International Paper Co /New/ Q1 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by. And welcome to First Quarter Investor 2020 Earnings Day Conference Call. At this time, all participant lines are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised, today’s conference is being recorded. It is now my great pleasure to turn the conference over to Guillermo Gutierrez, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Monee. Good morning, and thank you for joining International Paper’s first quarter 2020 earnings call. Our speakers this morning are Mark Sutton, Chairman and Chief Executive Officer; and Tim Nicholls, Senior Vice President and Chief Financial Officer. There is important information at the beginning of our presentation on Slide 2, including certain legal disclaimers. For example, during this call, we will make Forward-Looking Statements that are subject to risks and uncertainties including the impact of COVID-19. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S.GAAP financial measures is available on our website. Our website also contains copies of the first quarter 2020 earnings press release and today’s presentation slides. Relative to the Ilim joint venture and Graphic Packaging investments, Slide 2 also provides context around the financial information and statistical measures presented on those entities. I will now turn the call over to Mark Sutton.

Thank you, Guillermo. And good morning, everyone. Thank you for joining our call. We will begin our discussion on Slide 3. The COVID-19 pandemic is unlike anything we have ever experienced. This pandemic brings unprecedented challenges and requires us to focus on what we as a company need to do to remain strong and resilient for all our stakeholders in the short term and the long term. International Paper entered this crisis in a position of strength. No strength is more important than the talent commitment of our 50,000 employees worldwide. Our most important responsibility is the health and safety of our employees and contractors. I want to take this opportunity to thank our employees across the Company and all of the business and support groups for their commitment and ability to adapt in this challenging period. I’m especially grateful to our frontline employees in manufacturing and converting facilities around the world. They ensure our customers continue to receive essential products. We also went through this crisis with world-class manufacturing and supply chain capabilities. Our scale, flexibility, and geographic reach allow us to meet our customers' rapidly changing needs, which is more important than ever in times like this. And we have a strong balance sheet and liquidity position that provides us financial flexibility to navigate through this period of great uncertainty. Turning to Slide 4. International Paper is a critical part of the supply chain required to produce and deliver essential food, pharmaceutical, hygiene products and emergency supplies for consumers around the world. This privilege comes with enormous responsibility to our employees and our customers. We have taken significant steps to protect our employees and contractors. We also implemented contact tracing protocols in all of our facilities. Our COVID-19 measures have proven to be effective, and we have not had any material disruptions to our operations. I’m proud of the collaboration, ingenuity, and commitment of our employees to take care of our customers during this pandemic. Some of our teams have generated product and service innovations for customers, while others have found ways to simplify and streamline work, all of which is essential to navigating effectively through the enormous dislocations caused by COVID-19. A few examples include, our packaging business developed corrugated separators to allow citrus customers to run their packing operations with appropriate social distancing protection at the height of the harvest season. Our global cellulose fibers business is ensuring customers have real-time visibility of their orders, which is especially critical when ocean supply chains have stretched out. And our papers business quickly introduced new packaging sizes that allow safe home deliveries of uncoated free sheet products. As I have said earlier, International Paper entered this crisis in a strong financial position. Due to the unprecedented uncertainty regarding the ultimate economic impact of COVID-19, we are taking prudent actions to further strengthen the Company’s liquidity and preserve cash. We are undertaking vigorous sensitivity and scenario testing to make sure we make informed, principle-based decisions. And we manage each phase of this crisis with a view toward both the short-term and long-term success and sustainability of the Company for all of our stakeholders. Now let’s turn to our first quarter results on Slide 5. We delivered a solid performance with EBITDA of $802 million and free cash flow of $363 million in a very rapidly changing environment as containment measures across the globe accelerated. I’m inspired by the commitment and resilience of our teams who under unprecedented circumstances delivered strong operational performance in our mills and converting plants. In our packaging business, we were able to mitigate the impact of significant production loss in our Rome and Bogalusa mills. We leveraged the scale and flexibility of our system to meet strong demand for corrugated packaging and absorbent pulp, and through outstanding collaboration across our commercial supply chain and manufacturing organizations, we adapted quickly to meet our customer’s rapidly changing needs, all of which contributed to solid performance in the first quarter and further strengthened our position as we navigate the uncertainty that lies ahead. I will turn it over now to Tim to cover performance across our business segments, our second quarter outlook and details on the actions we have taken to further strengthen our liquidity.

