International Paper Co /New/ Q1 FY2024 Earnings Call

Good morning, and thank you for joining us. Welcome to International Paper's First Quarter 2024 Earnings Call. I will now hand the call over to Mark Nellessen, Vice President of Investor Relations. The floor is yours, Mark.

Thank you, Greg. Good morning, and thank you for joining International Paper's First Quarter 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's important information at the beginning of our presentation, including certain legal disclaimers. For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties. 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 certain copies of the first quarter earnings press release and today's presentation slides. I will now turn the call over to Mark Sutton.

Thank you, Mark, and good morning, everyone. We will begin our discussion on Slide 4 where I will highlight our results. Starting off the year, our teams across International Paper executed well with intense focus on taking care of our customers while accelerating commercial and mill optimization strategies. We are also encouraged to see positive market momentum as we continue to see signs of demand recovery. Additionally, our sales price index has improved across our portfolio, and the majority of this will flow through our contracts in future quarters. Our first quarter results were generally in line with our outlook and represent a trough based on seasonally low volumes, higher OCC costs and the majority impact from the 2023 sales price index declines. Earnings were also impacted by approximately $38 million from the January winter freeze and approximately $14 million from a significant fire that consumed our box plant in Ixtac, Mexico. Fortunately, no one was injured and our team remains focused on taking care of our employees and customers as we manage through this incident. Also, in the quarter, our teams across International Paper made significant progress executing our strategic initiatives. We realized significant margin and mix benefits from our Box Go-to-Market strategy, well above our initial expectations for the first quarter. In addition, we continue to make investments to strengthen our packaging businesses. We also realized benefits from our optimization strategy in Global Cellulose Fibers and from the fixed cost reduction initiatives in our mill system. These strategic initiatives across our portfolio are focused on accelerating margin improvement and driving profitable growth. In addition to this ongoing work, last week, we announced a catalyst to create significant value for shareholders through a highly compelling combination with DS Smith. This additional catalyst is something we look forward to working along with the DS Smith team and continuing our conversations with investors regarding this opportunity. At this time, we do not have any additional information to share. So for today's call, including the Q&A session, we intend to focus specifically on International Paper's performance. I will now turn it over to Tim who will provide more details about our first quarter performance and also our outlook. Tim?

