International Paper Co. 2026 Q3 Earnings Call

Thank you. Good morning and good afternoon, everyone, and welcome to International Paper's third quarter 2026 earnings call. Our speakers this morning are Andy Silvernail, Chairman and Chief Executive Officer, and Lance Loeffler, Senior Vice President and Chief Financial Officer. Before we jump in, please note that this quarter, in light of the planned separation of the EMEA business and the subsequent U.K. regulatory requirements, we are no longer including our existing Packaging Solutions EMEA U.S. GAAP financial guidance in our guidance framework, and do not anticipate providing such guidance in the future. The EMEA management team will provide more information at the DS Smith plc Capital Markets Day on November 3, 2026. This will include details about the business model, growth strategy, and financial outlook following the separation. I'd also like to remind everyone 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. Information about these risks, uncertainties, and other factors that could cause actual results to differ materially from our 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. Reconciliation to U.S. GAAP financial measures are available on our website, along with our third quarter earnings press release and today's presentation slides. Now, let me turn it over to Andy Silvernail.

Thank you, Mandy. Good morning, good afternoon, everyone. Let's begin on slide three. In the third quarter, we improved execution and delivered an important inflection in earnings in an environment of weak consumer confidence and rising inflation. Our focus is to control what we can control and execute the three pillars of our strategy: an advantage class position, superior customer experience, and a high relative supply position in the markets we serve. In North America, we made meaningful progress improving productivity, particularly across our mill system. Better execution helped us deliver results above expectations and offset persistent inflation as we continue to serve customers and strengthen our position in the market. Given performance to date and expectations for Q4, we expect to outpace industry demand by approximately two percentage points for the full year. In terms of improved execution, Pine Hill is a tangible example of our progress.

We completed the roof repairs and restarted the mill ahead of schedule. The team's disciplined work and the commitment to safety allowed us to restore operations safely, limit disruption across the mill system, and minimize the impact on customer box shipments. I want to thank everybody involved. Great work. Packaging Solutions EMEA also improved sequentially, although results were below our expectations. Natural gas costs rose sharply and consumers remain cautious. Realization of previously published paper price increases are on track and cost-out actions help mitigate rising input costs. We are also advancing preparations to separate the EMEA business, which I'll discuss later in the call. Across both businesses, the progress is encouraging, but there's more work to do. We expect the current market conditions to persist in the fourth quarter and into 2027.

Our priorities remain clear: execute with discipline, manage what we can control, and strengthen the three pillars of our strategy. I'm on slide 4. Let me spend a minute on demand in North America. Our box shipments declined approximately 2% year-over-year in the third quarter, one point better than our estimate of industry demand. In the quarter, we experienced headwinds from the disruption in the West Coast fresh fruit and vegetable business and softness in protein that have come from smaller livestock herds, inflation, and a strained consumer. In the fourth quarter, we expect to continue to grow above market, along with modest recovery in West Coast agriculture, and we expect to see the traditional seasonal increase. We expect to outperform the industry by more than 1% in the fourth quarter and by approximately 2% for the full year.

With that, I'll turn it over to Lance to discuss third quarter results and outlook in more detail.

Thanks, Andy. Turning to slide 5 and our enterprise results for the third quarter. Revenue improved sequentially, primarily through realization of previously published price increases. In EMEA, softer demand and a challenging macroeconomic environment continued to weigh on sales. Earnings and margins improved significantly from the second quarter. In North America, the main drivers were price realization, lower planned outage activity, and the absence of spending associated with the now-completed Riverdale machine conversion. Higher-than-expected inflation and softer demand partially offset those benefits. In EMEA, we continued to face softer demand and rising input costs. The team responded by accelerating cost-out actions, which helped mitigate the impact of these pressures. Third quarter adjusted EBITDA increased to $843 million, including $37 million of corporate expense. Of that expense, $30 million was attributable to higher insurance costs.