Thanks, Mark. Good morning, everyone. I’m on Slide 6, which shows our first quarter results. As Mark mentioned, EBITDA and free cash flow were solid; operating earnings were $0.57 per share, which included an unfavorable Ilim FX non-cash impact of $0.13 in the quarter. Moving to the quarter-over-quarter Earnings Bridge on Slide 7, price mix was a headwind as expected due to the prior index movements in North American packaging and global cellulose fibers. Volume was mixed; strong demand for corrugated packaging and pulp was offset by a sharp decline in demand for printing papers as stay-at-home measures accelerated. Operations and costs were favorable; our mills and converting plants performed well, and we successfully managed through the incidents at Bogalusa and Rome. We also had lower benefit costs of $40 million across the businesses that will not repeat in the second quarter. Input costs were favorable driven by the lower energy distribution and chemical cost. Recovered fiber costs increased rapidly in the latter part of March as generation decreased, but it did not impact the first quarter materially. Corporate items and taxes were unfavorable due to one-time items. Equity earnings were essentially flat quarter-over-quarter before adjusting for the $0.13 non-cash currency translation loss at Ilim. Turning to the segments and starting with industrial packaging on Slide 8. Our business performed well in the first quarter. We adjusted our system to meet our customers' strong demand for packaging as COVID-19 containment measures accelerated in March. In North America, we leveraged the scale and flexibility of our system to manage the impact of production losses in Bogalusa and Rome. Our converting facilities performed well in a rapidly changing environment to meet strong and often irregular customer demand. Our European packaging business delivered strong year-over-year earnings growth driven by margin recovery and the successful ramp-up at the Madrid mill, which performed at 100% despite challenging conditions. Across the segment, price and mix were unfavorable due to the impact of prior index movement in North America, as well as the mixed impact of higher container board exports. Volume improved sequentially driven by strong customer demand following COVID-19 stay-at-home measures. Operations and costs were favorable, mostly due to the non-repeat of last quarter’s positive LIFO inventory adjustment. The first quarter also includes $15 million in costs related to incidents at Bogalusa and Rome, as well as the expected $20 million in costs related to the Riverdale conversion. Maintenance and outage costs increased sequentially. We did, however, adjust the scope and timing of planned outages in response to unplanned production losses and broader cash conservation initiatives. Input costs were favorable across the segment driven by lower energy and chemical costs. As mentioned earlier, recovered fiber costs rose rapidly in the latter part of the quarter due to significant dislocations to traditional channels. We expect recovered fiber to be a significant cost headwind in the second quarter. I would also note that we are extending the Riverdale conversion schedule to manage contractor staffing levels to ensure appropriate social distancing practices; the expected startup moves from quarter two to the third quarter of this year. Turning to Slide 9. Let’s take a closer look at North American corrugated packaging segments and the impact we are seeing from COVID-19. Consumer behavior changed rapidly in response to containment measures. This resulted in immediate changes to packaging demands for our customers, both positive and negative. I will just mention green obviously shows the benefits from some of the changes and red shows the unfavorable impact from some of the changes and our near-term outlook. Yellow indicates a moderation from elevated levels of demand as we are in April. We experienced strong initial demand in March and April, driven by processed food, proteins, chemicals, tissue and towel in e-commerce. Conversely, customer segments oriented toward non-essential as well as those with higher exposure to restaurants and food service experienced a sharp pullback in demand. The near-term outlook we provide on this slide is our best view of current demand across our segments. Keep in mind, the environment remains fluid and there is variability within the segment. Growth in processed food is stabilizing after strong initial customer demand. Consumer demand for meat and poultry remains strong. However, recent processing plant shutdowns are expected to slow demand for packaging in the near-term. Produce remains weak due to significant exposure to restaurants and food service. E-commerce is seeing unprecedented growth; consumers have greater reliance on e-commerce as a primary spending channel as a result of the containment measures. Lastly, we are seeing a sharp pullback in packaging for durable goods. Corrugated packaging plays a critical role in the supply chain to bring essential products to consumers. We will continue to take care of our customers’ changing needs as communities around the world start to ease containment measures. Turning to container board exports on Slide 10, demand remains strong and customer inventory levels are normal to low. Demand in Latin America and Europe is solid, driven by resilient consumer demand for bananas and citrus. Demand in the Middle East and North Africa is solid but expected to slow as the citrus season ramps down. Demand in China is strong; industries are restarting following COVID-19 closures and customer inventories are low. The rest of Asia sees strong demand in the Philippines, which is focused on banana exports. Slide 11 recaps the status of Bogalusa and Rome following the incidents in March. As I mentioned earlier, we had a $15 million impact in the first quarter. Looking ahead, we expect a $30 million impact in the second quarter after the initial insurance recovery. We continue to assess the full cost impact of these incidents and are working with our providers to determine the potential insurance recovery. Global cellulose fibers on Slide 12, we experienced very good demand as our customers responded to strong consumer demand for absorbent hygiene products and tissue products as a result of COVID-19. Across the segment, pricing mix was unfavorable due to the impact of prior index movements. Absorbent pulp shipments improved 13% year-over-year, driven by improved supply-demand conditions and our successful customer contracts season in late 2019. Maintenance outage costs increased sequentially; for the full year, we will reduce the scope of planned outages and defer spending to preserve cash. Operations and cost management were strong and inputs were favorable. On Slide 13, let’s take a closer look at our global cellulose fibers statements and the impact we are seeing from COVID-19. In absorbent pulp, which represents about 75% of our mix, we experienced strong initial demand in March and April. All absorbent hygiene product categories were strong, although adult incontinence and sanitary wipes saw particularly strong consumer demand. We expect strong demand for fluff pulp in the near-term. However, we could start to see the impact of lower consumption as the impact of economic hardship, especially in emerging economies, unfolds. In market pulp, which represents about 25% of our mix, we experienced strong initial demand in tissue and towel segments, but a sharp decline in printing papers. We expect recovered paper shortages to support demand for our virgin pulp in the near-term. However, we could see destocking of tissue and towel as containment measures ease. Looking at printing papers on Slide 14, the business delivered earnings of $96 million in the first quarter. Products and mix decreased due to the flow-through from prior periods across the segment and weaker geographic mix in Latin America. Volume decreased sequentially. COVID-19 containment measures caused unprecedented demand declines in all regions, which accelerated in March. Operations and cost management were solid; planned maintenance outages were executed well and at a lower cost than planned. Our North American business successfully managed the first quarter of operations without Riverdale 15 capacity, which had previously represented about 240,000 tons of printing papers