International Paper Co /New/ Q1 FY2025 Earnings Call

Good morning and thank you for joining us. Welcome to International Paper’s First Quarter 2025 Earnings Call. All lines are muted to minimize background noise. After the speaker's remarks, you will have the chance to ask questions. I am now pleased to hand the call over to Michele Vargas, Director of Investor Relations. The floor is yours, Michele.

Thank you, Krista. Good morning and good afternoon. And thank you for joining International Paper’s first quarter 2025 earnings call. Our speakers this morning are Andy Silvernail, Chairman and Chief Executive Officer; and Lance Loeffler, Senior Vice President and Chief Financial Officer. 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 first quarter earnings press release and today’s presentation slides. I will now turn the call over to Andy Silvernail.

Thanks, Michele. Good morning, good afternoon, everybody. I’m going to start on Slide 3. Tomorrow I’ve been in the role for a year. The milestone is a good opportunity to reflect on a year of substantial change. As I look back, I’m excited about our progress. The team that I’m privileged to lead has embraced our transformation, moving with urgency and an open mind. I see the desire everywhere to win for this company, along with a willingness to embrace a culture of safety above all else. During this first year together, we’ve deployed our 80/20 approach to drive transformational change at IP. This began by focusing and over-serving our 80 customers by aligning our people, assets and investment with what creates value for them and to drive profitable growth. We’ve made investments across our business to drive substantial improvements in service and reliability and to grow in our most attractive markets. We’re building our execution muscle to drive commercial excellence and significant cost out across the company. Most recently, we’ve welcomed our DS Smith colleagues and we are well on our way to being stronger together. We’ve come a long way in a short time and I see significant opportunity ahead as we accelerate our 80/20 execution and continue on our transformation journey. I’m moving to Slide 4. At our Investor Day last month, we shared our ambitions for the next few years. We’ve outlined the three pillars of our strategy designed to drive sustainable value creation. It begins with building an advantaged cost position, which provides a foundation to drive additional investments and build the right capabilities to serve our customers with excellence. By building a superior customer experience, we will win profitable market share. This virtual cycle will drive high relative supply position, enabling us to build advantageous capabilities and strengthen customer offerings while increasing scale and further reducing structural costs. Before I turn to the next slide, let me outline my specific goals for today’s call. First, I’ll give an overview of what we have accomplished over the previous year. I’m incredibly proud of the focus, commitment, and tireless work across the teams in North America and EMEA. Second, we will address the realities of the economic noise and the impact on our businesses of consumer sentiment. I’ll provide a current view of what we’re seeing in the market. Finally, we’ll go through in detail how we’re working to control our own destiny to stay on our transformational trajectory. And in the first half of the year, we’ll be at nearly $800 million of run rate quarterly EBITDA, accelerating to $1.1 billion by Q4. We are on a transformational journey. The external world is a little wild right now. I’ve been involved in a lot of challenging moments from 9/11 to the Great Recession to COVID. We’re going to stay focused on the strategy, tireless in our execution, and resolute in building a great company. We’re moving now to Slide 5. Here’s another slide that we shared with you at Investor Day, which provided our earnings targets for 2025, including financial goals for each of our businesses and the underlying market assumptions. At our Investor Day, we noted that we had seen a tick down in demand when the tariff conversation first started. After the trade discussions escalated a week later, we saw another negative shift in demand. Despite the uncertainty about the macro landscape, we are controlling the controllables with a focus on driving commercial wins and inefficiencies out. Regardless of the macro environment, our job is to win for our customers, create a great place to work, and position IP for long-term profitable market share growth. At current demand levels, we can deliver for the year. It’s impossible to predict the next few months as much is being driven outside of normal market forces. Regardless, we will remain vigilant and work to accelerate our strategy if demand falters further. This is a self-help story. I’m now turning to Slide 6. You can see our current view of the demand environment. Industry demand in North America was down 2% in the first quarter, and based on our order patterns, we expect that level of demand to continue into the second quarter. Demand across the European markets was soft in the first quarter as expected, and we expect it to remain stable in the second quarter on a quarter-to-quarter basis. In both regions, demand has been stable in April, but we’re very cautious about the outlook given the strong negative consumer and business sentiment. Given the wide-ranging uncertainty and volatility, we’re prepared for three very different scenarios. If the demand environment remains stable going forward, I’m confident we remain on track to deliver the targeted range of earnings improvements. If we see meaningful deterioration in the economic environment, it’s likely we’d fall below our range. We would take appropriate countermeasures to ensure that we remain highly competitive while funding our strategy and our dividend. Alternatively, if the economic environment improves, we still feel good about the upper end