International Paper Aktie

All right, guys. I'm Phil Ng, Jefferies Paper and Packaging analyst. Bright and early to kick things off. Delighted to have the International Paper Company team with us. We got Andy Silvernail, obviously, CEO of the company. But also in the audience, we got Lance, CFO; Mandi and Josh on the IR side of things. Well, Andy, it's a crazy world out there. It would be helpful just kind of kick things off. Just let us know what you're seeing.

Yes. Well, thank you. Thank you, Phil, for having us, and thank you all for all being here. And it's -- I think this is the third time we've been back since I'm CEO of IP, which goes fast. So thank you. I think this is a great conference. I guess I'd start off with a few things. One, just kind of talking about just a little bit about the macro, which we all are bathed in every single day. But more importantly, the goal of where we're headed and very much so kind of what we're doing to control our own destiny in this kind of crazy world.

So obviously, the world that we're living in is sitting, I think of as a few things. One is relative to the forces of trade tariffs and conflict on both the demand side and inflation side. We all know those challenges that are out there, and they're undeniable. At the same time, what it does is it sets the context for how you can compete. And that to me is really the most important thing is whatever given period of time when the macro gets distorted for whatever reason. Throughout my career, the way I have dealt with that is you grab on to those things that you can absolutely control and how do you drive value and how do you drive competitive advantage and how do you drive a better position over time relative to that.

And we don't know what's going to happen relative to the business. Obviously, in our world, as we kind of see that lower-end consumer struggling, that's an issue relative to overall packaging demand. And then on the inflationary side, energy, obviously, is the biggest piece. We're most exposed in Europe when it comes to that. We produce 70% of our own energy in the U.S., although we do have exposure to diesel. And obviously, with diesel where it is, the number is about $95 million per dollar a gallon of diesel, if you kind of think about that in terms of the impact. So the inflationary pressures are there. Obviously, pricing has moved to deal with the vast majority of that. But what we've seen in the last 18 months or so is really a balancing of inflation being covered by price.

And so the incremental margin that you'd like to see from that has really been pushed into 2027, as our efforts to drive down our cost structure, which have been incredibly aggressive, have offset an awful lot of that. And so we have obviously seen over the last couple of years, pretty substantial incremental margin improvement on a dollar basis and on a rate basis. And we expect to see that as we move into the third and the fourth quarter and very much so into next year. So really grabbing on to those controllables.

The first around that is really just the absolute cost structure. So I think many of you who know International Paper well, the last 2 years, we've taken out an enormous number of latent assets of unproductive assets. We've taken those closures out. We've been reinvested very aggressively back into our mill and our converting systems to drive productivity, and we're certainly seeing the gains in that. And we'll continue to do that. Our belief is that winning just really comes down to 3 interconnected parts. The first one is having that best cost position. And so driving that best cost position, which doesn't mean a low price position, absolutely does not mean that. What it means is our ability to invest at any time in the cycle.

So any time to drive investment back into the business to continue to lower that cost position and frankly, to reinvest back into the front end of the business, what we call the customer experience. So how they experience us in terms of reliability, quality, service, innovation. As you see what customers care about, those things are not only table stakes, they really drive the willingness to pay and switching costs. And so a huge investment has gone back into the business around that, and we've seen very substantial moves in terms of where we stand in customer satisfaction rankings, and we've moved very, very nicely as we've done that in North America.

And then on the relative market share side, it's important for us to build density in the markets that we deeply care about. And those are local markets kind of by MSA per se and in terms of the overall network strategy on converting and in our mill systems in North America. So very happy with the progress there that we're driving in the face of that tough macro. And then in Europe, right, this is really all about 2 things right now. The first one is the restructuring that's happening in Europe. So you've seen the information. We're going to close upwards of 40 facilities in total and about 4,000 people will exit the organization here since the start of that, which is a very aggressive restructuring in Europe, and I think absolutely necessary.

And while anyone who's been through that knows that those things don't go without their bumps, it's gone very well. And we're getting the costs out of the system that we need to. And that will be very important for the long-term value creation of that company that we're going to spin out here over the next handful of months. And so we're excited about that spin that is on track. Really, in terms of the normal milestones and pathways to that process, they're moving along very well. We will certainly be within that 12- to 15-month time frame that we talked about in the past and no real major updates around that, except the process is moving forward. And you'll see that with Tim and Vincent are here, the future CEO and CFO. They're here presenting at the conference to socialize that even more. So they're here doing that.

So hopefully, that gives some confidence that this process is moving forward as we had hoped. So the last thing I'd leave you with before I turn it to Phil is what we will become. And the goal is to become for International Paper to be the largest scaled, most present player in the North American market for packaging, for paper-based packaging. And that's a great place to be. We like that business. The noise that has been around the business in terms of restructuring, in terms of asset sales, that will come to a close where we'll start really driving the business on a normalized basis around those 3 pillars of strategy, driving that cost position via productivity, reinvesting back into the front end of the business around organic growth and really around building relative market share in those markets that we care about. So we're excited to get there. It's been a long journey and a fast journey, and we're very proud of what we've done.

And so with that, Phil, I'll turn it to you.

Great. I think it's pretty well documented in terms of the investments you've made on footprint, closing high-cost capacity. But on the commercial side, at least the dinner we hosted with you last night, was an area that you talked about you're making investments and how you're trying to further realign incentive comps to enforce proper behavior. Can you expand on that a little bit, what you guys have done thus far, some of the opportunities going forward and how you want to rejigger incentive comp even more?

Yes. So when I joined the business, my observation was that we very much had a sales team that was kind of the classic gatherers, not hunters. That's the way I would put that. In terms of incentive comp, how we had built people into those organizations, the tools that they had were really around trying to sustain or maintain. They weren't about profitable growth going forward. So a few things that we've changed pretty aggressively. Incentive compensation has moved from being a very heavily guaranteed model to a very heavily weighted incentive-based model. That's a very important change. We've changed out a huge number of our sales force and added significantly to that sales force to the tune of about 40%. And we have started to give them tools that they didn't necessarily have, nothing that's groundbreaking in our world.

But in terms of tools around discipline, around pipelining and pricing and understanding that market segmentation. And 80/20, the methodology plays a very important role in that segmentation and understanding how you compensate and how you drive into the business. And we'll continue to do that. I think that modernization, certainly the utilization of data tools -- AI-driven data tools are incredibly important on the commercial side of the business from pricing to design, to configurations, to demand planning, you name that, to support.

There are incredible tools that we're investing in that are certainly moving that forward. So I feel really good about that. And the important part there, Phil, is that over the long term, right, we know that the business, we understand kind of what the slope of the line in terms of volume growth is going to be. And the variables are going to be our ability to take market share and our ability to capture price as tightly as we possibly can. And so those are really the investments that we're making on the front end.

Okay. Let's focus on some short-term stuff, and I promise we'll drill back on bigger picture, longer-term thoughts. But certainly from a macro standpoint, the headline is still pretty choppy, rates moving higher, oil prices, diesel prices. Curious to hear what you're seeing out there from a demand standpoint. I know you reined in your outlook in terms of industry trends last quarter. How are trends tracked July, August, whether it's the North American market or Europe?

Yes. So if you -- I mean, obviously, all the news that we all read and see and we dig into around consumer sentiment in the U.S. and Europe have been hit very hard the last 2 years relative to trade, to inflation, to the cost of energy. We've all seen that news. And in our estimation over 2.5 years, it's cost about 5 points of aggregate demand. That's my point of view on that. And I think demand will be muted going into '27 and throughout '27, assuming that we don't get a major relief from some of these pressures.

So if you just kind of think of it in the broad scale of the K-shaped economy that we all talk about, that bottom of that K is being squeezed, right? They're being squeezed in terms of their available spending, and they're having to make life choices that the people that I grew up with in a small town in Maine, I went back this summer, and they're having a very different conversation than the conversations that we're having in this room around gas in my truck, buy a shirt. Those aren't conversations that this group has, but that is what most -- those are the conversations most people have. And so we are seeing that the demand. So what I would say is it's steady, but it's soft, right? It's softer in Europe than it is in the U.S. So we have to be mindful of that.

And that is why we've been so aggressive around cost structure, right? So the ability to take that out to accelerate that. And so I feel like we've gotten the right balance there, but that is a wildcard as I kind of look forward. Our expectation is that the balance of this year is kind of flattish in North America. I think people saw the European consumer spending numbers that came out here in July, and they were pretty weak around retail spending and things like that. And we saw that certainly in our demand patterns. And so we expect it to be kind of squishy until we get some relief from some of these external forces. So that just comes back again and again to take control of what you can control. And that's really around the cost structure, our ability to take market share and our ability to get very efficient with the use of capital.

Got you. But this doesn't sound too different from what you kind of outlooked post 2Q? Or are you seeing a downdraft in activity?

Yes. There are 2 things. The general answer is yes, it's very consistent. The 2 places that I'd say are net negatives are the consumer spending numbers that we're seeing out of Europe, right? That's negative. And then obviously, what we've seen in the world of fruits and vegetables coming out of the West Coast. Those are things that are going to be -- on a trend basis, they'll look negative. There's no doubt about it. But I think from the perspective of the long-term trend, I don't know that they've changed that very much.

Okay. Well, in North America, at least, while demand feels pretty squishy, but as you pointed out, steady, supply still remains pretty tight from what I understand, especially with Pine Hill down, but it's up and running now. But help us kind of think through what you're seeing in the marketplace right now in North America and how you kind of see that supply dynamic playing out the rest of the year?

Yes. So the market is tight. We've gone from, as you know, from being very long in terms of our paper position 2, 2.5 years ago to being modestly short in our paper position because of the capacity, the high cost, basically under cost of capital assets that we had. And so we've changed that dynamic for ourselves pretty significantly. Now obviously, given our footprint, it's impacted the industry. And so it is tight, and I expect it will be tight. And I think that's a good thing because I think the industry -- each company on their own, having the discipline to make money is very important. And I'm not sure that the companies had that discipline in the past. And I think that's a good thing across the board.

And so from our perspective, what you should expect to see from us on an ongoing basis is being really around a pretty tight range around being long and short paper. I don't see that -- I don't see us being wildly on one end or the other into the future. I really think that, that balance is important. I think it's what drives really good discipline, operating discipline in the company. I think when you have excess capacity, it drives an inherent, I hate to use the term, it's kind of aggressive, but laziness that isn't good. And so having constraints and it drives innovation, it drives productivity.

And in this next phase, post separation, one of the most important things is going to be our ability to drive year in and year out productivity in this business. The ability to drive net productivity in terms of human capital and in terms of assets, that's going to be very important in the overall equation. And so I like where we are in terms of getting the asset base to the point where that constraint is natural and it's driving that. And then the investments that we've been making are starting to really layer in now. So if you recall, a couple of years ago, we announced a major change in our capital philosophy where we effectively doubled the overall capital spending in North America.

And it's more than just doubled the spending because it's on fewer assets. So the dollars are twice as much, but the assets are fewer. So the dollars per asset has actually gone up substantially. Some of that is eliminating a whole bunch of kind, it is kind of big holes that we've dug over time in terms of poor assets. We've exited those assets, whether they're mills or the box plants. So those -- that giant sucking sound towards money that didn't drive a return. We've closed that off, which is great. And we've made reinvestments back into places like Mansfield, like Riverdale, buying of NORPAC, the acquisition of the Dover Box plant.

All of those things are allowing us to move capital from high-cost, low-return assets and segments of the market to high return, much lower cost segments of the market that we really like. So we've seen that asset shift. But really importantly, what you will see from International Paper is incredible asset discipline and investment discipline. You are going to see that. We are going to push our cost curve constantly to the right where we're moving out of high-cost assets and into lower-cost assets, and that drives that best cost position, which allows us to reinvest on the front end of the business.

That's a perfect segue, Andy. That was my next question. That strategy just makes perfect sense medium, longer term, but it's been choppy, right, outside the macro, tariffs, the war and all this inflation. As you take out that cost out and you ramp up new capacity, you don't necessarily get that tailwind from the investments, right? So it's been really hard to forecast, model, and it's just been noisy. When we exit, I believe a lot of the start-up costs you're going to incur this year, kind of help us think through as you position yourselves for 2027, will a lot of the pain be in '26? And could you start seeing some points on the board with these investments you made that you highlighted?

Well, I think the bottom line is we're seeing big points on the board already. The issue is exactly what you pointed out, Phil, which is this macro noise around demand and inflation. At the end of the day, if you really kind of do the math of it, inflation and pricing have effectively offset themselves over the last 2 years, right? So there's kind of been no movement. And so if you look at the $700 million move in profitability and EBITDA in North America, that's effectively all cost out, right? If you look at those numbers and you balance off the inflation. So I feel really good about that movement there.

How things layer in? So we've gone through kind of a really, really aggressive set of 2 years of asset sales, asset closures, reinvestment. To your point, the reinvestment is just starting to layer in now, right? I'll give an example, I was out in Phoenix here earlier this year, they're putting in a new converter this year, right? So that's a business that, that in and of itself is going to radically change the productivity profile and the responsiveness profile of that asset, that business in that region, which is an important region. And that's one of 80 examples across the company. So if you look across our fleet of facilities, 80 different facilities are going to get some kind of major asset investment or has been over the last 2 years and will into the future.

So it's a major layering, and we're just starting to see the impacts of that now. So what you'll experience is -- and I think hopefully, investors will like this a lot, we're going to see the volatility of stuff that we interact and we control, that amount of change is just going to radically slow down, right? Because asset sales and asset closures and things like that, those big things are coming to an end. And so as we become a singular North American packaging entity, my goal is to take this variability out, right? I can't take the market variability out, but I certainly can take our variability out. And because of our size, we can then influence the market variability. And so I think those are really important things that are going to happen here as we go into '27 post separation.

Okay. All right. Looking forward to 2027, cleaner year, hopefully. In terms of inflation, I mean, you kind of highlighted earlier, Andy, energy prices in Europe, diesel prices in the U.S. I think your framework you guys gave from a guidance standpoint assumed margins would improve in fourth quarter with that price/cost dynamic. I mean, diesel prices have shot up. Is that still a good framework in terms of things that you can control today?

Yes. I really like -- if you look at North America, even with the volatility, I really like how our execution is playing out in terms of our ability to get that cost out, deal with the volatility. Again, in the U.S., our exposure to the energy volatility that we're all experiencing is really around diesel and how that factors into transportation. So I think, Lance, what you quoted was $1 a diesel price is about $95 million of headwind, right, or tailwind on an annualized basis if it goes one way or the other. So how much is diesel up in the last 6 months? $2, somewhere in that range. So you're talking $150 million, $200 million of headwind just in diesel in that.

But that being said, that's pretty isolated because in the U.S., we make 70% of our own power, and most of the -- the rest of it comes from natural gas. And so in terms of energy inflation in and of itself in North America, it's really the exposure to diesel. I think that's a fair way to put that. Other parts of inflation are still there, though, right? So we've seen what's happened to OCC and how that's moved. And obviously, we all know the variability in OCC over time. We do see that gliding down some now, which is good. So that volatility and variability, it's not a small number. It can be a big number. And literally, if you look at this year alone, you're talking about, what, $400 million, $500 million swing in this year alone.

And so last night at dinner, I was asked what I thought the exposure was into 2027 around inflation. And I said, well, first of all, you got to pick your pieces, but if I pick the bookends, I can see $400 million on one way or the other depending upon the -- how dramatic you want to pick your inflation mixes. And then you got to think about what will happen to price kind of from there. Europe is a little different, right? So there's a lot less volatility in the U.S. Europe is different, it's different because you have a lot more energy volatility, right? The natural gas cost and the volatility of natural gas has been higher. It's really moved aggressively in the last month or so. And that's just kind of a reality. And so you have the volatility of the energy side that we have to push against.

And pricing, as you have seen, has been moving very positively in the market. That's a good thing, but the lag time is longer. It takes longer from moving from paper pricing to how it hits box pricing in Europe. We very much expect to see that start to play through in the fourth quarter and into next year. So those are very positive things. So that's some tailwind. But you definitely have the headwind of energy volatility and how that's impacting consumer spending. So more volatility in Europe, which means we're going even more aggressive around cost. In the U.S., some volatility, but we really like how things are moving along in terms of our ability to execute.

And that $400 million to $500 million variability number you're talking about, Andy, is that a North America phenomenon or North America and Europe combined?

I'm just going to talk North America as I think about the bookends of how you can hit the P&L, if you kind of take that midpoint, I could see $200 million on either side of that midpoint, right? So that's how I kind of think about that volatility of that midpoint. In Europe, it just honestly is harder to call because of the volatility of energy prices and on the consumer side. And so the focus in Europe really is -- basically, it's a redo of what we've done in the U.S., which is get the assets to the right place, right? Get the right kind of assets in the right kind of cost position.

Some of you may have seen we announced last week that we're taking down a paper machine in one of our -- in Kemsley in the U.K. And so that asset structure around there is all about what assets drive attractive return on invested capital. And so getting there at the end of the day, DS Smith had really never done an integration of the acquisitions that they've done over the years, and so we're accelerating all those parts. I really like the execution, but you can't do that kind of execution and have it not be messy. It's impossible.

Inflation is unpredictable, Andy, as you kind of called out, but with a price increase in the marketplace, assuming we get some traction, is the expectation you'll see a little more of it in 2027, just given the productivity gains plus pricing?

Well, I think if you're asking the question, is the announced pricing going to have incremental profit impact for '27, the answer is yes, right? If you're asking if I know where pricing is going to go or predict it, no. And so the way I look at it is, obviously, we have a major carryover from the pricing that's already been announced and published, and we'll wait and see here in September and October, what happens to the most recent price increases that were implemented on the 1st. But net-net, our expectation is that, that is going to have -- is going to be a major tailwind in 2027.

Okay. That's what I was looking for. On the commercial front, service and reliability and quality are 3 things you have said they are must since you've taken on the role. Can you expand on that a little bit more and what that kind of impact has had on the commercial side of things? Because we've seen box -- your box demand outpaced the market. Is there still room to go as we look out to 2027? And I think you had some business up for bid, or you were in the mix for some larger business. So help us kind of think through that.

Yes. So I think -- so first of all, when you look at the Pareto of what customers care about, it's very clear and it's very consistent that reliability is always #1, right? So we can't shut them down. That's first and foremost. And obviously, quality goes hand-in-hand with that, but reliability, quality, service and then you get to price and then innovation comes after that. And so the way to think of it is, if you segment out the market, I kind of think of 3 big segments of the marketplace. You've got the big middle, which is really where we tend to live, right? So you're probably 70-ish percent of that marketplace that are large regional or national accounts in North America. That's kind of our sweet spot. Then you've got the hyperlocal piece of the business that's kind of 20-ish percent of the marketplace.

We obviously play there, but that tends to be a much more localized strategy market by market. So greater New York market, that would be choices around for that strategic business unit, not at the corporate level that we're directing assets and whatnot. And that's a really heavy cost to serve. It's a higher price market, but it's a very high cost to serve market. Returns on capital probably look similar to that big middle. And then the last piece is really that price seeker market, that's probably 10-ish percent. Large customers, they do not have demanding applications, and they tend to price seek all the time.

And my perspective of that is that big middle, they really do care about reliability, quality and service, and you can't let them down. And it's worth somewhere between 5 and 15 points of premium if you deliver day in and day out, right? Because that's what they care about. And the switching cost to pick up a tens of million dollars of accounts where you're doing business with dozens or maybe 30 or 40 of our plants and 30, 40 of our customer plants, that is not an easy -- that is not low switching cost. That is pretty high switching costs. And so our desire is to create an environment where we're investing so the customer doesn't have to. They can take their resources and put them in other places to drive their ultimate goals. And so we become a nonissue to them, and we become an easy player for them in terms of driving their cost structure down, improving their service and reliability, innovating where it makes sense.

And so there's a lot of focus on that in and of itself. In that price seeker side of the market, it's not that we won't do business with them. It's that we're going to do it on our terms. We're not going to do it because we're chasing incremental volume for what I kind of laughingly call the sugar high, which is really high incremental margins when you get it, but eventually, you have to capacitize it. You have to reinvest back in it, and those margins don't look very attractive. And so that piece of the business, given what we have chosen to do and what others have chosen to do, is probably has a harder game to play of going and seeking price in places without excess capacity in the marketplace.

And then finally, that question about our ability to grow longer term. As we look into '27, I feel pretty good about our ability to grow above market. We do have between now and the end of the year, we've got a couple of bigger things that we've been working on that we'll see what that means for -- ultimately for '27 and beyond for some of those bigger things. So really no new news around that.

Okay. Super. I think you've always talked about net productivity, aspirations of a number and game plan. Talk to us where you are with that journey because you kind of alluded to the mills having operated as well as you would like. There's money left on the table. So just kind of give us a little more color where you are in that journey.

Yes. So I think ultimately, this is a business that has to drive net productivity. And what do I mean by that? I mean the ability of assets and people to drive incremental volume without incremental cost besides the normal kind of inflationary costs that they're going to experience themselves. And that's an equation in our business that works incredibly well. We've blown away in the last couple of years what I think is a sustainable rate because we've been taking out big chunks of assets, and we're going to make big investments. So we'll be well into above our targets that we would have for the next couple of years because there's just a lot to pick up off the ground, so to speak.

But ongoing, we've got to invest year in and year out. And I've been asked the question a lot about what does that CapEx cycle look like? And I want to debunk a couple of things. Number one, the CapEx that we're in, which is kind of 9%, 9.5% of sales right now, we think that goes on for a couple more years. And then it settles down into about a 7.5% ongoing range, which I think is highly competitive and allows us to take advantage of our scale and our reach in the marketplace.

But I think that's really where it sets over a period of time. What's going to happen between now, what's happened and what will happen over the next couple of years is really the modernization of our entire mill fleet and our converting fleet and to really position them to drive significant changes like we've already done and that step function change we want again to modernize and then to prepare for that ongoing productivity over time.

Is there an internal target in terms of net productivity normalization, long-term targets?

There is, but we haven't laid it out for -- in terms of a framework, but we certainly will do that in the future, but we want to be in a position to drive that consistently year in, year out.

Okay. And where are you in terms of the modernization in terms of the mills and whatnot? Because you've taken a lot of high cost.

You said monetization? What do you mean by that?

You talked about investing in the mills and getting in a better spot, so it's modernized, you have an awesome fleet and whatnot.

Modernization. Sorry, I apologize, Phil. Yes. I think we're still pretty early innings. If you look at the investments that we made. Obviously, Riverdale was huge. That's ramping very, very nicely now. We've made really substantial gains at Mansfield over the last couple of years. NORPAC is going to be a great place to get very high returns for relatively low dollars and our ability to expand the overall capacity if we choose to in the business. And then we can understand kind of where our cost continuum is and how do we still take out higher cost parts of the business and invest in lower parts of the business. So I think we're still pretty early stage, Phil.

Okay, great. What about the box side of things? Where are you with that journey?

So we've -- in total now, gosh, I want to say it's about 14%, 15% of the assets have been taken out of the system at this stage. And as I mentioned before, the huge number of investments that are going in, in terms of the number of plants that's happening. So we're in the midst of that. We'll still have some consolidations here and there. But the easy stuff where we had old assets, too much capacity, that's really gone. And now it's a function of that productivity puzzle. So as you drive productivity, the ability to consolidate, the ability to modernize, that will be an ongoing journey.

Okay. The tightness in supply for the mill side is well documented. Any perspective in terms of how the industry is set up in terms of box capacity, and it's very local and regional. So any perspective on that front would be helpful. And the cost curve as well because I think there's parts of the country where capacity is very high cost.