per year. Input costs were favorable across the segment on lower fiber and chemical costs. On Slide 15, we will take a closer look at the printing paper segment and the impact we are seeing from COVID-19. Across our regions, we experienced an immediate and unprecedented decline in demand for cut size as work-from-home and other containment measures accelerated. We continue to work closely with our customers to support shifts to online and home delivery platforms by adapting packaging designs to meet customers’ needs. We also experienced an unprecedented decline in commercial printing segments due to the significant pullback in print advertising. The near-term outlook we provide on the slide is our best view of current demand across regions. We remain focused on optimizing cash and working capital, and we will match our production to our customers’ demands as we manage through a very challenging environment. Looking at the Ilim results on Slide 16, we had an equity loss of $35 million in the quarter, which includes a non-cash foreign exchange loss on Ilim’s U.S. dollar-denominated net debt of which IP’s after-tax portion was $51 million or $0.13 per share. Volume was essentially flat sequentially; average price decreased on the flow-through of prior period price movements as expected. Ilim achieved record production in March on successful bottlenecking projects completed in 2019. Demand for softwood pulp in China is solid, driven by consumer demand for towel and tissue products. We expect volatility in the ruble exchange rate to continue due to fluctuations in global oil markets. As a reminder, operationally about 60% to 70% of Ilim’s revenue is in U.S. dollars. Ilim is committed to the health and safety of its employees and is practicing appropriate containment measures. The business has not had any material operational disruptions due to COVID-19; lastly, in April, International Paper received a $141 million dividend payment from Ilim. This brings total dividends received from Ilim to more than $1 billion since the inception of the joint venture. Turning to Slide 17 in our outlook. In light of the uncertainty regarding the impact and duration of COVID-19, we are withdrawing our full-year adjusted EBITDA and free cash flow outlooks. We intend to continue to provide an update on business conditions and a quarterly outlook. Keep in mind that our second quarter outlook is our best view at this time in a fluid environment. So let me start with industrial packaging. We expect price and mix to be down $5 million on the flow-through of prior index movements in North America, which is partly offset by favorable price and mix in our export channels. Volume is expected to be down $70 million as demand slows from an elevated level, as well as the impact of one less shipping day in the second quarter. Operations and costs are expected to lower earnings by $60 million due to the non-repeat of lower medical claims and higher costs related to the Rome mill in the second quarter. Same with industrial packaging; maintenance outage expense is expected to decrease by $27 million, and input costs are expected to be higher by about $55 million due to higher recovered fiber cost. In global cellulose fibers, we expect price and mix to increase by $20 million on the impact of prior index movements. Volume is expected to be sequentially flat. Operations and costs are expected to lower earnings by $25 million. Maintenance outage expense is expected to decrease by $25 million, and input costs are expected to remain stable. Moving to printing papers, we expect the impact of price and mix to be flat. Volume is expected to be down about $50 million due to the impact of COVID-19 in all of our regions. Operations and costs are expected to lower earnings by $85 million, mostly due to the impact of unabsorbed fixed cost. Maintenance outage expense is expected to decrease by $12 million, and input costs are expected to remain stable. As noted in the segment details that I just shared, maintenance outages all-in are expected to improve by $64 million in the second quarter. Details by business and quarter are included in the appendix. In response to COVID-19, we now expect maintenance outage expense for the full year to be about $480 million versus our original forecast of $585 million. Lastly, under equity earnings, you will see the elbow for the Ilim joint venture. Turning to Slide 18. I want to take a moment to update you on how we are thinking about capital allocations as we navigate COVID-19. Our allocation framework does not change. We will continue to make thoughtful choices as we navigate these circumstances. I will start with the balance sheet. Our commitment to a strong balance sheet and investment-grade credit rating does not change. We reduced debt by $1.5 billion during the past two years and closed 2019 around the upper end of our leverage targets. Our leverage could be adversely impacted if negative global economic conditions persist. But as Mark said earlier, we entered the COVID-19 crisis in a strong position. That strength extends to our pension plan as it remains sufficiently funded, and previous actions to de-risk the plan help preserve the funding ratio at about 90% as we exited the first quarter. Returning cash to shareholders is a meaningful part of our capital allocation framework. In the past five years, we have returned nearly $5.6 billion to shareholders, or about 60% of free cash flow. Given significant economic uncertainties, we are suspending share repurchases. We paid the first quarter dividend in March. We are not making a change to our dividend policy at this time. We continue to evaluate it with our Board of Directors as we conduct testing on the impact of COVID-19 under different economic scenarios. Looking at investments, we intend to reduce CapEx to $600 million in 2020. We will fund only mission-critical needs, including the completion of the Riverdale conversion. We will not compromise the health and safety of our employees nor take any environmental or regulatory shortcuts. We are taking a deliberate approach to funding decisions to ensure we continue to have the right capabilities to provide the best solutions for our customers and are well-positioned for the essential economic recovery. Taking a closer look at debt and pension on Slide 19. Our maturity profile provides us with financial flexibility as we navigate through the crisis. We have no commercial paper debt outstanding and no near-term bond maturities. I would also note that we reduced our annual interest expense by about $100 million since 2017. As I have said earlier, our pension plan is sufficiently funded at around 90%. At this time, we do not expect any required contributions in the next five years. During the past few years, we have taken meaningful steps to de-risk the pension plan on a structural basis. You see the results of these actions on the chart. Our pension gap is essentially unchanged as we exit the first quarter despite significant market volatility. Turning to Slide 20, we have about $3.8 billion of liquidity as we exit April, which includes cash of about $1 billion and committed credit facilities of $2.8 billion. We have taken prudent actions to further strengthen our liquidity as the COVID-19 crisis accelerated. We entered a new $750 Million bank revolver. We also extended our AR facility and changed it from uncommitted to committed to ensure access. All our facilities are available and unused at this time. In addition, our credit ratings provide attractive access to the bond market. We value the financial flexibility our liquidity position provides, given the severity of the economic crisis and the uncertainty of the shape and pace of recovery. On Slide 21, we summarize some of the cash levers available. Given the significant economic uncertainty, we chose to take prudent and early actions to maximize liquidity. We will continue to evaluate conditions and make decisions based on the best information available and our view of risk. As a reminder, we monetized $250 million of our stake in Graphic Packaging in the first quarter. This puts us on a monetization path, and we will continue to be thoughtful in our approach. The net of all of this is that we are well-positioned with our operations, balance sheet and liquidity to manage the current economic crisis. And with that, I will turn it back over to Mark.

