INTERNATIONAL PAPER CO /NEW/ Q3 FY2026 earnings call

• Strategic Execution: Management emphasized discipline across three pillars: advantaged cost position, superior customer experience, and high relative supply. Operational improvements in the North American mill system are accelerating, with productivity gains from initiatives like NORPAC and the Riverdale ramp-up contributing significantly.
• North America Operations: The company outpaced industry demand by approximately one percentage point in Q3. Key operational successes include the timely completion of roof repairs at Pine Hill and the absence of spending from the completed Riverdale machine conversion. However, headwinds included a 2% decline in box shipments year-over-year, impacted by West Coast fresh fruit/vegetable disruptions and softer protein demand.
• EMEA Operations: Performance improved sequentially despite challenging macroeconomic conditions and sharp rises in natural gas costs. Cost-out actions and tighter management of controllable costs helped mitigate margin pressure from higher energy and paper input costs.
• Separation Planning: Preparations for the separation of the EMEA business (DS Smith) are advancing. The company is evaluating a potential sale while continuing spinoff work in parallel. International Paper plans to retain an approximate 20% stake in the independent entity. A Capital Markets Day for DS Smith is scheduled for November 3rd.

Packaging Solutions North America: Adjusted EBITDA increased 56% sequentially to $663 million. Revenue growth was driven by price realization ($141 million favorable) and improved operational efficiency ($85 million favorable), partially offset by volume declines ($46 million unfavorable) due to West Coast agricultural disruptions and protein weakness, as well as higher inflation in diesel, OCC, and energy costs. Packaging Solutions EMEA: Adjusted EBITDA was $210 million, improving sequentially but below expectations. Results were supported by price realization ($27 million favorable) and cost-out actions ($76 million favorable), which mitigated the negative impact of soft demand (volume -$32 million unfavorable) and rising input costs, particularly natural gas and paper prices.

• Full Year 2026 North America Packaging: Adjusted EBITDA outlook lowered to $2.27 billion - $2.31 billion, representing a midpoint reduction of approximately $110 million from prior guidance due to higher diesel/distribution costs, volume pressure, and residual impacts from the Pine Hill event.
• Q4 2026 North America Packaging: Adjusted EBITDA expected to be $700 million - $740 million. This assumes favorable price/mix from continued price increases, favorable volume from seasonal demand, and slightly favorable operations/costs, partially offset by unfavorable input costs (diesel/OCC).
• Free Cash Flow: Full year 2026 free cash flow expected to be $100 million - $200 million. Q4 is expected to see a strong swing back to positive working capital as inventory builds normalize.
• 2027 Outlook: No specific financial guidance provided for 2027. Management expects continued above-trend productivity improvements and margin expansion, targeting long-term EBITDA margins in the low 20s%, though this is contingent on managing persistent inflationary pressures.

• Macroeconomic Headwinds: Persistent weak consumer confidence, inflation, and strained consumers are impacting demand, particularly in protein and lower-end consumer goods.
• Input Cost Volatility: Rising costs for diesel fuel, old corrugated containers (OCC), energy (natural gas), and employee medical benefits are pressuring margins. Energy markets remain volatile with geopolitical uncertainties.
• Operational Disruptions: Recent events such as the West Coast agricultural disruption, winter storms affecting inventory buildup, and the Pine Hill mill shutdown highlight ongoing operational risks.
• Regulatory and Separation Risks: The separation of the EMEA business involves complex UK regulatory requirements and potential M&A discussions, creating uncertainty around future capital allocation and stranded costs.

Q: Analyst asked about customer trends in Oct/Nov and whether aspirational 20%+ EBITDA margins for NA in 2027 are realistic given current pricing. / A: CEO stated NA market is stable/flat sequentially; West Coast ag recovery will take time, and protein is soft due to consumer trading down. Inflation remains the primary challenge. He affirmed that achieving >20% margins in 2027 is still possible, citing strong underlying operational momentum, closed facility synergies, and productivity gains from Riverdale/NORPAC, despite not providing formal 2027 guidance yet.

Q: Analyst asked if September price increase is baked into Q4 box prices and what other actions drive earnings higher next year besides facility closures. / A: CFO confirmed September increase is not fully baked in, flowing through late Q4. CEO explained that instead of large nameplate closures, the focus is on aggressive reinvestment in productivity, expecting trendline improvements into 2027. CFO added that eliminating tail costs from closed facilities (real estate sales) will continue to contribute meaningfully.

Q: Analyst asked about the impact of pricing on volume/demand and the long-term demand profile in NA given inflation. / A: CEO estimated long-term volume growth at 0.5%-1%. Currently, inflation pressures mid/lower-income consumers, keeping markets flat. He noted elevated energy costs will persist, requiring continued cost-outs and appropriate price adjustments. The 'bottom of the K' economy is hurting, creating pressure on customers who are making specific purchasing choices.

Q: Analyst asked about the components of the $100-$200M FCF guidance and why there seemed to be a gap from EBITDA. / A: CFO explained Q3 FCF was negative due to inventory catch-up after winter storm delays and legacy debt interest payments. For Q4, he expects stronger operating results, a significant positive swing in working capital as inventory normalizes, and the lowest CapEx quarter of the year, leading to a much stronger FCF profile.