Yes. You've got -- I mean, at the end of the day, in the converting side of it, it's an incredibly local part of the business. And I think some folks don't understand how local it really is. Importantly, right, a box once it's formed and it lays flat does not ship economically. And so once you pass kind of a 200- or 300-mile radius, you really start to eat in dramatically into the profit structure of the business. And so that local nature of the converting business really matters. And so those investments that we're making around building the reliability and quality innovation locally and the ability to service that customer in that is really important because it is such a local business.

That being said, there are pockets of the country that have more capacity, less capacity. And it's not unique to us. It's not unique to anybody. It's really the market itself. And so for us, it's around where do we have density and where do we want to double down on our investments, where do we want to rationalize and drive that cost base more? So it's going to be market by market. We've outlined about 40 different markets in the U.S., and that's kind of how we manage it is by treating each of them as a business. Those tend to have multiple box plants. So they're going to have anywhere from 1 to 4 box plants in one of those local markets. So that's one where we like our competitive position. And like I said before, it's going to be consistent driving our productivity.

There was a view there is just a lot of excess capacity in the box network for the broader industry. Any perspective where we are?

There are pockets that have too much capacity. The Northeast is an example of that, right, that has too much capacity. There are a few others, if I were to say, like the Dallas market, as an example, has too much. But you're starting to see that tighten, also generally. So from the actions we've taken, I think from discipline from the market itself, it has not been and will never be as tight as the paper side of the business, don't expect it to be. It's a lower cost entry point. The bottleneck point is really around paper and that integrated paper play.

Okay. Well, Andy, this was super helpful. I really appreciate your thoughts as always. Thank you so much.

Thank you, guys. Appreciate it. Take care.

Thank you.

Good morning, and thank you for standing by. Welcome to International Paper's Second Quarter 2026 Earnings Call. [Operator Instructions] It is now my pleasure to turn the call over to Mandi Gilliland, Senior Director of Investor Relation. The floor is yours.

Thank you. Good morning, and good afternoon, and thank you for joining International Paper's Second 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.

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 risks and uncertainties 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.

So now let me turn it over to Andy Silvernail.

Thanks, Mandy. Good morning, good afternoon, everyone. Let's begin on Slide 3. During the past few quarters, we've been clear about our focus on improved execution. [indiscernible] in the second quarter showed tangible progress, reflecting the commitment of our team to deliver in a complex operating environment. Across the company, we delivered strong operational performance, successfully executed a particularly heavy outage schedule and advanced key strategic investments.

Also, we continue taking cost and complexity out of the business. producing results that exceeded our expectations for the quarter. In North America, we continued our trend of year-over-year box volume growth, and we expect to outpace the industry again this quarter. We also improved our overall mill performance and completed the Riverdale machine conversion on time. In EMEA, we accelerated cost-out actions and advanced our transformational investments.

We also continued making steady progress toward the planned separation of our EMEA Packaging business. More broadly, the priorities we established for 2026, improving reliability, simplifying the business, strengthening our cost structure and investing where we can create the most value are progressing as expected and reinforcing the momentum we're seeing. We still have work to do, but we're seeing better execution and improving performance as we build a stronger international paper.

Let's take a closer look at the quarter. I'm on Slide 4. One of the clear signs we're making progress is our ability to grow above the market. In the second quarter, our box volumes in North America increased 1.7% year-over-year on a daily basis, and we expect to outpace the industry by approximately 2% for the full year. That growth is a direct result of the work we've done to strengthen customer relationships and win new business.

We believe a superior customer experience is an important differentiator for International Paper. We're helping customers improve performance, innovate faster and grow their businesses. One example of our customer focus and action is the investment we made in our Aurora, Illinois commercial performance and Innovation Center. At Aurora, we've created a place where our customers can work side by side with our designers, engineers and technical experts to solve their toughest problems, innovate together and bring new packaging solutions to market faster.

I'm now moving to Slide 5. We're bringing the same intensity to our internal operations, which enables another strategic pillar and advantaged cost position. This slide shows the impact of the actions we've been taking to strengthen our mill system. Mill performance has improved by approximately 500 basis points year-over-year. More importantly, we're seeing consistent improvement in capacity utilization as the benefits of our focused efforts begin to compound. We've simplified the mill system and reduced costs by executing a series of footprint actions while directing capital to the assets and projects where it will have the greatest impact.

We're also beginning to see returns from targeted investments in reliability and productivity. All of our actions have been driven by a win the-day mentality that is enabled by discipline of daily management. The result is a leaner, more efficient mill system that is generating more output from a stronger and more capable asset base. This trend is encouraging and reinforces our confidence that the actions we're taking are delivering the results we expect.

On the next slide, we'll take a closer look at some of the key investments helping to drive our improvement. I'm on Slide 6. We're making focused investments across our system to upgrade our portfolio and drive reliability, productivity and growth. This is 80/20 in action. We've made tough choices to exit areas where we weren't delivering adequate returns so we can reinvest that capital where we see the greatest opportunity to win. The 4 investments shown here are examples of that approach. Each one strengthens our competitive position, supports our customers and drives financial returns in the mid-teens to mid-20s.

Let's start with the Orpak mill. Before turning to the strategic rationale for NorPac, I want to acknowledge the strategy that occurred at the neighboring Nippon facility in May. Our thoughts are with those directly impacted and with the entire Longview community, including our own Norpac employees who call that community home. Safety above all else is our core value, and this is a sobering reminder of why we must be relentless in that commitment.

Against that backdrop, we completed the NORPAC acquisition in June. The mill production was temporarily slowed during the DuPont investigation, but we responded quickly to address the reduced steam supply from their facility. As a result, the current mill operations have been returned to pre-incident level. [indiscernible] is an excellent fit for International Paper. It expands our ability to serve growing demand for lightweight, high-performance packaging grades, reduces distribution costs for the West Coast, lowers our total cost position and strengthens our overall mill system.

At Riverdale, the machine conversion is complete and the ramp-up is progressing as expected. We anticipate the ramp to be largely achieved by the end of the year with machine reaching full run rate in the first quarter of 2027. The ramp period allows us to work with customers to qualify the machine across all product lines. This project strengthens our product mix, enhances our advantaged cost position supports a more balanced paper system over time and is expected to deliver returns consistent with our investment expectations.

Next, Dover converting facility acquisition strengthens our footprint in an attractive region adds an established customer base and supports our long-term growth strategy. In Waterloo, we're preparing to start up in the fourth quarter and expect to be fully operational by the second quarter of 2027. Waterloo is a state-of-the-art facility designed around safety, productivity and innovation. It expands our presence in an attractive segment of the market and will position us to deliver high-quality packaging solutions with greater speed and reliability.

Together, these investments reflect our 80/20 approach, investing in the capabilities and locations that help us win in concentrating resources where they create the most value. Now let's turn to Packaging Solutions EMEA, with some of the investments underway there. I'm on to Slide 7. Over the past 18 months, we've taken significant steps to transform the EMEA business. We've simplified the organization, integrated legacy acquisitions, reset the cost base and built a stronger commercial model around key customer relationships.

Investments have been a critical enabler of that work. Across EMEA, we're investing to maintain and strengthen the asset base, improve competitiveness and lower cost and support growth where we see the most attractive opportunities. The 3 examples on this slide highlight the difference that we're making by putting capital to work. At Luca, we're modernizing our recycled containerboard platform by replacing an older paper machine with a new lightweight machine that will deliver higher yield, lower energy consumption, and greater sustainability performance. It's a transformational investment that will create a more efficient mill and strengthen our ability to serve our converting network.

We expect this investment to come online in the third quarter. In Germany, we're executing on our cost-out strategy by consolidating volume from smaller facilities into more modern and efficient plants, like our Lighthouse approach that we used in North America. We're maintaining capacity while improving utilization, lowering fixed costs and strengthening our cost position. And in Romania, we're investing to capitalize on growth. Eastern Europe continues to be one of the fastest-growing regions in our portfolio at approximately 4% CAGR.

We're expanding capacity within an existing operation to support our customers and capture that growth. Taken together, These investments will generate stronger financial returns and illustrate how we're improving the business for the long term, strengthening our asset base, lowering cost and investing where we see the best opportunities for growth. I'm moving on to Slide 8 and staying focused on our EMEA business. As in North America, we're simplifying the system and aligning resources to the assets and the opportunities that can create the most value.

To date, we announced more than $210 million of run rate footprint and cost savings actions. Those actions include 31 manufacturing facilities in a central office that have closed or in the process of closing and are expected to result and net reductions of more than 3,000 physicians. The actions shown here go beyond site closures. An important part of this work is asset optimization. We're optimizing the network by redeploying equipment, capital and capacity into the sites where we can have the greatest impact.

Approximately half of the equipment moves we have planned have already been completed, allowing us to consolidate operations, improve utilization and better align our assets with customer demand.

With that, let me turn it over to Lance to discuss our second quarter results and outlook in more detail.

Thanks, Andy. Turning to Slide 9 and our enterprise results for the second quarter. Starting with sales in our North America business. While our box volumes are up 1.7% year-over-year on a daily basis, overall sales declined due to the planned exit of our nonstrategic export business following the closure of our Savannah mill. In addition, our EMEA business experienced softer demand primarily driven by the geopolitical environment.

Earnings and margins declined year-over-year. In North America, the primary drivers were planned outage activity and the Riverdale conversion. In EMEA, we experienced margin squeeze due to the impact of higher paper prices on our packaging sales. as well as higher distribution costs. Despite those headwinds, operational performance was stronger than we anticipated and the results reflect continued progress on execution across the company.

Even with a quarter that included significant outage activity and investment spending, free cash flow was stronger than we anticipated. Free cash flow in the quarter was negative $7 million as cash from operations was used to fund transformation initiatives and capital investments of $533 million. Turning to Slide 10 in our Packaging Solutions North America second quarter results compared to the first quarter. Overall, our results reflect solid performance across the business. Price and mix was favorable by $37 million, reflecting faster realization of previously announced price increases and a more favorable mix due to lower export sales.

Volume was $16 million favorable, driven by normal seasonal improvement one additional shipping day and continued growth in our domestic business. Operations and costs were $1 million favorable, primarily driven by improved mill performance ex-TAC insurance recovery and the nonrepeat of the winter storm impact in the first quarter. These favorable items were primarily offset by increased costs associated with the Riverdale conversion and other reliability work completed during the outages.

Maintenance outages were $127 million unfavorable in the quarter. As planned, this was a very heavy outage quarter at roughly twice our normal levels. Despite the scale and complexity of the work, the team executed exceptionally well across the system. In fact, the second paper machine at Riverdale returned to service ahead of schedule while conversion work on paper machine 16 was underway. Input costs were $21 million favorable primarily driven by the non-repeat of elevated energy costs associated with the first quarter winter storm.

However, those benefits were partially offset by higher OCC and freight costs. In total, Packaging Solutions North America delivered $425 million of adjusted EBITDA in the second quarter. Moving to our third quarter outlook for Packaging Solutions North America on Slide 11. Price and mix are expected to be favorable driven by the continued realization of previously announced price increases through June publications.

Volume is expected to be unfavorable as one additional shipping day is more than offset by anticipated lower export volumes. Operations and costs are expected to be favorable sequentially. Benefits from the Riverdale ramp-up and the contribution from NORPAC are expected to more than offset the step-down of XTA insurance proceeds anticipated in the third quarter. Input costs are expected to be unfavorable, primarily due to higher OCC and seasonally higher energy costs.

Lastly, to ensure the safety of our team members, we proactively suspended operations at our Pine Hill mill to complete structural roof repairs. We currently expect the mill to be operational by the end of August. Our outlook shows a separate line item forecasting an approximately $85 million impact in the third quarter. before any expected insurance recovery. These items result in an adjusted EBITDA outlook for Packaging Solutions North America of approximately $555 million to $585 million for the quarter, which includes that Pinehill impact.

Turning to Slide 12. We outlined the key drivers and assumptions behind the step-up we expect in North America from the first half to the second half of this year. Our full year adjusted EBITDA outlook is now $2.35 billion to $2.45 billion. We have reduced the top end of the range by approximately $50 million primarily based on the macro environment and the prolonged impact from the Middle East conflict.

We delivered first half adjusted EBITDA of $902 million and continue to expect a significant step-up in the second half of this year. The right side of the slide walks through the primary drivers supporting that step-up and the progress we're making across the business. Compared to last quarter's view, the favorable adjustments include $50 per ton of the June published price increase, which is now factored into the price total. Volume is now slightly offset given that we originally anticipated an uptick in second half industry demand.

We now expect industry demand trends to remain generally stable from the second quarter into the third quarter. Some of our 80/20 initiatives were achieved earlier than planned, shifting a portion of the benefit into the first half of the year and reducing the step-up reflected in the second half. Now that the heavy second quarter planned outages are behind us and the Riverdale ramp-up remains on schedule, our expectations for these items remain unchanged. The largest unfavorable category is the macro environment. We had anticipated approximately $50 million in headwinds. Now we expect an impact closer to $150 million, primarily driven by elevated transportation spot rates and higher OCC, diesel and employee medical costs.

Putting it all together, these factors support an improvement of approximately $600 million from the first half to the second half of this year, excluding the impact from Pine Hill. Our preliminary estimate for the Pine Hill disruption in the second half is between $70 million and $100 million. We do expect to recover the majority of that impact through insurance in the second half, but we're still working through the details.

The key takeaway is that we have successfully completed several important milestones in the first half of 2026, including our heaviest outage quarter and the Riverdale conversion. We're realizing prior price increases and continuing to execute our 80/20 initiatives. While the operating environment remains dynamic, these actions will help mitigate macro headwinds and support our confidence in the outlook for the remainder of 2026.

Turning to Packaging Solutions, EMEA on Slide 13. The business delivered results that were ahead of our expectations for the second quarter. Price and mix was $12 million unfavorable sequentially as higher paper prices for external sales were more than offset by the unfavorable impact of higher paper prices on our packaging sales. Volume was slightly lower sequentially, reflecting continued softness in the market, driven by geopolitical uncertainty and consumer sentiment.

Operations and costs were $16 million unfavorable sequentially but better than our expectations. While distribution costs associated with higher oil prices remained a headwind, the team made progress on cost-out actions which mitigated the impact. Input costs were $10 million favorable as lower energy costs, which include subsidies more than offset higher OCC costs.

All in, Packaging Solutions EMEA delivered $182 million of adjusted EBITDA in the second quarter. Moving to our third quarter outlook for Packaging Solutions remain on Slide 14. Price and mix are expected to be favorable driven by the continued realization of prior paper price increases and the related recovery in box pricing.

Volume is expected to be favorable reflecting seasonal strength and the continued onboarding of customer wins. Operations and costs are expected to improve sequentially, driven by progress on our cost-out initiatives and lower distribution costs. Lastly, input costs are expected to be slightly unfavorable as lower OCC costs are largely offset by higher energy costs, including the nonrepeat of the energy subsidies received in the second quarter. These items result in an adjusted EBITDA outlook for Packaging Solutions, EMEA of approximately $230 million to $250 million for the third quarter.

Turning to Slide 15. We outlined the key drivers behind the step-up we expect in EMEA from the first half to the second half of this year. First half adjusted EBITDA was $390 million, slightly ahead of our prior expectations. With that higher starting point, the expected second half step-up is now approximately $170 million, supporting our full year adjusted EBITDA outlook of $900 million to $1 billion for Packaging Solutions EMEA.

The largest contributor remains margin recovery and commercial uplift. We expect packaging margins to improve in the second half of the year as prior paper price increases flow through to box contracts. This benefit is supported by incremental commercial growth from new customer wins, normal seasonality and 3 additional shipping days. Taken together, margin recovery and commercial volume uplift are expected to contribute approximately $110 million of incremental adjusted EBITDA in the second half.

Beyond margin and volume, there are 2 additional contributing factors to the step up. First, we expect to realize about $40 million in cost out benefits in the second half of this year. These benefits will come mainly from footprint optimization actions and improvement in distribution costs, assuming no further material escalation in geopolitical-driven volatility. Lastly, Input costs are expected to contribute approximately $20 million, reflecting anticipated lower OCC costs.

Altogether, these factors add up to a second half adjusted EBITDA of approximately $510 million to $610 million for EMEA. With that, I'll turn the call back over to Andy.

Thanks, Lance. I'm on Slide 16. I'll start by doing a couple of points on the planned EMEA separation. We're making good progress and have a dedicated team focused on readiness activities. We are establishing the necessary governance, legal, operational and technological infrastructure and making significant progress on our key transaction documents. The separation remains on track to the announced time line.

Next, as we've discussed today, our focus remains clear. As always, all of our actions are focused on delivering value for our customers, our teammates and our shareholders. We're improving execution across the company, strengthening reliability and performance across our network, simplifying the business and investing strategically to create the most value. We're seeing positive momentum in advancing the priorities we've laid out for the year.

As we close, I want to thank the IP team. I am extremely proud of the focus and commitment they have demonstrated in the second quarter. And I have confidence that together, we will deliver strong performance throughout the remainder of the year.

With that, let's open it up for questions.

[Operator Instructions] Your first question comes from the line of George Staphos with Bank of America.

Congratulations on the progress. I guess my first question as we look at the ramp-up that you have for second half versus first half, and we appreciate the bridge detail. When we do some rough math, it implies a 50% or so increase from the midpoint from third quarter to fourth quarter. So can you talk about some of the individual items that make you comfortable with that outlook, Andy and Lance? And recognizing prices change from day to day and week to week, what have you factored in for potentially higher diesel prices even since June 30, July 1 given where we're at right now. .

And my second question is more broad. Can you update us in total what you've achieved in terms of [ 80-20 ] across both. You had the slide earlier on Europe, but also North America, what do you expect will be at for this year and what will be left for '27?

Yes. Let me -- I'll take -- let me take the second one, and I'll have Lance put some color on the first question. So I think, George, across the board, -- if you look at the ramp first half to second half and then as you think about going forward, right, the 80-20 work has been central to everything we've done. Let me start with Europe. You've seen the focus on facility rationalization on reducing the people cost intensity in the business. 31 facilities, over 3,000 people impacted by that. And that will continue to move forward just as we have outlined in the past.

So that ramp that allows us to move into significant profit increases through the second half of the year and as we think about next year. That's been the bulk of that. And then really importantly, George, it's a matter of taking those resources and making really smart reinvestments like we have back in the U.S. in terms of -- on the commercial side. So reducing unnecessary waste, taking out unnecessary capacity or an effective capacity in effective assets driving profitability and reinvesting intelligently back into profitable growth of the business.

And we expect to see that same trend as we move into the second half in Europe that we had in the U.S. in the U.S. specifically, right? We've done the major structural changes to the mill footprint and the plant footprint, right? So we've taken out the big chunks of those things. That being said, right, we're continually driving optimization. Every month, I'm out in the field visiting mills and/or a plant recently in Pennsylvania. And the work that we're doing there, we built a new facility a number of years ago or driving some rationalization that is driving efficiencies in that plant.

And now it's about how do you tune that facility to drive incremental profitability. Lower utilization of working capital and capital in general. And then it's the big investments that we have made, so cutting and building, right? So the big investments, the big decisions that we made really throughout the last couple of years about taking assets out that were ineffective and reinvesting really aggressively back into a Manfield Riverdale, a NORPAC as examples. Back into now a Waterloo, and we've announced Mississippi to the Dover Delaware box plant that we built.

So those things are ongoing, and you should expect to see that kind of change continuing across the company. really to take out unnecessary waste, reinvest back into profitable growth. So those are going to continue. Obviously, the massive impact that we had in the U.S., you're starting to see moving towards optimization. And in Europe, we're really still right in the throes of it. And so Lance, do you want to tackle the first one.

Yes. Sure. Just to go back to your question, George, on 3Q to fourth quarter ramp. And I think in particular, you're focused on North America. And I think it's really driven by the momentum that you see or what that would imply for the fourth quarter is really driven by a couple of things. One, the continued ramp in Riverdale, right, as we continue to bring that machine up and online to get to sort of the full run rate by early next year.

The second, of course, is the pricing flow through that's going to continue to strengthen into the end of the year on pubs, the price publications through June, right? So we'll be continuing to add momentum as we realize more price across our box system into the end of the year. And then just the constant maturation of the cost-out initiatives that we've got throughout the business, right, that we're continuing to work on throughout the course of the back half of the year to continue to layer on to the profit momentum that we have.

I think those are the things -- and if you think about kind of what are the headwinds and the way that we thought about the cost side of this, from a diesel perspective, look, we've just taken a stance that hard to predict where that goes, given some of the geopolitical uncertainty and the back and forth that we see going on around the world today. So we just basically taken in our assumptions to strip -- and so that's something that we've kept relatively simple from an assumption perspective.

Your next question comes from the line of Matthew McKellar with RBC. .

First I'd like to just how you're managing the downtime at wet conditions is seemingly tight as they are. You called out some favorable mix and less exports in Q3 outlook for North America and the materials, I think that would be separate. -- from the $85 million Pine Hall impact we called out. So any color on impact to mix and how you supply your converting system would be helpful. And then I guess, just to clarify, does the guidance for '26 assuming insurance recovery it would be in the same ballpark? Is that $70 million to $100 million hit do you expect the Q3 results? .

Yes. Let me touch on the insurance piece real quick. I mean our intention is we think that there's a likelihood that a majority of that will be reimbursed. -- we are endeavoring to make sure that we try to match that as close to the periods that are impacted as possible to avoid the noise and some of the sequential comp comparisons. So -- we're focused on it. It's still early days. Majority of it is around the business interruption side of the business. And so we will be working with our insurance providers to work through it, and we'll keep you guys updated as we get deeper into the process.

Yes. And on Pinehill specifically in terms of how you think about the network and the impact to it, there's a few things. Number one, we think that we'll be up and running by the end of August. So it won't be an extended period of downtime. However, right, given the tightness in our system and in the system in general, right, it certainly has an impact -- we started actually if you think about all the work that we've done in the past couple of years of optimizing the system, very thankful that we've been ahead of the curve on that in terms of being able to match paper grades to customers, to industries to locations.

And so we've had a lot of work has gone on ahead of time. Thankfully, that's really good news. And one of the things we've been driving across the board is to maximize the mill network efficiency along all paper grades. Also, we have downgraded or reduced the amount of export that's out into the system. So we're pulling that back into the network to make sure we take care of our core customers. So it will be a tight couple of months, right? If you think about July and August is no doubt it will be tight and it exacerbates the tightness in the market across the board, but we think we've got it covered.

We can't deny though that it will be tight here over the next month or so. And then we think we'll ramp out of that pretty quickly.

Okay. Very helpful.

And if I could just follow up with 1 more. Between what's been recognized so far and announced to the market, North American pricing seems like it should be meaningfully higher in -- how are you thinking about looking at some tier response we see across the industry as that kind of to through to an extent experts continue to move are you likely to see new capacity announcements...

Matthew, I'm going to -- let me interrupt you. You're really muffled. We could not hear the second part of that. So if you could you start the question over again?

Sure. Sorry about that. So the price that's been announced and recognized so far, it seems like North American pricing should be meaningfully higher in '27, how do you think about what kind of supply response we see across the industry as that flows through? To what extent do the industry exports continue to move lower? -- we see new capacity announcements? How do you expect this to play out? .

Yes. Great question. So first of all, in terms of -- like anything, right, supply-demand dynamics are going to drive competitors' reactions, alternative reactions, things from overseas, you could expect to see potentially a bunch of stuff. I think structurally, as I look at the cost of building, we've done a lot of analysis on replacement costs, right? And as you can imagine, and I think pretty much anyone would attest to replacement cost of mill assets has skyrocketed in the last half decade. If you think kind of post COVID, just the ability to build a mill to bring on incremental capacity, it's a much higher bar than it was 5 or 10 years ago. I think that's a very fair thing to say.