of our earnings target. With our transformational initiatives, along with our strong balance sheet, IP is well-positioned to navigate various macro environments. I’m now moving to Slide 7. As I mentioned up front, we’ve accomplished a great deal in a year, but we have much to do. We have solid momentum on our actions to drive significant costs out of our system by reducing complexity and reinvesting to build our advantage cost position. As I shared in Investor Day, we are targeting $1.9 billion of cost out after inflation by the end of 2027. We’ve already taken actions across the company to drive approximately $400 million of annual cost savings while also pushing more resources closer to the customer. As we continue to accelerate 80/20 across North America and Europe, we have line of sight to an additional $200 million of savings opportunities by the end of 2025 and the synergy that we’ve outlined for DS Smith. We are laser-focused on achieving significant synergies from the combination of IP and DS Smith. After a very successful launch of our 80/20 lighthouses in Chicago and Atlanta, we are now rolling out our 80/20 performance system to more than 75 box plants across North America by the end of the year. We have also launched two lighthouses in our mill system to deploy 80/20 across that system. We are focusing on further optimizing our mill and box plant footprint while driving down sourcing and supply chain costs. We have tremendous opportunities throughout the company to reduce complexity and drive out costs. I’m now moving to Slide 8. We also have opportunities to drive significant earnings improvement through commercial excellence. We’re targeting $1.1 billion of commercial improvement benefits by the end of 2027 and we believe we are on track to achieve approximately $600 million of run rate benefits by the end of this year. We’ve made significant changes to improve our capabilities to over-serve our 80 customers, which includes investing in our people and our operations. In order to over-serve our 80 customers, we put more resources closer to the customer by investing in commercial capabilities and improving the customer experience. As a result of this strategy, we’ve significantly improved our service and on-time delivery, which has resulted in best-in-class Net Promoter Score. During the first quarter, our Packaging Solutions business in North America continued to improve commercially, closing our volume gap to market by approximately 500 basis points. This was 100 basis points better than we expected. Given our momentum, we expect to close this gap and grow at or above the market by the fourth quarter of this year. We will continue to invest in capabilities to improve the customer experience and drive profitable market share growth. We are committed to building a customer-centric culture across International Paper, and I’m excited about the opportunity to leverage the strong capability that has long existed at DS Smith. Importantly, we launched 80/20 at DS Smith immediately after the close. We have a rigorous implementation schedule which will catalyze our synergy goals of $600 million to $700 million. So now let’s turn to our performance and outlook on Slide 9. Going forward, for financial reporting purposes, we will have three reporting segments. We will report legacy IP and DS Smith businesses in North America as Packaging Solutions North America. We will refer to legacy IP and DS Smith businesses in EMEA as Packaging Solutions EMEA. Importantly, in North America, we are going to go-to-market commercially and for our people as International Paper, while in Europe, we are leveraging the outstanding brand equity by going to market as DS Smith and International Paper Company. Regardless, excuse me, regarding our Global Cellulose Fiber business, the strategic option process is ongoing. We have a number of interested parties in the due diligence phase. No changes are expected to our timeline and we remain focused on achieving the right value for the business. Now I’ll share some highlights and then I’ll turn it over to Lance, who will walk you through the details. I’m now on Slide 10. Our first quarter results reflected higher sales and earnings driven by the DS Smith acquisition, sales price increases in North America, benefits from transformation initiatives, and some favorable non-recurring items which Lance will cover later. These items also contribute to stronger adjusted EBITDA margins in the quarter. As a result of our commercial strategy, we made good progress reversing the slide in our North American Packaging business while executing price increases. Executing our transformation strategy results in various one-time items that impact earnings and free cash flow. This quarter, our earnings per share were impacted by accelerated depreciation charges related to our footprint optimization initiatives. Our free cash flow came in as expected and was impacted by $670 million related to investments in our transformation including severance costs and DS Smith transaction costs. This amount also includes this year’s incentive compensation payout. For the full year, we still expect to be in the range of $100 million to $300 million of free cash flow as we communicated on Investor Day. As we look to the second quarter, we expect flat adjusted EBITDA and higher earnings per share sequentially. We will have the non-repeat of accelerated depreciation from the first quarter, a full quarter of Packaging Solutions EMEA results, and additional realization from prior sales price index moves. We are actively executing our prior price increases. Our cost out actions will continue to ramp up and we expect seasonally higher box demand in North America. Offsetting these benefits will be higher planned outage spending and non-recurring items that were favorable in the first quarter. With that, let me turn it over to Lance to provide more details about our first quarter performance and the outlook. Thanks, Lance.