Great. Thank you, Mark. Turning to our first quarter key financials on Slide 5. As Mark mentioned earlier, our first quarter earnings were generally in line with our outlook and represent a trough based on seasonally low volumes, higher OCC costs and the majority impact from the 2023 sales price index declines. Operating earnings and margins were also negatively impacted by approximately $52 million or $0.10 per share from the January winter freeze and the Ixtac box plant fire. For the quarter, we generated $144 million of free cash flow. As a reminder, our free cash flow in the first quarter of last year included a $193 million final settlement with the IRS related to IP's timber monetization structure. Looking ahead, we expect significant earnings improvement based on positive market trends and benefits from our commercial and cost improvement initiatives. Now I'll turn to Slide 6, and I'll provide more details about the quarter as we walk through the sequential earnings bridge. First quarter operating earnings per share was $0.17 compared to $0.41 in the prior quarter. As I mentioned earlier, the first quarter included $0.10 per share related to the January freeze and the Ixtac fire. Price and mix was higher by $0.14 per share, driven by significant margin and mix benefits from successfully executing our Box Go-to-Market strategy and our GCF optimization strategy. This was partially offset by the majority of prior sales price index declines from 2023. Volume was unfavorable by $0.08 per share primarily due to seasonally lower shipments across both segments as well as some impact from the winter storm in January. We continue to deploy our commercial strategies across the portfolio, focused on margin and mix improvement which has impacted volumes in the near term as we transition based on our strategy. Operations and costs were unfavorable by $0.13 per share sequentially. This included approximately $0.07 per share from the January winter freeze and the Ixtac box plant fire. The remainder was primarily due to cost inflation including the higher cost of employee benefits. The unfavorable impact to operating costs from seasonally lower volumes was offset by cost savings from our mill closure and machine shutdowns last year. Maintenance outages were higher by $16 million or $0.03 per share in the first quarter. Input costs unfavorably impacted earnings by $0.07 per share sequentially, largely due to increased costs for OCC, with the remainder from higher energy and chemicals. And finally, corporate items unfavorably impacted earnings by $0.07 per share sequentially, primarily due to FX and reserve adjustments that were favorable in the fourth quarter. Turning to the segments and starting with Industrial Packaging on Slide 7. Price and mix was higher due to significant benefit from our Box Go-to-Market strategy, which contributed approximately $110 million of earnings benefit from improved margins and mix. This was partially offset by the majority of prior sales price index declines in 2023, negatively impacting earnings by approximately $53 million. With that said, the February index publication of a $40 per ton increase will flow through our contracts primarily over the next couple of quarters. In addition, the commercial benefits from our Box Go-to-Market strategy exceeded our expectations for the first quarter and the commercial teams remain focused on pursuing additional opportunities going forward. Volume was lower as the first quarter represents our seasonally lowest shipment quarter of the year and was also adversely impacted by the January freeze. Also, our Box Go-to-Market strategy is about making choices that will likely impact our volume in the near term, but will allow us to improve our margins and mix in the long term. Although we expect to trail the industry for the next few quarters when measuring unit volume growth, we fully expect the volume impact to be tempered as we continue to transition toward our target mix of customers and invest in the business to maximize profitability. Operations and costs included a $34 million unfavorable impact from the January winter freeze and the Ixtac box plant fire in March. The remainder was primarily due to cost inflation, including items such as labor, materials, contracted maintenance services and higher costs of employee benefits. There was also lower fixed cost absorption from seasonally lower volumes. However, this was partially offset by $22 million of fixed cost savings from the Orange mill closure. Outside of the January freeze, our mill system ran very well in the first quarter. Planned maintenance outages were higher by $26 million sequentially and input costs were higher primarily due to higher OCC costs. On Slide 8, we thought it would be helpful to update you on segment trends for our North American packaging business like we did last quarter. We continue to see stable to improving demand across all end-use segments. Let me highlight some of the trends based on customer feedback. E-commerce continues to be very resilient, up mid-single digits on a year-over-year basis in the quarter and significantly above pre-COVID levels. Food and beverage has been relatively stable overall. The overall Fresh Food segment continues to benefit from solid performance across the foodservice channel as well as consumer shifts toward preparing at-home meals in lieu of processed food and its convenience. The Processed Food segment is beginning to show signs of improvement as some retailers are running promotions to improve sales volumes. The produce segment was about flat in the first quarter with a drag from wet weather in the Western U.S. However, this segment is expected to recover in the second quarter. The Protein segment is improving following a period of supply reductions in beef and poultry. Poultry remains a preferred choice by consumers based on value. The beverage segment remains under pressure as budget-conscious consumers have reduced consumption of specialty beverages and bottled beer, which tend to be more packaging intensive. In summary, based on these trends, we believe industry box demand will grow approximately 2% to 3% in 2024. We understand the critical role that corrugated packaging plays in bringing essential products to consumers, and we believe that IP is well-positioned to grow with our customers over the long term. Moving to Global Cellulose Fibers on Slide 9. Price and mix were higher due to price index movement and the GCF optimization strategy driving benefits from higher absorbent pulp mix and the reduction of commodity grades. Volumes sequentially were relatively flat overall as improved demand for absorbent pulp was offset by lower sales of commodity grades as we continue to focus on strategically aligning our business with the most attractive customers and segments. Operations and cost were unfavorable sequentially due to the January freeze and cost inflation, including labor, materials, contracted services and higher costs of employee benefits and some timing of spending. Most of this was offset by $12 million of lower fixed costs resulting from the two pulp machine closures at our Mills in Riegelwood, North Carolina and Pensacola, Florida. Planned maintenance outages were lower in the quarter by $10 million and also included a $24 million outage related to the Georgetown's white papers machine that unfavorably impacted earnings in the first quarter but is expected to be recovered throughout the year through an existing supply agreement with Sylvamo. Finally, input costs were higher by $7 million, primarily due to higher energy costs during the January freeze. On Slide 10, we'll take a look at our second quarter outlook. I'll start with Industrial Packaging. We expect price and mix to improve earnings by $65 million sequentially. This is the result of the prior index movement in North America, higher export prices to date as well as continued progress with our Box Go-to-Market strategy. Volume is expected to increase earnings by $55 million, primarily due to seasonally higher daily with one more shipping day. Operations and cost are expected to decrease earnings by $70 million. This includes proactive maintenance spending beyond our full-scale mill annual outage program. As we anticipate continued demand recovery and increased equipment utilization, this spending is focused on improving productivity and efficiencies across our mills and box plant network. We will continue to experience additional inflation and higher S&A including additional commercial resources to support our Box Go-to-Market strategy. Higher maintenance outage expenses are expected to decrease earnings by $4 million. Included in that total is a $19 million outage related to the Riverdale white papers machine that will be recovered throughout the year through an existing supply agreement with Sylvamo. And lastly, input costs are expected to be stable overall as higher OCC costs are expected to be offset by lower energy costs. Switching to Global Cellulose Fibers, we expect price and mix to increase earnings by $15 million as a result of prior index movements. Volume is expected to remain flat as we reduce exposure to commodity grades and grow with absorbent pulp. Operations and costs are expected to increase earnings by $20 million, primarily due to lower fixed costs resulting from pulp machine closures in our Riegelwood and Pensacola Mills, the non-repeat of the January freeze and timing of spending. Lower maintenance outage expense is expected to increase earnings in the second quarter by $19 million. This sequential improvement reflects the $24 million Georgetown paper outage that occurred in the first quarter, which we expect to recover throughout the rest of the year. And lastly, input costs are expected to be stable.

