International Paper Co /New/ Q3 FY2025 Earnings Call

Good morning, and thank you for being here. Welcome to International Paper's Third Quarter 2025 Earnings Call. It is now my pleasure to hand the call over to Mandi Gilliland, Senior Director of Investor Relations. The floor is yours.

Thank you, Christa. Good morning and good afternoon, and thank you for joining International Paper's Third 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 the 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. Beginning this quarter, management has elected to present forward-looking guidance based on adjusted EBITDA rather than adjusted EBIT. This change reflects our view that adjusted EBITDA provides a better comparative metric to use during the company's transformation. Our website also contains copies of the third quarter earnings press release and today's presentation slides. I will now turn the call over to Andy Silvernail.

Thanks, Mandi. Good morning and good afternoon, everyone. Let's begin on Slide 3. As we go through today's presentation, there are 3 key messages I want you to take away. First, we're making significant measurable progress on our transformation. Our strategy is getting traction. Second, macro conditions in North America and EMEA continue to be challenging. Third, we're focused on what we can control. We're moving aggressively on cost initiatives to enable margin expansion and continued investment in our success. This quarter represents an important step on our transformational journey as we continue to execute the strategy we launched last year. We committed to an ambitious transformation plan to reinforce our leadership in sustainable packaging solutions through an advantaged cost position and High Rel Supply Position in most of our most strategically attractive markets and delivering an unmatched customer experience. Our strategy is rooted in 80/20, which has 4 elements: Simplify, Segment, Resource, and Grow. In that spirit, over the course of this year, we have announced several targeted actions. We are simplifying our organization by exiting select businesses, markets and functions to sharpen our focus and liberate resources. Post the GCF sale and the exit of some specialty businesses and low-margin export, we will be exclusively a sustainable packaging business. This is a major milestone in our transformation. A key step of segmentation is the rollout of our lighthouse model, which has accelerated across the North American box system and continues to gain traction in our mill system, and we are now kicking this off in EMEA. We are directing our resources, namely people and capital, toward our most advantaged opportunities to drive higher reliability and productivity. For example, we made the decision to close Savannah. We redeployed approximately 30 people to Riverdale and avoided a $300 million capital call, which allowed us to fund our Riverdale conversion to lightweight containerboard. These actions contribute to a stronger business for our customers, employees and shareholders, which is reflected in our EBITDA improvement. I'm now moving to Slide 4. We are well on our way in our transformation journey and are pulling multiple levers with many moving parts across North America and EMEA. Several will drive immediate benefits, and you'll see those in our numbers now. Others are medium and long-term benefits that come with near-term financial offsets. Facility closures, overhead reduction and refocusing our commercial efforts will have multiple short-term puts and takes. During this call, we want to ensure that we describe the key components of our transformation. The main takeaway is that our underlying earnings are growing significantly, and we are confident in our strategy to deliver profitable growth over the long term. It's important to recognize that North America and EMEA are at different stages of the transformation journey and operate in very different markets, which creates unique opportunities and challenges for each business. In North America, we're seeing significant benefits from the actions taken to date despite short-term market offsets, giving us conviction that we're on the right path. In EMEA, we are early in the process of optimizing our footprint, reducing overhead costs and reinvesting in strategic priorities. Despite macro headwinds, we are making progress and have a clear path forward to drive improvements. I'm on Slide 5. As we consider our journey and how much is left to accomplish, I want to anchor us in the progress we've made to date, utilizing North America as a transformation proof point. This slide shows how we can drive results in a tough market while investing to win. In North America, we have delivered a 40% increase in adjusted EBITDA year-to-date compared to the same period in 2024, while expanding adjusted EBITDA margin by 370 basis points. Our strong performance year-to-date has been the result of several costs and commercial drivers. In terms of cost improvement, we continued our footprint optimization in North America. We closed additional mills and box plants, sold or exited some of our non-strategic export and specialty businesses, further simplified our overhead structure and rolled out our 80/20 Lighthouse model to 74 box plants to drive improved operational efficiency and service levels. We launched the Lighthouse implementation in our mill system in the third quarter. Commercially, we continue to invest in our best-in-class experience for our customers. This has resulted in key strategic wins across national and local customers as we continue to benefit from strong margin improvement. In North America, we have pulled the levers of change aggressively. The tremendous effort and focus by our team is working. We will continue to build on our progress in North America while leveraging our 80/20 playbook in EMEA. I'm now moving to Slide 6. Let me cover a few quarterly highlights. To begin, our Packaging Solutions businesses grew EBITDA sequentially by 28%. These results underscore the progress we're making with our 80/20 implementation. As we move to demand, we came into the year, we anticipated U.S. box industry shipments would be up 1% to 1.5%. However, we now expect industry shipments to be down approximately 1% to 1.5% for the full year due to factors like trade uncertainty, soft consumer sentiment and a weak housing market. Similarly, in EMEA, our expectation coming into the year was for box volume to be in the 2% to 3% range. We're now seeing that closer to 1%. While the markets are challenging, we are controlling our own destiny. We control our customer-centric approach, and that focus is working. In North America, in the month of September, marked an important milestone as we took market share and grew box shipments. That trend will continue in the fourth quarter and 2026. Despite softer-than-expected market conditions, we have continued to build momentum on our transformation journey and are rapidly executing cost-out measures that will yield additional benefits in 2026, which I'll talk about in detail later. In addition to our mill closures and specialty business exits, we still expect to close the sale of GCF by year-end, pending regulatory approval. During the balance of our time today, we'll walk through more details about our third quarter performance, our outlook for the fourth quarter, momentum into 2026 and updated targets for 2027. Now moving to Slide 7. Looking at our overall company performance, excluding GCF, our third quarter results reflect solid progress and additional proof points along our transformation journey. Third quarter revenue was slightly higher sequentially, driven by continued strong price realization and stable volumes. Importantly, we delivered our expectation of significant sequential EBITDA improvement in the quarter. As a result, our EBITDA improved by 28% and our margin expanded by approximately 300 basis points. Our adjusted EBIT and EPS results included the accelerated depreciation expense of $675 million related to our facility closures, which impacted EPS by $0.81. Free cash flow in the quarter increased sequentially to $150 million, primarily driven by strong growth in operating cash flow despite approximately $60 million of direct cash costs related to our transformation. The strength of our balance sheet allows us to invest and position ourselves to drive sustainable, profitable growth. I'm now on Slide 8. Sequentially, we saw a significant improvement in EBITDA this quarter of approximately $190 million for IP's continuing operations. For the GCF business included, we achieved more than $1 billion of EBITDA in the quarter, in line with our expectations. I'd like to take a moment now to acknowledge the entire GCF team for their contributions and their hard work demonstrated throughout this transition. We wish them continued success as they team up with American Industrial Partners. Now I'll turn it over to Lance for a few additional details.