Thanks, Andy. Now turning to Slide 11, let me provide some more details about the first quarter as we walk through the sequential earnings bridge. Just a quick note up front, this bridge shows the breakdown by category for the three months of legacy IP results. The two months of results related to the DS Smith legacy business are reflected in the last two categories of the bridge. So let’s begin. Overall, first quarter adjusted operating earnings per share was $0.23, as compared to a negative $0.02 in the fourth quarter. As a reminder, the fourth quarter included accelerated depreciation related to our facility closures. Price and mix was higher by $0.02 per share in the first quarter, driven by the flow through prior price index movements in our North American Packaging business and energy credit sales in our Global Cellulose Fibers business. Volume was flat sequentially across the businesses. Operations and costs were favorable by $0.05 per share sequentially due to improved performance and favorable non-recurring items, which includes insurance proceeds and lower costs associated with employee benefits along with lower incentive compensation expense. Maintenance outages were flat sequentially and input costs were unfavorable by $0.01 per share due to higher energy costs early in the quarter, partially offset by lower fiber costs. Corporate items were favorable by $0.17 per share due to a lower tax rate as a result of favorable discrete items in the first quarter, primarily related to stock-based compensation. Depreciation expense was $0.02 unfavorable sequentially. As you will recall, accelerated depreciation was a $0.56 negative impact in the fourth quarter due to the closure of our Georgetown Mill and several box plants. Depreciation expense in the first quarter includes the closure of our Red River Mill and two months of depreciation for DS Smith, including the step-up in basis as a result of the acquisition. Lastly, earnings for the two months of the DS Smith legacy business accounted for $0.04 per share in the first quarter. Turning to the segments on Slide 12 and starting with our Packaging Solutions North America businesses first quarter results. Higher sales and adjusted EBITDA for this quarter reflect the addition of the DS Smith North American business, along with benefits from sales, sales price increases, and cost-out actions. In addition, the business had $62 million of favorable non-recurring items, which I’ll cover on the next slide. Overall, market demand was softer than anticipated. However, as Andy mentioned earlier, it’s our belief that the business successfully closed the volume gap to market by approximately 500 basis points in the quarter as a result of our focus on commercial excellence. Our earnings also included approximately $190 million of accelerated depreciation associated with the decision to close the Red River Mill in the first quarter. Turning to Slide 13 and continuing on with the Packaging Solutions North America business. Price and mix in the first quarter was higher by $44 million due to price realization from prior index movement and open market sales. For the second quarter, we expect an additional price realization of approximately $25 million for those same index moves. Volumes were seasonably lower in the first quarter and we expect them to be stronger in the second quarter as we enter our heavy produce season. In addition, we expect continued progress on growing our market position as a result of our commercial strategy focus. Operations and costs were $86 million favorable sequentially. This includes $62 million from lower costs associated with an employee medical benefits true-up and insurance proceeds related to last year’s Ixtac box plant fire. The balance is related to improvement initiatives and lower costs associated with employees’ incentive compensation. For the second quarter, the discrete items I mentioned are not expected to repeat and we also expect to have some additional ancillary maintenance costs due to timing. Planned maintenance outages are anticipated to be heavier in the second quarter, resulting in $33 million of higher costs. Depreciation expense was higher by $208 million in the first quarter primarily due to accelerated depreciation associated with the closure of our Red River Mill. It also includes two months of depreciation for the DS Smith North American assets. Finally, the adjusted EBITDA contribution from our DS Smith operations in North America was $7 million for two months of the first quarter. Our second quarter outlook reflects three months of results for an additional $25 million. Now turning to slide 14, let me take a moment and share our view on the cost and commercial initiatives that we believe will enable us to achieve our stated 2025 adjusted EBITDA target in North America. As a result of our Red River Mill closure at the end of the first quarter, we expect these mill costs to wind down over the remainder of the year. In addition, we’ll continue to see benefits associated with system optimization and productivity improvement across our mill and box network. Lastly, we expect to realize synergies associated with the DS Smith acquisition. Regarding our commercial initiatives, we anticipate full realization from the February price index move along with seasonally higher volume in the second half of this year. We’ve made good progress in the first quarter growing with our customers and expect to close the volume gap to market by the fourth quarter.