Thanks, Tim. I'll turn to Slide 11 and give you some additional perspective on the progress we're making on our business strategies. Our teams across International Paper are advancing our strategies and capturing significant value. In the packaging business, which is on the left-hand side of this slide, our Box Go-to-Market strategy is focused on enhancing our capabilities and strong value propositions to improve margins and mix. We are making choices that create value for our customers while maximizing the profitability of our packaging business. Earlier, Tim called out approximately $110 million of price and mix benefits realized in the first quarter, and we expect additional opportunities as we go through the year. In addition, we continue to make investments across our box network to improve our capabilities to serve customer needs and increase productivity. These projects have attractive financial returns and position our packaging businesses for profitable growth in the future. In our Global Cellulose Fibers business, we also realized benefits from our optimization strategy by aligning our resources with the most attractive customers and segments and exposure to commodity grades. This shows up as margin and mix improvements in the first quarter. Across the enterprise, we also optimized our mill system and realized $34 million of fixed cost savings in the first quarter. These strategic initiatives across our portfolio are focused on accelerating margin improvement and driving profitable growth and will remain a high priority for our teams at IP. Moving to Slide 12 and our CEO transition, I'd like to take a moment to express my personal gratitude for my journey with International Paper. It's been a privilege to be part of the IP family for my entire career. Four years really goes by fast when you work with outstanding people at a great company. While I enjoyed all the various roles and opportunities, I'm truly humbled and honored to have served as IP's leader for the past decade. During this time, we have become a more focused company, and our financial foundation is strong, as are the principles and core values that guide our actions and decisions about how we operate. Our team knows our mission matters that we improve people's lives by using renewable resources to make products people depend on every day. We understand how important it is to help our customers solve problems and achieve their goals. And we're laser-focused on improving the company and making IP a very well-positioned company for the future. I'm incredibly proud of our employees. I have seen them demonstrate time and time again their resilience and agility to overcome challenges. This was particularly evident during the global pandemic when our team showed up for work every day to get the job done. Their dedication ensured people around the world had access to a variety of essential goods. To everyone on the IP team in all our operations and offices around the globe, thank you for what you do each day and for making a difference. And to our shareholders, thank you for your continued confidence and investment in International Paper. It has been a remarkable journey for me being part of IP's 126-year legacy. I'm proud of how far our company has come and I'm looking forward to seeing where International Paper will go.

Your first question comes from Matthew McKellar from RBC Capital Markets.

I was wondering if you could start with just reconciling the benefits from the changes in your go-to-market strategy in the box business versus what you're expecting to start the year. And then it sounds like you're expecting some incremental benefits will flow through in Q2 and beyond. I was wondering if you could help us just quantify that.

So Matthew, I think you're asking, we had outlooked closer to maybe $70 million and we overachieved that. Tom Hamic, I think, can walk you through a lot of moving parts on that. But I think he can walk you through how we basically overachieved our outlook.

Sure. Thanks, Mark, and Matthew. I would say we exceeded the price component for two reasons. First of all, at the local level, we had better-than-expected improvement as we were starting Q4. So these are customers that are really the decisions are made in the field. Most of our forecast thinking about the improvement was focused on very large customers that are across the country. We exceeded expectations there, but the big move was our investment in teams in the field, training, execution, driving benefits for our customers and frankly, getting a fair price that maybe we didn't in the past. I can say that the volume gap to market was almost exactly where we expected it. So these trade-offs are playing out the way we expected, but the margin improvement is more significant.