Thanks, Tim. We began today’s conversation by sharing with you how International Paper is navigating the COVID-19 crisis. We have weathered many storms during our Company’s 122 years of history, and every day I hear another inspiring story of how our employees are stepping up to the current set of challenges, and I’m proud of their steadfast commitment to International Paper, our customers, and each other. Our Company plays a critical role in the supply chain required to produce and deliver food, pharmaceuticals, hygiene and other essential products to consumers. As I said earlier, it is a privilege that comes with enormous responsibility to take care of our employees and our customers. They are the foundation of how we create value for our shareholders. I’m confident that the Company we have built and our strong financial footing position us well to succeed in the near term and the long term. With that, Tim and I are happy to take your questions.

Thank you. Our first question is going to come from the line of George Staphos, Bank of America/Merrill Lynch.

Hi everyone. Good morning. Thanks for taking my questions. And thanks for all you are doing on COVID, both for us and your employees. A couple of questions to start. Mark, could you talk a bit about what kind of growth you are seeing in e-commerce, either in the quarter or maybe the current run rate as we are in April? And then, related point, what kind of volumes are you in fact seeing in box shipments to the extent that you can comment in April? I have a couple of follow-on.

George, this is Mark. On e-commerce, normally we talk about double-digit growth; we are experiencing extremely strong double-digit growth, so orders of magnitude above the normal double-digit growth. In April, our indications through April are that we are still seeing, although moderated from the heading March that we showed at 4.7 to more normalized levels, we are still seeing positive activity in the box market in April in the neighborhood of 2%.

Okay. Thanks for that. And then recognizing some of this is just going to be driven by COVID and social distancing. Can you comment on where you found the opportunity to cut back a bit on both capital spending and maintenance? On the latter, it seemed a fair amount of that was on North American industrial packaging. If you can provide a little bit more color in terms of what can be cut permanently and what gets pushed into 2021?

Yes. George, I’m going to make just an opening comment and ask Tim to give you a little more color. On capital and maintenance expenses, we make these decisions from a principle basis. Number one, we often get credit – I’m not sure credit is the right word – for having really good assets and spending a lot of money maintaining them. Our asset quality is really high and we are not operating typically in crisis mode. So our ability to adjust and I don’t think of it as cutting; I think of it as delaying, adjusting, changing the timing of CapEx and maintenance expenses. We are allowed to do that, managing the risk because we keep our equipment and our processes in very good shape. So there is a number of areas that we are just looking at before we understand what is going to happen to the consumer, GDP, and demand that we don’t tie up cash in projects in areas that we may not need as early as we originally planned. Tim, if you want to give some additional examples.

I think you just said it well, Mark. The only thing I would add is, and Mark referenced it, that this is not so much a waiting and seeing moment. All of the measures that we have taken, we can begin ramping them back up as we see less volatility and a return to some type of normal. But I think Mark characterized it well; we do have great assets. It gives us flexibility.

An example, just to give you a little more George. We have cost reduction projects every year. Most of that is related to consumption of input materials. Any type of input trying to be more efficient, consume less of it. In an uncertain economic environment, those projects don’t pay off as early as you think if you are not using that input anyway because of low demand. So until we have better clarity, we can change the cash outflow timetable and end up keeping the Company’s cash-in and cash-out in a much stronger position. And that is really all we are doing here.

Okay. And it sounds like it is more proactive than just social distancing. Thanks for that. And my last one, could you comment a bit further on Bogalusa and Rome? What do you think the production loss for the year might be? You gave some preliminary timing for the restart at Rome. If you could go into what is required there, that would be great. Thanks for taking my questions. I will turn it over.

Yes, Bogalusa started back up and running and Rome we are looking at June as the likely restart. So we are going to lose a quarter in Rome. We lost much less than that at Bogalusa. We don’t typically give out capacity numbers and things like that George, so I will refrain from that.

Yes, understood. I figured in this circumstance you could, but I appreciate it guys. Thank you.

And our next question will come from the line of Mark Weintraub with Seaport Global.

Thank you. And thank you for the very helpful presentation slides and all the actions you are taking for your constituents. The one thing I was trying to get a better understanding of is on those volume side in industrial packaging. I think you said a negative $70 million hit. And I think you also indicated that in April, box shipments were looking like they are up about 2% domestically. I realized that there is international as well as domestic in here, but if I look at the slide for the just-ended quarter, you had like an $18 million benefit from volume. It just seems like a very large negative expected impact from that? Can you help me understand why it would be quite as big as that, unless you are expecting a very sharp falloff, which I don’t necessarily get from the slides you put in volume for the second quarter?

