Earnings Call Transcript - IP Q2 2025

Operator, Operator

Good morning, and thank you for being here. Welcome to International Paper's Second Quarter 2025 Earnings Call. I am now pleased to hand the call over to Mandi Gilliland, Senior Director of Investor Relations. Mandi, the floor is yours.

Mandi Gilliland, Senior Director of Investor Relations

Thank you, Krista. Good morning, and good afternoon, and thank you for joining International Paper's Second 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 second quarter earnings press release and today's presentation slides. I will now turn the call over to Andy Silvernail.

Andrew K. Silvernail, CEO

Thanks, Mandi. Before we get into the details, I want to welcome you to the IR team. It's great to have you lead our Investor Relations efforts as the next step in your successful career. Now let's jump in. I'll begin on Slide 3. As we continue our transformational journey to our ambition of $6 billion in EBITDA by 2027, I want to speak to our strategy and the momentum we are gaining across the organization. There are 3 key messages we want you to take away today. One, our transformation is on track. Second quarter revenue was at our expectation, and we have confidence in closing the market share gap in North America this year, even as the U.S. and EMEA markets remain soft. Two, our cost performance in North American mill system and EMEA are not where we want them to be, but we have a clear line of sight to improvements. Three, we are holding our 2025 EBITDA guidance with our commercial and cost improvement efforts taking hold. We will win at IP through our deployment of 80/20. More specifically, we'll win through great teams deploying 80/20 at the point of impact. We launched 80/20 a year ago, and we did the same at the close of the DS Smith acquisition. EMEA has mobilized teams to deploy 80/20 by region, focusing on initiatives to accelerate significant synergies and profitable growth. Radical focus on the critical few is the key to our transformation. Momentum is picking up. While our 2 regional packaging businesses are at different stages in this journey, they're both executing a similar framework to achieve our 2027 targets. In the second quarter, we started to see momentum build, and they will take flight in the second half of the year. I want to thank the EMEA team for their tremendous work in tackling the challenges involved in combining the 2 organizations. This includes the finalized required sale of 5 plants in France, Spain and Portugal to the PALM Group announced earlier this month. Our Packaging Solutions North America team has been on the transformation journey since last year, and we're seeing accelerated momentum in our 80/20 implementation. We're gaining traction and customers have noticed. In the last few months, I had the opportunity to meet with several large customers, and they're excited about the things that we're working on. They're experiencing improvements in service and quality. They appreciate the investments we're making to support their growth, and they recognize the new International Paper with a stronger customer-centric focus. This same sentiment is at the heart of our commercial gains in the second quarter as we continue to close the gap to the industry in North American packaging. I've also visited our Lighthouse teams in Chicago and Atlanta during the second quarter, where I observed our strategy in action. They have incorporated 80/20 into daily management, and they are building stronger problem-solving muscles, which has resulted in improved reliability and cost reduction. The same focus on 80/20 is permeating the company, both in operations and in our corporate functions. It is the engine to our strategy. Moving to Slide 4. Let me start by sharing our current view of the markets in North America and EMEA. Industry demand in North America has been relatively stable, but softer than last year as economic uncertainty from tariffs continues to impact industrial production and box demand across the manufacturing sector. Based on our order patterns through July, we expect industry box demand to remain stable in the third quarter with upside potential in Q4 if geopolitical tensions ease and economic activity improves. Our gap to industry widened over the course of last year, peaking in the fourth quarter of 2024 when we shifted our portfolio to a more profitable mix. As we indicated in the Q4 call, we anticipated closing the gap to industry this year. That trend started in Q1 and improved as predicted by another 200 basis points in the second quarter. We expect our gap to industry to close by the fourth quarter, largely attributed to known commercial wins that will ramp up in the second half of the year. Turning to EMEA. Due to the inconsistency of industry data in EMEA, the chart on the right-hand side is reflective of our EMEA box shipments on a year-over-year absolute basis. The weak market is a headwind for us with macroeconomic volatility in the region. While we're holding market share, box shipments slowed sequentially in the second quarter by approximately 1%, primarily driven by market softness in April and May. June volumes, however, showed signs of recovery, which has continued into July. Looking ahead to the second half of the year, we anticipate a moderate increase in demand with fast-moving consumer goods seasonal growth in the third and fourth quarters. The wildcard is the unpredictable and unresolved tariff negotiations, which continue to pose macroeconomic uncertainty. Moving to Slide 5. Last quarter, we shared the commercial actions we are taking to achieve our 2025 run rate target of $600 million and our 2027 target of $1.1 billion. You can reference the list of first-quarter commercial and cost-out actions in the appendix, and we'll continue to update the appendix slide each quarter to reflect our cumulative actions and momentum. Now let's take a look at our accomplishments