Thanks, Andy. Still on Slide 8, let me touch on a few housekeeping items related to GCF. First, we've recast this year and the prior 2 years of financials to reflect GCF moving to discontinued operations. Second, we've identified approximately $60 million in annual stranded overhead costs, which we have reallocated to the corporate line throughout 2025. A significant portion of these costs will be covered by a transition service agreement following the close. As the TSA winds down, any residual stranded costs will be eliminated. Third, with the signed transaction, we've written down the GCF business to fair market value and the associated impairment of approximately $1 billion is reflected in the discontinued operations line this quarter. Finally, upon closing, we intend to use the proceeds from the sale of GCF to reinvest in our Packaging Solutions businesses and pay down debt in order to sustain our target credit metrics and maintain a strong investment-grade rating. Turning to Slide 9 and our Packaging Solutions North America third quarter results. As a reminder, we are using adjusted EBITDA for our bridges as a better comparative metric during the company's transformation. Looking at the data sequentially, Price and Mix in the third quarter was higher by $28 million, primarily due to strong price realization from prior price index movement. Volumes were relatively stable in the third quarter, and operations and costs were $49 million favorable, primarily driven by the non-repeat of second quarter items as we discussed on the last call and the impact of strategic cost-out initiatives. Planned maintenance outages resulted in $86 million of lower costs in the third quarter. In order to accelerate our mill footprint actions, we adjusted our outage schedule accordingly. Going forward, we will continue to optimize planned outages to align with demand and balance our network. Input costs were $27 million unfavorable for the quarter due to higher energy costs, including the incremental costs from the natural gas curtailment that continues at our Valeant mill. All of this leads to an adjusted EBITDA for North America of $655 million. Following the bridges, I'd like to note, our depreciation expense in the third quarter was $831 million, which includes the accelerated depreciation expense of $619 million associated with the closure of our Savannah, Riceboro and Red River mills. Turning to Slide 10. Let me take a moment to put the trajectory of the North American business into perspective. As mentioned on our last call, we finished the second quarter with a gap to industry around negative 4%, but expected to close our gap by the end of this year. Although industry numbers will often publish until tomorrow, we believe that we will be in line or above industry growth rates in the third quarter. Importantly, we exited the third quarter with volumes up 1% year-over-year in September, and we are seeing that trend reinforced in October. This gives us confidence in market share gains in the fourth quarter. As you can see in 2024, our volume trajectory versus the industry was a direct result of strategic actions we took to renegotiate low-margin contracts. While this had a significant impact on our volumes, it allowed us to shed less desirable business and refocus our capacity and commercial efforts on higher value, more profitable businesses. You can see from the benefits of these changes starting to take effect in 2025, where we have closed the gap to market and expect to have above-market performance in the fourth quarter and 2026. The current trajectory is consistent with our expectations and further affirms our strategy is working. Turning to Slide 11. Let me provide some detail on our fourth quarter Packaging Solutions North America outlook. Taking a look at volume, we expect industry demand to remain relatively stable in the fourth quarter. However, our outlook of an $82 million decline includes approximately $60 million of unfavorable commercial impact associated with the exiting of the 2 non-strategic export and specialty markets businesses. In addition, there are 3 less shipping days sequentially, which we anticipate will be partially offset by the benefit of strategic customer wins and stronger seasonal volumes. We expect operations and costs to be favorable by $44 million in the fourth quarter, primarily due to the $60 million of cost-out benefit from mill closures tied to the exit of the non-strategic export and specialty markets. This benefit is partially offset by seasonally higher labor costs and reliability spend aligned with our planned outages. So just to be clear, the $60 million benefit in ops and costs related to the mill closures in the quarter offsets the $60 million of negative commercial impact in volume. The fourth quarter will also include higher maintenance outages sequentially as planned. All in, our fourth quarter outlook for North America is approximately $600 million of EBITDA. Now moving to Slide 12. As we look to the balance of 2025 for North America, we expect continued EBITDA improvement building on our strong first half momentum. Let me provide you with more details of our commercial and cost-out improvement. This bridge reflects the expected benefits that we are realizing in the second half of 2025. From a commercial perspective, the benefit from the February price increase will continue to ramp throughout the year as we roll out our Lighthouse model more broadly, and we expect more wins with strategic customers, both nationally and locally. On the cost front, the EBITDA improvement throughout 2025 is primarily driven by corporate overhead structural changes and the closure of the Red River mill. These actions taken earlier in the year continue to flow through in the second half and into 2026. This quarter, we also announced the closure of Savannah and Riceboro mills. As I mentioned on the last slide, the reduction in fixed costs favorable to EBITDA is offset entirely by the commercial margin loss from exiting the saturated kraft and low-margin export markets. Both of these mills had significant near-term capital requirements and did not return their cost of capital through the cycle. By taking these strategic actions, this capital will be redeployed for stronger returns within the business.