Great. And then I realize it's a pretty marginal change, but could you talk about what you're seeing in the market, either in Q2 so far? Or more generally, that led you to revise your expected North American industry box shipment growth to 2% to 3% in '24 from 3% previously?

Sure, Matthew. This is Tom again. I would say that second quarter is going to be close to plus 2% for the industry. So that's an improvement from 4% to 1% to 2%. We expect that improvement to continue. But I would say 2% is probably in line with a fairly tough economic second half. And obviously, when you're forecasting the toughest things to predict are the turns. And we are going to have a turn. Our customers do not have enough inventory. And at some point, they're going to have to reinvest in that base as the economy improves. And so our forecast, if you go down to 2%, that suggests no improvement at all and probably a fairly tough retail sales environment. I think it would be closer to 3%, and I would not take 4% off the table. So a moderate adjustment to be conservative is what I would say.

Great. That's all for me. Mark, congratulations on the retirement.

Your next question comes from the line of Mark Weintraub from Seaport Research Partners.

First question, just wanted to understand the operations and costs in the packaging business. I think you talked about being a negative $70 million 2Q v 1Q. And I think though at the same time, we should have about $50 million positive because we don't have the fire and we don't have the winter freeze issues. So that seems to be like a $120 million negative swing. So I was hoping to get kind of more specific as to why that number would be so large?

Mark, this is Mark. That's a great question. I think it's two parts. It's the value chain, starting with containerboard and all the way through Box. Our prepared remarks talked about generically preparing for what we believe will be higher utilization as well as some of the spending is maintenance costs, but it really is in the box business to improve productivity and throughput. It's just not at the capital cost level. What I would like to do is ask Jay Royalty to talk a little bit about the containerboard part of the value chain, and then Tom can add some comments on the converting and box side. So Jay?

Thanks, Mark, for the question. Regarding the containerboard aspect, there are a few key points to consider. First, the inflationary environment has significantly raised the cost of providing value to customers over the past couple of years, and we expect to see this continue into 2024. We experienced a noticeable impact in our first-quarter results, and we anticipate a further effect in the second quarter. Much of this inflation is linked to labor costs, which are particularly high now due to contract resets at the beginning of the year. Therefore, we are seeing substantial increases in expenses related to labor, benefits, maintenance services, operating supplies, warehousing costs, and even some indirect costs like insurance and property taxes as we move into 2024. These factors are affecting our first and second-quarter numbers. Additionally, as Tim mentioned about proactive maintenance spending, we have adjusted our expenditures in response to lower demand, but we are now seeing clear signs of recovery across all channels. We need to be prepared for this growth, which is still in its early stages but will continue to accelerate. Tom will discuss the box aspect on the mill side, which I would describe as a slight increase.

Mark, this is Tom Hamic. I think Jay and Mark laid it out very well. I would say the one difference with the box business because we are increasing maintenance spending is that it's very targeted to places where either we've struggled with reliability or we have an opportunity to grow. So if you look across the country, it's not that we're spreading the maintenance dollars. We're really reacting to the marketplace and the strength of demand. And then we're targeting maintenance spending to improve reliability for those customers. While at the same time, we're improving our margins. So this real focus on reliability and delivering on time, it's going to pay off.

Okay. Would you say that what we’ll see in the second quarter is a return to your typical levels of maintenance spending, given the current situation? Or are we spending a bit more now to compensate for previous spending? Are there any further increases expected? It sounds like there won't be additional increases, but could you clarify if we're at normalized spending levels in the second quarter, considering we were somewhat below before? Is that the right way to think about it?

Mark, this is Tom Hamic again. I think there is a large part of it that is adjusting. But I think the key is what I talked about earlier is we've got to respond to the market, and we can't wait for the market then respond. And so there's a bit of this that is getting ready, as Jay talked about, for what we see as an expansion in box demand going forward. And one of the really positive things about maintenance expense in the box plants is what we've seen is a very short payback. So we're seeing the results. We're tracking the results and I feel very good. It really is our fastest way to react to customer needs. And so I feel very confident what we're spending is going to pay off.