So that's not to say that it will not happen, but the bar is higher. It's more expensive, and I think you've really got to think through that. You've heard me say in the past that I thought the threshold for people to really take a high look at that is kind of mid-teens to high teens return on invested capital. And I think there's -- for somebody to enter the market with a major mill investment, I don't know that we're quite there yet. But with our own analysis and we think about that.

Reactions from overseas, obviously, you have the shipping costs that are very substantial, especially when you look at the incremental energy costs incremental OCC costs that are out there in the system. So there are some challenges to that, but we'd be naive to think that you won't see some movement across that -- and then finally, on alternatives replacements, obviously, what we've seen in the Middle East with the cost of energy and therefore, how that's impacting the world of plastics.

Generally, I feel good about where we are. I like our position. I like how we have managed our business and how we're reacting to the market, and so I feel good about where we stand and good about the future.

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

I apologize if it's a bit detail oriented here, but it sort of ties together, George and Matthew's question a little bit. And just clarifying, is Pine Hill included in the updated $3.2 billion to $3.4 billion guide? And if -- and/or recoupment of insurance proceeds, but that might help explain that very large pickup from 2Q to 4Q and just clarify a few other things. If you could just is on that? .

So in the overall total guide, it's not included. It's excluded, right? But what we're anticipating is that we recuperate the majority of the loss in the second half of the year.

Got it. Okay. And then if I could, sort of 2, but for next year, given what you're seeing here, how are you feeling about kind of the $4 billion, $5 billion, $5 billion that you've talked about for a while, which frankly seemed like a big stretch at one point, but maybe is looking somewhat more feasible. I don't know if you're willing to provide updated thoughts there. And then kind of at the same time, you talked about demand being more flat rather than up year-over-year in corrugated.

Any kind of additional color? Is that just a macro call? Or what's the change there?

Yes. So let me tackle the second question first and then I'll come back to the broader implications. So on the demand side, what we've seen in the U.S. and in Europe, is the expected pickup in the second half. We're now not seeing that given what's going on with inflation and affordability we think that mutes the overall market going into the second half of the year. But we had expected a pickup of about 1 point.

And so we're downgrading that to effectively flat. -- in the second half of the year in North America and up modestly in Europe in the second half of the year. That being said, that really is -- if you look at the things that are kind of holding back the market, I'll put the affordability just kind of across the board, that issue is the biggest issue and the uncertainty for the lower end of the economy, right? So if you're sitting in the bottom half of the economic spectrum, you're struggling today. And you can see it with the major consumer packaged goods companies that are out there the protein companies, the vegetable companies, et cetera, they're certainly seeing that especially in that more cash constrained part of the economic spectrum.

And that and he put housing with that, we still really have not seen any relief there. So we see some pretty exciting pent-up demand into the future, but I think the conflicts and the affordability questions are going to mute that here certainly into the second half, and we'll see what that means for '27. Very specifically, we're seeing some slowness on the fruit and vegetables side, specifically on the West Coast from what's going on. We've seen everything in the news around some of the issues on the vegetable side with some contamination. We're seeing that firsthand, and it's showing up in our -- in the western part of the U.S. where the eastern part is pretty much in line with exactly what we thought.

So we believe we can really focus in a narrow that, that's a short-term impact. But that will be a headwind. For us, we're seeing it in the month of July. We'll see if that lets up here as you see a rebound, when people go back to normal behavior, but I expect we'll have some headwind in the third quarter from that. As regards the -- as we think about what does this mean for the future? I'm going to be very careful not to give any real detail about the future for a couple of reasons. One, there's a lot of uncertainty out there with what's going on with everything in the Middle East and what's happening to input costs and everything else. And so we'll hold off commenting further on what we think the likelihood of demand looks like into the second half of next year.

You've seen the pricing. You can do the math on the pricing right? We've always given kind of a guide of about $9 is a good proxy as we're doing that math, right? So kind of -- as we think about that math and how it flows through you can do your math on there of what that means going forward. We've talked in detail about the cost-out efforts that we've done. The other thing we just have to be cautious of is we're getting closer and closer to the spin. And so we -- by regulation, we have to be very cautious about forward-looking statements that aren't appropriate in that process.

So we'll be a little bit -- we'll be holding off on there. You'll hear more in the third quarter. And obviously, in the fourth quarter, we'll lay out all of the details of our expectations for 2027.

Fair enough. And just care that $9 reference, that's a $1 per ton of contained board leads to $9...

Correct. Yes. Thank you, Mark. Yes, thank you for clarifying that.

Your next question comes from the line of Phil Ng with Jefferies.

Solid quarter and good execution. I guess my first question, Andy. You and your peers are certainly out with a September containerboard price increase in North America. And as you alluded, the market is quite tight. So when I think about this increase, -- is this -- do you need us to kind of offset the inflation outlook that you're seeing that's in front of you? Or this is more of getting a proper return because you guys are obviously recapitalizing your assets and more importantly, bigger picture, when you think about the supply/demand backdrop and where you're deploying capital, what's your pricing philosophy? How should we think about it going forward longer term?

Yes. Look, at the end of the day, a combination of pricing to market and supply-demand scenarios, right? And so we make our own decisions on what we believe is the right thing to do given what's happening, certainly on the demand side, right now, a lot more is happening on the supply side with inflation and the tightness in the market. And so we -- as we think about pricing, we think about what is appropriate given all of the different market forces and that's why we've landed where we've landed thus far this year. And we'll continue to do that, right? Pricing, as you know, is incredibly dynamic in this environment. And we're really kind of looking at all those different pieces and all those different factors, and that's been driving our investment philosophy and how we thought about the assets that we want to have and what drives profitability, maximum profitability for our business. the pricing up to now has really been eaten by inflation.

I mean if you look at what's happened with OCC, energy, ESOL freight, you name it. right? It's unfortunately really eaten every bit of that -- of the pricing up until today. What happens to inflation going forward and therefore, what happens relative to the most recent announced price increases we don't know, right? That -- it's impossible to know. Obviously, we would expect some of it to flow through attractively to the bottom line. But we'll have to see kind of what happens specifically to what's going on in the energy world from the conflict in the Middle East. And what we're seeing with just general inflation across the economy that still flowing through from trade and tariffs and all the noise on that.

So we feel really good about where we are right now. We feel good about the mechanisms we use in that decision-making and ultimately turning into profits in line with the things that we've talked about in the past.

Okay. Very helpful. contact, Andy. And then as you kind of articulated earlier in your prepared remarks, you're deploying your 80/20 playbook, you're taking out some high-cost capacity. First, that was on the mill side. You've done some on the box side. So one, where are you with that journey on your box network rightsizing? And then certainly, you've announced some investments this year, whether it's Riverdale, Dover, Waterloo, Orpak, -- where are you in terms of recapitalizing your asset base in terms of investments? Are you still pretty early in that journey. Just give us a little color in terms of where you are in that process at this point.

Yes. Really good questions, both of them. On the first side, what I would say in the box world, we're really in -- I'm going to call it optimization mode. -- where we've taken out the obvious kind of high-cost capacity, things that had to be kind of completely recapitalized -- we're not -- they were uninvestable, so to speak. We've done kind of the big swath of that. Now what you're seeing, right, are the moves that look like, I want to call it, on the most aggressive end a Waterloo or Mississippi, right, where you're really going in and you're making a major bet on a market, on a geography or on productivity. That's kind of the most aggressive side.

And then you have things like Dover, which is really around strengthening around the market and being able to integrate Box and paper, right, being able to do that in the right kind of market, it's really very consistent with our strategy. Then the next , I would call the next level would be brownfield, which we have a number that are underway, which we're boosting the right kind of capacity, driving cost points down and driving responsiveness up. in the business. And then the last part, the last level of those is really around what I'll call just 80-20 optimization, price volume mix, how you think about all those things coming together, in and around a geography that has multiple plants.

So the example I mentioned earlier that I was in the -- in Pennsylvania here a week ago. And there, right, we have multiple facilities servicing that geographic marketplace and getting that right mix of a super plant, which is really kind of blow and go versus hybrid plants that are dealing with a lot more complexity in the marketplace, finding that right combination. We're starting to dial that in, which means the responsiveness goes up, cost comes down, and that's exactly what we're trying to do. So we're absolutely working that spectrum of things, and we'll continue to make those bets.

But in terms of kind of the bolus of stuff, the really big things that have come one after another, you're going to see it be much more measured as we go forward. On the big investment side, these are related, obviously, we've made a lot of big bets in the last 2 years. And what I'm really happy about is they're starting to really show up. That's big. So if you think about the combination of things that we've done, right, closures of 3 different mills that effectively were uninvestable, right? You could have put -- you had to put a lot of money into them for really nothing back. It was really around extending the life and frankly, building product or paper that wasn't fit for the right kind of market at the right kind of profitability levels.

We made those tough decisions and then we reinvested super aggressively back into places like Mansfield, Riverdale, Nope, where we see a future of more appropriate paper for the marketplace, both in terms of grade and location and market at significantly lower cost points. I think, frankly, I think we're going to find that NORPAC was a great acquisition, in terms of a great asset, a great team in the right location at a very attractive cost point. As an example, investments in Mansfield have paid off dramatically.

We're starting to see Riverdale ramp up in knock-on wood, right, because we're still earning early in that journey. And then to the last part of your question about investment, we've said to expect the same kind of level of investment in North America for the next 2 to 3 years, and you should expect that, right? What I'm trying to drive is the 2 key elements, 2 key pillars of our strategy. One is around an advantaged cost position. We have a footprint and we have, I'll call it, the bones of assets to be absolutely the low-cost player in the marketplace. And I fully intend to drive that relentlessly to be the low-cost player. Not the low price player. That's not what we're trying to do. We're trying to be in a position where we have strategic choices that others do not.

And we very much are trying to drive that across the business. Second, on responsiveness, right, we're integrating more fully our mill and our box network where we're building -- where we're making the right kind of paper in the right places for distribution to drive cost down and service levels up. which then drives a lower cost position within the box network and the ability to react even faster to customers. And so that cycle, right, that virtuous cycle is what we're now investing in, and that's going to require us to continue to make investments pretty aggressively over the next few years.

That's super insightful Andy. And looking forward to these investments, hopefully coming to fruition, contributing nicely next year.

Thank you.

Your next question comes from the line of Gabe Hajde with Wells Fargo Securities.

Andy, Lance. I wanted to ask about the spin and as you kind of put all the infrastructure in place for that to be a stand-alone entity, would you say that there are still other options that could be pursued or evaluated as part of that process? .

Yes. Look, we're working diligently to focus on the spin. That's our priority is to drive the spend. We have a clear path to doing that. We're on track to that. All of our efforts are focused on that. And I don't see a reason why we won't hit the time lines that we've outlined.

In terms of alternatives, we've said all along that at the end of the day, right, we have to do the right thing for our shareholders. And if someone shows up and has an appropriate interest and they are the right kind of partner we have to listen to that. And we certainly would with the right kind of proposition. And so look, at the end of the day, it's about our fiduciary duty and our responsibility to our shareholders. and to drive the most value, and that's what we're going to focus on.

I want to take one more stab I guess, at the Georges and I think Mark's question if we dial back to kind of pre DS Smith, and I'm the simple. So I'm going to stick with, I think, $1.2 billion of cost saves and $800 million of commercial opportunity. in what was kind of PS North America. You guys, I think, acquired maybe $100 million or so of EBITDA in there. But take out the report card, have you actioned everything on the cost side to get you to that $1.2 billion and on an exit rate or what you've accomplished thus far in '25, '26, where would you say you're at on the $1.2 billion and then on the commercial side, any help there. I mean, I think we can do some of our own math. But I appreciate that demand is probably 3% to 4% less than what you would have anticipated in March.

Yes. So first of all, I think I applaud the fact that you have triangulated appropriately on it. The fact that your attention to detail and really understanding that, that's a really good thing here. I think in terms of -- there are a few things that have shifted since that original goal. And what I might add is just how the world has shifted. And that's really around demand is lower, right, and inflation is significantly higher, right? If you just kind of look at those 2 pieces of it.

So -- so we've been squeezed. You're right. It's actually probably more like 4% to 5%. If you look at the difference between expectation and what we were assuming, right if you look at that, it's probably 4%, 5% -- and I'd have to go back and add up the difference in inflation compared to our expectation. But if you kind of think about it on a year-on-year basis, we're looking at about $200 million of internal inflation, not including input inflation, right? Obviously, the internal, we've dealt with incredibly well the external -- that kind of muddies between that input inflation and then what happens on the commercial side. And you understand that really well.

That said, as context, -- let's go the cost side first, and let's come back to the commercial. So on the commercial, if you look at kind of what you'd expect that's going to flow through the actions that will flow through into next year. In North America, it's in the range of $350 million to $400 million that is carryover cost out of all the things that we've done that being finalized that roll over, right? So if you just kind of do the math on that, that's about what that is.

In Europe, it's more like a couple of hundred million dollars, right, $200 million to $250 million. It's incremental. So you've got about half of that $1.2 billion that we talked about before, that will be finalized it flowed through. To be clear, almost all of that is actioned, right? Europe still has a few things. I mean, they're going to do more as the year goes on. but you're not talking about 3/4 of it having to be actions. You're talking about 1/4 of it having to be action. The rest of it has been actioned and is working its way through the system.

What I would say the negative to that is where we have gotten it wrong is the cost to execute has been higher than we expected by to some degree, but not outside the realm of a pretty darn good execution. So -- it's taken a little bit longer than we had expected a little bit more expensive. But if you actually look at the dollars, we've gotten them. There's no doubt about it.

On the commercial side, right, what I would say is the commercial has been far more than we expected, right? So it's a much larger number than if you went back 2 years ago than we expected, but it's been eaten up by the inflation, right? And so -- when it's all said and done, when you put all this together and you kind of look at the 2027, again, we got to be really careful about how we talk about it. But we're going to be right in the range of what we said 2 years ago. that we're going to be right there. If you kind of back out kind of GCF being sold and you look at the split between North America and Europe, we're going to deliver pretty darn near exactly what we said we were going to do 2 years ago.

And so it's been a lot of bumps along the way and the path has not been straight, but I can't tell you how happy and how proud I am with people grabbing on to it. dealing with this incredible uncertainty and putting this company in a position to win.

I mean I don't think anyone, as you pointed out, had tariffs are Middle East conflict in the...

It's not on our big go car. No.

Your next question comes from the line of Michael Roxland with Truth Securities.

And neonatal the progress. In terms of volumes, a quick question there. You mentioned that your North American volumes are up about 1.7% on a per day basis. I think you -- last quarter, you were guiding them to be up around 3%. And -- what changed with respect to occur what occurred during the quarter and what changed relative to your initial expectations? And can you also provide us some more color on how shipments are trending thus far in July, given you also mentioned some headwinds from the West Coast fruit and venerable market. .

Yes, I'll cover the first question. I think the confusion there was we're up 1.7%. I think the 3% was what we thought we'd be in terms of versus the market. There is a difference there. I think that's where you're getting a 3% because nothing has changed from our expectations in terms of where we're falling a we're right kind of where we thought we would be.

Add more color on...

Yes. I'm sorry, can you clarify that, Mike, with the second part of that question? .

Sorry, just I want to get just any color you can have in terms of how your shares are trending in delay? .

Yes. So I would say outside of fruit and vegetable, it's pretty much in line with where it's been, which is softer than we had expected, right, but not outside of the bands. I do expect to have some headwind in fruit and vegetable in -- on the West Coast in the month of July. We'll have to see -- I don't know if people may have seen the Taco Bell announcement this morning, they expect they're starting to see a return to growth and whatnot.

And so that will work itself through. I do expect there to be some volume headwinds in the third quarter from it. The exact number is really hard to put your arms around just because it was really noisy for a couple of weeks. You can see the noise is starting to die down, but let's find out kind of where it is. And if consumers are moving back kind of -- what I'll call just the normal consumption which historically with these things has happened after a short period of time, but we'll see where that goes.

Got it. And then 1 quick follow-up. Just on price. I think you mentioned more favorable price in 2Q due to faster realization of previously announced price increases. What does that relate to? I mean have you reworked contracts that is allowing you to recapture price in a faster pace than you have historically? Just any color as to why you're able to capture price faster than history, I would appreciate the color.

Yes. Look, I think it's just a factor of how we work through this. It's on a contract-by-contract basis. We try to make some assumptions on a 3-year full -- I mean, excuse me, a 3-month forward look, 90-day forward look. But -- and we effectively just sort of outperformed in the way that we're executing those contracts.

And I think part of this is just tied to the fact that we put a lot of work into building our commercial team. right? So if you look at the work we've done in terms of people and process, it's not something we've talked a lot about on these calls, but it's where we have retooled a very large percentage of our field force. We've changed incentives, and we have invested in their tools. And so I think it allows them just to move a little bit faster into the marketplace. .

We have time for 1 more question, and that question comes from the line of Anthony Pettinari with Citi.

Just on the just following up on the last question. Assuming the price increases realized in the publication in September, would the hike be fully realized like exiting 1Q 27. I'm just trying to figure out how much you would see in calendar '26 versus calendar '27...

Yes. Regardless of what happens to the pub, you pick your number, right? It's just the way it flows. You're not likely to see much in '26. It's really a '27 it's really '27.

Got it. Got it. And it would be fully realized exiting 1Q, 2Q? I don't know how you think about the lag, but..

Probably right in there. Yes, it's going to be between there. But I mean it's not going to look a lot different than what you've seen historically. We can't imagine it would be like that. It's pretty systematic.

Got it. Got it. And then one last quick one, and I'm sorry if I missed this. But if I think about the assumptions underlying the full year guide on the cost side, so I guess, OCC diesel at the midpoint, are the assumptions that those remain at current levels or 2Q quarter end levels are you baking in some inflation? Just wondering the kind of cost assumptions underlying...

Yes. So we're assuming some cost increase as you get into the latter half of the year around OCC. But really, our diesel costs, like I said earlier, is really the assumption that we're driving there is just today's strip.

Thank you guys very much. Just a few closing comments. So first, just some notes of thanks. I want to thank the European team. They have just carried an incredible load working through Project Diamond and the corporate team that's focused in on doing that, right? So we -- that's our name for it internally on working on the spin. And for anyone who's been involved in those kinds of things, you're doing your day job and then you've got to do that job. And it's an incredible amount of work, and they're doing a terrific job around that.

Secondarily, Lance mentioned this in his comments, but -- if you look at what the second quarter was in terms of workload for the containerboard team for the mill system, in terms of Riverdale and the amount of outages what they executed. That's no small feat, right? In moments like this, you kind of move past it pretty quickly. But I really want to note the incredible work and the execution that's happened around that while keeping a really tight focus on safety, safety above everything else. And so just congratulations to that team. And then just more broadly, right?

We have gone through a lot of change at IP, and we still have more change to go through and people have stepped up. And so I just want to thank everyone for that incredible work. And then finally, to our investors. I appreciate your interest and your continued support in what we're building here at IP, and I thank you for that support. So everybody, take care, and we'll talk to you.

Once again, we'd like to thank you for participating in International Paper's Second Quarter 2026 Earnings Call. You may now disconnect.

Good morning, and thank you for standing by. Welcome to International Paper's First Quarter 2026 Earnings Call. [Operator Instructions]

It is now my pleasure to turn the call over to Mandi Gilliland, Senior Director of Investor Relations. Ma'am, the floor is yours.

Good morning, and good afternoon. Thank you for joining International Paper's First 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. There is important information at the beginning of our presentation, including certain legal disclaimers. For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties. These and other factors that could cause or contribute to actual results differing materially from such forward-looking statements can be found in our press releases and reports filed with the U.S. Securities and Exchange Commission.

We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP financial measures is available on our website. Our website also contains copies of the first quarter earnings press release and today's presentation slides.

So now let me turn it over to Andy Silvernail.

Thanks, Mandi. Good morning, good afternoon, everyone. Let's begin on Slide 3. This quarter reinforced the importance of controlling the controllables in a dynamic operating environment. While inflationary pressures and weather-related disruptions created volatility, our focus remains squarely on enabling our strategy and improving execution. Today, we outlined the steps we're taking to manage external pressures strengthen execution across the business and address gaps where performance did not meet expectations, all in support of driving sustainable long-term value at International Paper.

I want to start by being clear about what's working and what needs to improve. In North America, we delivered above-market growth for the third straight quarter with box shipments exceeding the industry by 3% as planned customer wins came through. We're seeing mill and box plant productivity improve as strategic investments and lighthouse practices take hold, and we're strengthening our footprint through investments that support long-term profitable growth. We are executing important improvements, but the gains have not been fast enough or consistent enough to offset the macro pressures. North American mill reliability has inflected positively. However, we need to accelerate the momentum. We have more work to do to reach best-in-class reliability and that's essential to delivering the cost and service performance we expect.

We also need to improve execution. Unplanned costs have been higher than expected driven by both transformation activity and external factors. While some level of transition cost is inherent as we reshape the footprint and execute our transformation, we need to do a better job of identifying how to mitigate impacts and reliably overcome shortfalls.

Let's turn to EMEA. We've made progress on cost-out actions with footprint and overhead efficiencies flowing through the P&L. The conflict in the Middle East has increased the overall challenge across both regions with more energy exposure in EMEA. We're doing a very good job of managing the exposures and pulling forward costs as quickly as possible. Importantly, we stayed focused on the broad improvement work while a small core team executes the separation.

The EMEA market has been softer than expected with the macro environment impacting demand. We have modestly underperformed the market in terms of volume as we have held pricing. Our focus is maximizing total value by balancing the price-volume trade-offs in the soft market. We have, however, sharpened our commercial focus, and we want to make sure that we have the right price value trade-offs to maximize that profitability. In parallel, we are pushing hard on the transformation costs that are already underway, and we are focusing on execution and accelerating progress in a very challenging operating environment.

We've made important progress in both North America and EMEA, aggressively reshaping our portfolio, footprint and operating structure. These changes have allowed us to radically change and improve investments in asset quality, reliability and cost structure. In turn, we've improved our competitive position, grown in North America, and positioned ourselves for further profit improvement in the back half of the year and beyond.

I'm now turning to Slide 4. Let's take a look at the areas where our actions are translating into results. In North America, our team outpaced the market on volume growth for the third consecutive quarter. Even with the challenging backdrop, North American box volumes in the first quarter increased 2.5% year-over-year on a per day basis compared to a decline of 0.3% for the overall industry, which translates to nearly a 3% outperformance of the market.

Looking ahead to the second quarter, we expect our North American volumes to be up about 3% with the industry again tracking flat. And on a full year basis, we continue to expect to outperform the industry by about 2%. Lastly, due to macro trends, our full year 2026 industry demand outlook is now approximately flat year-over-year compared to prior assumptions of flat to up 1%.

I'm now moving to Slide 5. This page shows how our performance in North America is being supported by underlying improvements across the mill and box system. In the mill system, we're making steady operational progress. The winter storm impacted operational performance in late January and early February, but we saw strong improvements through March and momentum continuing into April. More broadly, capacity utilization has improved meaningfully over time, supported by elevated capital investment that's reversing a decade of underinvestment and improving reliability across the system. These gains are also reinforced by better operating discipline as lighthouse practices are rolled out across the mill system.