in the second quarter. In Packaging Solutions North America, we continue to make progress servicing our customers. On-time delivery improved from 92% in the fourth quarter of last year to 97% in the second quarter. We've made investment announcements focused on growing in attractive markets. We continue executing to overserve our key customers, such as rolling out our 1 to Perfect service model. This includes identifying actions required to achieve perfection on key metrics for our customers. We're also increasing positions with large global accounts by collaborating across both packaging businesses. In EMEA, with our combined team, we are refocusing our efforts on the most attractive customers, differentiating our go-to-market strategy and developing prospect plans to grow our position. And we are winning strategic accounts through our strong customer-centric culture at DS Smith. All in for the first half of the year, our actions account for a run rate of approximately $650 million. This trajectory reinforces our confidence that we are on our way to achieve our goal of $1.1 billion of commercial excellence benefits by 2027. Now I'm moving to Slide 6 to discuss our cost-out actions in the second quarter. In Packaging Solutions North America, we announced decisions to close 4 facilities, sell 3 facilities and exit a noncore business. As difficult as these decisions are, it is the right thing to do. Strategic decisions like these allow us to reduce complexity and minimize cost, which enables us to reinvest to build an advantaged cost position and enhance the customer experience. Last quarter, we communicated our goal of deploying the Lighthouse model to 75 plants by year-end. We have now installed the model in 40 plants and continue to see productivity improvements as we optimize. We are also identifying opportunities in procurement to reduce spend across both packaging businesses. Importantly, we continue to struggle in our North American mill system. Year-to-date, we have left about $150 million of profit on the table due to reliability issues. We are hyper-focused on this area for improvement. In EMEA, we have proposed to close 5 U.K. plants subject to consultation, which we believe will be worth approximately $25 million. We have also proposed to streamline our packaging business regional structure and consolidate 13 subregions into 7, essentially eliminating a layer of the reorganization. The estimated cost of the regional and subregional reorganization in EMEA will be known once those plans are finalized and we begin consultations with the new proposed organization. With the combined first and second quarter cost-out actions, we are nearing our goal of $600 million run rate by year-end, and we are on our way to achieve the $1.9 billion target for 2027. We have accomplished a great deal this past year, but we have much left to do. Our work is just beginning. And as you can see on Slide 7, we have many more value drivers developing that will contribute to our performance on our transformational journey. As an example, last month, we announced the expiration of a greenfield state-of-the-art sustainable packaging plant in Salt Lake City. We anticipate this investment will drive growth in an attractive market where we can leverage our strategic strengths. Moving forward, initiatives such as these will continue to be developed. We are committed to a relentless pursuit of commercial excellence and cost out in order to build a great company. So let's turn to our performance and outlook. Slide 8 serves as a reminder of how we will reference our businesses for financial reporting purposes, including the abbreviations of PS NA and PS EMEA for our Packaging Solutions businesses in each of those regions. Regarding our Global Cellulose Fibers business, the strategic review has progressed. There are no changes to our expected timeline, and we remain committed to achieving the best value for the business. Now I'll share some highlights of our performance and then turn it over to Lance to walk through the details. I'm on Slide 9. Second quarter results reflect higher revenue driven by a full quarter of DS Smith and strong price realization. Volume in the second quarter was seasonally higher in a stable demand environment in North America. However, we experienced lower volume and softer demand in EMEA. Last quarter, we noted that results were of relatively low quality, and we expected 2Q to be much higher quality. That's exactly what happened. The modest sequential decline in EBITDA is primarily due to 4 things: one, Q1 had favorable nonrecurring items that did not repeat. Two, Q2 had unfavorable nonrecurring items and costs from our transformation efforts. Three, Q2 also accounted for our highest quarter of planned maintenance outages. Four, while Packaging Solutions EMEA demand was soft, we also experienced a spike in fiber costs. Lance is going to walk you through the details in a moment to bring clarity to the bridges and give you insights into the important Q3 sequential profit ramp. Our free cash flow for the second quarter was $54 million. As a reminder, cash flow in the first quarter was negatively impacted by $670 million related to the investments in our transformation, including severance costs and DS Smith transaction costs, along with 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 look to the third quarter, we expect significantly higher earnings sequentially. This will be driven by higher volume and lower cost across all our business segments. Our commercial strategy is gaining momentum. We are closing the gap to industry in North America, and we will continue to strengthen as we onboard strategic wins. We also have fewer planned maintenance outages in North America, and we are accelerating 80/20 implementation as we move into the third quarter. With that, let me turn it over to Lance to provide more details about our second-quarter performance and outlook.