Thanks, Lance. I’m on Slide 21. What we’ve outlined here is the momentum we’re building in our North American and EMEA Packaging businesses. In this analysis, we’ve excluded Global Cellulose Fiber. You can get a sense of the progress in the core. We have a clear line of sight to sustainable earnings improvement and feel very good about our progress. We’re building execution muscle across the company and are transforming IP into a performance-driven culture. Based on the actions we’ve taken, our run rate by the second half of the year will be approximately $4 billion annually adjusted EBITDA in the core Packaging business. This positions us well, putting us on a path to achieve our $5.5 billion to $6 billion target. I’m now turning to Slide 22. I’m confident we’re on the right path with the right people and the right approach. 80/20 is how we work. Our performance system drives breakthrough results by focusing our strategy and execution on the critical few, not the trivial many. We put our focus and investment against our best opportunities to win for our customers, our people, and our owners. We will remain disciplined in driving an advantaged cost position, service and innovation excellence, and winning profitable market share. Before we turn to questions, I want to thank our 65,000 colleagues for their dedication to our transformation and commitment to win for our customers, our owners, and our fellow teammates. It’s through you that we have the opportunity to build something very special. With that, Operator, let’s now pause and take questions.

Thank you. Your first question comes from Phil Ng with Jefferies. Please go ahead.

Hey, guys. Sorry. I had an issue with my iPhone. Well, I appreciate all the great color you guys shared in the deck, and Lance, looking forward to working with you.

Good morning, Phil. No Phil.

Hey, guys. Sorry. I had an issue with my iPhone. Well, I appreciate all the great color you guys shared in the deck, and Lance, looking forward to working with you.

Yeah.

So my question is to kind of hit the full year EBITDA guide you have laid out, whether it’s the midpoint or the low end of the full year guide, what kind of demand assumptions are you assuming, whether it’s North America and Europe? And how are order patterns kind of shaping up at this point? And you also gave us a downside recession scenario, any color around how we should think about where EBITDA is going to shake out in that environment?

Sure, Phil. That's a great question. We're concentrating on factors beyond our internal strategies. Currently, we feel confident that if demand remains stable, we'll achieve revenues between $3.5 billion and $4 billion. As of April, the situation seems to have stabilized. However, we're closely monitoring consumer and business sentiment, especially following the recent first quarter GDP figures. If we encounter significant weaknesses moving forward, it could present challenges for us. A drop of a few hundred basis points would complicate matters further. At our Investor Day, we discussed anticipated market growth in North America of around 1% to 1.5%. Given recent developments, there was an upward revision to overall box demand in North America, which had decreased by two points. This represents a noteworthy shift, about a 3 to 3.5-point change in expectations from just a few months ago. Back in January, there was a strong belief in that growth rate. We have seen a gradual decline, which began before our Investor Day, a topic I mentioned then. The following week, we saw intensified discussions around trade, contributing to another decline. It’s important to keep in mind the gap we aimed to close this year, which we’re already improving on. We're currently about 100 basis points better than expected. Initially, I anticipated a 7-point decline in the first quarter, and we ended up at 8, affected by a 3.5-point market shift. I'm pleased with our progress in narrowing the gap to the market. Regarding your question, the variance we’re discussing now will primarily depend on the upper end of the market. I believe our initiatives are well-positioned within the commercial sector and cost management in North America. If the market weakens, we have several strategies ready to implement, and we’re already executing some of them. One approach is to expedite our cost-reduction strategy. If we find ourselves facing a demand gap, we will have more options for managing excess capacity, enabling us to be more agile. We have a detailed plan for the next two and a half to three years laid out for our execution across North America and Europe. We might advance certain initiatives if necessary. On the positive side of the commercial front, I’m encouraged by our gap closure, which has been supported by our performance in local markets. In the first quarter, we gained market share, indicating that our focus on the right customers, personnel, assets, and incentive systems is yielding results. The gap in the market primarily relates to large contract businesses that operate on multiyear cycles, based on decisions made last year and even two years ago, which we are now starting to see reflected in the latter half of this year. In summary, we will accelerate cost reductions if market conditions weaken and maintain our focus on building market share. That’s our priority, Phil.

Super. If I heard you correctly, $3.5 billion to $4 billion EBITDA target, as long as demand’s kind of in this zip code, I would call it down 2% if I heard you correctly. You’ll feel pretty good about it.

Yeah. If you look at where we are right now, Phil. If you kind of look at these demand levels with normal seasonal patterns, we would land in that $3.5 billion to $4 billion. It would be towards the mid-to-lower end, to be clear. But it would be in that $3.5 billion to $4 billion range. The upside scenario, right, is if we get some solution to some of these issues, so we’ve seen it already a couple of different times as things have gyrated. That sentiment can turn pretty quickly. And look, there is an enormous amount of pent-up demand to outlay capital in a lot of places around the year. I think the excitement that we saw in January was excitement around the pent-up demand around business investment and even consumer sentiment to a lesser degree. But that business demand into which really curtailed that has been that sentiment. And everyone I talk to, my peers, customers, investment community, everyone’s experiencing that. And obviously, we’re a really good barometer of what’s happening in the economy. So, yeah, Phil, you’ve nailed that exactly right in terms of your expectation of where we would land depending upon the demand scenario.