On the box side, performance is improving as those same lighthouse practices take hold, particularly volume optimization and stronger daily management. As a result, box productivity has improved 7% since the third quarter of 2024 as we have continued to rationalize the footprint. Taken together, these actions strengthen our advantaged cost position by simplifying operations, moving volume to our most advantaged assets and putting capital to work where it earns the highest return. The key takeaway is that these are real measurable improvements from actions already underway. And on the next slide, we'll show how continued targeted investment is expected to build momentum and further strengthen our mill and box system over time.

I'm now turning to Slide 6. Building on the productivity improvements and early operating results we just discussed, this slide highlights key strategic investments we're making across North America aligned with our strategic priorities of superior customer experience and high relative supply position. We've meaningfully accelerated investment across our network. These include targeted acquisitions, greenfield facilities, strategic conversions and more than 80 major investments across mill and box system, including corrugators, converting equipment and specialty capabilities with projects underway or planned primarily from late 2025 through 2026 spanning the U.S. and Mexico. Collectively, these investments will improve reliability, modernize our asset base and strengthen our competitive position to win with customers.

We also recognize we are temporarily [ short paper ] in North America ahead of the Riverdale conversion. While that conversion creates a near-term headwind, there is a clear long-term tailwind, improving our system mix, expanding lightweight capacity and generating attractive returns as the project comes online. Overall, we are investing approximately 50% more per facility in 2025 through 2027 than the average of the prior 3 years. This level of investment reflects a deliberate shift toward rebuilding reliability, upgrading capabilities, and positioning the system for sustained performance and long-term value creation.

Moving to Slide 7. We recently announced a bolt-on acquisition that fits squarely with our strategy, the NORPAC paper mill in Longview, Washington. This is a high-quality, top quartile asset that strengthens our West Coast footprint, which builds on our Springfield mill and box plant network across the region and lowers our overall systems cost. This location creates meaningful freight advantages in West Coast markets and its capabilities improve the efficiency and competitiveness of our integrated network.

The mill includes 3 paper machines, 2 of which are producing recycled lightweight containerboard, enhancing our ability to meet growing customer demand for lightweight solutions and higher recycled content. Just as important, this acquisition gives us strategic flexibility, supporting growth in attractive end markets, while creating opportunities for further cost optimization across the system.

Post integration, we expect this investment to deliver high teens or better returns over time, consistent with our disciplined capital allocation approach. Overall, this is exactly the kind of targeted, value-accretive investment we're looking for as we continue to optimize our footprint and build long-term value.

Turning to Slide 8 and our EMEA business. As we saw in North America, the first step in our transformation is to simplify. Here's what it looks like in EMEA, starting with footprint optimization across the region. The data here reflects the actions that we have completed as well as many still in process. We also believe there are additional opportunities to optimize our footprint with additional actions being proposed or evaluated.

When we shared this slide last quarter, we had approximately $160 million of run rate cost savings. Since then, we've continued to make progress, increasing run rate savings by roughly $40 million to more than $200 million in total. To date, 31 closures have been completed or are in process, which will result in net reductions of more than 2,800 positions. We'll continue to provide updates as we advance our actions in a disciplined and respectful way.

I'm now turning to Slide 9. Before getting into the results and outlook, I want to step back and frame the macro environment that is influencing near-term results across both regions, particularly in the second quarter, starting with demand.

In both North America and EMEA, overall market demand is softer than we expected coming into the year by about 1 point. This reflects a more cautious consumer, particularly as inflation pressures and uncertainty persist. We have not seen abrupt changes in order patterns in either region, but I'm cautious about demand. Visibility beyond the near term is limited. So we're staying focused on what we can control, strengthening the competitiveness of our network, onboarding commercial wins, investing in our assets and executing on cost-out.

As we look at energy, in North America, energy cost exposure remains relatively contained as our mills generate more than 70% of their own energy and our principal energy input is natural gas, which is stable now and in the futures market. In Europe, our business has an effective hedging strategy in place to help mitigate the impact of higher energy prices. The exposure is significant, but our strategy should allow inflation pressure to be offset commercially, assuming recent market price increases stick.

Now I'm turning to freight. Freight is having a significant near-term impact across both regions. In North America, sharply higher and volatile diesel prices are putting pressure on costs across the supply chain. Combined with an exceptionally tight freight market, this remains a strong headwind. As a reminder, rising freight costs are not passed through directly, they're recovered through pricing over time.

And other impacts, in North America, higher diesel prices are also flowing through to OCC and chemicals, reflecting increased transportation costs and oil-linked inputs. In EMEA, OCC prices remain relatively stable given supply availability, but we do expect higher collection and distribution costs to begin showing up as we move into the second quarter.

I'm on Slide 10. Now turning to our enterprise results for the first quarter. Overall performance reflects a challenging operating environment, normal seasonal volume declines and several deliberate actions we've taken to strengthen the business long term.

On sales, year-over-year growth primarily reflects the additional month of DS Smith in Packaging Solutions EMEA. Sequentially, revenue step-down is expected due to normal seasonality across end markets. In Packaging Solutions North America, sales are also impacted by our decision to exit nonstrategic export business following the Savannah shutdown.

Adjusted EBIT for the quarter was $188 million, benefiting from the absence of accelerated depreciation that we saw in prior periods. Adjusted EBITDA was $677 million and margins were 11.3%. We'll address the underlying margin drivers, including mix, cost timing and execution related impacts in more details as we move through the discussion. Free cash flow was $94 million in the quarter, which included a onetime $280 million tax refund. As a reminder, we also received $1.1 billion from the sale of the GCF business in the quarter, allowing us to pay down $660 million of debt, further strengthening the balance sheet.

While earnings came in below our expectations, we must control what we can control. We are laser-focused on accelerating cost reductions in both regions, maximizing high-quality organic and inorganic investments and winning share intelligently. Now Lance will provide additional details on each business.

Thanks, Andy. Turning to Slide 11 and starting with our Packaging Solutions North America first quarter results compared to our fourth quarter results. Price and mix was favorable by $24 million, driven primarily by product mix as well as higher export pricing. Volume was $52 million unfavorable, reflecting the normal seasonal step down across all channels from a strong fourth quarter as well as lower export sales from repositioning containerboard into the domestic market.

Operations and costs were $29 million unfavorable, primarily due to the winter storm impact of approximately $18 million as well as elevated costs due to reliability challenges. While we still experience some isolated reliability incidents each quarter, we are seeing progress. Improved operational performance across the mill system contributed $15 million of benefit in the quarter. Converting run rates continue to improve and the footprint rationalization is delivering cost-out each quarter. These improvements helped offset inflation and weather-related disruptions.

Maintenance and outages were $17 million favorable, driven primarily by the timing of a planned outage. With reduced production in our mill system during the winter storm, our timing for certain planned outages shifted in order to support inventory build in advance of a heavy second quarter outage schedule. That deferral created approximately $20 million of timing benefit in the first quarter with the outage now expected to take place in the second quarter.

Input costs were $43 million unfavorable, primarily due to a regional spike in natural gas prices and local utility costs related to the winter storm across our mill and box system, representing approximately $35 million.

Overall, the January winter storm resulted in approximately $53 million of unfavorable EBITDA impact across operations, costs and inputs. In total, Packaging Solutions North America delivered $477 million of adjusted EBITDA in the first quarter.

Moving to our second quarter outlook for Packaging Solutions North America on Slide 12. Price and mix are expected to improve, driven primarily by favorable product mix. That improvement is partially offset by the impact of the $20 per ton price decrease published in February. As a reminder, given normal price realization lags, the published price increases of $40 per ton in March and $30 per ton in April will benefit results beginning in the third quarter.

Volume is expected to be favorable, reflecting a seasonal pickup and 1 additional shipping day sequentially. Operations and costs are expected to be slightly unfavorable sequentially, primarily driven by the downtime associated with the Riverdale paper machine conversion and costs related to the additional machine work that coincides with planned outages, offset by the nonrepeat of the first quarter weather impacts and the benefit from cost reduction initiatives related to distribution.

Maintenance and outages are expected to be unfavorable sequentially as the second quarter represents roughly twice a normal outage schedule, which includes spending tied to the Riverdale conversion. Finally, input costs are expected to be favorable, primarily due to favorable seasonal weather, partially offset by higher OCC and freight costs driven by diesel prices. These items result in an adjusted EBITDA outlook for Packaging Solutions North America of approximately $380 million to $410 million for the second quarter.

Let's turn to Slide 13 and walk through what's changed in our 2026 Packaging Solutions North America outlook. At a high level, the full year outlook reflects unfavorable impact of the macro environment, winter weather, and weaker-than-expected operating performance with published pricing actions providing a meaningful offset.

We see North America industry demand roughly flat for the year, with our business growing approximately 2% above the market based on known customer wins. On the left-hand side of the slide, you can see our original 2026 adjusted EBITDA outlook of $2.5 billion to $2.6 billion has been updated to $2.35 billion to $2.5 billion.

On the right-hand side is a bridge that explains what's driving this change. Pricing is the largest positive impact representing approximately $175 million, which reflects the cumulative price impact of February, March and April price index publications. That benefit is offset by several headwinds. The macro environment represents about a $200 million unfavorable impact primarily driven by higher diesel and chemical costs inflation in OCC and other raw materials as well as the impact of lower demand.

Performance represents approximately $75 million of headwinds, primarily driven by operation reliability costs as well as operational and commercial challenges in our specialty business.

And finally, winter weather in the first quarter created an impact of approximately $50 million, as I previously discussed. Taken together, these items explain the step down from our original outlook to where we are today. The next slide highlights why we continue to expect meaningful improvement in the second half as these pressures ease and execution benefits come through.

Moving to Slide 14. With the full year adjusted EBITDA outlook of $2.35 billion to $2.5 billion, we now expect to deliver $900 million in the first half with a step-up of $650 million, significantly increasing our second half results.

The right side of the slide walks through the primary drivers which are well understood and are being executed in detail by our Packaging Solutions North America team. The largest contributor is an uplift in pricing, volume, mix and seasonality, totaling about $300 million. reflecting published price flowing through, seasonal demand patterns and mix benefits as we move into the back half of the year. 80/20 initiatives are expected to drive roughly $150 million of cost-outs driven by footprint actions, productivity improvements and supply chain initiatives that are already underway.

Planned maintenance outages contribute another $150 million as heavier outage activity in the first half rolls off in the second half. Conversion of the Riverdale paper machine in the mill's annual outage will be finished by the end of the second quarter. Those first half impacts of $100 million will not repeat in the second half. These benefits are partially offset by continued macro pressures, which we estimate as roughly a $50 million headwind in the second half, reflecting higher prices for diesel and chemicals.

Putting it all together, these growth and timing impacts support an improvement of roughly $650 million. The key takeaway is that the second half improvement is driven by execution, pricing flow-through and normalization of known factors, and it underpins our confidence in Packaging Solutions North America earnings trajectory for the remainder of 2026.

Turning to Packaging Solutions EMEA on Slide 15. The business delivered solid first quarter results amid a challenging and dynamic macro environment. Price and mix was $12 million favorable sequentially. Packaging margins expanded due to the EUR 40 paper price decline in January, which was mostly offset by lower paper margins tied to that same price decline. Volume was $3 million favorable sequentially. Although the post-holiday ramp-up in January was lower than expected, we were encouraged by improving trends as the quarter progressed. March volumes were up year-over-year on a same-day basis, indicating momentum heading into the second quarter.

Operations and costs were $39 million unfavorable sequentially, primarily reflecting elevated costs as a result of onetime changes in segment allocations and incentive compensation. Higher European energy price volatility had a minimal impact on results in the quarter supported by our existing hedging program. All in, Packaging Solutions EMEA delivered $208 million of adjusted EBITDA in the first quarter.

Moving to our second quarter outlook for Packaging Solutions EMEA on Slide 16. The key theme for the second quarter is peak margin compression as higher paper costs are realized ahead of pricing recovery. Energy-driven increases in paper prices are flowing through immediately while pricing actions and packaging lagged by roughly 3 to 6 months. This timing dynamic is pressuring margins in the near term before expanding as box pricing catches up. We expect pressure to moderate in the second half as prior paper price increases flow through our box contracts with margins progressively improving.

Against that backdrop, price and mix are expected to be unfavorable for the second quarter. Volume is expected to be favorable sequentially primarily driven by recovery from the softness experienced in January and continuation of improving trends seen in March and April. We also expect incremental contributions from known customer wins secured in 2025 to build through the second quarter and into the second half. Operations and costs are expected to be unfavorable, primarily reflecting higher distribution costs flowing through the supply base as well as lower levels of energy subsidies. Finally, input costs are expected to be unfavorable driven by higher OCC and energy costs. These items result in an adjusted EBITDA outlook for Packaging Solutions EMEA of approximately $150 million to $170 million in the second quarter.

Turning to Slide 17. I'd like to walk through what's changed since we originally set our 2026 outlook for Packaging Solutions EMEA and how that translates to the updated full year EBITDA target. Since we set our original 2026 outlook, the net impact of the change is approximately $100 million, lowering our adjusted EBITDA range from $1 billion to $1.1 billion to $900 million to $1 billion.

The largest driver is on the commercial side, totaling approximately $100 million. This reflects a combination of lower expected sales volume and margin compression versus our original assumptions. In particular, as we moved into the year, volume was affected by deliberate trade-offs we made last year in our commercial approach. And we also saw pressure on contribution margins in parts of the portfolio.

On costs, the net impact is flat. The continued pressure from higher oil prices impacting distribution costs is offset by favorable OCC costs and cost-out actions already underway across the business. Overall, outlook represents a cost volume squeeze in 2Q that eases in 3Q and 4Q with strong price momentum going into 2027, assuming price increases into the market stick.

Turning to Slide 18. We outlined the key drivers behind the step change we expect in EMEA as we move from the first half into the second half of the year. The core of the second half improvement is margin recovery and commercial uplift. As discussed earlier, we saw energy and paper price increases in the first quarter. And given it takes 3 to 6 months for these increases to flow through to our box contracts, we expect packaging margins to expand in the second half of the year.

On the volume side, the second half also benefits from 3 additional shipping days, normal seasonal improvement and the onboarding of new customer wins. Taken together, margin recovery and commercial volume uplift are expected to contribute approximately $110 million of incremental EBITDA in the second half.

Beyond margin and volume, there are 2 additional contributors to the step up. First, we expect to realize $40 million of cost-out benefits in the second half primarily from footprint optimization actions that improve network efficiency, reduce fixed costs and support structural margin recovery. Second, we are assuming approximately $50 million of energy price improvement, reflecting anticipated cost normalization in the second half, assuming no further material escalation in the Middle East.

Altogether, these factors result in second half adjusted EBITDA of $540 million to $620 million for EMEA. Combined with our first half outlook, this view supports our full year 2026 adjusted EBITDA target of $900 million to $1 billion for Packaging Solutions EMEA.

With that, I'll turn the call back over to Andy.

Thanks, Lance. I'm on Slide 19. Before we wrap up the EMEA discussion, I want to provide a brief update on our separation process. As we outlined on our January earnings call, we announced plans to create 2 separate publicly traded companies in North America and EMEA. Since then, a small core team has been working through the separation planning, and we've made meaningful progress over the past 3 months.

Following the separation, International Paper expects to retain approximately a 20% ownership stake for roughly 12 to 18 months, and the EMEA packaging business is expected to be dual listed on both the LSE and NYSE. We also expect both companies to have investment-grade credit ratings.

From a timing standpoint, we remain on track to complete the separation within the 12- to 15-month time frame we outlined in January, subject to customary approvals and conditions. This move is the right step to accelerate value creation for both businesses and will enable us to achieve best-in-class performance in each regional business.

Let me close on Slide 20 by stepping back and reinforcing what matters most. At International Paper, our focus remains clear and consistent, driving long-term value creation. Our 80/20 approach continues to sharpen our attention on the most important value drivers, reducing complexity and improving execution across the company.

Against the backdrop of a heightened macroeconomic uncertainty, including elevated input costs and ongoing pressures affecting consumer demand, we have updated our full year 2026 outlook for both businesses. In North America, we expect to deliver $2.35 billion to $2.5 billion of adjusted EBITDA. In EMEA, we are targeting $900 million to $1 billion of adjusted EBITDA. At the enterprise level, including corporate, that translates to $3.2 billion to $3.5 billion of adjusted EBITDA. Free cash flow of approximately $300 million to $500 million reinforces our commitment to disciplined capital allocation, a strong balance sheet and returning cash to shareholders.

We are making real and meaningful progress in every part of our organization as we focus on controlling our own destiny while navigating the macro environment, we remain confident in our ability to drive long-term value creation at International Paper.

With that, let's open it up for questions.

[Operator Instructions] Our first question is going to come from the line of Mike Roxland with Truist Securities.

Andy, I wanted to get a sense, with the revised guide, $3.2 billion, $3.5 billion this year. At the midpoint, the $250 million cut. Can you help us bridge how to get the 2027 EBITDA of $5 billion, particularly as -- is this cut, whatever incremental costs are set back to some degree?

Yes, no problem. Thanks, Mike. So I think what I do is I focus on -- Lance took you through the bridge from the first half to the second half, which I think has been put through in a lot of detail there on kind of how that builds itself up, and the reliability of those elements and how they flow through the P&L.

So if you look at the balance of that and then you add incremental price that will flow through in the year. So right now, in North America, you're talking about a net of $50 that's been published. So you'll get about half of that this year, you'll get half of that incrementally next year. And then in Europe, you have $100 -- EUR 100 price increase that's gone through. You'll get a piece of that this year and the bulk of that in the following year.

And so you take those incremental items plus what was in our funnel relative to operating cost improvements and considered a very modest market growth kind of returning to overall normal market growth, about 1 point in the U.S. and 1 point to 2 points in Europe, plus share wins that we believe that we will have in the year. That all adds up right into the range that we're talking about.

Got it. Just a quick follow-up. I mean, I don't believe the original guidance embedded much in the way of price. So really, the incremental here is you're going to be able to hit your guide because of the $50 per ton net in North America plus EUR 100 per metric ton as well. That's really what's going to help you get to those -- to hit your 2027 target.

Yes. To be clear, Mike, this does not include any other pricing that may come through. So nothing that's been talked about in the market, this is -- the only thing that's included in there is what's been published so far.

Got it. And then just quickly strategic customer wins, obviously, it's helping you drive your volume growth, pretty strong performance there. To the extent you can comment on what end markets do you see these gains? And can you also remind us how IP was able to secure these wins? I'm assuming that -- I don't think it was done on price given the company's refocused commercial mindset.

Yes, a few things there, right? So we've seen pretty consistent wins here since the late part of 2024 and through 2025. And so it's been really a broad mix across end markets. So it's really across every product category that we've been in. We've won nationally and we've won locally in the U.S. And we've done a very nice job of what we call our central accounts in Europe. So think of pan-European accounts there. We haven't done as well locally in Europe as we have in the U.S. We need to get better from that regard. So it's broad-based, and it's national and it's local accounts that we've seen.

To your point, we have not been aggressive on pricing. We have tried to really price to the market. I mean, as you know, with any large tender, right, price is a factor in there, but that comes after service and it comes after quality. That reliability of supply is the single most important factor for -- certainly for every customer, but as you're onboarding a large customer and we've done several here over the last year or so, that takes considerable time because they are exceptionally concerned about that cutover and not losing the ability to get their packaging supplies. So we've seen that very consistently. And we have, on purpose, very purposefully kept our discipline relative to market pricing. And I think that's very important. And we're starting to see those things play out in the marketplace as we're seeing inflation make its way through.

So I feel really good about where we are commercially. As you know, we've radically restructured our sales force and our incentive system in the U.S. Europe is a little bit different model. We have -- there is a pan-European model and a local model that we're getting more synthesis from more synergy from, frankly, as those businesses come together, meaning the legacy IP and the legacy DS Smith EMEA, but it really is winning customer by customer.

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

So for a while there, you were way behind [indiscernible] on market growth, you're losing a lot of share and you turned that around, and you saw it coming, and now we're seeing it. What we're not seeing is the reliability part of the equation playing out? Are you seeing things now that can give us confidence that, that's going to start showing up? And what are those things?

Yes. I can, Mark. And if you go back to the slide -- sorry, I don't have the slide number right in front of me that shows the capacity utilization and the productivity improvements in the mill and the box plant. If you go back starting in the fall of 2024, when we really started to execute the overall changes, and that was a combination of starting to accelerate capital investment and the lighthouse approach. And the lighthouse approach is really a focused approach around how do you run a good system daily. How do you do that daily. If you've seen that, you see a 7% to 8% overall improvement in those systems, both the systems in North America, which I think is very, very important.

Where we're missing, Mark, is in the transactional or transformation costs, think of things like network cost in terms of distribution and shipping, the cost of having assets on our books longer than expected and having to maintain them. We're eating some of that. We're also -- unfortunately, we're eating some contract cost of -- if you look back at the [indiscernible] contract, which ends this month. So in April, that ends, we'll eat about $20 million more than expected in that contract because of performance. So that's going to come out and those assets no longer need to perform. And so there are assets that, frankly, we're underinvested in and we're going to eat that. That's going to come out of the system.

Our specialty business, think of it as bulk products and the like. That has missed our expectations, Mark. The market has been weaker. We've had some reliability issues. We've accelerated the investment in there. So the key to it -- and look, I'm in the same boat you are. It's -- you've got to see it to believe it. The key is that the core assets, the core large, CL assets that we are investing in, we are seeing the measurable changes in productivity that are driven by reliability. As you know, reliability is the underlying first step in productivity. Now we've got to drive down these ancillary costs that have been out there, and we have very good line of sight to that.

So as an example, if you think of kind of cube utilization and transportation, we have driven that. We've gone very aggressively after that. We're still early in there, and we've driven huge improvements in the first stages of that. So that's an example of that across the system. So major improvements in the major assets, and now we've got to take care of the ancillary issues that are very solvable but they, frankly, are a pain in the butt and they're worse than our expectations.

Got you. So I do want to ask real quick -- I'm going to ask on NORPAC, just 1 real quick follow-up on this is, so it sounds like there's sort of a lot of quasi onetime stuff here that's like the transformation, the contract cost. Is there a ballpark number as to how much that might be impacting this year where, again, you can have a pretty high degree of confidence that it should show up next year because it's quasi onetime?

Yes. It's at least $100 million.

That's right.

Yes.

Correct.

Okay. Super. And then if I could quickly on NORPAC, $360 million. I mean, technically 3 big paper machines, so a lot of production capacity. So hard from the outside to square away all the numbers. And anything additionally you can tell us about EBITDA and what it can bring to you?

Yes. So first of all, Mark, I am very excited about this. When I step back and if you think about our overall strategy around our mill network, right, which is to drive down the overall cost point, right, we want to drive to an advantaged cost position. That's one of our key pillars of our strategy. And second, as we're driving reliability throughout the system and then finally, driving overall returns. This is a great example of the kind of investments and changes we need to make.

So if you kind of take a big step back for a second. We closed 3 North American mills last year, right, Savannah and Red River being the 2 big ones. In there. Both of those assets, we came to a conclusion after a lot of work that you were never going to earn an exciting return on investment or incremental investment in those assets.

And so as we close those, we have fundamentally did 2 really big things. Number one, we moved a bunch of people and a bunch of investment to [ Mansfield. ] And if you recall, Mansfield was a huge bug [indiscernible] a year ago. and we have effectively eliminated that issue. I was at Mansfield very recently with the team they have just done a masterful job. And while certainly, it's not where we want it to be yet, if you compare that business that asset rather to where we were a year ago, it's pretty remarkable with what they've done with getting better capabilities overall, some new team members and a bunch of new investments.

So that's kind of one big step going from an underperforming asset that's never going to return an attractive return to now to a really high-performing asset with a great team that can drive excellent returns.

