Ladies and gentlemen, thank you for standing by, and welcome to the International Paper Second Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I will now turn the call over to Guillermo Gutierrez, Vice President Investor Relations. Please go ahead, sir.

Thank you, Laurie. Good morning, and thank you for joining International Paper's second 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 the 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 second quarter 2020 earnings press release and today's presentation slides. Relative to the Ilim joint venture and Graphic Packaging investments, slide two 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. We will begin our discussion on slide 3. The COVID-19 pandemic continues to be unlike anything we've experienced and requires us to focus on what we need to do to remain strong and resilient for all our stakeholders in the short term as well as the long term. And as you can see from our results, that's exactly what we're doing. We delivered solid earnings and strong free cash flow in the second quarter, again demonstrating the strength of International Paper. Through the first half of the year, we generated $1 billion of free cash flow through strong commercial and operational performance, as well as outstanding cost management across all of our businesses. As you would expect, demand and recovery trends vary greatly by business and end-use consumer segment. Overall, demand for corrugated packaging in fluff pulp continues to be resilient and is outpacing what you would expect in the general economic backdrop. Our North America box shipments were flat in the second quarter compared to last year and we saw continued strong demand for fluff pulp. However, we've seen a substantial decline in demand for Printing Papers across all geographic regions due to work from home and school disruptions. Against this backdrop, our commercial teams are doing a tremendous job with our customers to ensure that we meet their changing needs. And our manufacturing and supply chain teams continue to leverage the scale and flexibility of our system to deliver strong operational performance and optimize costs across our businesses. All of this contributed to the company's solid performance in the second quarter. I'll turn to slide 4 now, which shows some of the specifics of our second quarter results. Operating earnings were $0.77 per share and this included a favorable Ilim FX non-cash impact of $0.09 in the quarter. Overall, our teams did a tremendous job managing through the current environment. Looking at sales, the majority of the sequential decrease is attributed to the decline in demand for Printing Papers. And as I said earlier, we generated strong free cash flow in the second quarter, bringing free cash flow to $1 billion for the first half of the year. We continue to apply cash consistent with our capital allocation framework, to maintain a strong balance sheet, return cash to shareholders, and invest to create value. We will remain focused on cash generation and continue to be thoughtful in how we use cash as we manage through the ongoing uncertainty. Turning to slide 5. As I said last quarter, International Paper entered the COVID-19 pandemic in a position of strength and it all starts with our employees. I'm really proud of their ongoing commitment to take care of first each other and our customers. I want to take this opportunity once again to thank them, especially our frontline teams for their ability to not only adapt to the challenging environment but to perform at a really high level even with reconfigured work systems that align with the highest COVID-19 health practices. I'm also proud of the work we're doing to support the critical needs in our communities including our donation of corrugated boxes to agencies that deliver essential food and supplies. As we look ahead, we're starting to see some recovery in our markets as economies around the world begin to reopen. Having said that, uncertainty regarding the duration and magnitude of the economic impact of COVID-19 persists. We'll continue to navigate these uncertain times by staying focused on the health and well-being of our employees, taking care of our customers, and ensuring that the company has a strong financial foundation through each phase of the crisis. Now, I'll turn it over to Tim, who will cover our business performance, as well as our third quarter outlook. Tim?