Let me add some context here. In light of the more challenged demand environment, we are accelerating our cost-out actions. While these are difficult decisions, they are the right thing for the long-term success of the business. This has been an active quarter, and I want to speak to several decisions. In North America, Lance just walked you through the mill closures announced in August, which ceased operation last month. Earlier this month, we also agreed to sell our Bag business. And just last week, we executed the decision to outsource a large portion of our North American IT service and support functions, a strategic move toward better scalability, cost efficiency and positioning IT in our businesses to deliver operational and customer excellence. We're grateful to all employees affected by these actions. Thank you for all of your contributions, and we wish you very well in the future. Now let me hand it back to Lance to walk you through EMEA's third quarter results.

Thanks, Andy. So now turning to Slide 13 in our Packaging Solutions, EMEA third quarter results. While we continue to see soft demand in EMEA, our business grew EBITDA and expanded margins sequentially. While Price and Mix contributed $13 million of improvement in the third quarter, this was below our expectations, primarily due to a recent downward price index movement. Volume was also lower than expected in the third quarter, which we believe resulted from overall market softness and destocking in anticipation of paper price declines. Operations and costs were unfavorable by $10 million, primarily due to the pricing impact on the value of our inventory. As a result of the paper price decline, we experienced lower fiber costs of $19 million in the third quarter, all of which resulted in third quarter adjusted EBITDA for EMEA of $209 million. Turning to Slide 14. I'd like to discuss our fourth quarter outlook for Packaging Solutions EMEA. Price and Mix are expected to improve by $12 million next quarter, primarily driven by continued box price realization due to the flow-through and timing of prior price index movement. Turning to volume, we expect an increase of $12 million in the fourth quarter based on improved seasonality heading into the holidays and the start of the citrus fruit season in Morocco. In addition, we expect operations and costs to be $24 million unfavorable, primarily due to increased costs related to the seasonally higher volume. Finally, we expect favorable fiber costs to provide a $16 million benefit in the fourth quarter. All in, our fourth quarter EBITDA outlook for EMEA is approximately $230 million. As I turn to Slide 15, and we discussed in North America, we are showing a bridge for EMEA similarly that reflects the 80/20 progress and the anticipated EBITDA benefits we expect to realize in the second half of this year. For our commercial initiatives building towards our '25 EBITDA targets, we previously identified uplift from prior price index moves. Since then, the European market has been challenged by demand softness and there have been several price index decreases offsetting that original gain. Our current view includes known adjustments to the paper price index. As a result of the challenged macro environment in EMEA, we are taking action to accelerate our cost-out initiatives. This quarter, we've proposed several closures across Eastern Europe, the Nordics, and Italy, which are all subject to consultation. Last quarter, we announced a proposal to delayer and remove the regional overhead structure in Europe as well as consolidate from 13 to 7 subregions. Consultation on this reorganization is progressing with an anticipated financial benefit occurring in 2026. Finally, we are launching our Lighthouse pilots in Spain and the U.K. similar to the model we rolled out in the U.S. with plans to expand across EMEA next year. I would also note that the input cost and other elements include the additional month of DS Smith and favorable energy costs offset by inflation. Obviously, EMEA is not in the position we expected this year. While we have significantly improved our strategic positioning and competitive strength, market softness and negative price movements have made the start of the DS Smith acquisition challenging. That said, we have an aggressive road map to improve profitability, invest in our strategic pillars and position the business for long-term success. Now let me turn it back over to Andy.

