International Paper Co /New/ Q4 FY2024 Earnings Call

Good morning and thank you for joining us. Welcome to International Paper's Fourth Quarter 2024 Earnings Call. I will now hand the call over to Jose Maria Rodriguez Meis, Vice President of Investor Relations. Please proceed.

Thank you, Krista. Good morning and good afternoon, and thank you for joining International Paper's Fourth Quarter and Full Year 2024 Earnings Call. Our speakers this morning are Andy Silvernail, Chairman and Chief Executive Officer; and stepping in today for our Chief Financial Officer, Tim Nicholls, who is in London for DS Smith day 1, is Finance Vice President, Mark Nellessen. There is 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. These and other factors that could cause or contribute to actual results differing materially from such forward-looking statements can be found in our press releases and reports filed with the U.S. Securities and Exchange Commission. 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 fourth quarter and full year earnings press release and today's presentation slides. And finally, I would like to note that all financial materials in this presentation reflect only the current IP portfolio. I will now turn the call over to Andy.

Thank you, Jose, and congratulations on your new role as Vice President of Investor Relations. And congratulations to Mark Nellessen, who's moving from Investor Relations to the lead finance role in our North American packaging solutions business. And Mark, thanks for pitching in for Tim as he's getting us ready here for day 1 with DS Smith. With that, good morning, and good afternoon, everybody. I'm going to begin on Slide 3. I'm excited to share that today, DS Smith appeared before the court in the U.K. to get final approval, and we officially expect to close the DS Smith transaction at the end of the day tomorrow, U.S. time, Friday, January 31. As you know, last week, the competition authorities of the European Commission approved the proposed acquisition of DS Smith by International Paper with conditions. The EC identified minimal concerns about the acquisition's impact on competition in certain areas. To resolve those concerns, we have agreed to divest five box plants in Northern France, Northern Spain, and Portugal within the next six months. We would have preferred to retain all facilities in the IP family, and we truly appreciate the contributions for the team and the team members of these five plants. We're committed to identifying suitable buyers who can offer a viable future for these teams. Each of these locations is attractive, and we expect significant interest from potential buyers. I'm looking forward to welcoming DS Smith to IP on Monday, February 3. Together with our customers, we're creating the global leader in sustainable packaging solutions, and we're focused on the attractive and growing markets in North America and EMEA. I'm excited about the potential to unlock value for our stakeholders. We'll do a deep dive on the path forward for DS Smith at our Investor Day in March. Now transitioning to Slide 4. We are building a performance-driven customer-centric culture at IP to fulfill our purpose, a culture that will enable us to create significant value for our employees, customers, and shareholders. That work begins with a strong alignment around a very clear and compelling strategy, and that strategy stems from our mission and our values of safety, ethics, and excellence. Most importantly, our teams will put safety above all else. We will drive profitable market share growth by being the low-cost producer and the most reliable and innovative sustainable packaging provider in North America to EMEA. A disciplined 80/20 mindset will permeate everything we do. By focusing on the critical few, we are aligning resources, reducing complexity, removing costs, and delighting customers. These efforts are all focused to deliver superior value for all of our stakeholders. I'm now moving to Slide 5. We're making progress and taking actions on our path to achieve $4 billion of EBITDA medium term. This does not include the DS Smith base earnings or synergies. Again, we're going to talk about those things in detail at our Investor Day in March. As I've shared in the past, roughly $1.2 billion of the improvement that we are targeting is going to come from cost out. This number is net of inflation. So the way to think about it is that we have to take out roughly $1.6 billion of cost. As we talked about on the third quarter call, we started to do the heavy lifting, so we're making the right choices to take cost out of the system. Those impacts will ramp up through the year with actions already announced and more to come. We've streamlined the corporate organization, we're aligning resources to the businesses, and we're having a lean, effective, and efficient corporate staff. As a result, we expect our costs will be reduced by $120 million annually. We have taken the difficult actions to close five box plants in our Global Cellulose Fibers mill in Georgetown; we estimate that these combined will remove roughly another $110 million of cost from our run rate. As I mentioned last quarter, there are two regions where we're doing 80/20 pilots. We're now calling these lighthouses. We have delivered over 20% productivity gains, and we will scale that optimization method to another 22 box plants in 2025. As we look into 2025 and beyond, we'll continue to be laser-focused on improving reliability at our mills and optimizing our mill and box systems, so we deliver structural cost reduction. In 2024, our operating performance and lack of productivity cost us $350 million. Unlocking