Lance T. Loeffler, CFO

Thanks, Andy. Turning to Slide 10. Second quarter adjusted operating earnings per share was $0.20 as compared to $0.23 per share in the first quarter. Price and mix increased by $0.21 per share, primarily driven by strong price realization in our Packaging Solutions North America business as well as continued realization of prior price index movement in GCF. Volume was flat overall. In Packaging Solutions, our North America business experienced seasonally higher demand, which was offset by softer demand in EMEA as well as lower volumes in GCF, primarily due to heavier outages in the second quarter. Operations and cost were unfavorable by $0.32 per share this quarter, primarily driven by nonrecurring favorable items from the first quarter and nonrecurring unfavorable items in the second quarter, including costs associated with our 80/20 strategic actions. I will cover the ops and cost variances in more detail by segment in a couple of slides. Maintenance outages were unfavorable by $0.16 per share. As Andy mentioned, we expect the second quarter to be our heaviest maintenance outage quarter for the year. Overall, input costs for the quarter were favorable by $0.10 per share, primarily due to lower-than-anticipated energy costs. Corporate and other items were unfavorable by $0.16 per share, primarily driven by an extra month of interest expense associated with DS Smith debt, the non-repeat of favorable first quarter discrete tax items and an increased average share count due to the additional month from the DS Smith share conversion. Depreciation and amortization were favorable by $0.18 per share. This is primarily due to a nonrepeat of the accelerated depreciation from the Red River mill closure in the first quarter, partially offset by an additional month of DS Smith depreciation as well as changes in estimates to the step-up depreciation as a result of our acquisition. And finally, earnings for the DS Smith legacy business included an additional month and were partially offset by soft demand and higher fiber costs in Europe and market-related downtime in North America, all of which accounted for a favorable $0.12 per share. Moving on to our Packaging Solutions North America second quarter results on Slide 11. These results reflect the additional months of the DS Smith North America business as well as the benefit from our cost-out initiatives and commercial excellence actions, including the strong realization of prior price increases. Our second-quarter volume was seasonally higher sequentially. And as Andy mentioned, we reduced our volume gap to market this quarter by 200 basis points. Planned maintenance outages were higher in the second quarter, offset by lower input costs. Operations and costs were unfavorable sequentially, and I'll cover those details on the next slide. I'm on to Slide 12. This will be our last quarter, breaking out our DS Smith legacy business from Packaging Solutions North America results. Beginning next quarter, all of our financials will be reflected as one Packaging Solutions North America business. Price and mix in the second quarter was higher by $67 million, primarily due to strong realization from prior index movement, especially across local accounts. Price was also favorable due to the geographic mix benefits in our export channels. For the third quarter, we expect an incremental $10 million benefit from the prior price index movements. Volumes were seasonally higher in the second quarter, and we expect to see continual growth in the third quarter as we ramp up our strategic wins. Operations and costs were $119 million unfavorable sequentially, primarily driven by the non-repeat of favorable items we discussed in the first quarter, totaling approximately $60 million. In addition, the second quarter included unfavorable nonrecurring items of about $50 million, which included costs associated with footprint and business optimization actions, inventory revaluations, and year-to-date employee benefit accounting true-ups. In addition, we experienced incremental costs from the natural gas curtailment at our Valeant mill, resulting in $18 million over 2 months. The gas curtailment has continued through July and is expected to be resolved shortly. These unfavorable costs were offset partially by footprint optimization benefits from the Red River closure and other prior cost-out initiatives. For the third quarter, we anticipate operations and costs to be favorable by $68 million due to the non-repeat of unfavorable items in the second quarter, cost-out actions, and focused performance improvement. Planned maintenance outages were heavier in the second quarter, resulting in $39 million of higher costs, and we expect lower outage costs in the third quarter. Input costs were favorable in the second quarter due to lower energy and fiber costs. However, we expect slightly higher energy costs for the third quarter. Depreciation expense was lower by $177 million in the second quarter, primarily due to the non-repeat of the accelerated depreciation expense associated with the closure of our Red River mill, offset by a combination of an additional month of depreciation from the DS Smith North America assets and refinements to our DS Smith purchase price accounting estimates. Adjusted EBITDA for DS Smith operations in North America was $5 million unfavorable, primarily driven by higher unabsorbed fixed costs due to market-related downtime and other nonrecurring items, offset by an additional month of earnings. Moving on to Packaging Solutions EMEA's second quarter results on Slide 13. As a reminder, again, last quarter accounted for 2 months of DS Smith data. So second quarter results include an additional month in the sequential and year-over-year variances. Volume in the second quarter was softer than anticipated, reflecting ongoing macroeconomic uncertainty. However, we saw encouraging signs of demand recovery in June, and we expect that momentum to continue into the third quarter. In the second quarter, we experienced a spike in fiber costs in April and May with limited supply driving up prices. Energy costs in the second quarter were favorable and provided some offset to the fiber cost run-up. We expect fiber prices to normalize in the third quarter. Adjusted EBIT was significantly impacted by the revision of purchase price accounting estimates related to our DS Smith acquisition. These estimates will continue to be revised over the balance of the year. Turning to Slide 14. As discussed, this will be our last quarter for breaking out the DS Smith legacy results from our Packaging Solutions EMEA business. Related to IP's legacy packaging system in EMEA sequentially, price and mix in the second quarter was higher by $7 million due to the prior price index movement and higher external paper sales. Volume was lower in the second quarter given the expected seasonality of the fruits and vegetables segment in Morocco as well as overall soft demand. Operations and costs were $17 million unfavorable sequentially, primarily from the non-repeat of our energy credit sales in the first quarter. Turning to depreciation for both business segments sequentially. As we just discussed, the major driver of the second quarter results is primarily due to an additional month of depreciation and revisions to the DS Smith purchase price accounting estimates. Finally, the adjusted EBITDA contribution from our legacy DS Smith operations in EMEA was $64 million, primarily driven by the benefit of a full 3 months of earnings in the second quarter. Sales price increase realization and lower energy costs, partially offset by softer demand and higher fiber costs. Now let's move to the third quarter outlook, which reflects our combined entity. We expect price and mix to increase by approximately $25 million due to price realization from prior index movements. Looking at volume in the third quarter, we expect an increase of approximately $24 million, primarily driven by a moderate improvement in overall demand and confirmed strategic wins. We expect operations and costs to benefit from approximately $8 million of favorable cost-out improvements related to our 80/20 implementation. And lastly, we anticipate lower fiber costs for a sequential benefit to input costs of approximately $10 million. Now turning to our GCF business on Slide 15. Earnings and volume were lower sequentially due to increased outages, but partially offset with higher sales price realization and favorable input costs. As I turn to Slide 16, price and mix in the second quarter was higher sequentially by $30 million, primarily due to price realization from prior price index movements. In the third quarter, we expect a reduction of $36 million, primarily due to the non-repeat of energy credit sales that were realized in the first half of the year. Volumes were lower in the second quarter, primarily due to a higher outage schedule, and we expect volumes to increase in the third quarter with fewer outages. Operations and costs were $18 million unfavorable sequentially, primarily due to the timing of spend related to turbine work. We anticipate continued mill reliability improvement in the third quarter. Planned maintenance outages were heaviest in the second quarter, resulting in $37 million of higher costs. With more than 80% of our outages occurring in the first half of the year, we're expecting higher overall quarterly earnings in the third quarter. With that, let me turn the call back over to Andy.