Thanks, Lance. I'm on Slide 16. As we look ahead to 2026, we'll provide full year guidance on our next call at the end of January. The numbers on this slide show a clear line of sight to the additional benefit of actions we have announced in 2025, which equates to $600 million of incremental adjusted EBITDA in 2026. The majority of the benefits already executed come from cost actions. We will see the impact from our footprint optimization, distribution, overhead and sourcing initiatives as we realize the full benefit of our 2025 actions with approximately $500 million of cost carryover into 2026. We will also see incremental margin gains from strategic commercial wins in North America and EMEA, partially offset by exiting the non-strategic businesses related to Savannah and Riceboro closures. We have not included in this analysis additional upside potential for market growth, price and future cost actions including productivity as we drive improvements in our North American mill system. Collectively, the actions we have already executed and actions we will take going forward are foundational to our controlling and shaping our future performance in a dynamic market environment. I'm on Slide 17. As we finalize 2025, I want to share with you our updated transformation targets. There are a few key points. First, our execution is on track. We have taken decisive action in North America, and we are accelerating our execution in EMEA. Second, market headwinds throughout 2025 will likely persist into 2026. The soft market has cost more than $500 million in profit this year alone. Importantly, the profit opportunity remains. It is simply going to take a year longer to achieve. We expect to capture the full opportunity by 2028. Third, due to the impact of the market softness, we are adjusting our targets for 2025 and 2027 compared to what we outlined at our Investor Day in March. Again, we'll offer full guidance for 2026 in January. With the market softness continuing in North America and EMEA, our revised full year 2025 targets are $24 billion of net sales, adjusted EBITDA of $3 billion and free cash flow of negative $100 million to $300 million. Our long-term ambitions remain. IP has the ability to deliver on the targets we laid out at Investor Day in the medium term. However, the softer market this year and into 2026 has delayed our progress. We can deliver $5 billion in EBITDA in 2027 and continue to accelerate our progress thereafter. With our improving performance, cash on hand and strong balance sheet, we will continue to invest aggressively in our transformation. I'm excited for the future as we retool International Paper through 80/20 and our strategic pillars. The team is doing yeoman's work across the company. We are committed to delivering our transformation plan. Before we move to Q&A, I'd like to thank our IP team. Our people are working tirelessly to win. Together, we are on an important journey to realize our potential as the market leader, employer of choice and value creator for customers and shareholders. Now operator, let's open it up to questions.

Our first question comes from Mark Weintraub with Seaport Research Partners.

Congratulations on your progress in a challenging environment. My first question relates to the opportunities in EMEA that Lance discussed. I'm trying to understand the differences between your strategies in EMEA and North America. First, in North America, there was significant opportunity to reduce excess capacity without sacrificing any business, unlike the situation in Savannah which had some negative impacts. Do you see similar opportunities in EMEA, or will it be more about gradual improvements that require tough decisions? Second, North America had prior commercial decisions that negatively affected performance, but you've managed to make changes and benefit from them. Are there comparable issues in EMEA, and how does the commercial opportunity there contrast with North America?

Those are both great questions, Mark. Thank you. So on the cost front, it is a little bit different, right? We don't have the same kind of magnitude of excess mill capacity or paper capacity that we had in North America. That said, there's more capacity out in the field. As you think about the box system and underutilization in the box system, we did not have a ton of underutilized capacity in the box system per se. We certainly found it as we have implemented the lighthouses. And so those 2 things were true in North America. In Europe, we definitely have excess box capacity as we look at the European footprint. And then on the mill side, what we have is we have a pretty considerable amount of our capacity that isn't going into the box business. And so we have to really look at the economics around that and make really good choices. One of the things that's different in Europe than in North America is that complexity. So where we found a lot of complexity in North America was at the corporate center, as you kind of define it. So call it the Memphis corporate center. And that really then bled into the field that added complexity from a product, from a customer standpoint, policies, procedures, investment, slow investment, those sorts of things. That all still exists very similarly in Europe markets. The difference is it sits kind of in the above-country structure. There's a very complex above-country structure that we talked about last quarter, Lance talked about again this quarter that we've already announced and we're in consultation to address. And so what I would say is, on a proportional basis, the cost opportunity is as large or larger, frankly, when you just look at the cost structure. The difference are a little bit in the buckets that we find. Lance's there is something you want to add?