Thank you, Mark. Moving to the quarter-over-quarter earnings bridge on slide 6, operating earnings improved by $0.20 to $0.77 per share as we executed well on the things that we control. Price and mix was favorable, mostly due to improved pricing in export containerboard and fluff pulp from trough levels. Volume was unfavorable with demand trends varying greatly by business and region. Demand for corrugated packaging and fluff pulp was resilient even as we stepped down from initial surge demand in the later flatter part of the first quarter. In Printing Papers, we experienced a substantial drop in demand across all geographic regions due to COVID-19 containment measures. Operations and costs were impacted by unabsorbed fixed costs, largely in our papers business as we matched our production to our customers' demand. Given the environment in which we are operating, the business did an excellent job managing costs and delivering strong operational performance at our mills and converting facilities. By executing well in the areas we control, we partly offset the impact of significant economic downtime in our Paper's business. Maintenance outage costs were favorable as planned. I'd note that the second quarter is our lowest maintenance outage quarter this year. Input costs were unfavorable with higher-recovered fiber costs, partly offset by lower wood and energy costs. Corporate expenses were favorable, and the effective tax rate was lower sequentially as expected. And lastly, equity earnings were favorable quarter-over-quarter, even after excluding the noncash currency translation gain at Ilim. Turning to the segments, and I'll start with Industrial Packaging on slide 7. Our business performed well in the second quarter. Across the segment, price and mix was favorable, mostly due to higher export containerboard prices and improved geographic mix in our North American business as well as higher prices in our European business. This was partly offset by the impact of prior index movement in North America. Volume decreased sequentially as demand slowed from elevated levels in the first quarter and one less shipping day in North America. Corrugated packaging demand in North America remains resilient and is outpacing the economic backdrop, whereas demand in Europe is seeing a decline from COVID-19 measures. Export containerboard demand remained strong across all regions in the second quarter, and customer inventory levels are normal as we enter the seasonally slower third quarter. Performance in our mills and converting facilities was strong, and we managed direct and indirect costs very well. We also benefited from about $10 million in one-time items as well as lower start-up costs in Riverdale as we shifted the start-up to the third quarter. Maintenance outage costs improved sequentially as planned. You may recall that we adjusted the scope and timing of our maintenance outages to further optimize our system and conserve cash as part of our COVID-19 plan. Input costs were unfavorable with significantly higher average recovered fiber cost in the second quarter, which was partly offset by lower wood, energy, and distribution costs. Finally, just a quick update on our North American containerboard mill system, the Bogalusa and Row mill started back up in the second quarter as planned. We did have an insurance recovery of $30 million in the quarter, but we also have higher costs related to the downtime. So it was about a wash in the quarter between insurance and incremental cost. Lastly, the Riverdale 15 conversion is now completed, and the start-up is planned for later this quarter. Turning to slide 8, let's take a closer look at North American corrugated packaging segments and the near-term trends as we exit July. We're seeing resilient demand for corrugated packaging as cities and states slowly reopen. We're also seeing a modest improvement in segments with greater exposure to food service. The near-term outlook is our best view of current demand across our segments. Keep in mind, the environment remains fluid. Within the segments, demand for processed foods is normalizing as consumers return to more frequent shopping activity. Consumer demand for beef, pork, and poultry is strong and processing plants are returning to normal capacity. We have an overweight position in protein where we've invested to establish advantaged capabilities. We're seeing a modest improvement in fresh produce and beverage as restaurants and food service activity slowly reopen. We continue to see very strong double-digit growth in e-commerce, with increased consumer reliance on e-commerce as a spending channel. We have a deliberate overweight strategy in e-commerce with advantaged capabilities and geographic reach. In durable goods, we're seeing a modest improvement, although from very low levels. The challenges surrounding COVID-19 reinforced the critical role of corrugated packaging to bring essential products to consumers. Our team remains focused on understanding and meeting our customers' challenges and needs as they adapt to their supply chains in response to the massive disruptions due to the pandemic. On slide 9, as we navigate COVID-19, we continue to position the company for success in the near term and the long term. That means investing strategically to enhance our capabilities and further strengthen our Industrial Packaging business. We're doing that through Greenfield box plants such as our recent Mexico box plant investment, by investing in capabilities and converting capacity in our North American box system to support growing segments and regions, and through creative equity partnerships that expand our containerboard channels. All of which is aimed at growing our North American channels profitably. Let me share a couple of recent examples. In the second quarter, we increased our ownership interest in a sheet feeder with a strong box plant network in North America. This investment allows us to expand sales through the channel by 140,000 tons annually by providing a broad range of containerboard solutions. We also made a decision to increase capital investments in our North American box system by about $60 million this year to enhance capabilities and converting capacity to support growing customer segments and geographies. It is our view that value creation starts with understanding the needs of our customers through their value chain to the end consumer. With that in mind, our investments have clear commercial objectives and attractive returns. Turning to slide 10. I want to provide an update on the progress we're making in our EMEA packaging business. Our objective is to bring this business back to sustainable mid-teen margins and generate returns above our cost of capital. As you can see through the first half of this year, we've improved adjusted EBITDA by nearly $45 million compared with last year. The Madrid mill is an important catalyst. We're building advantage by integrating world-class lightweight recycled containerboard with our box network in Southern Europe to provide customers with a broader array of packaging solutions. Our recent converting acquisitions in Europe are performing well and delivering returns ahead of our investment outlook. They also provide additional integration opportunities with the Madrid mill. More importantly, they've enhanced our commercial capabilities and geographic reach in the region. We're also making meaningful progress in our box system performance with more opportunity ahead. All of our plants have clear commercial and operational plans and we're leveraging the skills and resources from across the company to deliver on our commitments. The near-term