this performance will free resources, allow us to optimize our overall structure, and drive profitable growth. We are also speeding up capital investment opportunities that we believe will deliver significant cost reduction. And to that extent, we have initiated a complete overhaul of our capital investment process to simplify and significantly reduce time from idea to execution. If we turn to the commercial improvements, we expect these commercial improvements to contribute roughly $800 million to our $4 billion target. Our go-to-market value over volume reset is essentially complete. We expect the final unfavorable impact to volume to be behind us later this year. Volume has tracked to our plan for the past three quarters and since we started looking at January, we have a clear pipeline forward. We have developed a new compensation plan for our sales force to better align incentives to strategy. This plan will also support our goal of attracting and retaining the best commercial talent in the industry. We continue to add new sales associates as we enhance our commercial capabilities and move to a customer-centric culture. This renewed focus on customer experience has already resulted in significant quality and on-time delivery improvements in our packaging business, which is validated by both internal and external data. This is true in general across the overall business and specifically at our 80/20 lighthouses. We also have an ambitious pipeline of capital projects to both facilitate the regional optimization of our box system and deliver profitable market share growth. And I'll share an example here on the coming slides. Before we move on, let me say that I'm proud of our team and the solid progress we're making. We have a lot of work to do. There's absolutely no doubt about that, but the fundamentals are in place for our performance-driven customer-centric culture, and those things are starting to show. We have the right strategy and execution roadmap. Now comes the hard part, and it will not be linear. We need to demonstrate the ability to execute with excellence. Our success and our destiny lie in our control. Our actions are aimed to drive transformational improvements at IP and create significant value for our shareholders. I'm now on to Slide 6. I'm excited to share we are investing in a greenfield state-of-the-art corrugated box facility in Waterloo, Iowa. This is a great example of the investments we're making as we continue with our ambitious plans to optimize our mill-to-box system and generate attractive returns. This world-class box plant is designed to deliver on our strategy, with 20% lower costs, designed in product quality, and just-in-time service. All of this is aligned to a geography and end markets where we are positioned to win. The facility will be strategically located close to some of our best customers, specifically in the protein segment, while being in a freight-advantage distance from one of our mills. The plan is to start construction this year targeting a start-up in 2026. So again, it's a best-in-class facility designed specifically to delight our customers and achieve a low-cost position to drive profitable growth. In addition to Waterloo, we're also acquiring a bulk plant in West Monroe, Louisiana. This additional capacity and expanded capabilities will allow us to grow our specialty business in an attractive market. As you know, bulk is a business where we are differentiated and have a very good performance track record. We anticipate closing this deal tomorrow. So now let's turn to our full year performance. First, I'll share some highlights, and then I'll turn it over to Mark to walk you through the details. I'm now on Slide 8. Our full year results came in line with our outlook. Relative to prior year performance, higher pricing was more than offset by higher costs and expected volume losses from our commercial strategy, just as we expected. We have seen significant price improvements in our North American packaging business from our go-to-market execution and favorable price index moves. Volume came in lower, but very much in line with our expectations. And again, we're seeing that in January. This period-over-period volume declines from our packaging contract restructuring is playing out in line with our predictions, which is giving us good line of sight on when we will see an inflection point to profitable market share growth. Costs were higher due to employee incentive compensation and were impacted by reliability issues at some of our mills. As I shared before, we are laser-focused on improving reliability and taking cost out of the system. As we look to 2025, I want to note that we're not going to go into detail on the outlook for this year. As you may recall, while our combination with DS Smith remains pending, certain U.K. rules constrain our ability to provide a profit forecast. Even though we are looking forward to closing the transaction tomorrow, today, we are still subject to those rules, which limit what I can say. Our plan is to provide you with our outlook and a detailed roadmap at our Investor Day coming up in March. But at a high level, 2025 is expected to be a transformational year. During the first few months, we anticipate earnings will continue with the stabilization trend and then we expect our earnings to progressively ramp from a combination of the cost actions already announced, further improvements throughout the year, sequentially improving commercial wins, and overall benefits of our 80/20 implementation. With that, I'm going to turn it over to Mark, who's going to provide more details on our fourth quarter performance and outlook.

