through the supply chain, all having a cost impact.
And so having flex capacity to flex the system up and down is a better answer economically for us in terms of how we manage the system than running the system flat out 100% of the time.
And Tim, obviously, we always say this, we're just analysts. We push numbers around our spreadsheet. We type into a document, you guys run companies. And we always need to remember that but it's not the first time that we've heard IP in the past say it's good to have some flex capacity. And it's hard, right? Customers come to you, you need to serve your customers. So as you go through the next number of years, to the extent that you can talk to this, because some of it's commercial strategy, which you can't right? How are you going to make sure you serve the customers you want to serve and also make sure you've got the flex capacity that you say you need, which looks like you need?
Yes. I mean to your point, on serving customers, one thing that I'm really proud of. I know Mark is he's spoken about it frequently. But through all of these issues, we made sure that our customers had product, and they had product when they needed it. So -- and that in and of itself added cost because we were in the moment, less concerned about cost per ton and more concerned about making sure our customers had what they needed.
So your question is a good one. We look at our system. First point is we like our system. We have a very low-cost mill system. It's geographically well positioned to serve the entire U.S. And it's always a choice of thinking about what system capabilities we have, what incremental capabilities can come through non-capital types of efforts in terms of additional reliability and whatnot, and then where are there capital options.
And so I think we like the system we have. We think it serves our needs in the moment. So there's not a huge investment that we need to make, but there could be small investments that make sense in various facilities that would improve capability, probably improve cost structure, but might result in a few incremental tons in facility by facility.
Okay Understood. And to the extent that you can talk to this, a lot of our discussion today has been fairly around this. Cost per ton, the way we would calculate it again, based on your data has gone up a couple of hundred bucks in industrial since '19, which basically offset the commercial trends that you were seeing in the market, how do you -- how quickly can you get that back? And can you?
We think we can there's a certain element of inflation that we probably won't recover, but it's not a huge portion of it. Yes, and before '21, when the winter storm hit, I think we were known for flexing our system in times of high demand levels and lower demand levels to manage costs appropriately and make the kind of margins and returns that we expected and that investors expected.
So as Mark said, we're not satisfied with what happened over the past 18 months or so. And it was a series of external events and then complicated by supply chain and lead times on supplies and things like that.
So we are focused on taking costs out. We know how to do it. We have central buying organizations for a lot of what the mills use. We are deploying a regionalized but more centrally controlled procurement organization for our converting. We're focused on getting out highest cost suppliers, highest cost materials on any front. And we've got the resources dedicated to it. So I'm very confident that we know how to do it, we'll do it.
And you can do this all within your existing CapEx budget, and going forward, $1 billion-ish is still a pretty good place?
I think if you look at D&A, it's about $1.1 billion. We're spending around take this year or if you look at a longer-term average, it's been about 6% of sales in normalized periods. And I wouldn't expect it to change dramatically from that unless we identify something that looks to have compelling returns and grow EBITDA in the near term.
So there's a focus on improving the bottom line sooner rather than later and still generating the kind of returns that we need.
One question we had for you. What are you seeing right now in terms of nearshoring and reshoring and what demand impact that could have for your business or the business in total, the industry in total? And what are you seeing in terms of automation and what that could mean, either in terms of being a driver of demand for corrugated because of more stuff being shipped around the country to enable the automation or more demand for corrugated because there's more automation in the back of factories or back of distribution sites before that corrugated box goes the last mile?
So I'll try to unpack that just a little bit. Yes. So on the first, in terms of nearshoring and onshoring, the -- I think the data we have would be indirect or, in some cases, even anecdotal, but our teams looking in Mexico look at things like industrial real estate, commercial real estate, and they see more of that capacity being taken offline. So it looks like companies are making investments in Mexico and we'll have to see how that plays out, especially along the border across the Southwest.
Anecdotally, even here in the U.S., we have pockets, some metro areas, some more rural, but concentrations of box plants and customers in those areas where multiple customers are telling us, and we'll have to see it, but they're telling us that for their existing facilities, they have expansion plans. And so it may not show up in the near term in ground being broken for completely new facilities, but it could be enhancements to existing facilities.
So on the automation, there's automation that can be applied in the mills in box plants. You can buy equipment that pre feeders, load farmers, packing systems. And we do a fair amount of that. And conveyor lines that are automated and whatnot. And so there's a place for that, and we'll continue to look at those opportunities.
I think the more exciting part, it's a different type of automation, but it's back to the earlier part of the conversation of using data in unique ways, applying machine learning to predictive analytics. As an example, in our mill system, we don't have sensors on every piece of equipment, but we have a lot of sensors and critical operations within mill facilities they collect a lot of data, 24/7.
And that is fed centrally to a data analytics center where we have data scientists monitoring that, looking for correlations monitoring performance, not only in terms of are we running optimally but also do we have pieces of equipment that are starting to fall outside control limits and might be at exposure for failure so that we can address that ahead of time as opposed to incurring the additional cost of the disruption of it failing and taking parts of the mill down.
Thank you, Tim. Maybe my last question before we wrap up. and it will be 1 of my 3 partners, okay, with first of all, what is unique about [Auckland] that maybe is a model for the rest of your network over time? Two, how comfortable should everybody hear today and listening in, be about the EBITDA growth outlook you have for GCF?
And then last, a question we frequently get is, should we worry about the dividend at IP, given some of the challenges in the industry, the fact that you've had some portfolio changes and so on, that you have to get into the portfolio change themselves? Those 3 things, how would you answer?
So let me start with the last one. I feel very good about the dividend. We're committed to it. I know it's personal for Mark, it's personal for me. And we trough tested. We want to be at a range of 40% to 50% of free cash flow for the dividend. But that's through the cycle, and so it will vary at points in the cycle. So the dividend, we're committed to.
For the box plant, I think when we looked at everything, we've experienced a tremendous amount of growth in that geography. And building a new box plant was evaluated to be the best use of capital as opposed to trying to enhance the facilities that we had. So that was one approach but it's not the only approach. We've invested in a lot of new converting lines, corrugator upgrades and other facilities.
And one of the things that we talk about you can build a box plant without building a box plant. You can look at a geography where you have multiple converting facilities and you're making individual investments across 3, 4, 5 plants and you can create, in essence, a virtual box plant across those 4 or 5 facilities.
So we're looking at the most efficient, effective deployment of capital and the quickest way to get that capability and capacity online. What was part 2?
Just pulp, should -- do you still feel good about that $200 million-ish that I guided you to on the call?
Feel very good. Like I said, there's going to be a little bit of destocking, but the commercial strategy has worked. There's cost to be taken out. If you think about just distribution supply chain costs. I think back to the ports. We make 100% of our product in the southeastern part of the U.S. We export close to 90% of it.
So almost everything we make has got to find its way to a port and on a vessel and to a customer in some other part of the world. And the complications from the supply chain, just trying to get product to customers has been daunting. The team has done a great job making sure customers have what they need but at a fairly high cost.
Understood. Any last comments to wrap on your side, Tim?
No, I'd just say thank you for today, George, and thank you all of you and on the web for showing your interest in International Paper. We appreciate that. We feel good about the year. We feel good about the team, operating from a position of strength, and so we're looking forward to it.
Tim, thank you very much. Please, everybody, join me in thanking IP and Tim Nicholls for a great presentation.