path may be more challenging due to COVID-19, but our objectives and commitment are clear. Turning to Global Cellulose fibers on slide 11. Price and mix was favorable and improved pricing across all regions. Volume was stable with a mix of about 75% fluff pulp. Operations and costs were unfavorable overall. Strong operational performance and cost management was offset by non-repeat of favorable one-time items in the first quarter. Maintenance outage costs improved as planned. Through the first half of the year, we completed about 25% of our planned maintenance spending in the business. Taking a closer look at demand. The demand impact of COVID-19 in the first half of the year we experienced some pull forward in demand for fluff pulp as customers managed supply chain risk to support strong consumer demand. In market pulp, the initial surge in consumer demand for tissue and towel normalized and some destocking was evident in the latter part of the second quarter. Overall, the underlying consumer demand for absorbent hygiene products, as well as towel and tissue, remains resilient as we work through the fluctuations of the pulp supply chain needs of our customers. Turning to Printing Papers on slide 12. We experienced a short decline in demand across all of our regions. Across the segment, price and mix was stable while the volume decrease impacted both the cut size and commercial printing channels. Operations and costs were impacted by unabsorbed fixed costs as we matched our production to our customers' demand across all geographic regions. Operational performance and cost management was strong and maintenance outages were well executed. Despite a challenging earnings quarter, the business continued to generate positive cash flows by focusing on cost management and working capital. We exited the quarter with inventories at our target range based on the current demand environment. Looking ahead, our team will continue to focus on what we can control with three guiding principles: one, matching our production to our customers' demand; two, meeting our customers' changing needs; and three, focusing on cash and working capital. In recent weeks, we've seen an uptick in order entry for North America as the economy reopens. However, significant uncertainty remains as COVID-19 measures persist and school reopenings remain unclear. There are also some early signs of improvement in print advertising, but clearly from very depressed levels. Although it's too soon to know the longer-term impact, our view is that the recovery in papers could be drawn out. Looking at Ilim results on slide 13. We had equity earnings of $63 million in the quarter. This includes a non-cash foreign exchange gain on Ilim's U.S. dollar-denominated net debt of which IP's after-tax portion was $34 million or $0.09 per share. Volume was higher mostly due to improved softwood pulp demand in China and other export markets in the second quarter. The average sales price also improved slightly for softwood pulp in China. Wood costs were seasonally higher, and maintenance outage costs were also higher sequentially. So now I'll turn to the outlook on Slide 14. We continue to operate in a challenging and uncertain environment as economies around the world reopen and consumers adjust their purchasing and consumption behaviors. As we move into the third quarter, we see resilient demand for packaging, which should benefit from food service reopenings, although still at a modest pace. Underlying consumer demand for absorbent hygiene products remains solid, but we do expect some inventory destocking for fluff pulp as supply chains normalize. In Printing Papers, we've seen early signs of improvement from severely depressed levels. From an operations standpoint, we plan a sizable step-up in maintenance outages across the businesses as well as higher Riverdale start-up costs in the third quarter. So taking a closer look at Industrial Packaging. We expect price and mix to be down $25 million on the flow-through of prior index movements in North America, lower price and mix in European packaging, as well as the impact of seasonal box mix in North America. Volume is expected to be stable. Operations and costs are expected to lower earnings by $50 million, due to higher costs related to the Riverdale start-up, higher seasonal costs in our North American box business, and the non-repeat of one-time items in the second quarter. Staying with Industrial Packaging. Maintenance outage expense is expected to increase by $44 million and input costs are expected to improve by $25 million on lower recovered fiber costs. In Cellulose Fibers, we expect price and mix to increase by $10 million on the impact of prior index movement. Volume is expected to decrease by $5 million due to lower seasonal demand and inventory destocking. Operations and costs are expected to lower earnings by $15 million, partly due to higher expected unabsorbed fixed costs. Maintenance outage expense is expected to increase by $46 million and input costs are expected to increase by $10 million due to higher energy and chemical costs. Moving to Printing Papers. We expect price and mix to be down $10 million, mostly due to export channels. Volume is expected to improve $30 million on initial demand recovery. Operations and costs are expected to improve earnings also by $30 million on improved fixed cost absorption. Maintenance outage expense is expected to increase by $14 million and input costs should be stable. As noted in the segment details I just shared, maintenance outages across the company are expected to lower earnings by about $100 million in the third quarter. Details by business and quarter are included in the appendix. Lastly, under equity earnings, you will see our outlook for the Ilim joint venture. Turning to Slide 15, I want to take a moment to update you on our capital allocation choices in the quarter. I'll start with the balance sheet. Debt repayment is a priority. During the second quarter, we reduced long-term debt by $200 million. We also called another $210 million of long-term debt as we expect to settle later this quarter, which will essentially eliminate all bond maturities through the end of 2021. I'd also note that we recently met with the rating agencies. Earlier this month, Moody's reaffirmed our investment-grade credit rating. Returning cash to shareholders is a meaningful part of our capital allocation framework. Our Board of Directors authorized the third quarter dividend earlier this month. With this decision, we have returned about $600 million to shareholders through the third quarter. Looking at investments, we're increasing CapEx in 2020 by $200 million, bringing our full-year target to $800 million. This increase is mostly due to funding strategic projects with returns of more than 20% of our U.S. box business, as well as maintenance capital related to the incidents at Bogalusa and Rome earlier this year. As I said last quarter, we're taking a deliberate approach to capital funding decisions to ensure that we are well positioned for the eventual economic recovery. While we're still early in the stages of 2021 capital planning, at this point you can expect next year's CapEx to be no higher than $800 million. Turning to Slide 16. We have strong liquidity in place with $3.6 billion of cash and standby liquidity at the end of the second quarter, as compared with $3.5 billion at the end of the first quarter. All of our facilities are committed and unused. We like the financial flexibility this provides given the severity of the economic crisis and the uncertainty of the pace of reopening and recovery. And with that I'll turn it back over to Mark.