Thank you, Andy. So turning to our fourth quarter key financials on Slide 9. Operating earnings per share came in slightly better than the outlook we provided last quarter. Our EBITDA margin came in slightly better sequentially. And overall, we see stable to improving results on a sequential basis. Our free cash flow was impacted primarily by changes in working capital as well as sequentially higher capital spending and DS Smith-related transaction costs. We could turn to Slide 10, and I can provide more details about the fourth quarter as we walk through the sequential earnings bridges. Fourth quarter adjusted operating earnings per share was negative $0.02 as compared to $0.44 in the third quarter. As expected, accelerated depreciation expense was a significant impact in the fourth quarter due to previously announced facility closures accounting for $0.56 per share. Price and mix was higher by $0.12 per share, driven by the flow-through of prior price index movements and mix benefits in our packaging business. Volume was unfavorable by $0.08 per share due to two fewer shipping days in North America box as well as some volume trade-offs related to commercial contract restructuring actions. Deploying our commercial strategies across the portfolio continue to impact volumes as we closed out the year as we expected. Operations and costs was unfavorable by $0.11 per share sequentially. This is largely the impact of seasonally higher costs as well as a step down in insurance recovery related to the Ixtac box plant fire and some reliability events in our mill system across both businesses. Maintenance outages were higher by $6 million or $0.01 per share in the fourth quarter, and input costs were favorable by $0.06 per share sequentially, mainly driven by lower costs for OCC and wood. And finally, corporate items favorably impacted earnings by $0.12 per share sequentially, primarily due to lower taxes. Turning to the segments and starting with the Industrial Packaging's fourth quarter results on Slide 11. Price and mix was higher by $63 million due to the realization of approximately $40 million of benefits from prior index movement along with additional benefits from our containerboard export and open market sales. We saw a mix improvement in both North America and Europe. Volume was lower by $24 million sequentially due to two fewer shipping days in the fourth quarter. In addition, we made choices based on our box go-to-market strategy that negatively impacted our volume as expected, but this will allow us to improve our margins and mix over the long term. Operations and costs was $22 million unfavorable sequentially primarily due to the impact of seasonally higher costs, a step down in the Ixtac insurance proceeds, which we received $25 million in the third quarter to $12 million in the fourth quarter, and some reliability events in our mill system. Planned maintenance outages were lower by $22 million sequentially, and input costs were $20 million favorable, primarily due to lower OCC and wood costs. And accelerated depreciation decreased earnings by $9 million due to the five packaging facility closures in the fourth quarter. Moving on to fourth quarter results for Global Cellulose Fibers on Slide 12. Price and mix was sequentially lower by $13 million due to price index movement. Volume sequentially was lower by $8 million in the quarter due to the Georgetown mill closure in early December as well as a pull-forward of orders in the prior quarter as customers anticipated a potential port strike. Operations and costs was unfavorable sequentially by $23 million, which includes unabsorbed fixed costs from the Georgetown mill closure, some reliability issues, and higher seasonal costs. Planned maintenance outages were higher in the fourth quarter by $28 million, and input costs were $4 million favorable, primarily driven by lower wood costs. And finally, accelerated depreciation decreased earnings by $222 million, mostly due to the Georgetown mill closure in the fourth quarter. Turning to Slide 13. Before we get into the details, I would remind everyone that accelerated depreciation is included in operating earnings and is called out for each business. In summary, adjusted earnings for our Industrial Packaging segment are expected to be higher sequentially by $52 million. This includes a non-repeat of accelerated D&A expense. Adjusted earnings for Global Cellulose Fibers are expected to be higher sequentially by approximately $220 million, and this also includes a non-repeat of accelerated depreciation expense in the prior quarter. Now let me give you a breakdown by business segment. I'll start with Industrial Packaging. We expect price and mix to decrease earnings by $5 million sequentially from lower export pricing to date and unfavorable seasonal mix impact. Volume is expected to increase earnings by $10 million due to two more shipping days primarily. We expect operations and costs to increase earnings by $30 million. This includes benefits from our box plant optimization as well as non-repeats related to incentive compensation and other items from the prior quarter. It also includes the unfavorable impact of wage inflation. We expect accelerated depreciation will increase earnings for the packaging business by approximately $11 million because of the expense related to the five packaging facility closures that occurred in the fourth quarter. Lower maintenance outage expense is expected to increase earnings by $6 million. And lastly, we expect input costs to remain flat overall with higher energy costs offsetting lower OCC prices. Switching to Global Cellulose Fibers, we expect price and mix to decrease earnings by approximately $10 million as a result of prior index movement. Volume is expected to be stable, and we expect operations and costs to increase earnings by approximately $35 million. This includes improved performance and reliability as well as non-repeats related to incentive compensation and other items from the prior quarter. We expect accelerated depreciation will increase earnings for the pulp business by approximately $222 million because of the expense related to the closure of the Georgetown mill in the fourth quarter. Higher plant maintenance outage expense is expected to decrease earnings in the fourth quarter by approximately $26 million. And lastly, input costs are expected to be stable. With that, let me turn it back over to Andy.