Andrew K. Silvernail, CEO

Thanks, Lance. Now we're moving on to Slide 17. As I mentioned earlier, we've accomplished a great deal in the first half of the year, but we have more to do. Within our Packaging Solutions businesses, with the momentum we've made and the actions we continue to take, our run rate in the second half of the year, excluding GCF, is approximately $3.8 billion of adjusted EBITDA. Entering the second half of the year, we have momentum from our actions to drive substantial cost out and meaningful growth from our commercial wins. This positive momentum keeps us on track to the goals we laid out at our Investor Day in March. I'm on Slide 18. We've covered a lot of ground today, and I'm encouraged by the progress we're making on our transformational journey. We're driving a winning mindset within the company, and our teams are relentlessly focused on deploying 80/20 at the point of impact to deliver excellence for our customers, our shareholders, and our team. With that, let's go ahead and take questions, operator.

Operator, Operator

Our first question is coming from Mark Weintraub with Seaport Research Partners.

Mark Adam Weintraub, Analyst

Thanks for the comprehensive review. And a lot of it all comes together for me, I guess the one question that I have is the mill reliability issues. As you're taking this journey, that's also incredibly important. And you've been there now a year plus. What do you think is sort of holding up getting as much progress as perhaps you or certainly I would have hoped to have seen? And what's going to sort of get us there to not have mill reliability issues pop up again?

Andrew K. Silvernail, CEO

Yes, Mark. First of all, the mill reliability issues we're facing are not new. These are problems that have been building for many years due to underinvestment, which we've been discussing since last year. We have started to increase our investments. For instance, we are reallocating capital from areas that lacked competitive advantages to assets that do have competitive advantages over time, such as our decisions related to Red River and several converting assets. This is fundamentally about investing back into the mills at a pace that meets their long-term needs and ensuring we have assets with long-lasting strategic advantages that rank in the top half or top quartile in terms of cost and performance. The work we did at Mansfield this year is a prime example. We previously experienced a major outage because of a lack of investment stemming from a decision made five years ago, and we cannot let that happen again. We will tackle this through consistent investment and focusing on the strategic assets that matter while divesting from those that don't have a long-term strategic vision. This is going to require a steady and persistent effort; we will be working diligently quarter after quarter, month after month, week after week, and day after day to make these improvements. It is not rocket science.

Mark Adam Weintraub, Analyst

Okay. Very much appreciate that. Just one quick one. Just can you remind us the GCF timeline? I think you mentioned you're still kind of on track. What was the timeline again?