Thank you, Tim. I'm on Slide 12 now. We began today's conversation talking about our strong first half performance. Our teams are doing a great job taking care of our customers and each other. We're executing well and staying focused on what we can control. You may have heard me say in the past that the company we built can thrive in just about any set of challenges and circumstances that we face. I think our first half performance reinforces my confidence that International Paper is a really strong company. We have great employees, the right channels to market to help our customers provide products that people depend on every day. The advantages we've established are serving us well in the near term, while we continue to strengthen the company for the long term. And with that, we're ready for your questions.

Our first question comes from Debbie Jones of Deutsche Bank.

Hi, good morning. Thanks for taking my question.

Good morning, Debbie.

Good morning. I was hoping we could just start by talking about demand in the corrugated business and kind of re-highlighting how trends have been through July? And then very specifically, how much e-commerce has become kind of a part of the business as a result of that and how that's kind of changed things for you?

I’d like to discuss a few of the prominent trends we’re observing. The largest segment for corrugated packaging remains processed food, where we find ourselves somewhat overexposed. Demand trends in this significant segment have stabilized, and we continue to see a steady flow through the retail grocery channel, which has positively impacted certain sub-segments. Initially, protein was in a challenging position due to production issues, but many of these issues are being resolved, leading to strong growth among our protein customers. We have made considerable investments in this segment over the past few years to ensure we perform well even during periods of rising demand. In terms of e-commerce, we are still experiencing substantial growth, as I mentioned last quarter, with double-digit increases. This segment has been a focus for International Paper, and we have excelled in meeting our customers' fiber-based packaging needs. We remain optimistic, although there is some uncertainty surrounding the food service supply chain. As noted last quarter, a significant amount of produce goes to restaurants and cafeterias, and while some of that is starting to return, it is not consistent across the board. We are closely monitoring the situation with produce and fresh food as it is a critical segment for International Paper. Overall, we expect to see steady but gradual improvement in the main segments for corrugated packaging moving forward, as evidenced in July.

Okay. Thanks. That's helpful. And then I wanted to touch on paper demand as well. I realized that this past month the industry backed up was quite weak, but you are seeing a pickup or kind of predicting a volume improvement here sequentially in the order of $30 million. So I just wanted to better understand what's driving that? What you're seeing there? What do we need to look at going forward here to understand that trajectory as it relates to schools reopening and people going back to work, et cetera?

I think, Debbie, you hit on an important point. The amount of people that feel comfortable returning to their normal workplace, mainly offices and schools. I think a lot of that depends on where we are with the pandemic, where we are with therapeutics and treatments. But we do see some pickup and it's partly because of those two areas. We'll have to watch it very closely to see that schools, for example, in places that have said they're going to open at least for options of in-person actually occur. Even if they don't, when school starts, there'll be some improvement in demand as people now figured out how to do hybrid learning. Offices are another question mark. People are bringing some of their employees back in a very careful way, and we're seeing a correlation to Printing Paper demand with that.

Okay. Thank you. I'll turn it over.

Your next question comes from the line of Mark Wilde of Bank of Montreal.

Good morning, Mark, good morning, Tim.

Good morning.

Mark, I wondered if we could get your just your thoughts globally on repurposing printing and writing paper assets into other markets, whether it's pulp or whether it's packaging. And maybe your thoughts for kind of the industry at large, but then in particular for IP for operations like your facility over in Europe and also your big white paper businesses in Brazil and North America?