Thanks, Mark. We'll now turn to Slide 14. I'm excited to remind everybody that we'll be hosting our Investor Day in New York on March 25 where we will provide an in-depth review of our strategy, business, and financial objectives for the new IP. We'll share our progress on DS Smith integration and outlook, the detailed plan for North American packaging, and how 80/20 deployment across the company will help drive profitable growth. Our goal is to provide a very detailed, clear, and time-based path forward. With that, operator, let's now pause and take questions.

And your first question comes from the line of Mark Weintraub with Seaport Research Partners.

I appreciate your comments indicating that the volumes in the fourth quarter were largely aligned with your expectations. Clearly, there were significant year-over-year declines. In the past, you've mentioned that there could still be negative year-over-year results possibly through the middle of next year, with hopes for stabilization and potential positive movement in the second half. Is that still a reasonable plan?

Yes, Mark, absolutely. We certainly don't like the results in the fourth quarter, but they aligned with our expectations. The year-over-year volume drops are entirely what we anticipated based on the contract process we've undergone in the last 18 to 24 months. January is also progressing as expected in terms of day rates. We anticipate that the declines in the third and fourth quarters will start to lessen, resulting in reduced year-over-year losses in the first quarter and then again in the second quarter. As we move to the second half of the year, we expect to reach a turning point. While I can't specify if that will occur exactly in the third quarter, it's likely around that timeframe. In the second half, we expect to see positive shifts. Additionally, our investments in the box plant for reliability are starting to show results in both internal and external metrics. Our on-time delivery and service metrics have improved, and third-party validations indicate significant progress from our customers' perspectives. This is crucial as we're now able to quote business opportunities that we couldn't address a year ago. We have some larger contracts rolling in where we believe we offer a compelling value proposition. We're transitioning from a defensive approach to gradually adopting a more offensive stance in our commercial strategy. However, we must still overcome our current challenges and secure these contracts. Overall, I feel positive about our alignment with the plan, and our sales pipeline is showing encouraging signs with new opportunities we couldn't pursue in the past couple of years.

Great. And maybe kind of following up along the lines of the response to the question. I think you also mentioned a $350 million lack of productivity, reliability type of thing. Can you maybe provide more color on specifically what you meant by that? And do we get that back? And what are the actions that are being taken currently?