Andrew K. Silvernail, CEO

Our goal was to close it by the end of the year. And so that's our goal. So we are well into the process, and there's no reason to believe that, that won't be the case.

Operator, Operator

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

George Leon Staphos, Analyst

The first question, there's obviously a big jump in earnings 2Q to 3Q. And as we look at it, North American GCF, it's really in ops and outages. In Europe, it's really on commercial conditions. And as you were talking right now, you're working through your chopping wood on the operations issues. Do you feel more comfortable about the outlook 3Q to 2Q for North America because at least it's controllable relative to Europe, which is commercially driven and sort of subject to what's going on in the market or not? And how would you have us think about that? Relatedly, where is EMEA now slotting in terms of your EBITDA guidance? At one point, it was $900 million to $1.1 billion. Is that still the goal? How has that shifted? And do you have a view on GCF as well, recognizing that you're going to hopefully close the process at the end of the year?

Andrew K. Silvernail, CEO

George, there's quite a bit to unpack. From what I gathered, there are three main points. If I overlook something, feel free to bring it up. Lance will assist me as well. Firstly, I am feeling more optimistic about North America for several reasons. We've been focused on it longer and have really optimized our approach. The efforts by Tom Hamic and his team in North America are showing strong commercial results. Looking at the second half of the year, the key observation is the shift from consistently losing market share to achieving parity and now starting to regain share. That is crucial, and we are definitely witnessing this change. Ignoring the market for a moment, the aspects we can manage are progressing positively, and the hard work put in is paying off. Secondly, we initiated the 80/20 strategy early in the converting sector. To be fair, Tom and his team began addressing reliability and performance issues a year before I joined, tackling what they referred to as melt. This has been an ongoing issue for years due to prior underinvestment. In just two years, we've transformed a previously underperforming set of assets into one that is now doing quite well and regaining market share. I must credit Tom and his team for starting that important work long before I arrived. I am confident about our commercial endeavors, along with our converting operations and cost management. Regarding the mill operations, addressed in Mark's question and linked to yours, we have some control, but we are still in the early stages of that process. However, we have shown success in the converting side and in Mansfield. It should be clear that while we haven’t completely mastered the mill operations, significant progress has been made, and we have the know-how to improve it. You mentioned outages, and as you’re aware, eliminating costs in a process-driven business requires different strategies than those in my previous company, IDEX, where changes affected the P&L quickly. In our current business, the scale and timing of necessary changes take longer to reflect in the results. We need to get our North American mill operations running more efficiently. Nevertheless, I am quite confident in our North American prospects. In Europe, we have also rolled out the 80/20 strategy, as I noted in the last quarter. We have started strong, with Tim Nicholls, Stefano Rossi, and Paul Brown leading efforts there. We've made important changes in the U.K. and are reducing layers in Europe, which is significant. We recognize the urgency of acting swiftly. While some may feel uneasy about transformational changes in Europe, we are experienced in making such transitions. There will be challenges along the way, but the quarter-to-quarter improvements in Europe will largely depend on commercial progress. The foundational drivers that will notably impact our performance won’t appear for another six to twelve months, which is a natural delay in this scenario. So, that addresses the first question. What’s the second question?

Lance T. Loeffler, CFO

Outlook for EMEA and GCF.

Andrew K. Silvernail, CEO

Yes. Regarding the outlook for EMEA, we anticipated that the lowest point would be in the early part of the second quarter. June indicated that this was the case, and July seems to confirm it as well. We're optimistic about this. However, it's important to recognize that there are uncertainties in that market which can lead to variability beyond our control. There's approximately $50 million in total related to the two factors of volume and price. You've accurately identified that. When I assess our path towards achieving a $1 billion run rate, I'm feeling positive about it. There are no guarantees in our current efforts; the work is challenging, and we understood this from the start. All of you have been part of this journey with us. We know how to manage transformations, but it’s difficult and not a straightforward process. That said, we are making progress in North America and Europe. As for GCF, we made a decision last fall to work on carving it out as a standalone business to ensure proper presentation. The markets have been tough, particularly concerning financing and the overall macroeconomic environment. We're focused on realizing the value of that business, but our goal is to become a packaging business. I believe that the prospect of being a pure-play packaging business is very exciting. The stability and predictability of that business, despite the current challenges, make it an excellent industry to be in, and that's the direction we're heading.

George Leon Staphos, Analyst

Okay, so Andy, Europe may be pushed to the right, but you still feel good about the $1 billion summary on that. Would that be fair?

Andrew K. Silvernail, CEO

What do you mean pushed to the right?

George Leon Staphos, Analyst

So the $900 million to $1.1 billion, is that operable this year?