And then given the tariffs and trade flow dynamic, your pulp business, I would imagine, is probably most sensitive to tariffs because about half that business goes to Asia, a big part of that’s China. It doesn’t sound like demand’s been impacted. I mean, what you’re guiding is demand’s pretty stable. But curious, what do you see on the order side of things? Has that impacted conversations as you kind of looked from a strategic review? And then just lastly, on the containerboard business...

Yeah. So, Phil, let me answer that question directly. And then let me do a little bit of a side turn and just talk about impact of tariffs just generally. I think that’s important to note. So, for Global Cellulose Fiber, yes, we’ve got a bunch of business that goes to Asia, but you’re talking about mid-single digits risk from a demand scenario based on people having to go in different directions around where supply is. The reality is there aren’t easy replacements. You’re talking about really, really poor secondary replacements that those choices would be made on the lower end of the socioeconomic spectrum in places like Asia. But generally, it’s not like there are big alternatives you can just go jump to. And so we think there’s kind of mid-single digits of risk to the topline and then obviously how that flows through based on that, the flow of goods across the globe. And then a lot, and the reason I say mid-single digits is you probably have an increased amount that’s going to find its way into other parts of the marketplace that frankly are constrained right now. So in that business, there are some pretty meaningful capacity constraints in that business globally. So you’ll have some relief from Asia. I don’t like the relief, but you’ll have some relief from Asia. The market’s still healthy in other places. So I feel like we’re generally going to be okay. Specific to your question of how it may affect the process, look, we’re not Pollyannas, and so, obviously people are going to look at that. We’ve had very good interest so far. People are deep into diligence, so that process is ongoing. But I’ve said in the past many times and I’ll reiterate again, this is about value. This is a high-quality business. It has more volatility than we like, and it’s not our core Packaging business. But as I’ve said many times, we’re not going to give it away. And so, it’s a matter of getting the value that we deserve for the business. On tariffs more broadly, and I think most people know this, we don’t have a lot of direct tariff effect, right? So we don’t ship a lot of stuff across borders that’s going to be impacted by the tariffs. Pretty much, I mean, almost all of the impact that we’re going to see, or the vast majority of the impact that we’re going to see, is going to be second-order effects. And really what happens to demand, therefore what happens to price, and what could happen to inflation. Obviously the scenario that everybody is concerned about is weakening demand plus inflation. We don’t see that scenario playing out so far. There’s no evidence of that, as you guys all know. We tend to have a natural hedge on if you get weakening demand, you tend to get weakening commodity prices. So that offsets itself in many ways. But that’s the biggest thing that we’re concerned about, is weakening demand, and then a third-order effect of price, and then potentially if you get a spike in inflation. That’s the kind of really dark scenario that at this stage we don’t see. But you got to at least consider it. You have to think about it. I think one of the big lessons that we’ve learned, all of us have learned to have been around for a while with some of these larger shocks to the system, is take advantage of it, right? You hate to do it, but when bad things happen like this, accelerate your strategy, double down. It’s those folks who frankly abandon their strategies that get in trouble. And we will leverage our capabilities, we’ll take the cost out, we’ll use our balance sheet like we did in the first quarter. Obviously, we expect cash flows to get a heck of a lot better through the back half of the year. There’s no reason to believe it won’t. We want to protect our dividend and we want to execute that strategy. And so, look, if I think of three years or four years from now, do I think that this moment in time is going to affect the economic outlook? Of course it will. Do I think we’ll be basically where we thought we’d be two months ago from a global economy? Yeah, I do. And so, we got to stick to the strategy and we got to execute.

Really great color. Thank you, guys.

Thanks, Phil.

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

Yeah. Thank you, Andy, Lance, Mark, and Michele for taking my questions, and congrats on all the progress.

Thanks, Mike.

Thanks.

Just wanted to, Andy, follow up with you on that market position, the gaining share in North American market position with the local 80s. Could you provide just some more color about the share gains that you had there? Where was your share prior? Where does it stand now? And what are you doing to achieve those share gains, upgrading sales scores, improving reliability?