Yes, Mark, I see this as a central issue. Reflecting on my experience at Danaher managing a sub-manufacturing plant, I always focused on identifying bottlenecks that impede our strategy or execution. It took some time for me to fully grasp the situation, but I'll break it down simply. We've been operating with insufficient capacity for too long, which can weaken our performance, much like an athlete who has been inactive. We've begun to optimize parts of our operations by directing volume to our most capable assets. This effort is revealing the strengths of our mills, though some still require significant improvement. When you tally everything, it amounts to nearly a couple of hundred million dollars annually in potential savings. Currently, we're burdened with excessive costs because, if we investigate the root causes, we find two main issues: a prolonged period of underinvestment in essential reliability upgrades in the mills and a significant turnover in staff. As experience dwindles in those mills and these issues coincide, day-to-day reliability can suffer. Our priority now is on investing in maintenance and reliability, as well as rapidly training new leaders in their roles. This is crucial. The positive aspect is that we can quantify our progress. Mill performance serves as a reliable metric for our ability to manage overhead and production. By making these investments, we can effectively advance our strategy to reduce costs. Another key point is productivity. In manufacturing, the aim is to counterbalance internal productivity challenges. I’m not referring to input costs but rather the usual expenses like wages and maintenance. In my experience, we have successfully managed to tackle these issues in previous roles, and we're already witnessing similar results in our focused initiatives. For instance, our box plant projects, which we now call lighthouses, represent a highly profitable segment. By enhancing productivity, we can significantly cut costs and shift volume to more efficient assets, which yield higher margins. This has been an area we've underexplored. Maintaining excess capacity that results in inefficiency is how these challenges manifest. We are confident that we can tackle this. It won't happen overnight, but within the timeframes we've outlined for improving daily operations and boosting productivity, we estimate the potential benefit to be between $300 million and $400 million. That's a substantial amount, and we are indeed capable of achieving it.

Your next question comes from the line of Phil Ng with Jefferies.

Andy, thank you for the insightful information. I found the slide deck impressive, showcasing the significant progress made in terms of cost management and commercial actions. Additionally, you provided insights into upcoming initiatives, such as efforts to reduce structural costs in the mill and box systems, streamline organizational complexity, and enhance the sales force. I understand that Q1 serves as a period for stabilization. You mentioned earnings momentum and the transformation plans for 2025, so could you elaborate on how these initiatives might unfold throughout the year, both in terms of cost management and commercial growth, and how we should view the earnings trajectory as the year advances? You referenced the $300 million to $400 million impact that has been a setback. How quickly can we expect to recover from that?

Yes, Phil, that's a great question. As we look at how this year is shaping up, the cost initiatives we announced last quarter will begin to take effect in the fourth quarter and will continue to unfold throughout the year. You can expect to see a gradual improvement as we part ways with certain employees and close assets, even though we know that closing an asset doesn’t eliminate all costs right away; there's a period of transition involved. This situation will improve as the year progresses, and we are committed to actively pursuing cost reductions throughout the year. What I would recommend you focus on is a consistent series of actions on a quarterly basis. It’s important that these actions are reflected in our profit and loss statement, balance sheet, and cash flow. On the cost front, we have developed a clear plan, although we’ve had to be somewhat restrained in sharing details due to the DS Smith process. However, we aim to provide a more comprehensive roadmap at the upcoming Investor Day while being considerate of all our stakeholders. You can expect to see that progression. Regarding the commercial aspect, the current pricing remains unchanged, and we have not made any adjustments for future index fluctuations since we can't predict those outcomes. Therefore, there are no major expectations for significant market wins this year. It’s important to understand that turnarounds are gradual and often unpredictable. Think of it like a run chart from one of our mills; currently, there’s a lot of variability, and our goal is to minimize that. We are addressing factors that lead to significant fluctuations in our business which shouldn’t be as unstable. Execution is crucial now; we are deep into the details, as these changes happen on the ground in our facilities, not in isolation. We need to achieve a disciplined understanding of cause and effect, where specific actions lead to cost reductions or customer acquisitions. We have a strategy for how this will progress throughout the year. I'm very conscious of the challenges ahead; I have evaluated numerous business plans before, and when you see a bold trajectory like ours, it's vital to approach it with caution. We need to make steady progress each quarter and conclude this year significantly stronger than we were last year and throughout this year. There are encouraging signs, particularly in our North American packaging solutions segment, where performance is aligning well with expectations set by Tom Hamic and his team. Our investments in the box plant business have yielded noticeable improvements in service levels, with a significant enhancement in performance over the past year. We’re actively engaging with specific customers to discuss their experiences and are initiating collaborative innovation sessions on-site. This is where the competition intensifies. Now, we are fully focused on execution.