Andrew K. Silvernail, CEO

You're discussing Europe, right, George? I apologize, what I meant to say is that $1 billion isn't pushed to the right; $1.4 billion represents a $1 billion run rate in EBITDA for the company in the third quarter. In Europe, we're effectively maintaining that range we discussed during the Investor Day. I confused that, George; my mistake.

Operator, Operator

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

Anthony James Pettinari, Analyst

Is it possible to say what July box volumes have looked like in North America and Europe as you start off the quarter? And then you obviously have a lot of customers in a lot of industries. But I'm curious, when you kind of think about customer inventories, is there a sense that there could be some restocking in the second half of the year among your customers? Or just any kind of general observations there?

Andrew K. Silvernail, CEO

Thank you, Anthony. Currently, the market appears relatively stable. There have been discussions regarding unusual GDP figures and what that 3% real number actually means. For our business, we need to focus on what I refer to as the goods economy, which includes industrial production as a reasonable indicator, though not the complete picture. This area remains quite challenging. The housing market, which significantly impacts our business, has been struggling for some time. Looking ahead, while there is potential for improvement over time, we do not anticipate any immediate changes. The goods economy continues to be limited, and I have noticed that stakeholders are exhibiting caution, particularly regarding housing. There is a lot of speculation about people making moves prior to tariff implementations, which has resulted in a hesitance among businesses. As a result, investment spending and inventory levels have been quite restrained, and I don’t foresee a large-scale restocking happening soon. One key takeaway from the COVID period has been improvements in supply chain management, leading to tighter systems. We will likely see less variability unless there is a significant increase in economic activity that could overwhelm the system. As we approach the latter half of this year and into early next year, several external factors are worth considering. These include macroeconomic uncertainties related to geopolitics and trade tariffs, which are beyond our control. There is a considerable amount of unreleased investment in the industrial sector, so if that begins to materialize, it could affect short-term supply chains and potentially lead to restocking as businesses respond to market demands. However, the risk is that uncertainty might hold back investments further. Conversations with industry peers reflect a cautious mentality, with many choosing to wait. Overall, I feel that in the coming years, there is likely to be more potential for economic improvement than decline, especially since we are currently four years into a challenging industrial landscape. I see some promising signs for the future.

Anthony James Pettinari, Analyst

Okay. That's very helpful. And then maybe just a related question. I mean, you talked about closing the gap with the industry on the box side and expecting to have that closed by 4Q. When you look at your confirmed business wins, is it possible to kind of share any observations in terms of are these customers IP has won back or existing customers that are giving you more business or maybe new to IP? And are these longer runs, shorter runs, larger customers, smaller customers? Just curious if there's any generalization in terms of how you're winning in the marketplace.

Andrew K. Silvernail, CEO

Yes. I believe this is a positive development. Looking back in the future, I think this will be recognized as a significant turning point for us. We're starting to see results that we expect will materialize in the third and fourth quarters. Specifically focusing on North America, this includes large national accounts that are very selective about switching providers. It's not a straightforward process for them, as they thoroughly evaluate potential partners. The reasons these companies make changes usually relate to service and quality. While pricing is important for acquiring new business, when existing clients consider making a switch, service and quality issues become the primary factors, with price becoming a secondary concern. Last year, we highlighted the value of providing excellent service and quality, which we have found to be true in North America. For our clients, our overall cost to their total solution is relatively low compared to the high importance of our role. If we maintain fair pricing while emphasizing service and quality, we view that as a positive sign. We have had successes with both large clients and local accounts, which is encouraging. It's still early in the process, and if I were in your position, I would say that the real indicators will come in the third and fourth quarters, where we aim to close the gap further. We've already improved by 200 basis points and achieved the targets we set for the second quarter. We expect to see substantial progress in the third quarter, and by the fourth quarter, I believe we will be in a much more favorable position.

Operator, Operator

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

Matthew McKellar, Analyst

Just to follow up on Mark's question about mill reliability. Is there an opportunity here to accelerate reinvestment in your mills while the demand backdrop is still a bit soft? I recognize you probably can't pivot complex multiyear investment plans at a dime, but could you speak to what degree of flexibility you have here?

Andrew K. Silvernail, CEO

That's a great question, and we are really diving deep into the details. Mill reliability is not just about the $150 million; it’s significant, considering it's $300 million annualized. What matters even more is that it serves as a critical gateway to better financial performance. Improving mill reliability enables us to direct more business to our strategic, efficient, and profitable assets. Achieving that $300 million is important, but it also helps us secure additional business without relying on less efficient assets. A significant portion of our profit and cash loss occurs in that area, which underscores how vital this is for our success. We are fully aware of its importance, and rest assured, we are deeply focused on it. Regarding how quickly we can accelerate our progress, we are pushing hard but recognize we need to move faster. The turnaround we're undergoing right now has been a two-year journey, and we’ve only been committed to mill reliability for about six months, primarily spent diagnosing issues. The results thus far have come from only a few mills, not the entire system. Going forward, we need to ensure that we don’t invest in non-strategic assets because there simply isn’t enough funding available for that. We are focused on being self-sufficient and need to implement two key strategies: avoid funding non-strategic and short-term assets and reinvest incremental benefits back into the system over the next couple of years. Our plans, as discussed in the March Investor Day, reflect this approach. Currently, we are about $30 million to $50 million short of where I hoped we would be, primarily due to mill reliability issues. While I didn’t expect us to fully achieve that $150 million this year, we must make consistent progress. We need to see improvements in the upcoming quarters, focusing on redirecting our capital and having our best people work on our key assets.