No.

Okay. Excellent. Mark, does that answer that question for you?

Yes. No, that's super helpful. And then just one other follow-up in parks I'm getting asked from some investors wanting me to ask it. So I'm going to ask on their behalf. In the bridging to '27, so I guess we're kind of starting if we need like another $1.4 billion if we have like the $3.6 billion run rate already identified. How much of that would be cost takeout commercial? And does commercial have to include some price now that prices have gone down in Europe? Or how to think about that part of the equation?

Yes, I realize I didn't address your second question, so let me do that. In Europe, we don't face the same scale of commercial decisions as we do in North America. The challenge in North America was that we had priced several contracts well below market value. We have since corrected that, which has helped us improve our margins and gain market share, both of which are crucial. In Europe, while we have some commercial challenges, the main focus should be on leveraging our resources better. We have a strong set of resources in Europe that excel in customer service, supporting clients through their value chains, and driving innovation. However, these resources are somewhat scattered, and we need to concentrate them more on our key top-tier customers. So, Mark, could you please remind me of the question you asked earlier?

Of the $1.4 billion.

The costs and commercial aspects are about evenly split on a net basis. However, on a gross basis, costs are higher due to inflation. We do have some price included in that expectation. As previously mentioned, we anticipate reaching mid-cycle pricing in North America by 2027, which we still believe is achievable. It might only require one price adjustment, and if we see an improvement in the U.S. market, that seems likely. We did not factor in potential benefits from market growth or pricing adjustments in our projections for 2026, nor did we include any future actions that have yet to be implemented in the $3.6 billion figure I mentioned. To reach the $5 billion goal, we would expect some modest recovery in Europe, which has been fluctuating this year. Currently, the lower tier of paper producers in Europe faces significant challenges. They are not in a good cash position. I'm not naive enough to think there will be a widespread decision to reduce capacity; however, many resilient privately held family companies are holding on. We should not expect a miracle there, but we should continue to execute our strategies. We do anticipate modest price improvements over that time frame.

Our next question is going to come from the line of Matthew McKellar with RBC Capital Markets.

Just to follow-up on really the other side of that North American box shipments comping positive in September, seemingly again, October is quite positive. You made the comment that you expect above-market performance in Q4 and 2026. Could you maybe refresh us on what kind of volume growth and volume performance versus market you've assumed in getting to the 2027 targets?

Yes. So all along, we've assumed a pretty soft market, right? So our assumptions going into this year were plus 1% to 1.5% in the U.S., we had more robust assumptions coming in Europe, which were disappointing so far. As we look forward, our expectation would be 1% to 1.5% in North America and 1% to 2% in Europe over time. As you know, Europe has a stronger secular trend around moving from other materials, plastics as an example, to fiber and a stronger consumer component related to that. So that's why you've seen kind of stronger growth over time in the European market. We would expect those trends to continue. Very importantly, when we sat and talked about adjusting our 2027 target, and we all recognize that we've gotten some questions already on, hey, why did you do that now? It just was obvious. It was obvious that the $500 million that we've lost this year from the combination of volume and price, unless you expect a major pickup in volume to the tune of the U.S., you have to claw back a couple of points additionally and the same in Europe, unless you expect that over a two-year period, those benefits are going to get pushed out. And so we thought it was appropriate to capture that and not kid ourselves or anybody else around that and focus on what we can control. And so our expectation, Matt, is that we're talking the 1% to 1.5% in North America and the 1% to 2% in Europe.

Very clear. And just as a second question, last for me. Could you maybe just provide a bit of a perspective on the strategic rationale and high-level economics for the Riverdale conversion and what kind of returns you might be targeting with that investment?

Yes, absolutely, Matt. Regarding Riverdale, as mentioned in the script, we analyzed Savannah and determined it was not worth investing an additional $300 million there. The opportunity at Riverdale, however, revolves around lightweighting, which requires an investment of around $250 million. We anticipate returns of nearly 20% on that investment. This shift is significant as it transforms a business that historically operated below its cost of capital into one with promising prospects and appealing returns on capital.

Our next question is going to come from the line of George Staphos with Bank of America.

Congratulations on the progress. Andy, I guess first question I had for you, if we look at the change in the guidance for this year, and we appreciate the update, the free cash flow number for us, from our vantage point moved a decent amount. I think it was $100 million to $300 million positive for the year, and it's now a comparable deficit. What were the primary areas in terms of the movement there? Was it just purely the cost at the actions that you took its event, et cetera, that move that? Or are there other factors there? And then related, I just want a clarification on the answer you were giving to Mark earlier. As we think about the commercial and the cost out targets that you initially had in your March guidance and now in the current guidance, have those figures actually changed? Or are they still the same? And then I had one follow-on.