So Mark, I believe what Jay mentioned regarding the mill side applies similarly to packaging and is also true for Cellulose Fibers. We've been adjusting our spending over the past four to five quarters since both businesses were operating below target output, which is typically around 94% to 95%. Due to the current demand environment, our output has been significantly lower. As a result, we've been able to spread our available funds over an extended period because our plants didn't need to operate at their maximum capacity. We are now getting ready to operate closer to our target output levels. However, there is one aspect of the mill system that is somewhat unusual, which is the timing of certain power generation projects. In some of our integrated mills, we have significant preventive maintenance shutdowns on turbine generators that produce our steam and electricity. These do not occur every year but are scheduled in a specific sequence. Currently, we have a few extra scheduled maintenance jobs for turbine generators that we wouldn't usually have during this timeframe. If we exclude these, I believe the remainder of our operations is gearing up to run at a more targeted level, though I hesitate to say fully operational.

Got it. Thanks, guys, and thank you, Mark, for your clear explanation there and for your clarity last year as you've been working, and congrats on the retirement.

Next, we'll go to the line of Charlie Muir-Sands from BNP Paribas.

Yes. I would like to focus on two points. First, regarding market prices and the $40 per ton increase implemented in March, followed by no changes in April, do you expect that we won't see any further recognition unless there are additional price increases, relative to the higher figures announced by you and others earlier this year? Second, concerning corporate expenses, it was $24 million in the first quarter compared to the annual guidance of $60 million to $80 million. Do you have any insights on how Q2 might turn out, and are you now potentially looking towards the higher end of that range for the full year given the significant amount in Q1?

Charlie, this is Mark Sutton. Thank you for your questions. I'll address the first one, and our CFO, Tim Nicholls, will handle the second one regarding corporate expenses. Regarding pricing, we typically do not provide outlooks on future pricing. We recently had an announcement where $70 was mentioned, and $40 was recognized. There are various factors influencing how the index determines price through analytics. Therefore, we won't go further into that; that's the situation we have. This will carry through the next few quarters, but we don't provide forecasts or discuss forward pricing that hasn't been published in an index. Tim, would you like to discuss the corporate expense question?

Yes, we don’t provide a quarter-by-quarter breakdown. There are many factors we typically keep at a corporate level that can fluctuate. We remain optimistic about the $60 million to $80 million for the year. We account for things like foreign exchange movements and some unallocated subscriptions, among other factors. There are many variables involved, and while it can be estimated for the full year, it may vary from quarter to quarter.

Your next question comes from the line of Mike Roxland from Truist Securities.

Thank you, Mark, Andy, Tim and Mark for taking my questions, and Mark I just want to echo what everybody else says, congrats on the retirement and all the years following through.

Thanks, Mike.

I would like to understand the commercial or margin improvements in industrial packaging. What EBITDA margin are you aiming for and within what time frame? Can you provide some insight on how this will develop in the next few years?

I think the number we've always thrown out there was an EBITDA margin that led us to a really strong ROIC, several hundred basis points above our cost of capital. At yesterday's revenue line, that used to be in the 20s. But I think for us, that's an aspirational target to get back into that area. But even at today's revenue and 18% margin generates very strong ROIC similar to what a 21% margin used to generate. So I think that's the sort of milepost we're working toward now is getting up into those high teens, 18-ish percent on our way to 20%. And if you kind of take that to an ROIC, you've got a really strong kind of mid-teens ROIC in the packaging business. And then you put some growth on top of that, and I think the value creation can be pretty powerful.

Based on your current position, Mark, when do you anticipate achieving that 18% margin? Will it happen in the next year or the following two years? How do you see this progressing in the near term?

I think the answer to that question is going to depend a lot on what Tom Hamic talked about, and that is this steady improvement in demand and the consumer and when this turn occurs. Obviously, those margins would be indicative of a healthy economy, which leads to a healthy box market. So we would think several quarters before we're sitting at that point. But we should see a step change in the margins as we go through quarter by quarter by quarter. I'd like to say a point in time in '25, but it's really going to depend on the demand environment but it's not that far in the future.

Got it. And just one follow-up. I think you had a recent conference where you mentioned a change in the customer mix before COVID compared to after COVID, and the different margin profiles associated with that. Can you provide more details about how your customer mix has changed from before COVID to after, as well as any regional impacts that might result from this shift?