Matthew McKellar, Analyst

That's great. And then second for me, at the Investor Day, I think you talked about exiting some nonstrategic export markets. Could you please just update us on how far along you are in that process today versus your expected end state?

Andrew K. Silvernail, CEO

We're making progress. As I mentioned during Investor Day and the first quarter call, not all exports are negative. It's important to analyze them carefully. There is a segment that is highly strategic since customers truly appreciate it, and it isn't just being used as a way to offload excess from our domestic mills. Often, exports serve as a dumping ground when domestic systems lack sufficient volume, which disrupts overall markets because those products eventually return in some form. We're working to exit the segment that serves as this dumping ground and are likely about halfway through the process. We're not finished yet, but it feels like we're making solid headway. However, we have to approach this strategically, as we can’t just abandon assets. We need to be wise in our approach. There is also a part of the export business that is valued, and we aim to maintain that, as it represents a strategic opportunity where customers will pay for our expertise. We need to distinguish between the segments we want and those we don't, and while it’s a bit subjective, it’s likely over 50% of what we want to exit.

Operator, Operator

Our next question is going to come from Philip Ng with Jefferies.

Philip H. Ng, Analyst

Well, Andy, you've had a few months under the hood now with DS Smith. When you look at the asset quality, cost curve and all that great stuff, both on the box plant, and I'm particularly curious on the mill side of things, how does the asset stack up from a cost curve standpoint? Is there work you can do on the optimization just because that market, Europe more broadly is obviously oversupplied at this point. Granted, you're integrated, you're in a much better spot, but I would imagine some of the nonintegrated guys are kind of in the world of hurt, right? So just kind of help us think through that opportunity set on the mill side. And then on a side note, I noticed in the bridge for 1Q to 2Q, DS Smith North America legacy operated at a $5 million loss on EBITDA. Is there something you can do to shore that up, hopefully, sometime this year?

Andrew K. Silvernail, CEO

We have a mixed situation regarding the quality of our assets, which we anticipated. Specifically, in our mill system, about 50% of the paper we use in our box system is manufactured in-house, while the other half is sold in other markets and is not primarily for our end products. Our mill system can be thought of in three parts: the paper we produce for our own use, the paper we produce for the market, and the paper we purchase externally to support our operations. We aim to enhance integration between our box products and paper manufacturing, similar to our approach in the United States. This integration is crucial for success, as companies that effectively drive this integration are outperforming those that rely on more commoditized paper products. Therefore, our strategy will focus on being an integrated and sustainable paper-based packaging company.

Philip H. Ng, Analyst

Okay. Any color on the North American DS Smith piece that's offering a lot? Does that get sorted out soon?

Andrew K. Silvernail, CEO

Yes, I feel really good about the integration of the DS Smith U.S. assets into our operations. Currently, the asset mix isn't fully integrated into our system yet. This means that when there's a lag in demand, unlike our other mill assets where we can adjust and balance things, we can't do that yet with DS Smith. Over time, we will optimize the asset set and the flow of volume to the appropriate mills. I have no long-term concerns about this situation. We are on track to achieve the synergies and benefits we discussed at Investor Day.

Philip H. Ng, Analyst

Okay. And then maybe piggybacking off of George's questions earlier. In the deck, you reiterated your EBITDA guidance for Packaging Solutions ex-cellulose, but you didn't give as much color on Europe or pulp. It's one number rather than a range. My question last quarter was as long as demand is steady in North America. You generally felt like the EBITDA guide where it was a little more elaborate last quarter, wouldn't be quite in the midpoint, but above the low end. Certainly, North America is lining up as expected. Europe seems a little choppier. The pulp business is a little choppier. So kind of give us some, I guess, broader parameters how we should think about the year unfolding.