Okay. That's super helpful. I guess you gave us the road map today in terms of CapEx spend. It's great you're reinvesting in your growth products or box plants. You're stepping up maintenance and reliability and doing great things on the sales force front. Is this a level in terms of capital spend and maintenance operating spend that could be steady state from here? Or should we kind of accept that to step up the next few years as you move forward? How should we think about these moving pieces?

If I had unlimited resources and the business was performing as I desired, I would definitely increase spending. We're aiming for $1.2 billion because it aligns with what we believe the organization can actually handle and our current status in turning the business around. As we progress, we will invest heavily over the next few years. It's really a mix of factors. We need to address several gaps we've encountered. When making decisions about non-strategic assets and simultaneously increasing expenditure, what occurs is a significant rise in investment for strategic assets. We’re not looking at minor increases; we’re talking about substantial jumps, sometimes between 20% and 50% in certain areas. This will require sustained effort over the next few years because we’ve created a significant challenge over the past decade, and we can't resolve that in just one quarter. Making these decisions is crucial. For a better understanding, consider the demand for packaging throughout a business cycle. Typically, you’ll see about a 1% to 1.5% volume increase. This can fluctuate between around plus 3 to minus 1 or 2, representing the range of actual consumer demand, which includes both consumer and industrial needs. Historically, investment and profit trends in this sector have been highly unstable, and this volatility tends to provoke even more erratic investment decisions. Our goal is to reduce this volatility and stabilize the situation. Ultimately, this is a highly competitive environment, and we are currently focused on execution.

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

Congratulations on all the progress and the passion. Mark and Jose, congratulations on your new roles. I wanted to follow up on the regional portfolio. In the press release, you mentioned one of your goals for 2025 is to align capacity with demand. Could you share what type of capacity adjustments you are considering? Are you thinking about transferring production as discussed before, or perhaps closing high-cost mills that require too much capital to fix? Can you clarify what kind of capacity realignment you are anticipating?

Yes. So Mike, I'm going to give you an answer that's only going to be partially satisfying because of the two things. One, we do have some minimal restrictions, and also, as we talk about assets and locations, we need to do that the right way at the right time. I apologize if that's just the right thing to do. Let's just step back for a second. If you think of our entire business and you think of the quality of earnings across the spectrum of that business, right, it's pretty wide from one market segment to another. When you look at the portion of our business that isn't as profitable or frankly, maybe negative, and then you align that against assets that really have pretty poor returns, when you put those two things together, those are tough chunks of things to look at. You've got to move your investment to customers, products, assets, and people who are going to allow you to win. That's the process that we've been going before. As we move through this year, we'll continue to move down that path. We've got to do it in both the box system and the mill system. You can't peanut butter spread investments. You have to move investment. It's 80/20 thinking at its most foundational, which is you've got to move resources, money, people, and energy towards where you can have a differentiated position. The cool part is if you look at our box network in the United States and throughout North America, and you compare that to the competitive set, we feel really good about that. We know we have to change that because we have places that frankly have too much capacity, and there's too much in the marketplace, and then you got places where you don't have enough. In the areas where you don't have enough like Waterloo, Iowa, we're going to be super aggressive. Greenfields, brownfields, the lighthouses that we're talking about, the demand is there, and we can't satisfy the demand because we don't have enough capacity. In some other places where it doesn't make economic sense, we need to make other decisions. On the mill side, when you think about the mills, I grew up and as you guys know, I grew up in a mill town. And you have to invest, right? You have to invest on a consistent basis in mills. Of course, the older they get, you have to make sure you keep them primed. For those interested in cars, look, there are 40- and 50-year-old cars that run great, but they're not as competitive as the car you're going to buy off the lot tomorrow. You're constantly looking at where to invest and when to not. You have to do that in a very clear mature way because all our stakeholders require it. If you think about our people, customers, and shareholders, I'm a big believer that none of them can win over the others in any long period of time before it damages all of them. To make those investments in the business absolutely makes our business competitive. It creates very stable, attractive jobs for our people. We win with our customers because we offer them the kind of service, reliability, and innovation they want at a fair price. We take the cost out of the system, which gives us the margin to reinvest back. Ultimately, that turns into profitable growth for our owners. That highly dependent system of stakeholders is what we're driving in.

