International Paper Company Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Transformation On Track: Second quarter revenue met expectations, and confidence in closing North American market share gap this year despite soft U.S. and EMEA markets. Cost performance in North America mill system and EMEA needs improvement but has a clear path to fix.
• 80/20 Deployment: Launched 80/20 a year ago, with EMEA mobilizing teams to deploy 80/20 by region. Packaging Solutions North America has accelerated 80/20 implementation, seen in improved service and quality for customers.
• Commercial and Cost Actions: In PS NA, on-time delivery improved, investment announcements for attractive markets, and execution of 1 to Perfect service model. In EMEA, refocused on attractive customers and won strategic accounts. Cost-out actions included closing facilities, selling facilities, and streamlining regional structure in EMEA.
• GCF Strategic Review: Strategic review of GCF progressed with no changes to expected timeline, remaining committed to achieving best value for the business.

Segment Performance

• Packaging Solutions North America (PS NA): Second quarter results reflect additional months of DS Smith North America business and benefit from cost-out initiatives. Volume was seasonally higher, and they reduced volume gap to market by 200 basis points. Operations and costs were unfavorable sequentially but expected to improve in Q3. Price and mix were higher due to strong realization from prior index movement. Volumes were seasonally higher and expected to grow in Q3 as strategic wins ramp up.
• Packaging Solutions EMEA (PS EMEA): Volume was softer than anticipated in Q2 due to macroeconomic uncertainty, but June showed signs of recovery. Fiber costs spiked in April and May, but energy costs provided some offset. Adjusted EBIT was impacted by revision of purchase price accounting estimates related to the DS Smith acquisition. Volume is expected to improve in Q3 with momentum from June and July.
• Global Cellulose Fibers (GCF): Earnings and volume were lower sequentially in Q2 due to increased outages, but higher sales price realization and favorable input costs partially offset this. Volumes are expected to increase in Q3 with fewer outages, and planned maintenance outages were heaviest in Q2.

Guidance

• Holding 2025 EBITDA guidance. Expect significantly higher earnings sequentially in Q3 driven by higher volume and lower costs across all business segments.
• Confidence in closing North American market share gap by year-end, with commercial strategy gaining momentum and onboarding strategic wins.
• Anticipate moderate increase in EMEA demand in second half of year with fast-moving consumer goods seasonal growth, though wildcard is unpredictable tariff negotiations.

Risks

• Macroeconomic Volatility: Soft markets in EMEA and uncertainty from trade tariffs pose challenges.
• Mill Reliability Issues: North American mill system has left profit on the table due to reliability issues, with ongoing efforts to improve but still early in the journey.
• Market Softness: EMEA box shipments slowed in Q2 due to market softness, and European pricing weakness could threaten EMEA EBITDA forecast.

Question and Answer

Q: What's holding up mill reliability progress and what will get us there?

A: Mill reliability issues stem from long-term underinvestment. Progress involves redeploying capital into strategic assets, focusing on foundational investment in mills, and exiting non-strategic assets to reinvest in competitive ones.

Q: How does EMEA slot in terms of EBITDA guidance?

A: EMEA trough was in early Q2, with June and July showing recovery, but subject to market variability. Still holding the range discussed at Investor Day for EMEA EBITDA.

Q: Any observations on customer inventories and restocking?

A: Goods economy remains constrained, with no evidence of massive restocking. Pent-up investment in industrial world could lead to upside if economic activity picks up, but current caution among businesses is noted.

Q: Progress on exiting nonstrategic export markets?

A: Halfway through exiting dumping ground export markets, with focus on being smart about bifurcating strategic and non-strategic export segments.

Q: Europe 80/20 deployment and next steps?

A: 80/20 deployment in Europe is ongoing with streamlining subregions, but consultation processes make changes slower. Focus is on restructuring to invest in strategic assets, with employee receptiveness mixed but commitment to long-term business health.