Andrew K. Silvernail, CEO

Yes, I think you made some great points. If we look at the $3.8 billion run rate for the second half, that’s the target we really needed to hit, and we are on track. The fluctuations within that range have primarily been influenced by overall market volume, which has been down this year, particularly a decline of about 2% in the first quarter. Initially, we anticipated a slight market growth, but the reality has been 2 to 3 points worse than expected. This situation largely explains what we're seeing now. Regarding mill operations, while it could have provided some upside, we didn't fully capitalize on that potential, which is more about missed opportunity than a significant downside. Moving forward, I believe the marketplace has been affected by the macroeconomic conditions, but I do think we can capture improved opportunities in the future. We are within the range we laid out in March, and the focus now is on our top line and mill performance in North America. Europe is at the lower end of our expectations due to softer market conditions. Looking ahead to this time next year, I hope to see notable improvements in areas we can influence: gaining market share in North America, enhancing mill reliability, and reducing complexity in Europe. These factors will be what we are evaluated on in terms of progress, aside from market conditions.

Operator, Operator

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

Michael Andrew Roxland, Analyst

Congrats on all the progress. I just wanted to follow up with you regarding the 80/20 deployment in Europe. Obviously, you're moving at a very fast pace with some of the box plant closures. You mentioned streamlining in the subregions into 7 from 13. But you also just mentioned in response to Phil's question about getting after complexity in Europe. So can you comment on maybe what's next in terms of Europe? Is it mill closures? Is it mill consolidation? Is it further headcount reduction? Just to give us a sense of what's next in the list? And really, how has employee receptiveness been to the changes you're looking to deploy?

Andrew K. Silvernail, CEO

Thank you, Mike. The process of making structural changes in Europe is quite different. It's not just about the actions themselves, but there is a crucial consultation process that must be followed, which often slows things down. We need to navigate this carefully, considering legal and cultural aspects, and we are committed to doing the right thing throughout. In the U.K., we have embarked on delayering and have adhered to the necessary processes, which are still ongoing due to the consultation requirements. As a result, we can't pinpoint exact numbers yet, but we will proceed appropriately. We also have to strengthen the business. After 25 years working in Europe, I understand that many are hesitant to take the necessary steps for growth because the process can be challenging. This hesitation leads some companies to operate at subpar levels, often failing to meet their cost of capital, especially without a U.S. parent company. When we chose to acquire DS Smith, it was with the belief that we could fundamentally change that business and reinvest in its commercial strengths to drive growth. We are committed to this journey of restructuring in Europe, similar to what we've done in North America. We will invest in strategic assets and pursue customer opportunities that present chances for success. There's genuine excitement in making tough decisions because everyone wants to win, regardless of their location. We have a talented team at DS Smith, including Stefano and Paul, whom you may remember from Investor Day; they are driven and eager to succeed. However, we acknowledge that these decisions are extremely difficult and impact people's lives deeply. If those considerations don’t concern you, perhaps it's time to step away. We must focus on doing what's right, not only for our investors but also for developing sustainable and strong businesses. Sustainable businesses need reinvestment to thrive. If a business cannot stand alone, it limits reinvestment potential, leading to a slow decline, which we refuse to accept. We will invest in assets that have winning potential, enabling our people to achieve fulfilling lives and careers. I won't sugarcoat it; this process is hard and painful for those affected, and we take it very seriously. Yet, we will move forward because it is ultimately the best choice for the long-term health of the business, our employees, our customers, and in turn, our shareholders. Thank you for the question, Mike.

Michael Andrew Roxland, Analyst

I apologize for the technical difficulties. Regarding Europe, while there has been some improvement in pricing during the second half, we are also observing some pricing weakness. This could pose a risk in 2026. Can you clarify what European price assumptions have been included in your EBITDA projection of $1.8 billion to $2 billion for 2027? I'm trying to understand the potential risk to your EMEA EBITDA forecast given the recent price declines.

Andrew K. Silvernail, CEO

Yes. Looking back at last quarter, we mentioned a price increase that occurred earlier in the year, followed by a second one. We believed the first increase would be persistent, and all evidence suggests that it is indeed holding. Our projections are primarily based on this first increase. However, concerning the second increase, we are adopting a more cautious stance. While we aim to price accordingly based on market conditions, the market will ultimately guide that decision. At this moment, we haven't factored in anything related to the second price increase for this year or next year. I think that concludes the questions. I want to express my gratitude for your ongoing interest and support of IP. There’s a lot happening, and ultimately, we have several initiatives underway. I want to reiterate the three key points I made at the beginning of our discussion today. First, our transformation is progressing as planned. Second, the revenue from the second quarter met our expectations, although the market in North America and EMEA is weaker than we had anticipated. However, if I consider the intermediate and longer term, it seems there is potential for growth. We are aware of the need for improvement in our cost transformation and we are making good progress in many areas, especially with the mill system. We are just launching the 80/20 strategy in Europe, and it’s a priority for us. The teams are fully aware of this. Lastly, we are maintaining our EBITDA guidance. The increase from the second quarter to the third quarter is significant and we recognize how crucial this is for us. This is a pivotal moment for our organization, and we are committed to achieving our goals. Thank you once more for your support. I appreciate it and look forward to further discussions. Take care, everyone.

Operator, Operator

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