Let me address the second question first. No, those figures have not changed; they remain consistent. Regarding the first question about cash flow, it's largely due to the slowdown in the market. The profit we anticipated was around $500 million, but we would have expected slightly more if the market had performed as we discussed during our Investor Day. Our cash flow would align more closely with expectations under those conditions. The challenges we face are linked to the market, and there are some additional costs we hadn't anticipated because we decided to accelerate certain actions. However, those costs are not significant in relative terms, probably around $50 million to $100 million more than we had planned. Importantly, I've decided not to retreat from our transformation plan. We have a solid balance sheet and funds from GCF, along with proceeds from several smaller business sales, and we've made operational enhancements. Slowing our transformation by reducing capital expenditures would be a critical mistake. We must continue to operate at full speed in our current situation. You can see the positive outcomes in North America when we execute correctly. It's not a straightforward or perfect process, but the improvements we can achieve when our asset balance is right and we invest in the commercial side are evident. Looking back a year, we were losing market share, struggling with volume, and experiencing declining incremental margins, which led us to cut capital. We were in a negative spiral that is unsustainable. Remarkably, we have reversed that trend in 18 months. I am very proud of our team. EBITDA has risen by 40% year-over-year through the third quarter, and we've shifted from losing market share to gaining it. We will finish this year above our cost of capital in North America, marking a significant turnaround. Europe will be more challenging, and I'm realistic about the work required—it will take longer and be more expensive. But our approach remains unchanged, and we will pursue it diligently. This commitment is crucial.

I appreciate that, Andy. My second question is two parts that are connected. First, congratulations on the pickup in box shipments in September and your positive outlook for the fourth quarter. What has been driving that? Are there specific end markets where the new IP approach is gaining traction? Additionally, looking at your results compared to some of your peers, it seems each company is trying to optimize production for the market. Your margins are doing well at 17% or better, but there’s been a lot of volume reintroduced into the market, leading to other areas that are not earning high margins. Is this a favorable position for IP shareholders, or does it present a greater risk compared to where you were back in March, with many players in the market facing high volume but low margins?

Thank you. That was a comprehensive question. If I overlook something, please feel free to assist me.

We know where to find you.

Thanks very much. Regarding the marketplace, we don’t comment on competitors. Each company has to make its own decisions. From our perspective, we're focused on aligning ourselves with the right markets, and we believe we are achieving a good balance. Our approach involves leveraging our strengths in the marketplace, where we are effectively winning with select initiatives directed at specific customers in appealing markets. Given our significant size, we have a presence in nearly every market, primarily servicing medium to larger customers, although we also value our many smaller clients worldwide. Our strengths in fruits, vegetables, and protein are evident, and we are becoming increasingly engaged with strategic customers, investing considerable time, energy, and resources into those we see as vital for our future. While I won’t detail these customers, our focus is on being customer-centric, directing resources toward the most promising clients that align with our business model. In response to your second question about the overall marketplace and margin, I will only speak for us and not anyone else. I believe the industry has at times pursued short-term cash benefits by increasing volume. For instance, in our North American operations, we typically maintain a material margin of 65% to 70%. This means that any additional revenue generated contributes significantly to profit. If a competitor reduces their pricing and achieves some volume gain, it might lead to short-term satisfaction, but historically, this approach tends to create problems down the line. If this additional business does not come with proper investment, it eventually becomes unsustainable. We have committed to maintaining discipline in our business practices, anxious to pursue markets that promise attractive returns on capital. Our strategy revolves around three key pillars that work in conjunction. First, we strive for a favorable cost position, focusing on reducing costs to create a competitive advantage, which gives us the flexibility for margin growth and reinvestment that others may not have. Secondly, we prioritize the customer experience, having increased our sales staff by 22% this year compared to last, updated our incentive structures, and refined our innovation processes, all aimed at enhancing customer satisfaction backed by notable improvements in quality and on-time delivery. Lastly, we aim to establish strength in significant markets, which we will continue to invest in. By adhering to this disciplined approach, we can manage our operations effectively while others make their own choices about getting their businesses in order.

Our next question is going to come from the line of Mike Roxland with Truist Securities.

Congrats on the progress in a difficult environment. I want to follow-up with you on the closures of Riceboro and Savannah. And can you help us understand the EBITDA benefit associated with those closures? Because when I look at previous closures, like Orange and Red River, you guys called out specific either adjusted EBIT or adjusted EBITDA benefits associated with those mills. But I don't believe anything was highlighted in your recent SEC filing for those mills. So that's question 1. And question 2, just are you now at a point in your U.S. mill system where you can't reallocate tons and need to actually make mill investments, such as what you're doing at Riverdale? And really what I'm trying to get at is you can't reallocate the tons from Savannah elsewhere in your system then there might be a negative EBITDA impact in 4Q and maybe early 2026. So any color you can provide would be helpful.