Hey, Mark, it is Tim. You are right. April has been very good. Our cut-off is between 2% and 3%. That is not a shipment number. That is the consumption as we produce boxes to satisfy orders. But we will know what shipments look like of course until we close the books at the end of the month and see all of that. There is some uncertainty in Europe as Europe starts to reopen. And I think it is unfortunately just where we are. There is a lot of fluidity and uncertainty around everything. Three or four days ago, we had protein packaging plants being down and now they are going to be coming back. And so that is just how quickly things can change. We do have one less day in the quarter in the second quarter. So that has a not insignificant impact. But we are looking at what we are seeing in the moment. We are a short-order cycle business. We can only really gauge on order intake out a couple of weeks. So we are just trying to triangulate across all these segments, segment-by-segment as to what we think we are going to see in May and June.

So Mark, just one added piece of color. If you go back to the slide with the market segments for box that Tim walked us through with the red, yellow and green. Again, our best view right now, as multiple states and jurisdictions attempt to try reopening strategies. We didn’t have a view of whether that was going to be successful or not. But let’s assume part of it is more successful than we are all carrying and hedge. You have got flow through in food service and some of the other weak segments that would be upside to. As we sit here today, none of that has happened. So trying to call it, we just try to be very transparent and say this is what we see now. But as Tim mentioned, on the protein plants, and I think they will figure that out, and on successful reopening. And then anything else that gives the consumer confidence. Therapeutics that were reported earlier this week with some traction, those are all things that could give us upside in the demand cycle. But to put that out there as we see it in International Paper seems to be a little bit of wishful thinking, but all of it is moving and real and could be upside to our near-term outlook.

I appreciate that. And just real quickly, if I could. Obviously, white paper costs are moving really fast, or OCC is moving really fast. Can you give us a sense as to where you see them currently? And how that flows through into your business? And what if anything can you be doing to mitigate the impact if you have got a big collection system, etc.?

Yes. Well, they are significantly three or four times what they were earlier in the year. The good news is we have tremendous flexibility across our system. So we do have some facilities that are 100% recycled, but most of our facilities are a blend of virgin and recovered fiber. And so on a normal basis, we go about some amount of balancing and arbitraging cost facility-by-facility. So we will have some flexibility to work around that, but again it depends on with the reopening, it depends on how fast and to what degree because this is really a generation issue where certain parts of the supply chain for OCC have been impacted quite negatively.

Thank you.

Thank you. Our next question will come from the line of Anthony Pettinari with Citi Group.

Thanks again for all the detail, especially with what you are doing on safety. Maybe just following up on George’s question. You know, it seems like this experience may accelerate e-commerce and e-grocery at the expense of physical retail. If that is true, how do you think about the long-term impact to your corrugated business, either from your ability to engage those customers and then any difference in the margin profile? If there is any difference from some of the other traditional customers you serve.

Anthony, it is a great question. We are well positioned to serve e-commerce, whether it is business to consumer, both in the general retail sense and e-commerce that is business-to-business, that is to say more industrial products. We have a position with almost everybody who is anybody in that particular type of business model. We have product and service platforms that do very well there. I think the margin comparisons are not a big issue. Some of the retail is replacing lower-margin retail. Some of the food through e-commerce is replacing some of the average margin in the center store stuff. So, when you are looking at it all, e-commerce is a good business for us and it is not a margin arbitrage issue that we look at in the long-term.

Relative to the total size of the market, it is still relatively small as the segment and the segments are not homogeneous. E-commerce is not e-commerce as we look at the customers that we supply.

Great. That is very helpful. And then in printing papers, I think you anticipate essentially stable price mix in Q2. Just wondering with demand down 40% globally, I am wanting to gauge whether the shutdowns that are being taken are sort of appropriate to balance supply to demand and then, as you move from March and April to May, are you seeing sequential weakening or stabilization in printing paper demand? Any kind of thoughts there?

You know, it is like we said when we covered it; 40% to 50% lower order intake is, as we said, unprecedented. So again, these are short-order cycle businesses, and we don’t have - unless it is an export shipment which has a little bit longer lead time, you don’t get tremendous look through to what it might be a month or two months out. We are going to have to see how - I think it is going to be a function of how quickly and how successfully things reopen. We are taking all of the steps we need to take to match our productive capacity to our customer’s demands. The last thing we want to do, as we referenced earlier, is high cash where we don’t need it. Therefore, it is better for us to adjust our productive footprint in the short term than tie it up in inventory.

Okay. That is helpful. I will turn it over.

Thank you. And our next question is going to come from the line of Steven Chercover with D.A. Davidson.

Thank you. Good morning everyone. First of all, do you anticipate, I think you do, future insurance recoveries from the outages at Rome and Bogalusa? As Tim said, there were initial recoveries. So maybe what is deductible and how much more can we perhaps expect?

Yes, we have a $10 million deductible in each of the mills for the two incidents. We are just going to have to wait and see how it plays out. This is still an ongoing process. So we will have more to say about it in future quarter results.

Okay, and sticking with container board. I guess the implications we see had suggested that you were perhaps trying to fast track the Riverdale conversion in order to offset the impact at Rome and Bogalusa. I mean, I think it is fine that you are doing it safely and it is even a quarter push back. But, was that just pure speculation on their part? Where did they get that?

I have no idea where they get it. It wouldn’t even be accurate in terms of greater product. Because we are going to be producing totally different product in Riverdale than the other two mills. So I can’t speak to what they write or how they obtain it. We are just managing the project. We are trying to protect our employees and our contractors and do it in a very responsible way.