Second, you got NORPAC right? So NORPAC as you mentioned, it's on the West Coast. We're significantly short paper on the West Coast. We're shipping paper to the West Coast uneconomically. It allows us to go more towards the lightweight market that you know is critically important in that market. And to your point, it's a big asset with 3 paper machines, 2 in our core market. 1 that's not, it can be in the future if we choose to be.

And so as I look at that trade of assets, it's exactly the kind of stuff we need to do. If you think of it kind of from a bell curve, you go from the left-hand side of the bell curve that's underperforming all the way to the right-hand side to high-performing with Mansfield and with NORPAC.

In terms of returns, our belief on a full year basis as we get into '27, it's going to be high teens or better in terms of return on invested capital. So you can do your math out of that there. It's got solid EBITDA in its current system. But we've got some work to do, not on the asset itself. It's really a great asset, but really bringing it into our network.

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

This is actually [ Bryan Burgmeier ] on for Anthony. Just wondering if you could maybe share some high-level thoughts on sort of the supply-demand outlook in Europe. I think we've seen some closure announcements, maybe higher energy prices kind of pressure -- high-cost players. I'm not sure how you're thinking about just a broader supply demand outlook for the region.

Yes. So it's -- I would say demand is modestly down compared to expectations. It's still growing in Europe modestly. We expect it to be about 1 point less than we came into the year when it's all said and done. I think that's a fair assessment, really driven from the consumer side is the consumers being overall more hesitant, and we all know the reasons behind that relative to the most recent impacts of the conflict in Iran.

And so we expect that to continue for a little bit of time as the uncertainty is out there economically, kind of broad-based uncertainty that was first driven by trade and tariffs and now the conflict in the Middle East. So I think it will be a little bit weaker than expected but still positive.

On the energy side, as we mentioned -- as Lance mentioned in his comments, we have a very effective hedging strategy that's in place that assuming that price sticks will buy us time to pass through into the marketplace, the EUR 100 that's gone through. That EUR 100 is worth about [ $300 million ] on an annualized basis in Europe, and it will obviously overcome the issues that we're facing in the short term.

So if you look at our P&L, we're getting that kind of profit accordion squeeze in the short term, specifically in the second quarter until pricing starts to make its way through the system. Very specifically relative to kind of the marketplace and high-cost producers. I think one of the things that's very interesting and important as we look at what's happening in EMEA relative to the energy shock that the world is experiencing right now is when you look at the bottom quartile assets in the marketplace, there are 2 things that this -- makes their life very, very difficult.

The first one is they tend to be older assets generally that have just more reliability problems and tend to struggle in terms of their overall cost position. They also are fossil fuel dependent much more so than the newer assets. And so when you combine those 2 things together, this situation right now is very, very painful. As best as we can tell, and it's our own analytics and the analytics that we use from the outside -- from outside experts. That fourth quartile is very likely under cash cost right now, right? So you're actually -- you're seeing that -- you've seen small pieces of action relative to that, whether it's temporary shutdowns, furloughs, you're seeing a few closures that have happened modestly.

And I also think we've got to be realistic. Historically, people have looked at some kind of panacea, like all of a sudden, the fourth quartile will wake up and close itself. It's not going to happen. They're going to hold on as long as they possibly can, hoping that the price comes through the market. So we shouldn't expect this to be like a mass pivot point in the marketplace. That's really never happened. That being said, capacity is slowly coming out of the system as you see folks being under cash cost. So this is a very, very difficult time if you are a fourth quartile producer.

Got it. Really appreciate all that detail. Just one quick follow-up for me, and then I can turn it over. Just curious if there was any change in demand kind of throughout the quarter into April, just following the kind of cost spike that took place in March. Yes, I can go ahead and turn it over.

Yes. So not really. It's actually -- we have not seen a major change. I think that from a pattern standpoint, as we all talked about, January in the U.S. was really strong, right? It popped up as I expressed very openly in our quarterly calls and in the one-on-ones I've had since then, we really believe that a big piece of that was the drawdown of inventory that happened in the fourth quarter, and that was a snapback and that proved to be accurate. And so folks who may have gotten over their skis about that, I think we're seeing kind of the normalization of that.

And now we're kind of seeing the market in the U.S. is basically flat. The marketplace, it was down 0.3% overall in the first quarter that you saw. And I think what's important here is you got to look at it on a daily basis, right? So if you look at the market data, the industry data that comes out, the really important thing is looking at it on a daily basis. And that net down 0.3%. We think the second quarter is basically flat. The balance of the year is effectively flat for the industry in North America, and we'll outpace that. As we get into the second half, we'll start to comp -- we'll have a lot more difficult comps, so that will come down. Overall, we believe will beat the market by about 2 points.

In Europe, I think you're going to see basically 0.5 point to 1 point of market growth. That's what it's feeling like right now. We were a little bit behind the market in the first quarter. And as we have been holding on price to value, we'll be targeted where we need to be to make sure we don't lose important business on price where we should get there.

That being said, we are going to be very discerning on pricing to value, right? It's important that we keep that discipline for ourselves as we look at the marketplace. So Lance, anything you'd add there? All right.

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

A lot of my questions have already been answered, but I want to ask a couple of things. First, a top-down, so if we sit back and look at 80/20, what have you achieved cumulatively across the enterprise in terms of cost out and commercial? And what's left to go through 2027. So through first quarter of '26, what have you gotten? And what is left to go that will help you build towards the ultimate '27 goal, I guess, if -- then I had a question, a 2-parter on Slides 13 and 14.

Yes. George, I'm going to answer, and this is not going to be exact. I can put the pieces together for you and we can certainly get back to you on it, but I'll take you through in rough math, and Lance keep me honest.

I will.

So in terms of total cost out, if you recall, in the last quarter, we talked about $700 million total that has come out of the system when it's all said -- thus far. When it's all said and done, we will take out more than $1 billion of cost in the system.

So if you see -- if you look at in the U.S. I still think we've got $200 million or $300 million of cost that is latent within the system at normal operating rates. And so if I just kind of look at that, that's -- and where is that? That's sitting principally in those ancillary costs that we talked about, that $100 million that we're eating this year, and another couple of hundred million dollars of efficiency as you drive productivity through the mill system. That's how I look at the U.S., principally.

You've also got some costs that haven't come out yet. As you know, we've outsourced IT. That process unfolds throughout this year, mostly in the first half. So you'll see some incremental costs come from there. Frankly, while you save a little bit of money on there, that's really a capability play more than anything else.

In Europe, if you flip over to Europe, and I think this is really important. If you look at that -- go to that one slide in the deck that talks about what we have done so far. We have announced 31 facilities closures, an impact to 2,800 people that's unfortunate for them, but really critical to be done to rightsize the competitiveness of the company. That has about $200 million of annualized impact, and I would argue that there's probably another $100 million after that to go after.

So as I break it down from -- just from a cost-out perspective, that's how I get to over $1 billion. Now you have some offsets to that, right? You've got we -- the shutdown of Savannah was basically a 1 for 1, call it, about $300 million of cost savings and EBITDA loss on the marginal piece. But on a return on capital basis, it's a home run for us.

So that's how I break that out, George. Hopefully, that's effective.

Yes. That's helpful. We appreciate it, Andy. The other question I had is a 2-parter on Slides 13 and 14. So in particular, I want to spend time on 14, the year is the year you're making progress. You're pretty candid about what's been not going the way you'd like. This step up -- to the second half of '26 in North America, you lay it out, but it's quite large. Of the items that you have in that $650 million, let's hold the macro to the side because you're not going to control that. Which of those line items do you feel least comfortable about? Said differently, why do you feel comfortable that you can see a 75% step-up in first half to second half EBITDA.

The related question, when I do the math on your pricing on Slide 13, the $175 million, I get -- even if I adjust for half a year, I guess something less than $50 per ton across the system. Is that mix? Is that timing? What else is going on there, if you could help us bridge that.

Yes, no problem. Thanks, George. So to answer your first question, on the step-up here, I think from a price, volume, mix seasonality feel very comfortable there unless something lackey happens in the world, right? So if you look at the world as it is today, I feel very reliable that, that part takes place on a half-over-half basis.

The other thing -- the other part, obviously, that you feel really good about is the $150 million of timing of planned maintenance, right? We control that very, very well. So you've got $450 million of the $650 million that you feel really good about. The $100 million of the Riverdale conversion, that feels really good because that's cost that you're spending in the first half that you're not spending in the second half. The risk of that, right, is the ramp-up, right? That's -- any risk to that is a ramp-up. And we've tried to be conservative in the planning that's built into that $100 million.

So I really think that the 2 big pieces that you say, hey, there's risk there, the $150 million of basically the stuff we're taking out of the system and the [ $50 million ] of the macro -- incremental macro, principally is tied to diesel early. I mean, when it's all said and done. So I think those are the 2 big things. So let's talk -- the [ $50 million, ] I can't control, right? I don't have really any control over that. So we'll see where that plays out. So it's the $150 million that really is -- if I were in your shoes, that's where I'm drilling into. And frankly, from an operating basis, that's where I'm drilling in -- that's what we're spending our time on.

Yes. And so that's a bunch of things in there. But really, the few big things are executing the open items on footprint rationalization, right? So you've got to nail those. You've got the continuing to drive that capacity utilization in the mill system where if you look at post the ice storm. So if you look at post the ice storm, our mill system in North America is running the best it's run in at least a half a decade and maybe more than that. And so we're seeing the gains there.

And then supply chain and procurement. Procurement is really supplier by supplier. And these are the things where we have negotiated contracts and you're seeing how those contracts flow through. And then on supply chain, in particular, it's really around cube utilization. So if you think of as we are moving, as we are shutting down capacity, both on the box system and in the mill system, right? You're having to reroute a lot of that. That has been more inefficient than I would like. And so there's an awful lot of focus there on driving cube utilization and planning of freight.

And just to add a little bit of color. I mean we're seeing -- when we talk about those cost-out initiatives, that's about, I guess, in the first quarter, it represented about $20 million of benefit.

Correct.

So we're watching it. We're counting it, and we're seeing it, George. To your other question on price on Slide 13, I mean, I think it's simply that. I think it's simply just the timing and the flow through of how all the volatility and the pricing publications have come through over the last 3 months.

Yes. So that's nothing beyond that. But that's really, George, that's counted contract by contract, right, kind of when that price comes through and you have -- as you know, there are 2 things that happen. You have noncontract business which you can move -- you're moving on price immediately negative and positive, unfortunately, right? You're trying to hold on when it's negative, like that $20 pop down, you're trying to hold on. Thank goodness. We got -- that was rectified. But -- and then as the contracts come through, that really is a timing thing built in the mechanics of the contract, right?

And so that $175 million that's in there, that is netting out the down [ $20 million ] and the plus -- now plus [ $70 million, ] so you can get the net [ $50 million. ] How that timing flows through contract by contract.

We have time for 1 more question, and that question is going to come from the line of Phil Ng with Jefferies.

Despite the uncertain macro backdrop, encouraging here, I mean, your box shipments in North America pretty strong and you're expecting a pretty stable environment at large for the broader industry. If I heard you correctly earlier, you mentioned you were short on paper. So just curious, what are you seeing in the marketplace from a supply-demand standpoint. One of your bigger competitors talked about really tight market conditions, it led a price increase in June. So kind of help us tease that out just because we've been all anticipating this capacity closure, hasn't felt tight yet, but what do you think now as we head into a busier time. .

Yes. I think what we should do is just focus on the facts -- what the mechanics are of the market, actually, what's really happening. So we are modestly short on paper ourselves, right? So we're in the market buying some paper. What you just said, we've heard the same things, but I can't really comment on that.

The other thing that I think is noticeable is what's happening in the export markets because if you think about the export markets tend to be more volatile and they tend to be a leading indicator of what's happening in the marketplace. And the export market, you can see the facts, right? It's been really tight the way to say it. So we never comment on future pricing, things that haven't happened. But our view is that the market -- the paper market in the U.S. is very tight.

Okay. And you could confirm you haven't announced an increase yet for June in North America?

We have not announced increase yet, but we don't really talk about future stuff, and we don't -- we avoid that.

Okay. Fair enough. And then the [indiscernible] here, Andy, and Lance, you guys have made a lot of tough decisions, and I respect what you guys are doing, but it's anything but easy from a macro standpoint, right? You've had a lot of [indiscernible] last year with tariffs and the Middle East war. And with that backdrop, you've had to revise your outlook a few times, right? So I guess in terms of your approach going forward, just from a philosophy standpoint, how are you taking things? Are you giving yourself a little more cushion for some of the choppiness that most of us didn't expect? And then you called out reliability issues. I understand long term, you guys are making the investments to be more reliable and put up good results. But how do you hold your people accountable in the very short term to execute better? .

Well, let's talk about holding ourselves accountable first, right? So holding me accountable first. And I can't ask anybody else to do that unless I'm doing that to myself. And I think the really important thing here, right, is yes, Phil. If you'd asked me 2 years ago, I'm coming up on my 2-year anniversary, if on my bingo card was a global trade war, and bombing Iran, I would not have had those on the bingo card, right? And so -- but that's life. I get paid to deal with these realities.

And frankly, I think in terms of the magnitude of what our teams have done in Europe and the U.S. It's pretty awesome. And I give them a lot of credit in a really tough environment, right? Because with all that hard work that's happening with 20% of the paper capacity coming out -- our paper capacity coming out in North America, 10% to 15% of our box capacity coming out in North -- box footprint coming out of North America, redesigning the entire corporate structure changing IT infrastructure, changing the commercial aspects, the massive restructuring in Europe, right? If you just kind of look at that, it's a huge amount of work that has happened that has been eaten up by the macro pressures.

And the key thing here is to not lose focus on the strategy, right? We have 3 strategic pillars in this business. The first 1 is to drive an advantaged cost position, a superior customer experience is number two, and our relative market position is number three. And the great work that we're doing of the tough decisions on assets and unfortunately, how it impacts people's lives, we've had to do that for a singular reason, and that is to reinvest back in the business.

And if you look at the reinvestments that we're doing back into the strategic assets of the business, I'll take the punches in the face that we've taken. What I'm not going to do is I am not going to back down on the strategy. And the reason I'm not going to back down the strategy is that the core of this business is a good structural business that can earn attractive returns on capital. It's d*** messy as we've gone through this, but we're doing the absolute right things. And so I'm going to stick with this, and we're going to drive through it. And I believe that the economics are there, and that's what we're working to.

So that's the accountability that fundamentally sits with me and it sits throughout the entire organization. And the bottom line is this, is if you don't want to do it, if you don't want to be part of it, this isn't a place for you, right? This is a place that we are here to win. We are here to win to drive returns on these assets, to have a great place to work, which starts with being a safe place to work and invest in this business throughout. And then -- but the bottom line is we haven't given ourselves enough breathing room on this with the macro. I mean, look, I couldn't have called the macro -- and I'll be the first one to say that our performance on a quarterly basis, I'm disappointed in the fact that we have missed numbers. That is not something I am used to doing, and it's not something I like doing.

And so yes, we're trying to give ourselves more cushion. We're trying to give ourselves more cushion in there with what we have. But I'll admit, right, it is a tough macro environment that we're out against, but the plan that we have that we put in place, I believe in 100%, and I am 100% committed to it.

Thank you. Well, look, to close, I don't think I can say much more than I just said. So I want to thank everybody for your time and attention to IP. I want to thank our employees who are working their tails off to build a great business, and that's exactly what we're going to do. Thank you.

Once again, we'd like to thank you for participating in International Paper's First Quarter 2026 Earnings Call. You may now disconnect.

Our next guest is presenting today. We have Andy Silvernail, Chief Executive Officer of International Paper. It's been kind of an interesting time last couple of weeks. What have you Andy. Also in the audience is Lance Loeffler, Chief Financial Officer of the company. He's been with the company since 2025 and also from the Investor Relations effort, Michele Vargas and Mandi Gilliland, who heads up Investor Relations. So welcome, everybody. Thanks for being here.

So Andy, talk to us a little bit about just what you're trying to share with investors recently. There's been a lot going on. Maybe we'll start first with DS Smith. Talk to us about the evolution and your thinking there and how that's progressed.

Yes. So the bigger picture is when I joined the company, my goal was to turn this into exclusively a packaging business and to get into a far more stable set of the market dynamics to restructure the company in terms of eliminating excess capacity, eliminating, frankly, inferior capacity and capabilities and investing in how do you drive down the cost curve in the business and how do you drive the customer experience up. And then finally, thinking about kind of where and how we compete with a relative market share position geography by geography as you think about the converting side of the business. And so obviously, with the sale of GCF, we exited our last non-packaging business. And with the acquisition of DS Smith, we then had -- became the #1 position in North America and then I call it tied for #1 in terms of EMEA as we combine the businesses.

And so the focus really has been driving those 3 strategic pillars. That has been the focus of the business. And we've made tremendous headway around that in terms of restructuring, getting the cost out of the business, taking out excess capacity. We've invested very aggressively. If you think about everything that we have exited and the things that we have invested in, we've exited in total a cost base of about $700 million that has come out of the business. And we have invested back into the business. We're actually going to spend in North America. We're going to spend about 50% more per mill and converting plant and we did in 2025, we will again in '26 and '27 compared to the run rate, the 3 years before there, the average before there.

So that elimination and investment has been ongoing very aggressively to modernize our system and to drive those 3 pillars. And so where we ended up with 2 regional powerhouses. And as I spent last summer digesting kind of where we were and the progress that we've made, what became very evident was that the benefits and the strength really set in the regions and very few, if anything, in terms of value that was going to be created for the customer or value that is going to be created for the shareholder sat in a global construction. And so starting there, when I came to that realization that, look, you've got -- you have 2 really good positions in the marketplace. but they really don't have anything to do with each other. That really started my thinking around then they shouldn't be together, right? Let them have their own place in the market, let them have their own focus on customers and people and incentives. And then very importantly, in terms of capital, you think about capital alignment with the mission around customers and shareholders.

And so with the combination of the 2 businesses, we ended up with 2 really strong regional positions. And as I said, they don't really have much to do with each other. So let's go liberate them. Let's liberate them and let's let them go play and win in their individual markets. And so that's really been where we are now. In terms of where the 2 businesses sit strategically, I'll start with Europe and then come back to the U.S. So the new EMEA Co, so to speak, is, again, tied for #1 in the packaging business in that region. It has demonstrated real strength around innovation and sustainability. They've built a core competence on the commercial sides of their business, but they got too much cost. Frankly, it's just -- and so does the entire European theater as there's too much cost in the system.

And so much like we've done in the U.S., we're going to do what a lot of folks have not been willing to do, which is to aggressively take that cost out of that system. So you saw that on the earnings call in terms of the number of facilities and unfortunately, the number of people are going to be impacted is really substantial. And so you're talking about between the end of last year and this year, we'll exit between $250 million and $300 million of cost. About 4,000 people, unfortunately, will be impacted by that and almost 30 facilities in this first wave of actions. And in doing so, we will change that cost curve very substantially and allow us to reinvest back into the business where we need to and very importantly, change the profit profile of the business as we prepare to spin it in later this year or early next year. And so that's where we kind of stand with Europe right now.

The U.S. is further along in terms of that transformation. We've taken out a huge amount of excess capacity on the mill side. We have also taken out aged facilities and underscaled or inferior facilities on the converting side and are investing back aggressively now on the converting side in terms of a couple of new greenfields, some brownfields, most importantly, actually internal capabilities relative to modernization of equipment and facilities to drive productivity and drive service levels at the customer. And then on the mill side, that's where a lot of the heavy lifting is now. So the mill side, there's -- you've heard me mention in the past that I believe there's $300 million or $400 million of latent productivity caught in the mill system. And I very much believe that, and we're seeing that day in and day out. So a lot of focus there.

And so what you should expect over the next few years is continued investment, very aggressive investment in the North American side of the business relative to modernization, to capitalization of the business. I think we've made a bunch of changes to the front end. We'll continue to tweak that. But the real focus is on driving productivity at this stage.

One question that came to mind, as you're taking the cost out and as you're investing aggressively now, and we're seeing it in the margin, certainly in North America, how do you feel about your talent, not yours specifically, but your people being able to put in all this capital, deploy it, make sure it comes up the curve the right way. You've been doing this for 20-plus years leading finance and industrial organizations. What are the pitfalls there possible?

Great question. So I think I've been asked a lot about things that have surprised me. I got asked again last night at dinner. And what are the surprises in a very positive way is the talent at IP is dramatically better than the historical results would suggest. So if you kind of look at the people in terms of do you have the intellectual horsepower, do you have the drive to get better? They do. But like all of us, we become a function of the system that we sit in, right, in many ways. That system, in many ways, starts to determine how capable or how high can someone reach. And frankly, and this is going to sound unfortunate, it's a tough way to say it. The team is learning how to make money. That's -- it's just a straightforward comment, which is really understanding that it's not just the process, right? It's not just the investment. It's not just running mills well or box plants well. It really does come down to how those things all intersect with the ability to drive profitability.

And so when I say learning to make money, that's a shorthand way of saying you have to be incredibly focused on where resources are being deployed against profit pools. That's how I think of it all the time is where are the profit pools and those profit pools at the customer and where are you sitting in terms of your capabilities internally to drive that business. And so they know how to run the business. They know the customers. They know the mechanics of the business inside and out. And a lot of it is around choices, right? That's the biggest thing is how do we make those bigger choices that flow downstream that end up as cash flow and end up as return on invested capital.

And so that so much of what myself and Lance are bringing to the table is that discipline. That discipline around capital choices, that discipline around people choices. Do you need to go in and blow up the whole thing and go hire 2,000 new managers? No, you don't need to do that. I would put this team up against a lot of teams that I've been with in the past and certainly against a lot of teams in the industry. But that focus and that tenacity and that aggressiveness, that's where we've had to step up the game substantially.

Thanks Andy. And just to conclude that point, you feel you've got the engineering and whatever the talent you need to make sure that the reorganization, the capital deployment that occurs on the back end is there.

Yes, we do. I'd say that the technical skills I feel great about.

Okay. And you've created the 2 regional powerhouse to use your terminology. And as you look at it, really the values in the region, not in the tie between the 2. To the extent as you evaluated it, what was the original then premise of putting the 2 together that as the organization was doing that, didn't see that ultimate value in this region being separate as opposed together.

Yes. It's a great question. I think that -- I think was that obvious. Yes. It's that obvious sitting here, that obvious sitting in -- as you go look back. I think the reality is I think we overestimated a couple of things, if I'm candid about it. One is, I think we overestimated the commercial benefits of customers actually being interested and willing to strike deals on a global basis. It's not that those things don't exist at all, but they're more relational than they are directive. And what I mean by that is a global company, one of the global packaged goods companies as an example, those decisions around which packaging supplier use really happen locally. They are influenced globally, but they're really driven locally. And I think that probably that was overemphasized. The other part is I think that the -- where everyone in the world sat in early 2024 compared to where we sit today, around the impact of global supply chains, that has changed and changed meaningfully. And I think one of the parts of the underlying thesis was around paper flows.

And the reality is, if you look as an example, our Savannah mill that we closed, we could have kept that open and we could have shipped paper across the ocean, right? So you could have done that. And -- but the return on invested capital of that was effectively zero, right? And so that becomes a reason to keep a plant open or a mill open versus a good economic decision. And I think an example of learning to make money, that's a very clear one. And then the assumptions around global procurement and things like that, the reality is those assumptions were correct, but the assumptions were driven locally, not globally, right? The leverage point was local, not global. And so as you sit there and you add that up and one of the questions that I've gotten quite a bit is, what was that conversation like with your Board as you broach this topic.