Yes. Let me explain this and then Lance can add some insights. I will address Savannah and Riceboro separately as they are distinct situations. Savannah mainly focused on exporting low-value products, which served as a volume outlet. Our analysis shows that at times during the cycle, we generated positive cash flow, but overall it failed to produce returns above its capital costs, leading to value destruction. It also necessitated increasingly high capital investments. Shutting down Savannah and exiting the low-value export market neutralizes EBITDA impacts, but it's crucial to note that the replacement asset value exceeds $1 billion, possibly significantly more if rebuilding the mill from scratch. Under normal circumstances, building that mill to serve that market wouldn't be feasible. From a return on invested capital perspective, this is a significant advantage. However, we have to consider the challenges, like the temporary boosts we experience when the export market is performing well, which can turn sour quickly. We need to evaluate our long-term investment returns and the best use of our capital. The strategic move involving Riverdale is extremely important, reflecting the decisions we are making across the company. I recognize the complexities involved, and while the transformation isn't straightforward, these are the efforts we're undertaking to enhance our business. Riceboro, on the other hand, was a mill that could never achieve a competitive cost position, making it sensible to shift that volume to other more efficient mills, which is a modestly positive move. However, it's important to clarify that Riceboro is a relatively small operation.

Got you. And now, Andy, it's very helpful. Are you at a point in your U.S. mill system where you can't reallocate tons? Do you actually need to make no investments, such as what you're doing at Riverdale?

Yes. In terms of removing more capacity, that's not in the plans for the near future. Currently, we're focused on several key aspects of the mill system. First, as I mentioned last quarter and briefly referenced this quarter, we have significant costs stemming from a decade of underinvestment. We began addressing this last year and will continue to do so, which is why I'm committed to maintaining our strategy. By investing robustly in the mill system, we could recapture a substantial portion of around $400 million that is effectively wasted when the mills are operating suboptimally. While we may not recover the entire amount due to unforeseen issues like the Vaillant Gas situation, which has taken longer to resolve than anticipated, we aim to eliminate breakdowns caused by deferred maintenance. Our investments should help us reclaim a significant part of that waste, though it will require time. Over the next few years, we expect to enhance our bottom line substantially. The second crucial component is the reinvestment in ongoing productivity. Over the past decade, our business has not shown any net productivity gains; in fact, it has declined. If the market grows at 1% to 1.5% and we can slowly gain market share, that would be positive. Combining that with productivity improvements, we can achieve significant success. Therefore, we need to activate our productivity engine, and while we know how to do this, it will take some time. These two elements are essential for our progress.

Got it. And just one quick one. Just you've mentioned accelerating cost actions in North America. You sold the bags business. You mentioned just now outsourcing a large portion of your IT support. Can you comment on the EBITDA savings you expect to achieve from those moves? And are there similar types of actions you can potentially take in North America if the market remains challenging as you sort of indicated in 2026?

Yes, we have included those details in the figures we provided. If you examine the bridge, most of what we've discussed will be realized, primarily in 2026. However, there will be some residual effects that carry over into 2027. Regarding future steps, we recognize that there is still considerable work ahead. We have addressed many significant structural issues in North America, and now we must focus on resolving them. We also need to tackle the cost structure within the mill system, as there is still overhead that needs attention. Additionally, we are just beginning our efforts in Europe.

Our next question is going to come from the line of Anthony Pettinari with Citigroup.

Just following up on Mike's question, with Savannah and Riceboro closed and let's assume Riverdale comes up, what percentage of IP containerboard production in North America will go to an IP box plant? What's your integration rate going to be? And then what percentage would be exported offshore, understand that is going to bounce around a little bit, but just on a normalized basis, like can you give us any sense there?

Approximately 90% of our production will be utilized in our box system, give or take. We have partners in the box industry in North America and we also conduct some exports, which we find important. This export business is strategic, profitable, and generates returns above its cost of capital, making it a valuable part of our operations. Our long-term partners in this sector are excellent, and we expect that relationship to continue. The export portion accounts for about 6% to 7% of our production.

Okay. Okay. No, that's very helpful. And then I guess, just looking at the mill system exiting the year, are operating rates where you want them to be? Or are they still maybe a little bit loose because the demand is weak? Or are you going to be running tight until Riverdale comes online? And then just given the kind of volatility in demand and weakness in demand, how should we think about the sort of timing of Riverdale? Is that something that could get flexed sooner, later, or just any thoughts there?