Sure, okay. We don’t always know where they get their stuff. And then a longer-term view on paper. Is it possible that post-COVID, like there might be many other long-term impacts that we are not anticipating? For instance, e-commerce might have a permanent boost; might there be a permanent negative shock to printing paper demand?

It could be. I wouldn’t argue that something is not possible. We just don’t know. Just anecdotally, I try to reframe from printing as I work remotely at home, but then I found myself printing two rings at a time to catch up with all the things that I would normally print. So, it depends. We know on the print advertising side that still a combination of online platform marketing and direct mail marketing is the most successful type of marketing approach. So, we will have to see what happens as things start to open up again.

And last question on fine paper. Don’t you make a lot of the course for tip swabs for instance? Are there any benefits on your specialty side?

Yes, we do make those. This is a much smaller product. So the amount of fiber is much less. But yes, we do make those; we are maybe the only, at this point, but we are one of the few producers that actually make it.

Okay, thanks. That helps me.

Thank you too.

Thank you. Our next question will come from the line of Debbie Jones, Deutsche Bank.

Hi, good morning. Thanks for taking my question. I know you touched on this before; could you just give a little bit more granular on what you are seeing in the export markets and if there is anything notable by region and kind of how things are trending right now and what you expect in May?

Yes. The summary comment is really relatively strong across all of the products and regions that we ship to, both for export container board as well as our pulp business. Pulp on the strength of hygiene products and some towel and tissue. On container board, remember, inventories were much lower as we entered the year and demand has actually been good to this point. So we think the inventory levels and customers around the world that we service are normal at best and loyal in some cases. The pull for banana and citrus has been strong.

Okay. And then I wanted to ask you a question about the dividends. You mentioned the Board reviewing it. Could you talk about what goes into that? My thought would be that you looking at the first half of the year, in a performance in fine and you are taking a lot of steps at the balance sheet and CapEx, but you shouldn’t be in a difficult position. But what kind of stress testing are you doing at this point?

It is a great question. And as I said, there is no change to our dividend policy. We paid the dividend in the first quarter, and there is no change to the policy at the time, but with all prudence, for not only for dividend, but for all aspects of our operation, we are doing as robust economic scenario planning as we know how. Starting with the impact that we saw during the financial crisis back in 2008, 2009 and then working to lower levels of performance from that experience. We don’t know, given this is a different type of crisis with health implications, how severe it can be. So we are looking at a whole range of testing and scenario planning, and trying to be as robust as we know how. I would say this: in terms of the actions that we have taken, they have been taken out of caution and prudence. Because we have flexibility to lower capital and lower maintenance, because of the asset quality, we just stopped for a moment in time. We can always resume if things appear normal. So there is an amount of sequence of the cash mitigation levers that we have. The ones we have taken so far are ones that we can turn back on if we want to. But we thought in the moment back in March as things accelerated, it was very uncertain. These were prudent things to do at that point in time.

Okay. Thanks, that is helpful.

And our next question will come from the line of Adam Josephson with KeyBanc.

Good morning everyone. I hope you and your families are safe and healthy. Mark, one on demand; I know Mark asked you earlier about that $70 million delta, but just more broadly, I know you look at a number of economic indicators, whether it be GDP growth or non-durable industrial production or otherwise, and there has historically been about I think a 150 basis point gap between GDP growth and box demand. Just wondering how you are thinking about that relationship this year, just given how unusual, obviously the first quarter was particularly March, and April was good as well. Box demand was likely much, much better than what the actual economy was doing. So how are you thinking about that relationship this year in the context of what you saw in Q1 up about 3% and then you were up to 2-ish in April?

It is a great question, Adam. We do have a demand model that we use for International Paper. It is not only looking at GDP but the construct of GDP and then some other inputs that correlate very closely with corrugated demand. We use that model under different scenarios of GDP put out by others, not in our own number, but well-recognized external sources. When we look for this particular disruption, you are right, it is different. It is a lot about the duration of the disruption. We look at what we think recovery patterns will be, not one letter in the alphabet, but by segments. It is likely to play out differently by different types of segments. So what role the consumer plays in the largest part of corrugated packaging, which is in the food and non-durables sector really determines what we are going to see in demand. That may be for several quarters completely dislocated from the broader GDP if that is being driven down by capital investment, or other components of GDP. So we are not looking at a delta or an offset to GDP and then calculating historic relationships for box demand. It is much more granular than that. One of the biggest sources of input we have to our demand model is actually talking to our customers and seeing what they are seeing. That is why we think for the kinds of products we make and the role they play in the supply chain through an environment like this. This isn’t a bunch of luxury products that you can buy or not buy. Most of what we do is essential to everyday life. Therefore, we believe we are going to weather all these dramatic forecasting GDP pretty well.

I appreciate that, Mark. And one on recovered paper. I know you talked about the expected sequential drag in industrial packaging from higher OCC costs. I’m just wondering, embedded in that, if you are expecting another, call it, $20 to $30 bucks jump in the price in May, and then what, if anything thereafter? More broadly, how long do you expect this spike to last? I know it depends on how long the economy is effectively shut down for and how long commercial collection stays down for. But any thoughts you have about how much you are expecting OCC to go up again in May? And then where you think it shakes out thereafter based on how quickly the economy reopens?

You know, I think it is just as we call it out. We are expecting a $55 million impact on higher input costs. Most of that being recovered fiber in the quarter. I think you said it. I think it depends on how quickly and to what degree the shape of the reopening takes. Retail has been significantly impacted unless it was non-essential, and the restaurant food service segment has been significantly impacted. I think it is going to depend on how quickly and how successfully those come back.