It's a good question, Mark. It's a broad topic when discussing the potential for repurposing. Technically, repurposing can be feasible. Depending on the wood basket configuration, it can either be a smart capital investment or a costly mistake. I won't cover every possibility, but for our printing and writing business, we have top-notch low-cost fiber in Brazil, specifically eucalyptus fiber, which is well-prepared to support that type of product globally. In the U.S., we've been gradually shifting our southern locations that have softwood fiber availability toward fluff pulp or containerboard, and that has worked to our advantage. In Europe, we focus on a specialty niche in printing papers, primarily folding boxboard and products outside traditional printing paper. For our printing and writing segment, we are not pleased with the decline in demand and are uncertain about how much may be allowed. As Tim mentioned, we anticipate the recovery will take time, but we believe we are well-positioned to navigate through this. We still have various options available for our specific assets and customer base.

Okay. And then the follow-on question I had is can you talk about sort of what the keys are going to be for improving performance in cellulose fibers? It seems to me it's been fairly disappointing since that Weyerhaeuser acquisition three and a half years ago. I know that a part of this is we've had quite weak years for just global pulp pricing. But beyond that, what are the issues?

We had a strong start in the first 18 to 24 months after the acquisition as we integrated the business. In the latter half of 2018, we were nearing the margin structure necessary to meet our cost of capital. However, pricing has been a challenge on both sides of our focus area, absorbent products. Some higher-end products are shifting to fluff pulp and absorbent needs due to disruptions in their respective markets, along with issues in the general softwood market pulp. For us to succeed, we need to target about 85% absorbent in our specialty category, and we are currently 10% short of that goal. We must continue to invest, which we've temporarily paused, to reduce our cost structure, especially concerning the legacy system from IP before acquiring Weyerhaeuser. It's essential that we improve our value proposition, product innovation, and commercial strategies to enhance our pricing and, consequently, our margins. These are the areas we are focusing on. The global pulp ecosystem is facing significant noise and disruption, which has likely delayed our progress plans by about a year and a half. Fluff pulp continues to grow, remains important, and appeals to consumers with a certain income level, so we are optimistic about its growth potential.

Okay, very good. I'll turn it over.

Your next question comes from the line of Gabe Hajde of Wells Fargo.

Good morning, Mark, Tim.

Good morning, Gabe.

I was kind of focusing a little bit on the CapEx projects that you guys talked about, I guess more on the strategic side, $60 million. I know it's not necessarily large in the grand scheme of IP. But I'm curious if this is for specific kind of end markets within e-commerce, even more particular thinking about online grocery delivery and something that's really been, at least according to what I read, accelerated given COVID.

Yes. Hey Gabe, it's Tim. It's some of that. It depends by geography across North America. So, what we're trying to do obviously, e-commerce is growing at a rapid pace. Protein seems to be coming back, and we believe in that segment long-term. So, what we're doing is looking facility-by-facility and area-by-area of the United States for where we want to supplement and prepare for customer growth that we expect to achieve over the next increment of time. So, it's mostly strategic. It's around converting equipment. There are some corrugator upgrades. But it's preparing for supporting these very important segments that we have and customers that we have.

Then just to add to Tim's comments, some of what we're doing because of the growth in some segments, e-commerce is a great example. It puts pressure on existing plants. So, some of this investment is really targeted at debottlenecking the bottlenecks that have been created because of the good growth we've seen. And that's all solvable with just a little bit of reconfiguration. And in some cases investment to add a particular type of capability or process line at a plant that doesn't have it today.

Okay. And then I guess bigger picture question appreciating it's probably difficult to answer. But you mentioned kind of a drawn-out recovery in printing paper at the same time again kind of what we seeing here in the outside world, you see announcements from Google delaying or embracing I guess work from home until mid-2021. It seems like some other organizations are looking to do the same such that there would be some sort of structural decline in printing paper similar to what we saw in the 2008-2009 crisis. Can you speak to any of that? And kind of how you're thinking about your system and how you might respond?

So, we are thinking about it. We have a pretty robust demand model. It's hard to figure out what inputs to put in it right now because of the sheer speed at which this pandemic has changed everybody's work life. But all those factors around how fast people return and what they do after their return will factor into it. Again, as I mentioned, in answering Mark's question. I think our system is of the size and of a capability and of a physical location that it gives us some options. We just took out a big part of our system to make the white top containerboard at Riverdale. We didn't know this was coming at the same time, but it actually has helped soften the blow for us as paper now becomes in the mid-teens as a percentage of IP's total company. But look, it's hard to tell on a permanent basis. But if we just use what we learned in the past and what you mentioned about the Great Recession, it's likely there's some type of step down. Then a new level starts back with the secular decline. But it's just very difficult to predict what that will be if it will actually happen. But we do share the view that you just expressed. That's been what happened in the past.