Got it. And just one quick follow-up. There have been a lot of changes in a very short period of time, which is interesting for a company with a deeply rooted corporate culture. I'm trying to understand if there's been any pushback or resistance. What steps are you taking to facilitate acceptance and encourage progress?

Yes, great question. Look, I have been thoroughly impressed with how people have grabbed on to the change. There was an enormous pent-up demand in this company for change. The people are great. To be candid, when I was considering this role, one of the thoughts I had was, how good can the people be with the performance we've had, and I have been absolutely delighted. We have smart, capable, driven people who want to win. That being said, in a business like ours, there are a handful of very, very big decisions that get made that either enable or disable the organization to win; capital is a huge one. When you're spreading your capital thin, you are basically telling your people to play whack-a-mole, they have no other choice. When you don't make the courageous decisions, that's what happens. When you have capital decisions that take an ungodly long period of time, it ties up thousands of people in non-value-added processes. If you grab any one of our mill managers and you asked her or him, what does it take to win, they know. We have handcuffed them with decisions on capital investment, with decisions that are very bureaucratic and frankly, not setting and upholding very high expectations. There should be no daylight between the expectations of action and the expectations of performance between anybody. A lot of people complain about quarterly calls. I think they're great. I grew up getting a report card; you have to talk about why you got an A or why you got a D. There is no hiding. I love it. I grew up playing sports. Scoreboards are great; you are what the scoreboard says you are. There is no confusion in this organization about what the scoreboard says we have been. No confusion at all. Our goal is to be one heck of a lot better.

Our next question comes from the line of Mat McKellar from RBC Capital Markets.

I'd like to start asking about the Waterloo greenfield box plant. Are you able to provide any additional color on what kind of CapEx you're anticipating for that plant? And then how you would think about an attractive return for this type of project, please?

Yes. We haven't disclosed any details today, but we will provide more information, especially during the Investor Day. This represents our largest investment in a box plant to date. I expect this investment to deliver cash-on-cash returns of about 20%. This figure encompasses the total cost, not just the direct investment. When considering the entire value chain from an integrated perspective, we believe this kind of investment can generate significant value. Additionally, we are exploring a few similar opportunities, particularly in brownfields. I appreciate that these investments align with our overall strategy. Our aim is not to be the lowest-priced option, but definitely to be the lowest-cost provider. We believe our scale and footprint position us well, but we need to make strategic choices. The Waterloo plant will significantly alter our operations. The improvements we see from our existing plants motivate us to expand, and our plan is to implement this across 22 more box plants by 2025, with further plans to enhance our box plant network in the coming years.

That's helpful. If I could follow up with one more question about the box plants. As you expand your strategy from your initial two locations to the additional 22 planned for 2025, are you expecting similar improvements in productivity? How does that compare to what you achieved at the first two locations? Will there be any changes as you aim for the next group in 2026 and beyond?

I do expect similar results. It's important to emphasize that the outcomes we're experiencing are not primarily being driven by significant capital investment. The improvements in these two areas thus far largely stem from reducing complexity. We're concentrating a lot of complexity in a few box plants, allowing them to become experts at configuring complex customer products. The other locations can almost operate independently; it's this combination that is delivering the productivity we are observing. With additional capital expenditure, we can expect even more. However, the gains won't be uniform; we won't achieve the same level of improvements everywhere. Some areas will see more progress, and it's beneficial to support those with additional capital. There will be locations where we may not see the 20% or 30% improvement due to different configurations in those regions. Substantial productivity enhancements are on the horizon. I would like to implement these changes rapidly, but it's important to approach this thoughtfully: we can't just present ideas and expect immediate results; we need to collaborate closely, make necessary adjustments, implement daily management, and ensure everything is functioning well before moving on to new initiatives.

Your next question comes from the line of Charlie Muir-Sands with BNP Paribas.

Just sticking with the rollout of the lighthouse strategy for a minute. Can I just clarify, that is the one that you think can unlock around $300 million to $400 million of cost productivity?