Mike, our business can be divided into two main segments. Approximately 60% to 70% consists of national or super regional accounts, which are large customers that we serve across various regions. The remaining 30% to 40% is more localized, including both multinational companies and smaller local businesses. These local customers are very important to us. After the pandemic, as our industry grew and we faced capacity limitations, we had to make tough decisions about where to allocate resources. Unfortunately, this often meant that we could not adequately serve our small- to medium-sized customers, which led to a negative cycle of declining sales and poor service. The improvement we’ve seen began before I joined the company, though I wish I could take all the credit for it. Tom Hamic and his team made significant and challenging decisions over the past few years, choosing to reinvest in the business to enhance service and reliability. Our on-time delivery rates have improved dramatically over the last two years, rising from the high 80s to the high 90s. We’ve also noted positive changes in our Net Promoter Score. Our sales structure consists of a national sales force in North America and a regional sales force in Europe, along with local teams focused on specific accounts. We've become more focused in our approach, hired additional personnel, and improved our service reliability with targeted investments. This focus has allowed us to better serve different customer segments, minimizing confusion. Although the progress is modest, we are seeing consistent improvements. Last summer, we were losing market share in the local segment, but now we’ve stabilized, which is encouraging.

That’s great color, and Andy, thank you for that. My follow-up, I just wanted to get a sense, given the slowdown that you saw in February, can you give us a sense of your operating rate in North America in 1Q, where does it stand now that things have stabilized? And has the weakness really afforded you an opportunity to further assess the portfolio to see which mills, which cost plans are performing and where there’s potential for, let’s say, further right-sizing and consolidation?

Yeah. Mike, so if you think about that, just where we are on the demand side, what I would say we’ve seen so far in April is stability from, if you look at kind of last part of February, right, as you said, we’re into February, we saw the step down. March, after the tariff discussions kind of kicked in, we saw that little bit of step. All through April, we’ve now seen stability from that second step down. We’ve seen that stability. If we just assume that that’s what holds, that’s where I’m offering that guidance of where I think we’ll land for the year. In terms of your question of does it allow us to rethink it, the way I would think about it is there are very obvious choices in our business around where you want to be and where you want to grow your capability to win. There are also some very obvious choices about what you need to get out of. And you’ve seen us move aggressively, really starting since the fall of last year, you’ve seen us move for a footprint optimization to address that. And so with a weakening demand curve, you’d have to believe that something is structurally different to say I’m going to do more than what I intended to do over the three-year window. I don’t see that being the case. What I see, however, is the ability to pull forward some of the things that you’re working on. So you can pull forward some of the footprint optimization efforts that you’re working on. But ultimately, as I think in 2027, do I think what’s going on is going to radically change the overall demand picture and therefore the assets required at that end point to win in the marketplace? I don’t think it materially has. That could change. Look, if we go into a really aggressive, dramatic change in the global environment that becomes systemic, all bets are off. That’s a different deal. Do I expect that? I do not. Am I considering it? Yes, I am. Because you have to. Or you have to at least think about that as a possibility. But I think the probability is relatively low. And so where we’re playing right now is on the April demand is where we are. Let’s see what happens. We know that business sentiment and consumer sentiment are negative. And so what I’m going to say is we have a negative bias relative to what the demand picture is likely to play out, and so therefore, we’re playing stronger offense on dealing with those things. But look, this is an environment, and we’ve all lived in it, where one day the world is coming to an end and the next day it’s hallelujah. And so given that, you can’t gyrate a 65,000-person company with literally 400 locations across the world. You can’t gyrate based on that stuff. You’ve got to think about what business do I want to be in? What is my strategy? Can I afford what I want to do? I’ve got to balance affordability and aggressiveness. But you’ve got to stick to your strategy.

Yeah. That’s very helpful. Thank you and good luck in 2Q.

Thanks, Mike.

Your next question comes from the line of Mark Weintraub with Seaport Research Partners. Please go ahead.

Great. Thanks very much and thanks for all the color so far. Just sort of coming back to understanding the bridge from first half to second half. In first half, I think it’s like $1.5 billion or so of EBITDA based on what you did in the first quarter in the guide. So it kind of suggests like a $500 million, $600 million pickup in the second half.

Yeah.

And now you’ve spoken, I mean, as you point out, there’s less maintenance outage. I think that’s like $130 million. And you got DS Smith for an extra month, which is maybe another $90 million, $100 million or whatever there. And so the balance that $250 million, $350 million, presumably is primarily from the cost outs, et cetera. But what I did notice is that you also have a pretty small increase for price mix in 2Q-v-1Q for your North American Packaging Solutions business.