Thank you. Good luck.

Your next question comes from the line of George Staphos of Bank of America.

Hi, everyone. Good morning. Thanks for all the details. Thanks for what you are doing with COVID as well.

Thanks.

I want to go to a question on industrial. And we've chatted about it I guess in the past, but we're now a quarter or two since COVID began. The company has done a very good job, frankly, as other containerboard companies have done in making what would normally have been fixed costs somewhat variable and leveraging the system. As a result, blunting the impact of weaker demand and pricing even since last year, is there a natural limit coming at some point where your ability to flex the system either because of what's happening with your mix, what's happening with demand? I'm not sure that where you wouldn't be able to get the same level of buffer that you've seen in the business? Or do you think you have kind of a blue sky here, you can continue managing the variable cost or the fixed cost to be variable for the foreseeable future?

That's a hard question to answer in the way that you asked it. What we do conceptually is we look at all of our costs as potentially variable, all of our material costs, and all of our operating costs. What we don't look at as variable is our people because our people are highly skilled and they make this happen. We're fortunate that that's not the largest percentage of cost in the materials industry. As you know, the inputs are the largest. We've designed supply chain and flexibility, and all the investments we've done since the beginning of the 2000s to make our facilities able to make the same products and run profitably without running wide all of that comes into this. Think about what we did last year with the high levels of lack of order downtime in containerboard when we variabilized costs. This year we're doing that without high levels. We actually have pretty strong demand in the first half of the year. I think there's a limit to everything, but there's not, there's not a view by IP that we have to only be successful when we have absolute wide open absolute perfect economy. We've got a lot of levers. Again, I give our employees a lot of credit. They've come up with some different ways to variabilize some of what looks like fixed cost in a normal materials business. I see our ability to do that continuing.

Mark, thanks. That's helpful. So within reason, obviously in terms of whatever the demand picture might look like or pricing for that matter, you have the ability to manage the system it sounds like. I wanted to come back to a question that Mark had themed up on pulp. Again looking back over time, 2016 was a very tough period for pulp. It was a year where the company didn't do as well. 2017 and 2018 were strong years for the business, but that was also a strong period for the global pulp cycle, irrespective of fluff versus commodity markets. Once again now, we're kind of at a low point, hopefully at a bottom when you look at pulp pricing and the company's earnings challenges. You mentioned that the formula for success will be getting the mix to about 85% absorbent investments and further cost reductions, and furthering your value proposition to your customers so as to get better pricing and commercial benefits. If you added all that up together, what do you think would be the increment to your earnings power from current levels? What could that add to your business? And would you be mid-cycle if you did that at a mid-cycle level in terms of the market burning above the cost of capital? Thank you, guys.

Thanks. The level of success and structure we've talked about is we need margins in that 20% range or high teens; we need a lower cost structure. What I meant by commercial and value proposition is, like any business if you look at our profitability by product, segment, and customer, it's obviously not a straight line across. We have some really high-value specialty products inside of fluff that we just need to grow and develop more of. That was the vision when we put IP and Weyerhaeuser together. It was taken off track a little bit by the global pulp environment; a little bit by our own doing a couple of years ago. But I believe we can get back to that level of track. I'm not going to give you an earnings projection, but we did give one back a few quarters ago that, at this number, the company will be at cost of capital. That's probably still a number that's in the right range.

All right. Thank you, Mark. I will turn it over.

Your next question comes from the line of Anthony Pettinari of Citi.

Good morning. Regarding the investments that you're making in the North American converting system, did those move the needle in terms of your forward integration rate which I think is 85%, if I have that right? Is raising the integration rate important to IP? Or is it not necessarily something that's sort of a goal in and of itself?

Hey, Anthony, it's Tim. The goal that we have is the more that we can put through our North American integrated channel, the better we like it. We know that our margins, that's our most profitable channel to market. So we're always looking for innovative and creative ways to do that. This is simply funding capability and capacity where we have had long-term strategy around certain segments. We've built up our capabilities to supply customers' needs in those segments, and we're trying to keep pace with the growth that we expect from those customers in those segments. So, we don't have a hard fixed target on integration per se, but we are constantly looking to intelligently put more volume through our North American channel because that's where we make the most money.