And one of the things that I think that we are responsible for is we wake up every day, just like all of you as investors, you wake up every day with a choice to make. And just because you made a choice yesterday, doesn't mean you should be anchored to that choice today if the facts are different or your understanding is different. And I give my Board an immense amount of credit for sitting with the facts and for being willing to make a choice that was a very clear choice relative to the industrial logic, but doesn't make it an easy choice relative to your past decision-making. And so sitting with that discomfort and making those courageous choices is another thing that we're talking about and doing within International Paper is don't get stuck in the past, right? We maintained 20% excess capacity in our business frankly, because people were afraid to shut things down, if we're just honest about it, right?

You came up with a million different excuses that sounded really good. But the bottom line was you were keeping 20% of excess inferior capacity, third or fourth quartile cost position because you didn't want to do the hard stuff. And we get paid to do the hard stuff. That's what we get paid for. We get paid to do things that other people don't want to do or can't do. And so I applaud my Board for having the courage to make that decision and my team for the courage to make that decision.

Thanks Andy. Maybe one last question for me, and then I'll see if there's anything in the audience. Can you talk about the $400 million investment that you're going to be making in EMEA before the spin? How much of that is on capital? How much of that is on spending related to optimizing the organization? Help us understand what's in that investment.

And if I get this wrong, Lance throw something at me. So it's about 60% of it is actually going towards things like severance, right? So you've got a pretty large nut, which, of course, that's one of the reasons that people don't take the actions in Europe, right? Because the cost "is so much higher than the U.S." which is true, is 100% true. But the return on investment is still outstanding, right? If you gave any one of us a 50% to 100% return on investment of any action, we'd all jump at doing it. It just happens to be in the U.S., it's a 200% return on investment for those same sorts of decisions. So about 60% of it is relative to the cost of changing the overall population of the organization. And the rest of it is going into capital investment in terms of modernization and/or shutting facilities down.

Thank you for that. Any questions from the audience for Andy? We'll keep moving on. Andy, one of the things we've talked a little bit about, but interested in an updated view. As you evaluate your cash flow going forward, there are obviously ways that you're going to deploy it. Certainly, you've been reinvesting in the facilities. You have a dividend. You maintain the dividend has been at a relatively high level versus your current earnings and cash flow. As you evaluate everything, which is I'm paraphrasing perhaps poorly there, but I think you're looking at everything in terms of the spin. How do you look at the dividend? How does the Board look at the dividend relative to the earnings power of the company on a going-forward basis?

Yes.

Would it just not be a good time to evaluate that again.

Yes. So the answer is yes. The answer is it is a good time to evaluate it. And so if I think about that, let's kind of think about regionally where things need to be and then kind of holistically what that -- how that comes together. So as you spin the businesses, the first thing is you want to make sure you have a capital structure that's appropriate for the mission of each of the businesses.

Absolutely.

And what that means, specifically in Europe, is that business needs to come out and have a conservative enough balance sheet that they have degrees of freedom. One of the biggest issues and one of the biggest opportunities in Europe is everybody is kind of in the same situation. They have -- their cost base is too high, and they have crappy balance sheets. That's just kind of a general statement. And so what I want to make sure is we actually put EMEA Co in a position to have really arguably the best balance sheet in the industry. And then next to that is what are the calls on capital. And so the dividend that we put on EMEA Co has to be commensurate with the cash flows of that business. And so we'll spin that business with a very good balance sheet and with a reasonable dividend that we'll decide as we get closer that allows it to go out and compete. What I'm not going to do is spin a wounded animal. I think that's a bad idea. And I think we got to be smart about that.

As you look at the U.S., we have a lot of confidence around the cash flows of what that business is going to look like over time. And so the ability to support a reasonable dividend in the ranges that are competitive in the marketplace, we absolutely know we can do that, we feel very comfortable. We feel comfortable with the work that we're doing that we can afford the aggregate dividend as we look at 2027. We feel very comfortable with that. We're going to do between now and the end of this year is really decide what's the right thing to drive the most value for the business? Like what is the right ultimate dividend for us to reinvest back into the business aggressively. That's priority one. Priority 2 is to have a dividend that is predictable and reliable and your ability to grow it over time. And then priority 3 is to make sure you have that capital flexibility after those 2 decisions to take advantage of the marketplace, whether that's investing more internally, buying back stock, buying other companies. We want to have that flexibility to be able to do that.

My history for those of you who have known me in the past is to provide you folks with real clarity of what a capital allocation model will look like. And as we get into that spin, we will do that. We'll provide that very clearly. You folks should be able to look at and understand the algorithm that we are working to in terms of value creation and be able to test that relative to organic growth to a pricing model to productivity and ultimately to capital deployment and be able to understand what the range of likely outcomes are through a cycle. And that's what I want to be able to make sure that you're all able to do.

Thanks, Andy. Let's get maybe to some of the near-term developments and news. And I guess, first off, -- can you talk a little bit about if you're in a position to comment what the impact of storms has been in the first quarter. You guided for the first quarter, EMEA to around $220 million of EBITDA, $1 billion-ish for the year. North America, we've guided to about $530 million for the quarter, $2.5 billion, $2.6 billion for the year. How do you stand early in the year? Obviously, we've all done this a long time. No guarantees in line. Get it.

Yes, I'll just -- I'll give you a sense of kind of where we are right now. January, I think as we talked about the earnings call, was pretty darn strong in the U.S. And we saw that strength all the way through the storms. So we saw -- commercially, we saw that strength. I would say that as we're looking at February, February is softer than January was. And that wasn't -- it's not unexpected in terms of just of what to see there. I think what we have to do is kind of as this normalizes through, I believe that there was -- I believe January, as I mentioned on the earnings call, was impacted positively by inventory correction, meaning too much inventory was drawn down in December from a weak December.

So as I mentioned before, I thought that the results were overstated relative to a trend line. And we're seeing that normalize as it comes to February. And so not surprising there. I think March will be a real tail of where the business really sits on a year-over-year basis. Our expectation remains that the industry is going to be 0 to 1 this year in North America as we see there. So I expect things to kind of normalize downward versus what we saw in that strength in January.

In terms of the storm itself, the biggest impact for us is natural gas. That spike, that big spike in natural gas. And so we had said that we thought at the earnings call, we were literally in the middle of the storm, right? That was just happening. And we called $20 million to $25 million of impact. It will definitely be bigger than that because of natural gas, what that spike is. Unmitigated is probably in that $40 million to $50 million range is my guess, is somewhere in there. But we'll see how that plays itself through the year or through the quarter rather.

In terms of Europe, the market in Europe has stayed soft. So no surprise there. That stayed soft. The big question in Europe is really going to be what happens with pricing. For those of you who understand the European market, it's different than the U.S. market. There's been a real push and pull around pricing in the European market. And so -- our expectation has been that you would see an early attempt at paper pricing moving and then it would tail off much like you saw over the last couple of years. That's still our belief is that that's likely to happen and that the market will remain soft. You've got a couple of pockets of things that have been good. I'm skeptical. I'm skeptical until you have a real trigger. And frankly, I think across both businesses, and we get this question a lot, if you look in the U.S., right, about 75% of our business is sitting in markets, if you think of that K-shaped economy that we all keep talking about and reading about -- about 75% of that business is sitting in the lower side of that key-shape.

So if you're looking at housing, if you're looking at consumer packaged goods, you're looking at light industrial. Of those 3, the one that's really shown real promise so far is the light industrial, right? So that spike we saw in the ISM in there. The other 2 really haven't moved much. I think that my optimism around this, as I think about the intermediate term is I find it unlikely that we're going to find ourselves some months or a couple of years from now with those things as depressed as they are. What releases them? That's outside of my expertise. But from that perspective, it feels like there's a lot of pent-up demand there. And given where capacity utilization is in North America, I think that's a really good overall place to be. Europe is more challenged relative to all of the trade noise and relative to the war, right? Those 2 things have really bound Europe in terms of spending. You see -- continue to see individual spending hampered and people are saving a lot more money. Savings rates have gone up substantially in many parts of Europe because of uncertainty. And so I think that uncertainty has to break there.

Understood. Just a point of clarification, Andy. Again, the 0% to 1% in North America, again, market...

Market. Yes. I think we end up being probably a couple of points better than that over time over the year.

And then I guess I'd be remiss if I didn't talk a little bit about the recent prices out of RISI, who does the most widely tracked index. Any thoughts that you can share in terms of how that affects your pricing strategy for this year? Remind us what you're out in the market with, I believe it's $70 a ton. Do you have letters now to customers on box pricing? Help us understand how that is all going to churn in your view without going where you can't go.

Right. Thank you. So I mean, first of all, I will say that we were surprised. We were surprised by last Friday's publication, did not expect to see that. There's a lot of people have a lot of speculation about things. I'm just going to avoid that. I don't think that will be helpful in any way or at least not helpful to me. And so I'll stay away from that. I don't think anything has fundamentally changed in terms of the dynamics. So if you look at operating rates through the industry, if you look at where we sit in the marketplace, the $70 price increase that we put into the market effective March 1, we don't see any change in that. Obviously, now with that announcement, you'll have to overcome that. But it's hard to imagine, given where operating rates are and the long-term correlation between pricing and operating rates it's hard to imagine that our thesis is materially different than what we've seen.

And that continues to be in a pretty weak environment, right? When you look at it over the last 6 months, we'll take January, we'll hold that and say, that's good news, but let's be skeptical. And so with any pickup in demand, obviously, on the paper side, things are tighter than they've been in a very, very long time. And so I think that the probability of our pricing moving into the market and being successful is relatively high. In terms of the mechanics of it, effectively, you have a price increase that goes through in paper and then that has to migrate its way through box, right? Mechanically, again, about 70% of our customers that's contractually in place. And so that mechanism is going to play.

So you're going to end up with 2 different things happening at the same time for a short period of time. You're going to have the pub down to $20 and you're going to have the push of $70 going through the marketplace, and then we'll see what happens with publications in March and April. We'll see where those go. So those 2 will be fighting each other a little bit over the next quarter, right, if you just kind of think about the mechanics of it. But it really is about us moving that $70 through the box system.

And you made an interesting -- an important point, which is your $70 will be effective March 1. But theoretically, that would be from the new starting point to January.

That's correct.

Okay.

That's correct.

And I would again, be remiss if I didn't bring up what's been discussed in the past by some of the independents that phrasing, sure the paper makers like to raise containerboard pricing, but they don't always transfer that price through in box pricing. Again, can you comment as to why they might have that what your overall determination would be to make sure that converting prices match at least paper pricing, again, wherever you can go, where you can't go, don't go?

I think the most important thing to recognize here, and this is a little bit of the anomaly of this marketplace, is that we used to be one of the largest suppliers to the market of paper, right? That's a role that we play outside of our own consumption. We are not anymore, right? We actually are buying paper on the open market right now, not a lot, but a little bit because of the capacity that we've taken out. And so while we do still sell about, what, 5% or so that goes into -- those of our paper that gets made that are grades that we really can't consume for one reason or another. So we're both a buyer and a seller in the market. So we're seeing both the signals. And that's why last Friday was frankly pretty confusing to us because the signals that are being talked about of why that happened, we don't experience and we're 30% of the market. So it's an interesting anomaly.

And so from that perspective, as we think of it, we're effectively taking our own box pricing. We're taking our own paper pricing, right, and it's being passed through to the market. And 80% of the market is integrated today. And so what's really happening, right, is RISI is setting a price point on a relatively small sample size, if we're just honest about it. And so from that perspective, we've got to kind of say a small sample size is going to have more volatility to it than the 80% of the market that's integrated. We are almost 100% integrated at this point. And if you look at the top 5 players that are 80% of the market, most of that is integrated also, right? There are a couple of players that are still selling paper into the open market that would cause some volatility, but not a ton. So -- from that perspective, we effectively, to get your question nailed is we're pushing our own containerboard into our own box system. So we don't have to rely really on anybody else. We do sell the independents that are our partners, right? They're not just random independents. So...

How do you incentivize your -- if it's done at the local level or if it's done at a regional or national level, your commercial officers, how are you incentivizing them to make sure that if prices go up, whatever per ton, that, that gets transmitted in boxes?

Yes. So first of all, remember that 70% of it is mechanical, right? So it's only 30% that you're actually pushing that through the system. And so it's a real focus on that 30% to make sure that you are raising those prices and sticking to the discipline of those prices going through the marketplace, right? So what you're avoiding is the negotiation of, okay, it's $70 but let's cut a deal for $50. It is effectively no, it's a $70 price increase, and we're going to stick to that with that 30% of the market, that's really the variable part of the market.

Thanks, Andy. Any questions in the audience? All right. Well, I've got a couple to wrap. We do go a little bit of reverse order. Keep your employees motivated and focused during this period where there's going to be a lot of transition after 2 years where there was a lot of transition. Are there KPIs? Are there other things that you're looking at to make sure that the troops affect the change that in aggregate, everyone knows that IP needs to get done. So that's question number one. And question number two, I mean, I think I know what the answer is going to be, but I want to know what you think the pluses and minuses are in the puts and takes. Do you think you can get to the margin levels of your peers, both in North America and EMEA by, call it, 2028?

Yes. Good questions. So the first one on keeping people focused. I'm a huge believer in ownership and incentives. I think those things matter tremendously. And 2 -- both of those things were broken at International Paper up till 2024. And what do I mean by that? We had a very large centralized command and control structure within IP. And so the mill system and the box systems existed to serve the center. That's really how it was set up. And what we have done, and we did that in the fall of 2024 is we completely separated that we broke that apart 100%. With the sale of GCF, we will have half as many people at the corporate center as we had in May of 2024. And those people, they are -- you have a very clear delineation between who sits in Memphis. You are either part of the North American packaging business or you are part of corporate. And the reason for corporate, if you think about it, is basically raising cheap capital as you can, right?

That's really the job of corporate is how do we get as low a cost of capital as we possibly can. And the job of the business is to sell packaging that meets and exceeds the needs of our customers. And so you have to separate those things out. So we've separated that. There is no center as they say today. There is none. There are businesses in the corporate and each have jobs to be done. And incentives matter. And so as we've separated those things out, as an example, on the sales side, we have completely changed the incentive structure. We had an incentive structure in sales that was really about keeping your job, if you're honest about it, versus you get paid for performance. That has completely changed. The incentive systems that existed for those who received part of our annual incentive plan, those were really around the hybrid between some metrics and a bunch of subjective.

And the example that I use often is if you look at the 11 years, and that's the only reason I think 11 is because it's the data that I was given. The 11 years that I looked at before I started, the 2 years before I started, the bonuses were 30% and 20% of target, those 2 years. And then the 9 years before that, the company was paid on average 100% -- a little over 100% of bonus, while profits were cut in half. So think about that reality. So as you guys are experiencing profits cut in half, for 9 years, people received 100% of their bonus. And that's because there was a complete mismatch between ownership and incentives in the system. And then what happened? Chris Connor, my Lead Director, he became Lead Director in those 2 years before there. And he basically said, we're going to make this change, and we're going to make this change to align incentives with performance.

So we've continued that down through the system. So today, in terms of incentives, you're paid on sales. Our 2026 system is 30% sales, 60% EBITDA and 10% cash conversion cycle. That's what you get paid on. And the 2 businesses have their own bonus structures. They don't share a bonus structure. They share metrics, but they don't share the bonus structure, right? So their own -- they have the same metrics, but they're local, very important.

In terms of stock compensation, myself and Lance and my team, 100% of our stock compensation are PSUs, performance shares. They're tied to an index, right? So our competitive index. And that's the way I believe it should be. I think it should be -- we should eat our same cooking that you guys have to eat. There should be no difference in those things. So I think you keep people motivated. I have ownership, I have clear line of sight to what I own and what I'm responsible for, and I am rewarded or I am punished in alignment that there's no confusion. And I think I grew up playing sports. I love sports. And the thing I love about sports is there's a scoreboard, right? And I love it.

You are either winning or you're losing. There is no in between. And so when I came to the business, you had green, yellow and red everywhere. Well, guess what, there was a lot of yellow. Some of the very first things we did is say, get rid yellow, right? Because I don't care if you win by 1 point or you win by 50. I don't care if you lose by 1 point or you lose by 50. You've either won or you've lost. There's no fr****** in between. And let's get figured out how you're going to win or you're going to lose.

Second question, I forgot what was?

Margins versus peers by '28.

Yes. So I think in North America, absolutely believe that we have the ability to be best-in-class in terms of margin structure. It will happen a little bit differently than our best-in-class friends who are up here a minute ago. They have a higher percentage of local markets that tends to have a higher variable margin and a higher cost to serve. And we have a much larger footprint and more scale around that business. I think structurally, though, in terms of can you get to that low 20s EBITDA margin? Can you get to into the teens in terms of ROIC? Structurally, there's really no reason why that can't happen. It's not easy. And the point that we are now in the journey is we've taken out the really big chunks. How that gets realized to the P&L is still making its way through the P&L. But now the work of margins is really around productivity, around pricing optimization as you kind of think about that. That's where that hard work comes at. And that's more of continuous improvement than it is kind of big structural changes.

In Europe, it's a little bit different. I actually think that we're at a slight structural disadvantage because we're really not in the craft business in Europe. So I think our ability to be into that low to mid-teens in terms of EBITDA margin, I think we have the ability to be in that 15% range in Europe. I don't think that gives us the liberty to be in that kind of 16%, 17%, 18%. I think that's probably not realistic mid-cycle. I don't think that's realistic given the profile. So -- but still a decent business.

We look forward to the progress. Everybody, please join me thanking Andrew Silvernail.

Good morning, and thank you for standing by. Welcome to International Paper's Fourth Quarter 2026 Earnings Call. [Operator Instructions]

It is now my pleasure to turn the call over to Mandi Gilliland, Senior Director of Investor Relations. Ma'am, the floor is yours.

Good morning and good afternoon, and thank you for joining International Paper's Fourth Quarter 2025 Earnings Call. Our speakers this morning are Andy Silvernail, Chairman and Chief Executive Officer; Lance Loeffler, Senior Vice President and Chief Financial Officer; and Tim Nicholls, Executive Vice President and President of DS Smith.

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. Our website also contains copies of the fourth quarter earnings press release and today's presentation slides.

Beginning on Slide 3. Before we jump into the presentation, I want to provide clarity on what will be discussed on the call today. We will begin by walking through the separation announcement for the EMEA packaging business. Then we will discuss our 2025 full year and fourth quarter results, followed by our outlook for Packaging Solutions North America and Packaging Solutions EMEA. We will close out the call with Q&A.

So now let me turn the call over to Andy Silvernail, who will start on Slide 4.

Thanks, Mandi. Good morning, and good afternoon, everybody, and thank you for joining us to discuss the next steps in our transformation journey. Today, I'm excited to announce our plan to create two publicly traded scaled regional packaging solution leaders in North America and EMEA. I recognize that this action, understandably, is a surprise to most of you. But during this call, I'll walk you through why this is the right step to accelerate value creation for both businesses.

My objective today is to answer a few critical questions, what, why and why now? We look forward to helping you understand how this swift, decisive action is a continuation of our 80/20 focused strategy and accelerate toward our ambitions and supports our ultimate objective, which, as always, is to maximize long-term value for our shareholders.

But first, turning to Slide 5. I want to anchor you in our core strategy and how we operationalize it to our 80/20 performance system. While our portfolio is changing, the core strategic principles and the operating model are not. 80/20 is the driver for our transformation. The lens we use to determine where to play and how to win and it guides us on how we operate each day. The 4 elements of 80/20 are Simplify, Segment, Resource and Grow and they ensure that resources are focused on the highest value areas across geographies, customers and products. The 80/20 methodology is also how we drive sustainable value creation through our virtuous cycle as we build an advantaged cost position and a high relative supply position, all delivered for world-class customer experience.

I'm now on Slide 6. The acquisition of DS Smith strengthened our regional footprint and positions both businesses in North America and EMEA to advance our virtuous cycle. Through the application of 80/20, we have made significant progress on building [ an enhanced ] cost position, executing $710 million of cost-out actions through 2025 on a full run rate basis, which includes synergy benefits that will be realized in 2026 and 2027. This was achieved through actions such as optimizing our footprint in North America, streamlining and reducing structural organizational layers in EMEA and exiting lower-margin segments.

The combination also advanced our competitive positioning. Our voice of the customer surveys show that we have achieved the highest customer satisfaction among direct competitors in North America and leading scores and customer experience relative to the other top players in EMEA. The improved positioning and bolstered operational capabilities will provide ongoing benefits for each independent region going forward.

Moving to Slide 7. So why separate and why now? The combination of IP and DS Smith enabled important steps forward in terms of cost and relative supply positions and enable superior customer experience as demonstrated by a high and increasing in-region Net Promoter Scores. Since the combination, our teams have made tremendous progress rapidly integrating the businesses within each region and implementing our 80/20 road map. I'm proud of how our teams have embraced the challenge. And because of these efforts, it has become clear that each business is at a positive inflection point.

By acting now, we can more fully enable the full potential of each business. Taking this action will allow both businesses to accelerate progress toward maximizing long-term profitable growth through greater speed, agility and differentiation as well as enhanced focus on their different regions and targeted investment approaches. Creating and inventing companies will further enable the businesses to win in distinctive competitive markets through focused leadership, tailored commercial strategies, independent balance sheets and flexible capital allocation aligned to attractive but different in-region opportunities. The separation will also give each business the ability to customize their messaging for regional customers without diluting the message for global audience which is a very small portion of the customer opportunity.

I'm now on Slide 8. Overall, we are playing in the two most attractive global profit pools with significant and increasing demand. After the combination of IP and DS Smith, the regional integration of the legacy positions of both businesses, each of the regional businesses is better equipped to compete and win in their respective geographies. However, there are key structural differences in the competitive and commercial landscape that will require tailored commercial and capital allocation strategies going forward.

North America is more integrated and resilient in terms of supply positions and buyers has a high degree of supply integration and steady demand growth. EMEA has more localized dynamics at the country level and relatively higher demand growth. Customers in EMEA value different products and supplier traits as well with greater emphasis on sustainability. Consequently, it's important that each business unit tailors strategy to best meet the distinct customer expectations in their markets. Creating two separate businesses will enable each region to accelerate its path to long-term profitable growth.

I'm now on Slide 9. I want to address what is changing and what is not. As we discussed, our 80/20 methodology starts with Simplify, which we have been working towards over the past year, deemphasizing or exiting select businesses, markets and functions and then redirecting our resources to a sharper focus and higher value. The action we are discussing today is the next step in the 80/20 performance system, segmenting the business to further optimize resource allocation and enable long-term profitable growth.

While these actions separates the businesses from one entity into two discrete, highly focused companies, both businesses will continue to emphasize the powerful operating discipline of 80/20 and our three strategic pillars. Our 80/20 approach with a clear focus on cost optimization and operating efficiency, strategy execution and customer centricity will remain core to both businesses.

The independent scaled businesses will benefit from true alignment to the characteristics of their district customers and regions. Local leadership and optimized capital allocation strategies without regional trade-offs. Most importantly, both companies will continue to be customer-driven organizations focused on delivering exceptional customer service with attention to detail around on-time delivery, quality and engagement.

Turning to Slide 10. Let me provide an overview of what the post-separation International Paper will look like. IP will be the leading scaled sustainable packaging solutions provider in North America, relentlessly focused on customers with an advantaged cost position and leading innovation capabilities. The business will be comprised of the current packaging solutions in North America, including both legacy IP and DS Smith assets. As you can see from the pro forma results on the slide, the business that will become stand-alone IP had full year 2025 net sales of more than $15 billion and approximately $2.3 billion of adjusted EBITDA that is poised to accelerate rapidly over the next 24 months.