Yes, that's a good question, Mike. At that conference, I discussed how, during COVID, some of our large contractual customers in specific end-use segments were experiencing remarkable growth. We had a responsibility to support their demand, either as a percentage of their purchases or through other metrics in our contracts. Their growth outpaced that of other segments and smaller customers. As a result, we had to prioritize these larger customers, leading to some smaller customers being left without support due to capacity constraints in our converting system. I want to emphasize that these customers are not problematic; they are valuable and grew quickly, and we responded to their needs. However, this affected our margins because some of the customers we couldn't accommodate were actually more profitable and more localized. Consequently, our business shifted toward a higher proportion of large national accounts. Now, we are working to improve the economics with these large national accounts since their contracts have become open following COVID. Some of these contracts lasted two to three years. Where possible, we are enhancing the economics as Tom has mentioned. This change accounted for a significant portion of the $110 million in the first quarter. In cases where we cannot collaborate with a customer to enhance the economics, and they find better alternatives, we will lose that volume, which will allow us to refocus on the segments and customers we had to neglect previously. The good news is that we have been suppliers to many of these clients for a long time. Although it was a difficult period, we are getting opportunities to reconnect with customers we have served for many years. The demand profiles were highly unusual due to an external shock. We did our best to fulfill our obligations but faced challenges, especially with post-COVID inflation, demand declines, and contractual limits that created less favorable economic conditions. We are now focused on returning to the most profitable customer mix possible. In terms of converting, Mike, it's about optimizing the hours of operation on our converting machinery to add value to containerboard by creating packages. The challenge we faced was maximizing profitability per hour of converting time given to the market, which became skewed not because of our intent but because we were responding to what we believed was right for our customers based on the contracts we established before COVID.

Great color and good luck in retirement, Mark.

And your final question for today comes from the line of Gabe Hajde from Wells Fargo.

Mark, I'd like to echo everyone's comments. I think we told you also that congratulations. Hope you get to enjoy the time. I'm going to try to come back to the maintenance and investment question. I looked at average maintenance outage expense pre-pandemic in an average of about $250 million. During the pandemic over the past four years, including 2024, I think it was averaging about $380 million, $130 million more maintenance expense we're investing. And now we're talking about some extra costs running through the P&L. I don't know if you quantified it for us, but it seems like it's maybe at least $100 million in the second quarter, correct me if I'm wrong. So maybe just help us with dimensionalizing some of these costs where maintenance would go next year sort of an ordinary environment? And what sort of return are you expecting on the capital or the extra costs that are flowing through the P&L?

Gabe, let me start just at a high level. So the $250 million you talked about, you could probably put a 40% inflation number across that spend. Typically, maintenance is half materials and half labor. Some labor is in annual outages and it's labor that we don't provide in specialty works. So we hire that labor during those two-week outages. And so that $250 million automatically jumps up in the neighborhood of 40% more. Now the numbers you’ve quoted at $380 million, $400 million, that's more like 50% more. Some of that is additional targeted spending and a lot of that’s in the box business. It shows up as maintenance spending, not capital expense because box plant projects tend to be small enough in many cases, where we don’t need a new machine; we just upgrade an existing machine, and that flows through the P&L as an expense. A lot of the mill projects are so expensive and large, and OEM equipment is of a scale that it ends up flowing through our CapEx in that $1 billion of CapEx. So the way we think about it, and I'll ask Jay and Tom maybe to give you some particulars, we look at the cash investment in our business, whether it's a maintenance expense or whether it flows capital as the investment in protecting today's cash flows via reliability and generating tomorrow's cash flows in the box business via new capacity and capability and in the middle business by lowering our cost, changing grade structures and those types of things. But the 40% is inflation in that neighborhood is the part that I think a lot of people miss. And while inflation isn't going up as much, there's no deflation in any of that stuff. There's some deflation of energy inputs and all that. There's no deflation in what drives maintenance cost. It's just going up less fast than it was. So Jay and Tom, do you want to add a little bit of color?

Yes. I think the inflation comments are right on. It's a very extraordinary period that we're in versus the last decade or a couple of decades, and so certainly a step change in that regard. I think the other thing to keep in mind, Gabe, is this: we have been intentionally spending at lower levels for the last several quarters to match the lower demand environment. And as we see the early stages of recovery and making sure that we're ready to ramp with that as it comes, we're stepping up. So that's the other piece, I think, to keep in mind in terms of these comparisons. Tom, I don't know if you ...

Sure. I think Mark and Gabe summed it up well. The increase in box spending is focused on reliability. In the past, we were comfortable with running overtime, such as two Saturdays a month in a box plant. While that approach allowed us to fulfill orders, it didn't ensure reliability. Therefore, we are now very focused on on-time delivery and quality. We are directing a significant amount of maintenance spending towards this shift, which will also support our margin structure moving forward.