Adam, another point on this to add to what Tim said is, this retail component is really going to be interesting to watch. Almost 30% of OCC generated in the U.S. begins its life as a box being imported to the U.S. from somewhere else. Many of those type of products end up through the U.S. retail chains, and they are definitely impacted right now. Not all of them are in that essential category. Again, duration of the stay-at-home orders, the confidence of consumers getting back into society, whether there are medicines and other treatments; all of that fits together. But there is a full, almost 30% of our recovery fiber that is available for recovery in the U.S. that begins somewhere else, and that is really ratcheted down a lot right now. Likely will take a while to come back.

Thanks so much, Mark.

And our next question is going to come from the line of Dr. Mark Wilde with BMO.

Hi, Mark, hi Tim.

Good morning, Mark.

I wonder if either of you could just give us a sense of how you are responding to these declines in printing and writing paper consumption in the various regions around the world? I think you produce in the U.S., Brazil, Poland, and Russia.

Mark, I think the way we are responding is we are taking care of our customers. We are managing inventory very closely to Tim’s point about not tying up cash, and we have got a very flexible system in Europe and in the U.S. We are not along individual mills left in that business, but they are large and important. The same reasons we usually talk about in packaging; when we have supply and demand dislocations, we have got the same marginal cost shedding model and systems in place. We just don’t use it very much in printing papers. We were able to shed a big portion of our marginal costs and variable costs to match our production with our demand. We are setup to do it, but we take care of our customers and we take care of our inventory and cash tied up there and we adjust our production.

So, Mark, both of you, your two biggest competitors domestically have sort of put out press releases and told us what they expected to pull out of the market in the second quarter. Is it possible for you to give us anything like that either domestically or for the offshore businesses?

No, it is not. But we did give you a cost number in the outlook slide Tim walked through; I think it was $80 million, $85 million of unabsorbed fixed costs. That gives you some indication of what we are expecting. But no, we never give forward views of our planned production output. We just don’t do that.

We do quantify after the fact every quarter.

The other question I got is that for either of you, can you talk a little bit about how you are thinking about kind of foreign exchange and the strength of the dollar? I’m curious about this from both a translational standpoint, but also the impact, for a largely U.S. dollar-based producer of dollar-denominated commodities. You know, what it means in terms of both a potential for demand and price?

Yes, it is a great question, Mark. It just strengthened some at the beginning of the crisis; it has been roughly the same zone for a few weeks now, maybe a month or two. We tend to get a bit of a wash around the world when you look at our different businesses. A weak relative to dollar helps that business in the export markets. The Ilim joint venture has all of its costs for the most part in rubles and it is exporting and selling in dollars for us to some degree at times depending on the strength of demand and supply, on exports from the U.S. But again, a lot of what gets exported out of the U.S. is in our pulp business, which is a unique product and benefits from the fiber characteristics that we have in the Southern part of the U.S. So when we put it all together, over a long period of time, it seems to be mostly net neutral.

Okay. Just a last quick one, Tim. Can you just update us on Ilim’s capital plans?

Yes. In this environment, you would expect that they would pull it back. They have taken some measures to cut capital in the moment. They are still progressing on the large project that is ongoing and don’t see any real significant delays to that, but they have other places to balance out capital spending across the rest of the business as well as that business is particularly good at managing their cash and taking any cash mitigation measures that they need to.

Okay. Fair enough. I will turn it over.

Thank you. And our next question is going to come from the line of Gabe Hajde with Wells Fargo.

Mark, Tim, Guillermo, thanks for the detail. And hope you guys are all doing well.

Thanks, Gabe.

I was curious if you could comment at all. Tim, you touched on some I think export customer inventory levels, but maybe your domestic inventory levels in the industrial business. I appreciate there is a balancing act going on right now with bringing up foreign facility Bogalusa, another one being out for June. But demand kind of plays out as you see it, or as you are projecting where you might expect your inventory levels to be at the end of the second quarter versus where you are at today?

You know, I guess what I would say is, as you know, we don’t publish or share our specific numbers and levels. I would say we are on the low side here domestically. We have had a strong demand pull across the entire business all channels so far this year, given the factors that we talked about. So, low inventory levels and a lot of demand through this point in time that we have seen in the export channel. You have seen the results that we had in the integrated channel here in North America. To this point, it has been about balancing our supply to make sure we are trying to take care of all of our customers. At the end of the second quarter, I wouldn’t venture a prediction at this point.

Okay. And maybe just try to dig a little bit deeper on Adam’s question, kind of on Slide 9. Mark, you talked about trying to get in the lead a little bit in terms of underlying demand drivers for corrugate. As we think about maybe corrugated intensity through the supply chain for food and beverage specifically going through retail as opposed to food service. Is there a way that maybe high level you can help us think about is it more corrugate intensive for that channel versus – and I appreciate again you don’t necessarily know what your customers do with the product once it leaves your facility?

I understand your questions, Gabe. I don’t have a good clean answer to corrugated intensity per unit of output. But just suffice to say that both channels, the retail channel which doesn’t – it is corrugated intensive, but as you know, there have been a lot of innovations with beverage and other things that don’t use as much anymore. The foodservice channels are very, very important to our corrugated demand. I would say the food service channel, given the way product moves and the bulk in which it moves in the quantities, has a very large component of corrugated. You think about even anecdotally; if you think about watching a restaurant get supplies from the backside as the food service truck is there, there is a lot of corrugated delivering multiple units of ingredients and supplies. So, it is definitely important for our demand and it is important for coordinated usage. As we see some success in reopening, even at reduced capacities, it is not just restaurants; schools and cafeterias and other things are large users of the food service supply chain as well. But it is meaningfully important for us.