Yes. Mark, you have accurately captured how this flows. We have a relatively low quality number in the first quarter. The second quarter number is almost the same but is of exceptionally high quality. When you look at the first half, those two together represent our current run rate. In the second half, several things are taking place, and the good news is most of the work has already been completed. The cost reductions that began in the fall of last year will start to kick in as we move past asset closures, and those costs will eventually disappear. The initiatives from the first quarter, particularly regarding the Red River Mill, will also show benefits that accelerate through the year. Additionally, the elimination of the matrix organization, which we addressed late last year, is still producing effects as we are seeing people exit the business. This will become fully apparent in the second half, and we will start to see greater realization of price increases. These are contractually linked, so the timing of price implementation and how it affects contracts has a mechanical aspect to it. Ultimately, we are witnessing the mechanical realization of those price adjustments.

And so just to clarify on that last point, first in the U.S., is there more that would be expected to show up in the second half related to say...

Yeah.

...the February increase? And then also...

Correct.

Thank you. And then also, particularly since we’re kind of newer to understanding how the European business works, there’ve been a number of significant increases that were reflected on containerboard, but at the same time, OCC has been going higher. So…

Right.

...where things stand today, what type of tailwind should we expect in Europe from price changes, recognizing things could change?

I have mixed feelings about this, Mark. To clarify, during Investor Day, we mentioned the first price increase that was starting to make its way through the market. Since then, a second increase has also begun to move through the market, but neither has yet been fully realized. At a basic level, this is definitely a positive sign for the second half of the year. However, I’m not counting on it and we aren't incorporating it into our plans due to some marketplace weakness. If the market improves, I’d feel more confident that the second increase will be implemented. We believe the first increase will come through and is accounted for in the numbers. The second increase has a longer lag time in Europe from when paper prices change to when box prices change, influenced by the various contracts and the dynamics between small and large customers. The European market tends to show periods of over-earning and under-earning due to price fluctuations. Currently, we are in a period of price compression, but we believe we are moving toward price expansion as we enter the second half of the year. There is some positive news, Mark, but it's important to remember that this is tied to demand. So, while I think the first price increase will hold, we’ll have to wait and see about the second one.

Thanks so much.

You bet, Mark.

Your next question comes from the line of Anthony Pettinari with Citi. Please go ahead.

Good morning. Hey, Andy. Just…

Good morning.

Good morning.

Hey. Just following up on Mark’s question, you have a relatively steep earnings ramp from the first half to the second half. It’s a little steeper in Europe.

Yeah.

So…

Yeah.

It sounds like price improvement from the first hike is not baked into the second half improvement. I just want to make sure that I have that…

The first price increase is.

Okay.

But the second is not.

Got it. Got it. And then can you talk a little bit more about the assumptions for what happens in the second half in Europe, either internally or externally, that gives you confidence in that, big sequential move from the first half to the second half? And Andy, I guess, maybe it’s a hard question to answer. But when you think about sort of degree of difficulty or maybe how much your time is being spent driving these improvements in EMEA versus North America, is there any kind of sense you can give us in terms of level of confidence in where your time is being spent?

Certainly. If you recall our Investor Day, we mentioned we anticipated a slight improvement in the European economy for the latter half of the year. Currently, that optimism seems uncertain. However, given the existing market environment, we still believe we can achieve our targets. This indicates that we now foresee Europe being somewhat weaker than we initially expected at Investor Day. Despite this, we are confident in our ability to meet these expectations. The initial price increase was implemented out of necessity rather than market strength, and the second increase was somewhat driven by a slight improvement that suggested it could be sustained. That said, I remain cautious, particularly regarding the anticipated weakness in the second half stemming from the trade climate. On Slide 17, we’ll see our efforts to cut costs in the early phases and the commercial benefits we expect to realize in the latter half of the year. My main focus right now is on building the team. With Joy and Lance joining us, my senior team is complete and fully capable across North America and Europe. Our North American team has been together since last fall, focusing on the newly structured packaging business unit, while the EMEA team combines talent from both DS Smith and IP, creating an exceptional group. I've concentrated on developing the team and executing the 80/20 deployment strategy. My time is spent guiding strong teams and ensuring effective implementation. To kick off the year, I dedicated significant energy to DS Smith, spending nearly 10 weeks in Europe. The team there is performing well, and I frequently return to Europe to oversee the 80/20 rollout, which started shortly before Investor Day. We expect to have complete initial launches across Europe by mid-summer. In North America, we are ahead in our progress and focused on adhering to schedules for cost reductions and commercial targets. I'm managing my time between both regions with fully staffed teams in place, ensuring we stay on track. Our approach in Europe is now intertwined with the synergy work we've conducted, and importantly, we’ve acknowledged internally that the distinction between synergy and 80/20 improvements is not as crucial as achieving overall improvement for our customers. Ultimately, our goal is to deliver better outcomes and reduce costs effectively.

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

Thank you, Anthony.

Our final question comes from the line of George Staphos with Bank of America. Please go ahead.