Okay. You guys did outperform, if I go back to the bridge on a sequential basis, you talked about flattish pricing. It was plus 57%. So it's clearly showing up. We didn't build a better IP in this presentation formally talked about. Is it incorrect to annualize that $110 million number? Is there a reason why it's more pronounced here in the first quarter? Or just, again, any way to think about that? Because it I mean that and other health was, I think, a big part of a better IP and it's shown up in the numbers now here.

Gabe, this is Mark. I believe we missed the beginning of your question, but I think I understand your main point. Regarding the $110 million, it's reasonable to say that you can annualize that figure. This definitely falls within the scope of our strategy to build better intellectual property. However, I didn't catch the initial part of your question when you mentioned the bridge.

You have one last question. That question comes from the line of Phil Ng from Jefferies.

Well, I'm glad I got to get on this call because I wanted to thank you, Mark, for all the help over the years, really appreciate it. I guess, first off, you're certainly seeing a lot of inflation, and you guys are putting real dollars here to be positioned to capitalize on a better demand environment. So my question is really, do you think you're getting paid for these investments? So is there another opportunity we should be mindful of in the not too distant future? And as you implement these latest box price increases, are there levers here where you could potentially drive more than the $40 linerboard increase that went through in February, especially as you kind of move forward with this Go-to-Market strategy of yours?

Yes, this is Tom Hamic. I believe we can clearly distinguish between the two. The improvement you observed in Q1, as Mark mentioned, is sustainable. I expect the $40 increase to perform as it typically does. If you reflect on past price increases, you should feel assured that it will follow a similar trajectory. However, I view these aspects as somewhat separate. Regarding the ongoing margin expansion, I have strong confidence due to several factors. Firstly, we are significantly investing in our commercial capabilities, which represents a shift in focus. While we have always prioritized commercial aspects, our future efforts will be more robust. Additionally, we have a deep understanding of different segments and are closely connected to them and their value propositions. We are achieving success in both market growth and margin structure. Our objective is to leverage this capability, which we are actively pursuing, and enhance our Go-to-Market strategy by extending it to additional segments. There is a wealth of knowledge within the company, and this is a pivotal change for us as we implement that across the entire organization.

Got you. Okay. That's helpful information. My next question is about operations. During the COVID years, you faced operational challenges that may have limited your market growth. You're currently navigating your Go-to-Market strategy. Looking ahead, do you feel you are properly positioned to enhance market growth on the operations side, particularly in production? Additionally, how are the investments you've made in packaging performing? Are you beginning to see positive results and acceptance in the market? As you shift towards a more favorable customer mix, could you share your target percentage for regional versus national customers in the medium to long term?

That's a great question. I'll address a couple of points. Regarding investments, in the first quarter, we still have some challenges with new employees, which is why we're focusing on retention. New employees tend to be less productive than those with more experience. However, despite having a few additional people, the productivity of our machines is improving for the first time in a long while. These investments are yielding a solid return, with throughput improvements of about 2% to 3%. We've made significant changes to our capital process and maintenance expenses, dedicating time and resources to empower local decision-making. It's essential to understand the specific market dynamics at each of our 120 plants, allowing us to target our spending effectively. Regarding your last question, I expect the local business to grow as a percentage of our overall operations in the coming years. Currently, it's improving at a faster rate than the national business, and we recognize that meeting local demand is more profitable than focusing solely on national accounts. While we're not abandoning national accounts, we are shifting our focus toward a more balanced approach, as Mark mentioned in the segment discussion.

Thank you. I'll now turn the call back over to Mark Sutton for closing comments.

Thank you, Greg. And I'd like to wrap up today's call by sharing my conviction that International Paper is well positioned for the future. Andy Silvernail steps into the CEO role next week on May 1. I'm very confident his leadership experience and proven track record, combined with the industry expertise of our senior leadership team will amplify the company's success going forward. When I provided updates along the way about the CEO succession process, I said the Board was looking for the right leader for the company's next chapter, and I am confident that Andy is that leader. Andy and his team will look forward to sharing updates with you starting on next quarter's call. Thank you for your time today and for your continued interest in International Paper.

Once again, we'd like to thank you for participating in today's International Paper's First Quarter 2024 Earnings Call. You may now disconnect.