Okay, thank you. Good luck.

And our next question will come from the line of Mark Connelly with Stephens.

Thank you. Just two things. Riverdale obviously represents a nice opportunity to bring all that high-value board in-house. Are your white top customers any more or less essential in corporate terms on average? I’m just wondering how to think about the customer side of that ramp up.

Hey Mark, it is Tim. A large portion of what we produce is around food. So whether it is produce or other types of food products, a lot of the usage of white tops goes into that. So without giving you a hard number, I don’t have a hard number off the top of my head, but there is a big component to consumer goods and food products.

Okay, so shouldn’t see too much of a drag there. Just one more question, a little more decent on Brazil. Can you remind us what the split of business down there is in terms of cut size versus roll and how much of that business stays domestic Brazil lately?

Yes. Roughly half of our production, if memory serves, stays in Brazil. Then it varies up and down. The balance of it does either go to the Latin American region and some amount to Europe. The split is largely in cut size business. We have a predominant brand in the country that is very well received by our customer base. We do some printing grades as well, but for the most part, it is a lot of cut size.

Okay. That is very helpful. Thank you.

And our last question for the day will come from the line of Brian Maguire, Goldman Sachs.

Hi, thanks for squeezing me in. Hope you all are doing well. I just wanted to take another stab at the Q2 kind of volume outlook in corrugated. Just trying to reconcile a couple of conflicting statements. Kind of like April is off to a good start on a year-over-year basis, the heat map sort of showed some deceleration, I’m guessing as the month progressed, but then the guidance on EBIT again down $70 million or so. Just wondering if that is kind of representing your worst case estimate for how things could progress in Q2 if things maybe deteriorate even more from here or is it something you are actually seeing? I guess just trying to get a sense of how conservative you are taking a cut at the Q2 guide and just sort of related to that, I understand pulling the full-year guidance, but why even give the Q2 numbers if so much is sort of up in the air and uncertain at this point?

That is a good question, Brian. We always give an outlook; we are required to give an outlook. We try to give one as thoughtfully as we can. I would say April looks like it is turning out okay. We will have to get into May and see. Again, I continue this and that we are a short order cycle business. So a lot of this is triangulating based on what we hear from customers and what we are seeing across all of the converting facilities that we have and looking at it segment-by-segment. So it is our best estimate at this moment in time, but I think it is acknowledging that there is a lot of fluidity. As I mentioned, with the protein example, one day it looks like 25%, 30% of supply is going to be constrained. The demand is there, but the supply is not; then a few days later, there are changes in place and protein plants will hopefully be starting back up at a point in time. So just a lot of fluidity.

Okay. And then just one last one just to switch gears, maybe a more philosophical or a longer-term question on credit free sheet. You know, obviously, it is going to be off quite a bit this year and someone alluded to earlier some of that could be structural longer term in nature. Meanwhile, your corrugated business is performing well. Just wondering how you are thinking about the interplay between the two in the industry, the potential for others, you talked about conversions from printing papers to packaging to maybe look to move forward on some of those as they need to shut some mills. Your role as a leader in both markets, do you guys view yourself as somebody who would look to proactively preemptively shut some more of your white paper capacity to try and keep others in the industry from trying to move towards a conversion mentality?

So, Brian, I mean, that is a difficult question to answer. Because it is so forward-looking. If you look at our track record on how we have managed our uncoated free sheet business over the years, it has been a combination of how we match the supply side to a structurally declining market. It is a mix of converting some facilities to a different product that were already in like container board and fluff pulp. Unfortunately, we closed some facilities that didn’t have good conversion options. We have managed the business, I think, gracefully to meet the reality of the decline. All the other parts of your question are really unanswerable in terms of what we would do and why. We would do things and have done things with our printing paper assets and especially talented production pieces we have at those plans to proactively help one of our other businesses. That would be the primary reason for making changes. So, it is really early to figure out right now whether there is a permanent structural step down and then a return to a steady structural decline or not. It is a good question; it is possible that could happen. But we are going to stay flexible enough to make sure we see what is happening before we make any conclusions on that. But, our uncoated free sheet business is now less than 20% of the company. It generates strong cash. We have got great assets and good wood baskets that give us flexibility for the future. So that message hasn’t really changed.

Okay. Thanks so much. Stay safe, guys.

Thank you.

Thank you. I will turn it over to Guillermo Gutierrez.

Thank you, operator; this is Mark, and I’m going to wrap up. First of all, I just want to again, publicly thank our employees in International Paper for their courage and commitment to our company and to our customers and to each other as we operate through this. We think there is obviously more uncertainty as communities reopen their economies. Our hope is that that is done well and successfully. That will help the people around the world and will also help our Company. The crisis has done one thing for us; we talk a lot about the purpose of our Company. Making products that people need every day from renewable, natural resources has really brought our purpose to life, reinforcing the critical role our products play in people’s lives and in the important supply chains. I will leave you with International Paper and my confidence in our future. We have a strong financial footing. You can count on International Paper to deliver; you can count on our employees if you invest in International Paper. You can count on us to create long-term value and lead the Company and manage the Company with all of our important stakeholders in mind for the long term. We have been at it for 122 years, and we are going to plan on being at it for a lot longer. Thank you for joining our call, and we look forward to talking with you in the future.

Thank you. Once again, we would like to thank you for participating in today’s conference call. You may now disconnect.