Okay. That's helpful. And then in pulp you talked a little bit about stockpiling turning to destocking over the course of the quarter. I’m wondering, on the Industrial Packaging side, when you look at customer inventories or maybe even consumer inventories of finished products, is there any stockpiling that could turn into a destocking headwind? Or do you feel like inventories are sort of pretty normal out there?

No. As I mentioned in our prepared remarks, we think for containerboard in the U.S. we were squeezed. We're tied based on the recovery that we saw. So, if anything the issue there is making sure that we've got the right grades and basis weights in the right places across our system. On the export side, we think customer inventories for roll stock are in very normal ranges for the time of year and the season. We're in between seasons right now, but we think inventory levels are in good shape. The agricultural season picks back up around the world in late August, September, October, so we think inventory should be in good shape.

Okay. That's very helpful. I’ll turn it over.

Your next question comes from the line of Brian Maguire of Goldman Sachs.

Hey, good morning, guys. Just wanted to follow-up on one or two questions that were already asked. Just e-commerce obviously is a growing part of the company it has been for a while. I think in the past you talked about it might be 10% of your mix or box shipments. Just wondering, do you guys have an estimate of where that figure might stand now given that we've seen quite a bit of growth there and some declines in other parts of the company? Do you see any potential challenges to that continuing to be a bigger part of the mix going forward?

No, challenges. I mean, we like our position, and we think we've got a great customer set across e-commerce that have different needs and we cater to them with different capabilities and different service platforms. In past times when things were more normal, it was growing and it was probably just under 10%. I would say today, with the dynamic that you mentioned, it's probably one or two points above 10%, and growing rapidly. So yeah, I mean, it's not a dramatic move in a normalized setting, but we have seen it become a bigger part of the mix. But we like the segment, and we like the customers that we have and expect to continue growing at a high rate with all of those customers.

Okay. And then just one on the sort of the equity investments maybe kind of a multi-part question. But just to clarify, will the sheet feeder now be consolidated on the financials? And then do you see more equity investment potential partnerships in the U.S. to sort of tie up with some of the independents that remain out there? And then just sort of finally related to that any thoughts on your partnership with Graphic Packaging and the potential to monetize that in the near term?

Yes. I'll start with Graphic and work backwards if I can. We mentioned earlier this year that we value the partnership and believe they operate a strong business. However, we determined it wasn't a strategic fit for International Paper. As a result, we initiated the first part of selling our position, and we have consistently stated that this clearly sets us on a path to monetize. We are currently in the window again and remain careful to ensure we are not acting like traders or planning to hold our position indefinitely. Our goal is to maximize value within a defined range. Therefore, we are indeed pursuing a monetization strategy over the coming quarters. It's important to note that our agreement has specific requirements regarding how this monetization occurs, which allows a maximum of $250 million every six months. Since we completed a transaction in January, we are now back in the next available window. What was the other part of your question? I'm sorry.

Sorry. Yes. There were a couple in there. So just one to clarify on the sheet feeder investment will you start to consolidate those earnings now? And then just any other equity investment potentials?

Yes. No, it won't be consolidated because we have a minority position, but we're excited about the opportunity and the relationship that we'll have with the other equity holders. We're creative, and we look for opportunities to do things from a service and capability level that others maybe can or won't do. So I'm not going to speak specifics, but we want to be thoughtful and creative about how we participate in all of the segments of the North American market.

Okay. I’ll turn it over. Thanks.

Your next question comes from the line of Steve Chercover of D.A. Davidson.

Thanks. Good morning everyone. So, yes, my first question was also on the Graphic stake and how you'll be thoughtful. So when you're considering whether to sell, is it not only your own cash needs, but also the implications for Graphic's financial ratios and therefore the iterative process on valuation?

Well, we make decisions based on International Paper's investors and stakeholders. From our cash position and liquidity position that I mentioned in the prepared remarks, we feel really good about cash flow and cash available to us through the committed facilities that we have. So it's really down to capital allocation and looking at different choices that we have before we can apply cash and then trying to be thoughtful about making the right decisions across our entire capital allocation framework.

Okay. Thanks. And then my second question, I'm going to say the word that you would never really heard, which is Asbestos. I think it's the first time that I recall you taking a reserve. Can you give us a little more color? I mean, this isn't the first, hopefully, phase of a bigger situation. I’m sure you've got Asbestos being a 100-year-old company?

Yes, it's primarily related to the acquisition of Champion Products. We believe we've managed the situation and decided to take a very conservative approach in establishing this reserve. Therefore, we recorded the charge in the second quarter, which accounts for a potential exposure over a lengthy period, approximately 40 years, that we anticipate may be excluded.