Hi, everyone. Good morning. Thanks for all the details.

Hi, George.

How are you doing?

Good. We’re doing well.

It sounds like it, it sounds like it, despite GDP today. But two questions. One is kind of a shorter-term question on DS Smith and then one is maybe more of an intermediate-term question on North America and what you can and can’t control, Andy. So first, on Europe and DS Smith, if I go back to Slide 16, we’re looking at, I think, lower EBITDA sequentially from 1Q to 2Q, so $104 million to $85 million, despite there being an extra month. I think you’ve hit on a lot of the overriding factors, but is there any one or two things you’d call out there in terms of that sequential downtick, recognizing as you’re answering Anthony and Mark’s questions earlier, you’re expecting a bigger step up in pricing the second half, but what’s happening there in terms of that step down?

I think you may be interpreting the bridge differently. In the first column, you have two months, while in the second, there is only one month.

Yeah.

Because you’re looking at sequential.

I got you. I got you.

No, that’s just the sequential implications.

Okay. Understood. We appreciate that color and sorry for the misinformation there. The intermediate question…

Okay.

… is on controlling what you can and what you can’t. And so, as you look at trying to close a gap in North America, you’re focused on the smaller accounts, Bob’s Mushroom Factory, but these accounts typically, and we hear they like you too, by the way. Are the types of accounts that initially, when things start to slow down, will actually pull in the horns more quickly based on our industry research over time?

Yeah.

You’re trying to implement your commercial improvements, which includes, without getting too forward-looking, value over volume. Where would you say ultimately the risks are on volume as the year progresses, given what’s a weaker environment? My guess is you want to really focus more on the commercial and focus on the margin, which might mean you ratchet some of your footprint alignment more quickly. That maybe puts some of the volume expectation and closing the gap at risk. How would you have a think about that and how you’re managing what the priorities are? Thanks and good luck in the quarter.

Thank you. There’s a lot in that question, so let me parse through it. The first one, I want to clarify something up front, which is we are not disproportionately deployed to the smaller customer, to be 100% clear.

Correct.

We are concentrating on what we refer to as 80 customers, which are large customers either nationally, regionally, or locally. This segment represents about 70% of our market focus. Our recent successes have come primarily from these local, larger customers, where we acknowledge that we had previously underperformed in terms of service levels and coverage. We've been reinvesting in those areas, and we are seeing positive trends. Our performance with national accounts and large regional accounts has also been strong, thanks to significant improvements in our service levels due to investments in assets and personnel. I feel optimistic that we are heading in the right direction. Our understanding of the market gaps we have experienced is improving, and as we have started to close that gap, we can identify where those opportunities may arise by customer. Currently, we do not anticipate any major customer losses in the near future, and our confidence in closing the market gap in the latter half of the year is strong. However, given the current market uncertainties, we are focused on closing that gap while remaining aligned with our long-term strategy in the Packaging business, which we believe will correlate with overall economic trends over time. We are monitoring performance closely, and if we encounter weaknesses in certain areas, we can adjust our actions based on capacity utilization while sticking to our overarching strategy. I am confident that we are in control of our destiny and will adapt as needed while maintaining our focus on being a cost-advantaged player. Our investments in customer excellence are starting to pay off, and while there is always room for improvement, we are pleased with our current progress. Regarding our strategy of value over volume, we have made significant strides over the past two years to become competitive at the right market levels rather than chasing unjustified premiums. We recognize our position in the market and know we need to compete effectively, which will be our primary focus. I believe we are in a solid position concerning value over volume and are playing strategically in North America. Our European team is performing well in building customer relationships and understanding the marketplace. They are working diligently to implement recent price increases while remaining sensitive to market conditions. Overall, I believe we have found the right balance.

Thank you, Andy.

You bet.

Thank you. I’ll now turn the call over to Andy Silvernail for closing comments.

I want to thank everybody for joining us here for the quarterly call. We appreciate the opportunity to update you on our strategy. Hopefully what you’re seeing now is predictability and repeatability of the message and that because of the actions that we’re taking to control our own destiny. That’s what it’s all about. And most importantly, that happens because of the 65,000 people across International Paper. And we’re just absolutely thrilled to have the team from DS Smith, our new colleagues on board. I had the opportunity to spend an awful lot of time with them in the first quarter of this year. It’s just a great group. They’re outstanding. We have an incredibly bright future, but we got to stick to the strategy and we’ve got to execute. So, with that, thank you very much to my team. Thank you very much to the investment community for the attention and the time you give us and it’s our job now to go out and execute.

Once again, we’d like to thank you for participating in International Paper’s first quarter 2025 earnings call. You may now disconnect.