The sharper regional focus will enable IP to further accelerate value creation for our shareholders. We have already made significant progress executing our transformation strategy and expect the benefits to flow through adjusted EBITDA over the coming year. We'll provide more detail about that in the earnings portion of the presentation. Additionally, we expect that the acceleration of our transformation to result in expanded margins, growing free cash flow, which will support disciplined investments in organic and inorganic growth opportunities.

We have a robust plan in place to continue delivering our strategic ambitions, which you can see on Slide 11. This is a continuation of our 80/20 approach in our virtuous cycle. We will continue to assess our mill and plant footprint and transform day-to-day operations, deliver differentiated customer service and develop and deploy local commercial strategies. These actions will enable strategic reinvestment in the business to accelerate organic growth, drive productivity and support disciplined bolt-on acquisitions. This will all be supported by a strong investment-grade balance sheet and a capital structure that supports an attractive dividend.

Our ultimate goal will continue to be to provide customers with the best possible solutions and creating value for our shareholders as a preeminent packaging company in North America. I'll now turn the call over to Tim to talk about the post separation of EMEA Packaging business.

Thanks, Andy. I'm on Slide 12. I'm excited to talk to you about the post-separation EMEA Packaging business, which will continue to be a leading provider of innovative, sustainable packaging solutions across Europe.

The new independent company will be defined by its strong customer relationships, high-performance operations and best-in-class innovative solutions that help our customers meet their sustainability goals. The business will be comprised of IP's current Packaging Solutions EMEA business, including the combination of legacy DS Smith and IP assets. As you can see from the pro forma results on this slide, the business will become the stand-alone EMEA business at full year 2025 net sales of approximately $8.5 billion and approximately $800 million of adjusted EBITDA.

Over the past year, we have created and begun to implement an 80/20 road map based on the proven 80/20 performance system. We are still at an early stage of the transformation to optimize our footprint, structurally reduce cost and extend our innovation leadership, but we expect to begin seeing the benefits of these actions in 2026. The separation will enable us to accelerate this progress, enhancing the new company's ability to make both organic and inorganic investments into our business to further improve our cost position and enhance customer experience and relative supply position. You can see the priorities for the post-separation EMEA Packaging business on Slide 13.

A key area of focus is to continue using our 80/20 approach to complete the integration of legacy acquisitions made by DS Smith prior to the combination with IP, transforming our footprint and aligning resources to drive value. We will remain laser focused on our customer-centric mindset, rigorously aligning our resources and investments with the needs of our key customers.

As we execute our strategy and 80/20 road map, we'll be focused on delivering organic growth and structural cost reductions in order to expand margins and drive strong cash flow and returns. We expect the post-separation EMEA packaging business to have a strong investment-grade balance sheet and a dividend policy that is supported by strong operational profit and high return organic and inorganic investments. Our goal is to meet our customers' needs with the best possible packaging solutions and to create value for our shareholders by delivering operating performance at the top of our peer group. Our transformation will continue in 2026, and we believe that by the time the separation is complete, we will be making significant progress against our financial targets and toward more definitive market leadership and sustainable packaging solutions.

I'll now turn the call over to Lance, who will go over the details of the transaction.

Thanks, Tim. Moving to Slide 14, let me walk you through some of the specifics of the separation. First, we expect the transaction to be structured as a spin-off of the EMEA packaging business to shareholders with International Paper retaining a meaningful ownership stake in the new company. Second, whether the transaction will be tax-free to U.S. shareholders will depend on the ultimate terms of the transaction, the percentage of ownership retained and other factors. Third, we expect the separation to be completed within the next 12 to 15 months subject to satisfaction of certain customary conditions and regulatory approvals, with plans for the company to be listed on both the London and New York Stock Exchanges.

As part of the management plan, Andy, Tom Hammock and I will continue in our respective roles in International Paper. Following the separation, Tim will serve as the CEO of the publicly traded EMEA Packaging business. As many of you know, Tim previously served as CFO of International Paper and has been leading the EMEA Packaging business during the past year, overseeing EMEA's 80/20 implementation and strategic transformation. The International Paper board has confidence that he is the right person to continue leading EMEA's transformation.

Also, David Robbie is expected to be appointed as Chairman of the Board. David has a wealth of experience having served on the former DS Smith Board as Senior Independent Director until joining the International Paper board in 2025.

In order to position the EMEA packaging business for success following the separation, we plan to invest approximately $400 million in EMEA throughout the course of 2026 and to fund the ongoing transformation of the business and 80/20 implementation. As mentioned earlier, we intend to create strong investment-grade balance sheets for both businesses and we'll continue to provide updates and additional information on our progress as the details of the separation materialize.

I'll now turn the call over to Andy to discuss our full year results and fourth quarter performance. Andy?

Shifting now to our full year and quarterly earnings update on Page 15. In North America, we made significant progress on implementing our 80/20 plan and executing our strategy this year, achieving approximately 37% year-over-year adjusted EBITDA growth in 2025. And we expect our volume growth to outpace the underlying market by 3 to 4 percentage points in the fourth quarter which is well ahead of where we thought we'd be earlier last year. Throughout the year, we continue to advance our cost improvement strategy, delivering approximately $510 million of run rate cost benefits. The ongoing transformation resulted in approximately $110 million related to footprint optimization in 2025, and we expect to have similar amounts in 2026. We'll share more detail on these dynamics for North America in a moment.

In EMEA, we're moving decisively on transformation of the packaging business. We have actioned 20 site closures impacting approximately 1,400 roles with another 7 sites and 700 roles in work council discussions. We have a clear road map for applying our commercial and structural cost levers and expect to see the benefits of our cost and commercial actions accelerate through 2026.

Turning to our enterprise results for full year 2025, which reflect the steadfast commitment of the entire IP team to execute our transformation plan, continue to deliver best-in-class customer experience and create value for shareholders. We continue to drive strong growth from integration in 80/20 in a year of significant transformation. We expanded adjusted EBITDA margin by 230 basis points. Our adjusted EBIT and EPS were impacted by $958 million of accelerated depreciation by our footprint optimization and higher levels of depreciation and amortization related to the DS Smith acquisition. As anticipated, our investment in the transformation resulted in negative free cash flow of $159 million. As a reminder, I would note that the enterprise earnings numbers have been restated to exclude GCF, and we are pleased that we closed the transaction at the end of last week.

Now I'll turn it over to Lance to take you through the drivers of North America performance, including what drove the year-over-year improvements and what to expect in 2026.

Thanks, Andy. I'm on Slide 17. I'd like to begin by reiterating the progress and momentum we've built in North America. Our teams delivered meaningful improvement across the business in a challenging environment, and the results reinforce our strategy is working. Notably, we have gained commercial momentum through focused service and reliability efforts, increasing on-time delivery percentage to the upper 90s, which has allowed us to win the trust of both new and existing customers. Also, our investments in our commercial team, adding new sales reps and upskilling the existing team has supported customer excellence across our national and local accounts, evidenced by our above-market volume growth in the second half of 2025 as well as strong price realization.

We continue to optimize our box footprint while rolling out our Lighthouse model to shift decision-making and strategy closer to our customers. We've now installed this in 85% of our box plant system.

Our mill investments are paying off, and we're beginning to see reliability improvements as we've expanded our lighthouse learnings to all our mills this year. The combination of our 37% year-over-year EBITDA improvement and 340 basis point margin expansion gives us confidence in our road map and our ability to achieve results in North America.

Moving to Slide 18. As a reminder, we are using adjusted EBITDA for our bridges as a better comparative metric during the company's transformation. Now let me walk you through the sequential variance for the fourth quarter.

Volume was $87 million unfavorable, largely in line with our expectations due to an almost $60 million impact as a result of exiting the nonstrategic export business as well as the impact of three fewer shipping days in the quarter, which was partially offset by continued momentum in onboarding our strategic customer wins.

Operations and costs were $3 million favorable. The cost-out benefit from the mill closures was offset by timing of spending across the business, including transitory costs as we optimize our network in line with our new footprint as well as higher seasonal labor costs.

Maintenance and outages were $41 million unfavorable as we continue to invest in the reliability and quality of our mill system. And input costs were $24 million favorable for the quarter primarily due to minimizing the impact from the natural gas curtailment at our Valeant mill early in the quarter, which has now been resolved. All of this leads to an adjusted EBITDA for North America of $560 million for the fourth quarter of 2025.

Turning to Slide 19 and looking ahead to 2026, our EBITDA growth will be primarily driven by approximately $100 million of commercial benefits as well as $500 million of cost benefits. Key drivers to this include strategic customer wins in the commercial front as well as cost out benefits across footprint optimization, productivity, supply chain, sourcing and overhead. Those benefits will be offset by approximately $200 million of nonrecurring transformation costs related to our ongoing investments in reliability and capacity, primarily driven by the Riverdale mill conversion in the first half of 2026. These investments are critical to support our profitable growth ambitions and bolster our lightweight capabilities to meet customer demand. This year, we also expect inflation to rise by approximately $200 million, while we continue to optimize our sourcing and procurement to minimize the impacts.

The takeaway here is that we remain confident in our trajectory to deliver on our 2026 targets of $2.5 billion to $2.6 billion with the assumption that the industry growth is flat to up 1% and we outperformed the industry by approximately 2%. Our 2026 target does not include the impact of any future pricing realization as we do not forecast price until it publishes. However, we would expect to see an incremental adjusted EBITDA impact of approximately $90 million for every $10 per ton price move on an annualized basis.

Now moving to Slide 20. We wanted to provide additional visibility into how we anticipate this year playing out with our planned transformation investments. There are a few factors driving the shape of 2026 that we wanted to be very clear about. In the first half of the year, we expect to see typical seasonality and one fewer shipping day. However, the main driver of our anticipated year-over-year decline comes from our planned investments in reliability, capacity and capabilities. This manifests itself in higher maintenance outages and costs related to our Riverdale mill conversion. All together, these represent approximately $165 million of nonrecurring timing impacts that will unwind in the second half. Normalized for these onetime impacts, we remain on a strong growth trajectory with approximately 10% first half year-over-year EBITDA growth.

In the second half, we expect our performance to materially accelerate, driven largely by nonrepeating items from the first half and realizing the additional momentum from our 2025 transformation activities. To add some more color on the sequential jump, approximately $200 million will come from returning to a normalized outage schedule, approximately $80 million associated with Riverdale nonrepeating items and margin benefits and a $75 million benefit from second half volume seasonality.

The remaining $200 million in our plan will be achieved through commercial and operational productivity actions as a part of our 80/20 transformation. The main drivers here are from continued footprint optimization, mill and box productivity improvements from rolling out the Lighthouse model as well as supply chain efficiencies, procurement initiatives and the winding down of ongoing mill costs. Our team remains laser-focused on executing against this plan, and we have high confidence in our ability to deliver.

Moving to the first quarter Packaging Solutions North America outlook on Slide 21. Price and mix are expected to improve by $51 million primarily due to seasonal mix improvement following a heavy e-commerce fourth quarter as well as favorable mix related to our smaller but more strategic export customers. We believe volume to be unfavorable by $68 million. The sequential seasonal decrease as well as the exit of nonstrategic markets more than offset the increased volume from our strategic wins and one additional shipping day. All in, our first quarter 2026 outlook for North America is approximately $534 million of adjusted EBITDA.

One more note before we move on. The first quarter outlook I just shared does not include any impact from the winter storm that moved across the United States Southeast this past week. We are currently assessing the impact and at this point, we're estimating that the total impact could be in the range of $20 million to $25 million for the first quarter. That wraps up our review of North America performance and outlook. And with that, let's move on to EMEA.

Turning to Packaging Solutions EMEA on Slide 22. We delivered a solid fourth quarter with sequential EBITDA growth of $19 million. The improvement was primarily driven by favorable pricing on key inputs, including fiber and natural gas, along with benefits for some of our early 80/20 cost actions. From a demand standpoint, the market remains soft, but broadly stable with continued pressure on board pricing. Overall, while we are still in the early stage of our transformation in EMEA, we are starting to see the benefits of our strategy materialize and are very confident of the path ahead.

Now on Slide 23 and looking at a full year 2026. Our adjusted EBITDA growth in EMEA will be driven by $200 million of commercial benefits, primarily driven by above industry growth with continued momentum of flow-through already captured from 2025 growth with our strategic customers. In addition, we expect approximately $200 million of cost-out benefits, primarily driven by footprint and head count optimization as well as cost improvements across procurement, distribution and our mill and box systems. We expect these benefits to be offset by approximately $100 million of inflation impact. Overall, we continue to build momentum on our transformation, and we'll continue to act decisively to optimize our footprint and operations while strategically investing in reliability and quality to best serve our EMEA customer base.

Moving to Slide 24. I want to take a moment to share additional detail on recent actions we've taken to improve our cost position and focus resources on the most attractive markets. In 2025, we actioned closures across 20 sites reducing head count by more than 1,400 positions. While we are engaged in ongoing consultation on our additional 7 sites and more than 700 roles, we expect this to deliver run rate cost savings of more than $160 million. At the same time, it's important to recognize these actions affect people and their families. We do not make these decisions lightly, and I want to thank the employees across these facilities and offices for their professionalism, dedication and contributions to the company.

Turning to Slide 25 and our outlook for the first quarter. We expect EBITDA to be roughly in line with the fourth quarter. We anticipate price and volume tailwinds of approximately $33 million driven by favorable mix and continued benefits from our strategic wins in 2025. Option costs are higher by $42 million, primarily driven by the timing of energy subsidies typically received in the second half of the year as well as costs related to accounting policy changes. We continue to build momentum with our strategic actions while managing through ongoing market volatility and focusing on those things that we can control as we execute our plan.

Now let me turn it back over to Andy, who will close it out with some key takeaways from today. Andy?

Thank you, Lance. Turning to Slide 26 and our full year 2026 targets. We are confident in our trajectory, our plan for the coming year and our ability to execute against our targets for 2026. We're projecting enterprise net sales of $24.1 billion to $24.9 billion with adjusted EBITDA of $3.5 billion to $3.7 billion and free cash flow of $300 million to $500 million. As for the first quarter, including corporate, we're guiding to $740 million to $760 million of adjusted EBITDA. Importantly, as Lance mentioned earlier, our guidance does not include the impact of price actions. The enhanced positioning and greater efficiency that we've realized through our strategic actions in 80/20 implementation have us well positioned for 2026, and we expect that we will begin to see that flow through in the coming year.

As we discussed today, we are taking swift and decisive action to create long-term value for our shareholders. The combination of IP and DS Smith created two regional powerhouses that are leading providers of sustainable packaging solutions with significant scale and strong customer relationships. Our 80/20 actions over the past year have reduced complexity in each region. And the next step to continue the transformation is to segment the businesses so they can realize their full potential. Separating the businesses will provide each with the ability to best align capital and resources to distinct regional opportunities, market environments and customer needs. Each business will have the necessary ingredients, including strong investment-grade balance sheets to execute its 80/20 plan and the virtuous strategic cycle in the most effective way possible. We believe this is the most certain path to deliver our 2027 target of $5 billion of EBITDA and enable each business to achieve best-in-class performance and best-in-class valuation as we create long-term value for our shareholders.

At this time, let's open up the line to questions.

[Operator Instructions] Our first question is going to come from the line of George Staphos with Bank of America.

My question in your free cash flow guidance of $300 million to $500 million, can you give us some of the other important assumptions that are in there? I don't believe price is in there, but if you could confirm that related -- is -- are you out with a price letter to customers? And then most importantly in terms of the question, if you want to just take this, $300 million, $500 million doesn't cover your dividend, Andy, with the spin. Might you consider reviewing the dividend policy over time?

So first, yes, we are out with a price letter. We have done that earlier this week. And so that will play itself out in the normal course of business. As you noted, no, there is no inclusion of price in the numbers that we have provided today into the guidance that we have -- provided an incremental price to come through. And as Lance said, in there, each $10 of price that sticks is worth about $90 million of price realization into the market. So that -- I think that covers that question there. Lance can cover any other topics you want to talk on about other elements of free cash flow.

What was the second part of the question, George?

It's on the dividend.

The dividend, $1 billion and the free cash flow, $300 million, $500 million, might the spin be an opportunity to review the policy and how do you feel about it?

Yes, sure. So we've said all along that covering the dividend was about $3.6 billion to $3.7 billion of EBITDA is the breakeven. Obviously, in 2026, we have substantial restructuring costs that are going in and some onetime costs that don't fit into the restructuring line. So you've got a combination of those things. We are maintaining our dividend policy as it is through 2026. And of course, through any process like this, you're going to review that work in conjunction with shareholders to make sure we get to the right place on a dividend post spin, and we'll evaluate that throughout the year in conversation with the shareholders.

Our next question is going to come from the line of Mark Weintraub with Seaport Research Partners.

A few really straightforward questions. One is -- so on some of the slides, it says like at the segment level, it doesn't exclude -- that it's excluding corporate. And then on the final slide, it doesn't sort of say anything about that. So just one clarification. How should we be thinking about corporate relative to the various numbers you're putting out there, that $3.5 billion to $3.7 billion, is that included or not included?

Yes. So the guide that Andy gave on a total company basis, $740 million to $760 million includes the impact of corporate. So if you take what we gave you on the region slides and the difference between that should cover the corporate line item.

Yes. Same thing for the year, Mark.

Okay. And with the spin, is there any meaningful change to what you expect corporate costs would go to?

Well, they would go to their independent regions. But in terms of being an overall increase, no, there would not be.

Okay. Very good. And then second, any quick reason why -- and maybe this is normal of course, but why 12 to 15 months to complete this process? It seems like a long time to me, but maybe I'm just wrong.

Yes. I'll touch on that. There's -- you get the mechanics, frankly, of accounting, right? There's just -- it's a heavy lift from an accounting perspective. What we don't have here is kind of large legal entity issues or things like that. And obviously, we're going to move to do it as quickly as possible, Mark, but the best guidance that we've been giving in the precedent is usually somewhere in that 12- to 15-month time frame.

Lance, anything you'd add to that?

Yes. No. I would say -- I would echo Andy's comments. I think this is a little different than if you look back at the Sylvamo exercise we went through several years ago that had a lot more operational tethering that we had to unwind to get that to where it needed to be. This is largely an accounting exercise that we're going to start off today in real haste to try to get this thing done by the end of the year. But right now, we're contemplating 12 to 15 months.

And one last one and hopefully not an unfair one, but so you've got this big step up in the second half of next year, particularly in North America, and you lay it out very clearly. It does include a big cost takeout acceleration, that $200 million. And if we look back, you had a great first quarter relative to expectations, et cetera. And then the last three quarters, though, you fall in shy on ops and costs. And so maybe talk a little bit about why you have a lot of confidence that you get back on track and you can deliver a really big number second half of 2026.

Yes, a few things in there, Mark. So first and foremost, the vast majority of what we're talking about are things that have been actioned and the tail here are the cost of finalizing that. So as an example, closures and the lingering cost of finalizing those closures, those tails start to fall off as we get through this year. That's a big one.

Second, we've got more actions. They're not the large-scale actions that we've seen so far, but we're starting to get much more into the nitty-gritty around things like supply chain and procurement distribution rolling out the Lighthouse models throughout the mill system and the productivity investments that we're ramping up going into that. And so there's a lot of intensity to happen last year and certainly throughout this year, that's going to continue to drive those. So those benefits start to accumulate more and more as time goes on through there.

So the key to it is it's literally -- the costs have got to be counted down to the penny in terms of facilities, impact of people, which is always unfortunate, but a tough reality in the transformation. And that's the level of granularity we're operating at. And that's both in North America and you saw for the first time today that we were able to -- now that we've gotten past a bunch of the consultation periods, to lay out the granularity in Europe, and you can see the magnitude of what we're doing in Europe that we will accelerate throughout the year.

So this is extremely granular. Look, I'm also realistic. There's a lot of moving parts. There's no doubt about it, but we are executing quite well.

Your next question comes from the line of Charlie Muir-Sands with BNP Paribas.

Just firstly, if I could just ask on volumes. You alluded to your belief that you gained share in the second half of the year in North America. It seems likely albeit we haven't seen the industry data yet. Can you just talk about the relative profitability you're seeing on those new wins versus the old business you lost. And also, I think you suggested there's something similar in EMEA. I wondered if you could share any kind of like-for-like or pro forma volume performance you've achieved in that region.

Charlie, I apologize, you were pretty muffled on that call, so I'm going to do my best where I think I heard the question, which is really around the volume wins and the quality of profitability around those volume wins, if I understood it right.

Right.

Yes. So they're very good. As you recall back a couple of years ago, we really started to reset our discipline around assuring that we were pricing to market, and we've obviously kept that discipline and if you look at the volume wins we've had in North America, they have been absolutely at those quality levels that we've been talking about. And so I feel really good about the business that we're winning and coming on. Again, we won substantial market share here in North America in the back half of the year. We were 3 or 4 points above market. We'll find out where the market actually settled later on here, but we feel very confident given the other results that we've seen that we have one quality market share, and you can see the expanding margins at the same time.

In Europe, right, the market has been softer in Europe. And just like in the U.S., you have to play where the market is. We have been really disciplined about making sure that we are bringing our value to the market, and we're not chasing bad business. That's very important in a softer market, and we have not been doing that. And again, you can count it by meters or you can count it by tons, we can see where those wins have come in and then how they'll be layered into the year. So we feel good about the wins that we have. We feel good about the commercial momentum in both regions, particularly in North America, where we won substantial market share, and our work is to keep that momentum continuing.

Your next question comes from the line of Phil Ng with Jefferies.

Thanks for all the great color. A lot to unpack. I guess, to kind of kick things off, the 2026 guidance. Lance, last quarter, you guys gave us a nice slide deck calling out $600 million of self-help and commercial efforts. Certainly, there's -- it feels like there's some movement, but the guide itself, does it account for any incremental cost actions that has yet to be announced? So -- or is that kind of accounted for?

Second, I think on the commercial front, certainly better in North America and Europe. And correct me if I'm wrong, Lance, the North America piece accounts for the exports, you kind of co-mingled it. So where are you seeing some of the wins on the commercial side, whether it's North America and Europe? I mean, Europe, I'm particularly curious, just give -- I thought the commercial side of things were quite good but it was more on the cost out. So help us kind of see through some of those dynamics.

Yes. So I'll start with the cost-out side. Yes. So what we described, I think, infamously, it was like Slide 15 on the deck on the third quarter call where we talked about a lot of the momentum that we had in carrying over things that had already been announced in 2025 and what that impact would be. I think that was the $500 million that you were characterizing. We are going to continue to optimize in North America around our 80/20 transformation. So it's an incremental $200 million of cost benefit that should be accruing to us as we continue to execute that plan as we look to -- into second half of '26 and into 2027.

On the commercial side, we're really pleased with the amount of progress that we've made about. We're ahead of schedule. I think as Andy mentioned, in terms of North America and our exit this year in the fourth quarter. And we thought we'd be at market. We're clearly ahead of that and we're excited about onboarding some very important customers that allow us to achieve those metrics. And we're excited about the wins that we've got in Europe. We expect to outperform. We believe the market next year will be up 1.7%, I believe, next year and -- or excuse me, in 2026 and we believe will outperform by about 50 basis points ahead of that. So we're excited about the momentum that we've got in that market as well.

Got it. So just so if I heard you correctly, Lance, the upside on the cost out, the $200 million that's incremental cost actions you haven't taken in the back half of '26 that you still need to execute...