Yes, we are doing well in terms of our capacity utilization. Our operating rates are satisfactory. We plan to be cautious with our paper strategy if we see an increase in activity, especially since the market has been soft. If the market rebounds quickly, we want to be intelligent in our approach while enhancing productivity within the system. This focus on productivity allows us to achieve 1% to 1.5% growth without increasing fixed costs, which is crucial. I am not particularly concerned about this. Our plan for Riverdale is to be operational by late next year, which we believe is well-timed and aligns nicely with the growing market segment.

And our final question today comes from the line of Phil Ng with Jefferies.

Europe is clearly more challenging than expected coming in the year. I think you and your peers have both talked about perhaps 50% to 75% of the non-integrated tons in Europe are operating at uneconomic levels, maybe not even cash flow positive. I believe your Europe business is about 40% to 50% of the paper you make you're selling into the open market or you trade tons. So can you kind of let us know if that business, one, is cash flow positive or EBITDA positive at current levels? Is that a business you want to be in, in the medium term? And is there a good way to think about your unintegrated and integrated business in Europe, is there like a massive spread in terms of margins?

Yes, that's a good question. We're currently assessing the non-internally consumed product and its strategic fit within our business, rather than just its economic aspects. Right now, Europe is consuming cash due to its cash flow situation, and we plan to restructure it. I acknowledge that we have areas in our mill and box systems that are not generating cash profit, which needs to be addressed through either commercial strategies or cost-cutting measures to achieve a satisfactory return on capital. We haven't discussed the specifics of the profit and loss splits, as sharing that level of detail isn't beneficial competitively. However, we are aware of where our profits and losses are located and have a clear plan moving forward. It's essential that everything we do in Europe adheres to the consultation process, and we will ensure that this is reflected in our public statements and private discussions.

That's helpful. And then appreciate Europe is a little newer for all of us. Lance, did you mention on the prepared remarks that you're going through a works council process in Eastern Europe, Nordic and Italy? Can you give a little more perspective what's out there in terms of potential closures? Are those box plants? Is that mills? Just kind of help us size how quickly could you see that? And perhaps, Andy, as you kind of accelerate this restructuring in Europe, how quickly you're going to move in? And could we see some uplift perhaps in 2026? Or is this more of a '27 event where you see the big inflection in terms of cost-out savings?

Yes. So Phil, we have to dance carefully on this topic, right? And the reason I say that is there is a highly defined process in Europe around consultation. And so what that means is we're working hand-in-hand with the works councils and with the regulators to go through that process in a very detailed way. And I appreciate the fact that we all want to put a number out there and put a date out there and talk about what's going to happen. That is different than the U.S. And so what I'll say, and then, Lance, you can add any color that you want is we are going to move aggressively toward rightsizing Europe. We have to, right? As does everybody else, given the market conditions. Everyone's going to make their own choices around that, but the marketplace is going to have to decide what they're going to do. We are going to be aggressive about getting ourselves in the right economic position. That being said, it has to be in conjunction with the regulations and the laws and the practices in Europe.

Yes. I don't have anything to add. I think you covered it in terms of being aggressive about the actions that we take under the appropriate circumstances without getting wrapped around the axle. That's probably as much as we can say.

Yes. But just expect it, Phil, we're going to move, right? The stuff that we have, we have talked about already. That's in consultation. We're going to go through that process the right way. But we know the magnitude of what we have to address.

Okay. And sorry, I just sneak one more in, something perhaps you could talk about a little more freely. Good to see progress on box shipments and you're calling up 1%. That certainly appears to be outpacing the market. Given the line of sight and perhaps on the wins you already have in North America on the box side, is there a good way to think about relative outperformance that we could hope to expect in North America for you guys next year and some of the wins that you've had in terms of what type of customer mix of business?

Yes. So based on what we're looking at right now with known wins and losses, we think that number is kind of 2%. So you pick your market number, but we think we can outpace the market by a couple of points in 2026 in North America.

I will now turn the call over to Andy Silvernail for closing comments.

Well, thank you very much. Thank you, everybody, for being with us on this transformation journey. The work and the focus on 80/20 and on the 3 pillars of our strategy are critically important, and we're working it, and we're working it hard. I'm delighted to see the progress in North America and what that team is doing. Obviously, the North American team is facing headwinds that we didn't expect, but we're being aggressive with the realities of that. And so we're getting after it. In Europe, it's been a tough market. No doubt about it, right? If we look at both in terms of volume and price, it's been meaningfully more difficult than we had expected. But the same thing holds true. We are moving forward with the same playbook, with the same level of aggressiveness that we have in North America, and we understand the challenge, and we understand the need to get that business in the right place. So I want to thank you for your support. I want to thank you for your attention. And very importantly, I want to thank the IP team for the incredible work that they're doing in North America and in EMEA. So thank you very much, everybody.

Once again, we'd like to thank you for participating in International Paper's Third Quarter 2025 Earnings Call. You may now disconnect.