Our adjusted EBITDA margin improved nearly 400 basis points sequentially to 13.6%, and adjusted operating earnings per share was $0.37. Despite the improvement in earnings, free cash flow was negative $267 million in the quarter. This reflected cash payments for the second quarter's heavy maintenance spending, annual interest payments on legacy DS Smith debt, and an inventory build following our planned outage season. For the full year, we expect to generate free cash flow of approximately $100 million-$200 million. Turning to slide six, Packaging Solutions North America increased adjusted EBITDA by 56% sequentially. Price realization and stronger operating performance drove the improvement despite softer demand and higher input costs. Price and mix were $141 million favorable, reflecting faster realization of previously published price increases announced through June. Volume was $46 million unfavorable.

The benefit of one additional shipping day was more than offset by softer demand, including food safety-related disruption in West Coast agriculture, weakness in protein, seasonally lower daily demand, and lower exports. Operations and costs were $85 million favorable. Improved mill efficiency was the key driver. Initial benefits from the Riverdale ramp-up and the absence of spending associated with the completed machine conversion also contributed. We also experienced additional benefits from a full quarter of NORPAC earnings, our 80/20 strategic initiatives, and lower ongoing mill costs. Inflation was higher than we anticipated during the third quarter. Higher diesel, OCC, and energy costs drove a $55 million unfavorable impact on input costs. The temporary Pine Hill shutdown had a $20 million unfavorable impact in the quarter, including roof repairs and business interruption that were partially offset by insurance recovery. We received most of the expected insurance recovery during the quarter.

In total, Packaging Solutions North America delivered $663 million of adjusted EBITDA in the third quarter. Moving to our fourth quarter outlook for Packaging Solutions North America on Slide seven. Price and mix are expected to be favorable, driven by the continued realization of previously published price increases. The September published price increase is expected to begin flowing through late in the fourth quarter based on our normal realization patterns. Volume is expected to be favorable as seasonally higher daily demand is expected to more than offset two fewer shipping days. Operations and costs are expected to be slightly favorable sequentially, supported by the continued Riverdale ramp-up, NORPAC synergies, and the absence of the third quarter Pine Hill expense. As a reminder, we also expect this to be the final quarter of Ixtac insurance proceeds, as those benefits will not repeat in 2027.

Seasonally higher labor and employee medical benefit costs are also expected to partially offset these benefits. Our outlook assumes continued inflationary pressure, with input costs expected to be unfavorable, primarily driven by higher diesel and OCC costs. As noted in the footnotes, our diesel assumptions reflect futures market pricing and US Department of Energy projections published as of September 29th. These items result in an adjusted EBITDA outlook for Packaging Solutions North America of approximately $700 million-$740 million for the fourth quarter. Moving to slide eight, I'd like to take you through our updated full-year 2026 outlook for our Packaging Solutions North America business. The third quarter improvement was meaningful and our execution confidence and output is improving, but higher inflation and weaker volume expectations have reduced our full-year outlook. Our full-year adjusted EBITDA outlook is moving to $2.27 billion-$2.31 billion.

Since our second quarter call, incremental headwinds of approximately $145 million have emerged. The largest drivers are higher diesel fuel and distribution costs, along with increased volume pressure. Those headwinds also include approximately $20 million from the third quarter Ixtac event, net of insurance recovery, which was not included in our prior outlook. The balance primarily reflects higher employee medical costs and an outage move from the first quarter of 2027 into the fourth quarter of this year. Partially offsetting these headwinds is $35 million of price benefit from faster realization of the June increase and partial realization of the September increase. Together, these items reduce the midpoint of our full-year North America packaging outlook by approximately $110 million. Our 80/20 initiatives remain on track.

We delivered a significant improvement in the third quarter and expect further progress in the fourth quarter from productivity gains, the Riverdale ramp-up, and NORPAC synergies. Many of these actions supporting that improvement are already complete and contributing to results. That execution gives us confidence in the expected fourth quarter step-up even as demand and inflation remain challenging. Turning to Packaging Solutions EMEA on slide 9, third quarter results improved sequentially but were below our expectations, reflecting continued softness in market demand and persistent cost inflation. Price and mix were $27 million favorable sequentially, primarily reflecting the pass-through of previously published paper price increases and higher prices on external paper sales. Higher paper costs pressured box margins, partially offsetting these benefits. Volume was $32 million unfavorable sequentially as demand across the business remained soft and fell below our expectations.