No, I believe that wasn't the main emphasis. It mainly revolves around having approximately $175 million to $200 million in mill reliability. A significant portion of this is related to the mills, while the remainder pertains to productivity, both in the mills and the box plants. Regarding productivity, my experience shows that maintaining an effective productivity engine can help mitigate factors like wage inflation and other internal inflation, not including input costs. Our performance in this area hasn't been strong. If you review our financial history over the past five or ten years, you'll notice a substantial destruction of value, primarily tied to two main factors: reliability, which affected customer satisfaction and subsequently volume, leading to increased costs. I've analyzed some data recently, and it reveals a growing disparity in our long-term maintenance spending compared to the replacement asset value within our mill system. This doesn't imply that our costs decreased; rather, they shifted from capital expenses to operational expenses. When you combine capital and operational spending, we are currently spending more than we did five or ten years ago due to these decisions. This situation can be likened to car maintenance: neglecting oil changes can lead to engine failure, which is far more costly than routine maintenance. We are currently engaged in rapid engine rebuilds to address this. The productivity engine is vital and operates continuously. To offset internal inflation, we generally need to achieve a growth rate of 2% to 3% annually. In the context of conversations about needing 5% growth year-over-year, it's well-known that only a few achieve that benchmark. What we strive for is to unlock capacity. While shutting down nonstrategic assets can yield some benefit, unlocking capacity and experiencing any volume growth can lead to exceptionally high returns.

Right. And sorry, just one more question. I think historically, you've guided annual corporate expense. I know that there has been a big restructuring of cost savings, you’ve devolved a lot of the staff headcount to the segments, but I just wondered what we should understand as being the figure now for 2025.

I believe we haven't detailed it very clearly. However, as we approach 2025, you can expect to see the cost reallocations adjusted back to their respective business areas. There will be some fluctuations. For instance, the North American packaging division wasn't receiving its fair share of the load, as more was directed to Global Cellulose Fibers and our EMEA operations. We'll correct that imbalance. Overall, central costs are set to decrease significantly, with a reduction of $120 million based on the actions we've discussed.

Our final question today comes from the line of Gabe Hajde with Wells Fargo Securities.

I want to put some numbers to our discussion and refer back to the presentation from the Q2 call. In that presentation, it was noted that you underspent your peer group by 1.5% on CapEx and maintenance, which equated to $0.40 per 1,000 square feet. You mentioned mill reliability and some historical underinvestment, which I find to be a fitting analogy. It's like running a 1-mile race while being a quarter mile behind; it's difficult to catch up. I recall a figure of $260 million being mentioned for new investments from local government agencies related to Waterloo. This year, you're expected to spend about another $1 billion, maybe slightly less. When do you anticipate that the IP will start to make up for the $1.2 billion of underspending? Do you feel that, based on the metrics you're discussing, you're falling further behind?

No, I don't think we're falling further behind, right? Because the choices we're making on the reallocation of where that other money is going is a big change, right? If you just took a peanut butter spread, I would agree with your concern, but you can see from the actions we've already announced that is not the intention. You can expect to see us make some other choices here readily around that. The total time frame to make up the hole, I think, is about three years to make up the hole. Look, again, I'd do it faster, but I don't think we could spend it faster effectively. Looking at lead times in terms of equipment and whatnot, I think it's a three-year march; that’s my opinion. Before you go, what's really important is this dynamic resource allocation is really, really important, right? Moving it away from places that don't deserve it, that don't make money, that you're not going to win in, to places where that is true. The difference in returns on capital is gigantic in those choices. If you think of a bell curve of ROIC for these investments, oftentimes, people think about things like safety investment or maintenance investment as on the left-hand side, meaning not very attractive, right? I look at it completely opposite: they're on the far right-hand side of that, they are everything. You have to have stability before you can have improvement. So much of the work that we did last year, and we're still doing today, is around stability. Then it gives you a chance to drive improvement. Thank you very much. Well, thank you, everybody. Appreciate your time today. Appreciate your interest in IP. I want to thank the teams for just a herculean effort that they are putting in and the commitment that people are showing to grabbing onto doing these tough things, right? Doing hard things is what we have to do. That should be our motto, do hard things. That's what the team is doing. I'm very proud of how we're tackling that. I appreciate your interest. I look forward to seeing you on March 25, at the Investor Day and laying out a lot more detail. So take care, everybody.

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