Okay. And my final is more of a comment than a question. I really love the winning streak, so I hope you've got the financial ability to keep your dividend streak alive. Good luck.

Thank you.

Thanks, Steve.

Your next question comes from the line of Adam Josephson of KeyBanc.

Mark and Tim, good morning. Hope you and your families are well.

Thanks, Adam.

Two demand questions. Tim, I think Debbie asked about July, I don't think if you gave it. Would you mind giving us a number for what you were up in July? And if whatever that number is for July is roughly your expectation for the balance of the quarter?

Yes. I mean it's very similar to what we experienced in June. As you can imagine, June was a strong month relative to where we were earlier in the second quarter. So I don't have a number off the top of my head, but July is like a carbon copy of June's results. So we feel very good about how the quarter is starting. The color that we provided in our prepared remarks segments that have performed well are continuing to perform well, and we're seeing normalization across other segments as economies reopen.

Got it. Thanks. And Mark, you talked earlier about corrugated packaging outpacing the economic backdrop in the U.S., but not so in Europe it sounded like. What do you attribute the differences between the two regions to, particularly given that Europe has handled COVID, obviously, much more effectively than we have judging by the difference in case numbers?

I think the outpacing comment is given the GDP and all the other traditional indicators, our particular product is performing a lot better in a difficult economic backdrop mainly because of what the product does. I think the comparison in Europe and the U.S. is probably because of Europe's approach on the pandemic and how they've gone about managing the economy country-by-country. You compare that to the U.S. where we've done some things maybe a little quicker. It may or may not play out to be the correct thing to do for all indicators, but I think our economy is opening a little bit faster and I think the supply chain in the U.S. is a little bit more robust than what we see in the European market.

That's a good question.

Mark, I think the main point on Riverdale is what Tim was talking about, and that is it's not the same product that we make in the other mills. To the earlier questions around variabilizing cost, we're going to make the unbleached medium weight, lightweight, and heavy weight leer that we need for the order book. But this Riverdale product is going to be an upgrade for existing light top that we make at other facilities that's not as high-quality, and it's going to be a strong value proposition for winning new business. We will adjust our system. We're not going to make room for Riverdale. We're actually going to market the Riverdale product as an upgrade to what we do today, and as a value proposition for the e-business. We will adjust the non-high-performance white top part of our system as needed.

Okay, great. When we consider the earnings base for the North American Industrial business, can we view Riverdale and expect around $100 million or an appropriate number of incremental EBITDA as part of that earnings base without it impacting any other part of the business?

Yes. There will be an increment of additional earnings out of Riverdale in a normalized environment, of course. That was the basis for the investment and the related benefits that we got in the other facilities.

Thank you.

Your final question will come from the line of Mark Connelly of Stephens.

Thank you. Your Madrid project solved a problem that had developed with your non-integrated box plants. I understand that they're really not non-integrated because all the stuff comes from the U.S. Has your European converting acquisition strategy changed because of the experience you had in Spain, or was that really just a one-off in your mind?

Hi, Mark. I think I would say it changed a little bit. We saw the value of this regional integration better and more clearly when we had the Madrid mill. The plants we acquired, or in one case even swapped, one that was in Northern France for one that was in Spain; it's a very good business model for us. Given the fact that the European market is kind of regionally segmented, we think a good dense, high-quality mill and box plant network is the best model for IP in that market versus a more homogeneous market in the country like we have in the U.S. So I think we learned something there, and it has kept us more in whatever you want to call it, more in the kind of bolt-on, very focused growth mode versus other avenues we could take.

Okay. That's super helpful. And just a simple one, I assume that the $800 million of CapEx for next year doesn't contemplate any of the stuff that you were talking about in terms of future potential conversions. So if you did decide to do something like that, that would be outside the $800 million?

That's right.

Super. Very helpful. Thank you.

Thank you.

So as we wrap up, I just want to once again thank the International Paper employees for their extraordinary commitment through this pandemic. We've got to obviously manage the ongoing uncertainty as our communities where we live and work reopen. But as I said last quarter, and I'll say it again, with even more conviction. I'm very, very confident in our future. We have a strong financial footing, and all of our stakeholders can count on us to do the right things. We're going to be guided by our core values of safety, ethics, and stewardship, and we're going to deliver for the stakeholders that are depending on us. So thanks for your time this morning and for your interest in International Paper.

Thank you for participating in the International Paper second quarter 2020 earnings conference call. You may now disconnect.