Yes. So Phil, those will be -- those are -- that amount and those actions are stuff that was not announced or actioned in 2025 that we will continue in terms of our momentum into 2026.

Okay. And the other piece I wanted to tease out, perhaps for you, Andy. Mark kind of teased it out already last year, a nice beat in the first quarter and the Q2 to Q4 was a little uneven. Just want to give us some comfort that the framework you've laid out accounts for any hiccups along the way just because it's a choppy environment. So like how you kind of laid out the framework where -- is this conservative or are you making like a lot of stuff kind of has to kind of stick the landing just because you got a lot of moving pieces here.

Yes. I think the range that we've given provides a pretty decent margin in there in terms of the $740 million to $760 million in the quarter and the $3.5 billion to $3.7 billion in the year.

In terms of kind of -- I would just call them good guys, bad guys, how do you think about that over the year. On the good guy side, the year has started strong, and I will certainly say that January was strong. Obviously, the ice storm, that's going to be on the bad guy side, to see kind of what that impact is going to be. It's a super thumbnail sketch of $20 million to $25 million. It's just hard to know, right? You could make that up. But certainly, mill shutdowns and certainly some of the areas that were hit hard in terms of box. The box side will come back fast, but you got some mill impact that we'll see how that plays out because that's a pretty modest bad guy that's out there. Again, the January has started strong. We've seen that in our daily numbers. We'd expect that to even off throughout the year. And again, we said we thought the North American market would be flat to up 1%, and we'll take a couple of points of market share in there.

In terms of other good guys, right, we don't have anything in here for price. And we don't normally do that. We don't normally guide that. And so we've kept to that practice. But depending upon what happens with pricing, that's a pretty substantial good guy that's not in any of our numbers here. The real big bad guy is potentially out there, we don't know is what we faced last year was the global economy. And again, right now, things have started well, but that's hard to predict throughout there. So I feel good about where we are. I think that they're -- given the pricing there's more upside than downside in terms of opportunity. And so we feel like we played it down the middle.

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

Some costs in North America appear to be more sticky, like mobile liability, et cetera. I mean, your volume is up for [ 2% ] in 4Q better than you expected, yet EBITDA missed. So wondering if you can speak to cost in North America, which ones are more problematic, sticker, how you intend to tackle them? And with the cost structure in North America, part of your calculus in terms of deciding to spin out Europe. And what I'm trying to get is if you have to deal with the cost structure that's a little bit more challenging than you expected, it's harder to tackle that plus having a European arm as well. So any color you can provide would be helpful.

Yes. So on the cost side, look, I'm really happy with what we've done. We've taken out over $700 million in total cost when you look at the execution on that. So I'm very happy with the progress that we've made on that.

The things that are harder to get at, there's really two, right? One is the speed at which you take things down and all of those costs go away, right? So as you close a mill, there tend to be lingering costs during the shutdown and ultimately into the final closure and then potentially the sale or disposal of the property. Those tend to linger a little bit.

And then on the reliability front, it's as we have described, which is you've got to get in there and you've got to make the investments consistently over a period of time to drive the reliability and not have things pop up that can be very expensive in any given period. I mean, as you know, a singular mill struggling can be $100 million hit in a year easily, if a mill is really struggling.

And so we are putting -- aggressively investing back into our mill system in North America. And that's -- if you look at the expanded CapEx, if you look at the onetime accelerated transformation costs, even the Lighthouse rollout. Those are all things that we are doing to drive that reliability. It's absolutely showing up for the customers. They're feeling that positive reliability and it's showing up in their customer satisfaction numbers. It's showing up in our cost numbers. But it is, that's a slug fest. And you got to stick with it and the team is doing an excellent job.

On the European side, look, what Tim and team are doing in Europe is pretty exceptional. They are tackling structural costs in a way that's very unusual in the European marketplace. And you can see from the magnitude of what was on that one slide that we're getting after it. And so we're getting after it fast, and we'll continue to do that throughout 2026.

Got it. Just one quick follow-up. I mean, so it sounds like with respect to Europe, the costs are -- the hard to get at and taking a little bit longer. So was that part of what was packed into your -- was that what you consider in terms of the spin? Was that a huge factor in terms of your consideration for spinning Europe? Because...

No, not at all. The real driver for this decision is the fact that the value is really in the regions. When you get right down to it and you look at where value is created, the acquisition and the combination, what it did was it created two regional powerhouses that really have very, very, very little overlap. I'm talking almost zero overlap in terms of how those businesses -- they're structured in the market, how those businesses go to market with customers and how you execute all the way from inputs, fiber supply all the way through the market. They're really distinctive markets. And so using 80/20 as the lens and as the mindset, you want to simplify, right? You want to take the complexity out, you want to focus on where the value is in the discrete markets. and then you want to get capital and people aligned and focused to those best opportunities. And that's really the driver there.

The exciting opportunity in Europe is even with the headwinds that the business had all of last year, with a combination of the war in Ukraine and trade tensions and the softness in the market is the business performed well relative to the marketplace and is getting after the changes in a way that's really distinctive to that marketplace. And this business coming out as a stand-alone business is going to have a great balance sheet. It's going to have great positioning in the market, top of its class in terms of customer satisfaction and the ability to direct and align people and capital to that unique mission, and that's really what this is all about. So I'm super excited for what Tim and the team have lined up. And as an independent company, I believe it's going to thrive having that focus and that aligned capital allocation. And the same thing in the U.S. And this really allows us for each to realize its unique mission and really drive incredible value.

Your next question comes from the line of Anojja Shah with UBS.

I just wanted a quick clarification. So clearly, the price increase is not built into commercial initiatives in North America, I get that, I read you loud and clear. But in EMEA, the commercial initiative bucket is now $200 million in contribution. I think in Q3, it was $100 million. So what happened there? And can you confirm that if price goes down in Europe, whether that's already in that bucket or not?

Yes. So specific to -- so yes, you're correct on North America first. There is nothing in there in terms of price. In EMEA, same thing. It's only things that have been executed, and we have line of sight to. So you have the underlying assumption of market growth in there, which, as Lance said, was 1.7%. And then you got a 0.5 point, which are wins that we know that we have today. And so we do not have incremental price that has not been -- that is not settled into the market built into there. So there is no price.

Now that being said, as I mentioned in my remarks, just as there's a $70 price increase in North America that's been put out into the marketplace by us to our customers. In Europe, there have been a lot of -- there's been a lot of activity, and there's about EUR 100 paper price increase has gone out in most markets. And what we don't know is whether kind of what's going to stick. It's a more dynamic market. In the U.S. on an annualized basis, if you got every penny of that, that's a little over $600 million, about $630 million. And in Europe, if you got every penny of that, it would be about $300 million incrementally from what we're talking about today. But in neither case do we have those built into the numbers.

Your next question comes from the line of Detlef Winckelmann with JPMorgan.

Just if I can ask two, maybe the first one, regarding your commercial improvements year-on-year, that you've guided for now, it looks like about $100 million in North America. If I go back to third quarter, it was sitting at about $300 million based on your bridge that you gave. Just wondering if anything has changed and why the delta?

Yes. I don't know. I have to go back and look. Nothing rings a bell. I mean I think nothing has really changed other than the relationship that we've described. I think the extra $100 million is incremental to where we were in the third quarter. But we do have some commercial trade-offs that we've talked a lot about in North America about leaving the export business and the closure around Savannah.

Yes. That might be part of what you're looking at there is that, that $100 million, if we're talking about North America, right, that is netted against the trade-offs with the export business that we have exited. Did we answer your question, Detlef? I want to make sure we got it.

Yes, I think so. It was kind of a net zero right in the beginning now to net $100 million. If I really -- correct me if I understand. And if I can ask 1 more follow-up. I mean, right from the beginning on your Investor Day, you were very helpful in giving an EMEA and North America split all the way to 2027. Now I know partway through the year, you said demand is a bit worse. Pricing came down a bit from your initial expectations. So I think you were talking about maybe Europe coming down a bit from that initial guide of, call it, $1.8 billion to $2 billion. I'm wondering, given the context of your $5 billion guide now, what Europe plays a part of in that, if you can share? Any color would be great?

Yes. We haven't broken out specifically, but generally, you're talking about kind of $3.5 billion in North America and $1.5 billion in Europe.

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

Just following up on questions for Charlie and Phil and apologies if I missed it, but is the 2% outperformance versus the North American industry you expect in '26 based solely on those customer wins you've seen so far, mostly in the back half of '25? Or have you assumed further wins and share gains as the year progresses as part of that outperformance assumption? And I guess with that, could there be upside to that number as the year progresses, given improved service quality and customer experience metrics you've highlighted?

Yes. So those are -- this is a great question. Those are based on what we have line of sight to today, so business that we have won. So we don't need major incremental wins in this year to move the needle. And to be fair, right, what will move a needle in a short period are going to be local wins, right? The national business tends to be more on a contract cycle. And so we know what we won in 2025 that's now showing up in 2026. That's what we're communicating here. And then you'll have the local piece of business, which is much more day-to-day, much less contractual in there. So if we were to win incremental business throughout the year. Obviously, that would be an upside.

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

Well, thank you very much. I appreciate everybody joining us today. This is an important and a very exciting day for International Paper. The decision to split into two public companies to build two powerhouses that we have put together from the legacy pieces of International Paper and the legacy pieces of DS Smith now have two regions that are #1 in their regions have an exciting strategy in terms of cost position, how we're working with customers, how we're building our relative share position and ultimately, the financial upside that we see here, all of the hard work that's been put in the focus on 80/20, making really tough choices around assets and reinvesting back into the business aggressively to drive the customer service experience that we're seeing today, winning share, aggressively taking cost out and maximizing return on invested capital. When I look at that, I see two businesses that will stand on their own with great balance sheets with the ability to invest in their future with the ability to make dynamic capital allocation decisions to maximize value for shareholders. I'm very excited about that future. And I applaud the team for all the incredible work that they've done. I thank our shareholders for your interest in the business and what this can become and I'm incredibly excited about the future. Again, the year has started strong. We've seen a nice pickup in business here, and we're excited for the year to come and in the years to come. So thank you very much. Take care.

Once again, we'd like to thank you for participating in International Paper's Fourth Quarter 2026 Earnings Call. You may now disconnect.

[Audio Gap]

Can you just level set us in terms of what 2025 has looked like in terms of commercial improvements, cost out and changes within IP? And then any kind of trends you call out and the '25 EBITDA view you've articulated?

Sure. Thanks, Andy, and thanks again for having us this morning. It's great to see everyone and thank you for the great weather and the view this morning that I get to look at towards New Jersey, but it's great to be here.

And yes, so I would start with what has transpired over this year, right? And the tremendous amount of work that the organization has done and gone through really across both regions and really at the corporate level, too, right? So as we -- as we change the radical decentralization that Andy sort of put in place, the arrival of me in the spring, the announcement around Red River in North America, the subsequent mill closures that we announced in August, September time frame. And then now the tremendous amount of work that's going into the footprint transformation with the closing of the DS Smith transaction in February, but the work that's going on today as we speak to really refocus that organization and get the footprint the way that we want it in Europe.

So all in the midst of, which is a very different market than we thought coming into the year, right? And so as you think about 2025, the market headwinds that we faced in terms of demand across both regions and pricing pressure, in particular, combined with the demand pressure in Europe set us on a different course than I think we anticipated going into the year. So as we round out this year, right, coming into the year, we thought we'd be at $3.5 billion to $4 billion in EBITDA. Our fourth quarter guidance implies we'd be around $3 billion exiting this year.

And what we tried to do on our earnings call was because we have so many things in flight that are not at a run rate, what we were trying to do is build confidence in investors and knowing that because some of these things happen later in the year, the things that we've announced to give them sort of a view of, I would say, "what's in the bag." And so what's in the bag of things that we've announced that have been executed that will perform at a run rate going into next year. And so you're sort of at that level $3.6 billion level as you look towards 2026.

Right. So looking at the delta between the initial expectation for '25 and about $3 billion EBITDA, that delta is basically all weaker demand? Or how would you characterize it?

Yes. Yes, I think so, it's weaker demand and the impact on price because of weaker demand in Europe. And if you think about it, right, let's just say, for North America for a second, we're about $15 billion in revenue. We thought the market would be up 1%. It's actually down close to 2%. So 3 points on $15 billion, do the math, it's about $450 million of revenue. And as we discussed last night, about, let's call it, 60% fall-through, you're close to $250 million of EBITDA right there. And so -- and then the same in Europe, right? So we thought Europe would be up. It's softer than we had expected and with the impact of pricing pressure. So you can easily get to market-driven pressures and the impact of about a little over $500 million.

Right. Right. And in terms of the carryover into '26, can you help us with the kind of the waterfall in terms of commercial improvement versus cost out versus anything else you call out?

Yes. So as you think about -- if you go back to the waterfall that we laid out on Slide 16, I think I remember clearly because we've talked a lot about it since the -- since the earnings call, but Slide 16 in the presentation, about $150 million to $200 million of that sort of what's in the bag is a full run rate of pricing that we were able to get primarily from North America in 2025 that will roll into 2026. You have about $500 million to $600 million of cost-out initiatives that will -- additional benefit of cost-out initiatives that will roll into 2026. A large part of that is driven by North America and the late nature with which we announced the closure of Riceboro and Savannah. And now that will be offset. I think we need to be really clear, Savannah will be offset because of the positive contribution margin that was associated with that business.

So that was a strategic trade-off that we entered into. I think we've been -- tried to be pretty clear about why we did what we did. But we are losing some commercial profit because we're making a decision to step out of an export market that has not been able to return its cost of capital through cycle. We were facing a large capital call on that facility. A majority of that capital call was going to a roof that certainly won't help us improve returns. It will keep things dry, but it won't help us improve returns. And what we got to do was redirect that capital over time to a new paper machine at Riverdale as we exit the Savannah contract. So the trade-offs there at a return that's very attractive, close to 20%.

So the decision for us was pretty clear, but the benefits of the cost out will come next year, offset by the exit of the commercial impact of that closure. And then you have -- you've got the commercial success. So the continued momentum that we have around, I think everyone has seen the transformation of us on a year-over-year basis as you compare our quarterly numbers to the market. We sort of -- we communicated earlier in the year, we were crossing the chasm in terms of the year-over-year comps. I think that we have been very accurate in what we have seen and how we have behaved relative to the market. And now as we came into the third quarter, really showing that strength versus a change in market based on some of those key strategic wins that we've added.

And so between all of those things as sort of make up the bucket. So pricing, cost out, offset by the commercial impact of Savannah and then the additional commercial momentum we have going into next year by onboarding some key clients.

Great. Great. Well, there's a lot to unpack there. But I guess maybe we can start with the mill system and in North America specifically, after Red River, Savannah, Riceboro, is the mill system work kind of done? Or is the footprint -- are you at pretty full operating rates? Is there a little bit of slack, like how would you characterize it going into next year?

Yes. I think the way that we view it is we're going to continue -- I mean this is just the nature of this management team, and particularly Andy and I thinking and working with someone like Tom Hamic, who runs North America is, we're always going to be assessing our assets. But where we sit today, it feels like a lot of that footprint work has been done. Right now, the focus for us is to continue to go back to what Andy talked about on the second quarter call, which is how do we improve the performance of the mills? How do we stay dedicated to that investment in some form, outsized investment to play a little bit of catch-up, not a little bit, but a lot of catch-up on assets that had -- I wouldn't say had been neglected, but had gone through a period of a lot of volatility and whether they were being invested back in or not, which caused a lot of the reliability and efficiency issues that we deal with today that we're trying to turn around.

And I think as I described last night, what I've learned since coming to this company is that those assets look a lot like refineries. I come from the oil and gas industry. They look a lot like refineries. Oil isn't going into the refinery and coming out as some other petroleum product that we use, it's pine trees, but they behave the same. And as we are playing catch up on our investment and that commitment to turning them around, they are a bit of like an aircraft carrier, not a Sea-Doo, and that's the plan for us. I mean, that's why you hear Andy talk so much about the vigor and the courage that we have to continue to really support the organization and really focus on making sure that we get to a point where we're not playing whack-a-mole in these facilities as we're dealing with maintenance and reliability issues, but we're actually on our front foot.

Right. And in that context, can you talk a little bit more about Riverdale, like the timing of that, what that gives IP?

Yes. So we'll start work, Riverdale, the paper machine is slated to start work in the third quarter of next year, right? And so it will continue to ramp into 2027, so that the full benefit of that investment on a run rate will occur really in '28. But it's all a part of the plan and what we've sort of guided to that $5 billion in 2027.

And then directionally, can you compare the progress that's been made in North American mill system versus the box plant system?

Yes. So really Tom Hamic used to run the packaging side of the business, the converting side of the business. And so he started the -- converting side of the business was actually recognize this sort of lack of investment and needing to -- both on the commercial side, I would say, commercial and customer side and also in the facilities. And so I would say, as you compare the 2 pieces of our business, the converting business is about, I would call it, 12 to 15 months ahead in terms of the focus, either around capital or around the way that we go to market with our customers. And so that was a lot of what we went through on the market share side and what we were talking about earlier on the sort of the -- our comparison to market over the course of the last year and how you've seen that really find a chasm and then work its way back up to the point now where we're exiting I believe this quarter, we will be outperforming the market. And I look forward to that.

And what it's meant, though, has been we've left some customers or some customers have left us. And -- but over time, we have seen some of those customers come back or we have added significant new ones, that's allowed us to really rebound where we want to be under pricing terms and economics that make sense to us.

So the contract kind of resets are basically done in 4Q, this quarter essentially?

I mean, there's always going to be -- there's always going to be the natural churn for us. And so as we think about, okay, so as the clock turns, right? So we've got a pretty easy mark over the next year on a year-over-year basis given where we were from a comp perspective. But what does '27 look like? And the expectation is from this management team that we still continue to outperform the market. And someone might ask, well, how do you have confidence that you do that? I think that our 3 strategic pillars at the strategic business unit are really key to that. And the first is an advantaged cost position. We talked a lot already about what we're doing around reliability and efficiency in the mill system. That's a big driver for that. But what it tells you is that, that advantaged cost position doesn't mean low-cost producer. It means that we have an advantaged cost position so that we can win when the market is good and when the market is bad. So it gives us a lot of power.

Two would be a relative share position in the geographies in which we choose to compete. And then the third would be delivering superior customer excellence. And you hear Andy talk a lot about the focus of this organization that wasn't always there around how we continue to delight the customer, right? And that is simply measured today by on-time deliveries and parts per defects. So -- and in both those places, we've made huge strides over the last 18 months. And so it's given customers a lot of confidence amongst a myriad of other things that we're doing at a more detailed level to make sure that we are delighting our customers and serving them appropriately.

So those are the things that give me a lot of confidence that we can continue to build and outperform the market going forward.

Maybe without going into a huge history lesson, but I think it's important for what you're saying. Can you talk about maybe what IP was not doing in the box plant system before Andy arrived or like what you saw as an outsider coming in, in terms of...

Yes, it's a great perspective, I think. So as an outsider coming in, it was clear when I got here in the spring, that the organization was clearly going through a lot of transformation. But culturally, it was going through a lot of transformation too in North America. And the way that the box system and the mill system worked together or maybe in the past hadn't worked together so much. So it was really around kind of who held the power historically. And if you think about the history of International Paper many, many years ago, they had a lot of different avenues of which to send and produce paper from the mill system. So there was a lot of decision-making at the mill system around where they were trying to aim their paper supply to maximize returns.

Roll forward to where we are today, we are effectively a sustainable packaging company that produces corrugated product. So there is no decision-making anymore. And what the lack of focus that had occurred on the converting side around being that customer-facing value-adding perspective had been lost based on the fact that the mills were driving how and when we did business. And so today, it's completely flipped. And I think Andy was a great catalyst. Tom had started a lot of that as well in terms of the head start that I was talking about, both on the investment, but also on the commercial side and recognized that, that was a road to ruin. And so what you see today is very much our business being led, where the money gets made and that is interfacing with the customer, and then we work backwards into the mill system for what the needs are for the business.

And so it's been a cultural shift, but things -- but one that I think has gone well, and we'll continue to. We just need to -- we're just working with the mills to get them where we need them to be.

Right. And you talked about sort of the capital needs and the profile for the mill system. In terms of maybe the future for the box plant system. And then can you talk a little bit more about that? And then the progress on the Lighthouse initiative sort of like where you are?

Yes. So I talked a little bit already about kind of thoughts around the mill footprint. I think that there are some things that we'll continue to do that we're assessing into 2026 around our box plants and our footprint. Some of it will be net takeaways, but some of them may be just trading up in terms of quality. So there'll be some work that we're going to continue to do in our box plant system. I'm sorry, what was your other question?

Lighthouse.

Lighthouses. So we're continuing to roll out the Lighthouse. I think we will be through 75 by the end of the year, which is great. And they continue to do what we thought that they would do in terms of productivity and efficiency.

Not every cluster delivers the same productivity, right? If you're able to initiate the Lighthouse projects and segregate into the sort of the super plants and the hybrid plants, and you're able to close a facility, it clearly does -- it's a very different turn on the efficiencies and productivity that you're able to provide versus just keeping the plants and optimizing a system where it doesn't really shake out.

But in the early days for us, we were seeing in some of the low-hanging fruit where we were able to close plants, we saw productivity up 20%, 25%, right, in efficiency. But -- and then in a world where you're not really closing a plant, you're just really focused on taking that 80-20 approach and segregating and making sure that you have the plants focused on what they do best, either running volume full out or being really good at the turnovers for the more complicated hybrid work, you're seeing improvements of 10% to 12%.

I think we focused mostly on North America. I'm wondering if we could kind of switch over to Europe and high-level thoughts on '25, how it's played out, the DS Smith asset and sort of where we are?

Yes. So I'll go back to -- we are in the thick of it today. Tim Nicholls and his team around making sure that we're getting the footprint right. What we recognize is that the DS Smith company had been on a 10-year acquisition spree across Europe, and it had not really integrated the businesses. And so for us, it's going through and figuring out the parts and pieces that we like, and those that we don't and understanding and making those decisions and being very careful how we talk about it in the midst of the negotiations that we have with the work councils and regulatory bodies across Europe.

So all these things can be done. We know that it takes longer, and it is expensive. It's hard work, but we are confident that we will get where we need to be to make that a better business. So we're in the thick of that today. From a market perspective, I sort of already covered it, lower -- very much different than our expectations coming into the year. I think a lot of it is driven probably more of an impact in Europe around the actions from Liberation Day and the tariffs. But then you also have the overhang from the Ukrainian crisis. And really, that business in Europe is much more focused on fast-moving consumer goods. And the fact that people are just at all-time high saving rates in Europe, you can look at it through the economy or the economists will tell you, it's no surprise that we just don't see as many goods moving through the system, which is a direct indicator of our business. So that's sort of where we are today, but we're excited about what that will mean over the next 2 years.

And can you talk a little bit more about like levers that you can pull in Europe, maybe specifically with the box plant system versus North America? Or how you kind of compare the two? Like...

I would say, I think the biggest difference that I would note is and this is part of sort of the thing that we are looking at is when I talk about, one, we're less integrated, right? That is a fact. And I don't see that we -- that there's this burning need to become more integrated today. And then it's really going through and optimizing -- reviewing and being very intentional around how we think about the assets because of where they sit and how they sit across borders even sometimes. For example, we have a box plant system around Barcelona. It looks and feels a lot like our Atlanta complex, right? And how we can apply the same lighthouse approach in that area, in that urban area. But then we have a lot of assets that we're also coming through that are effectively stranded.

So you have a lot more flexibility strategically when you have a cluster of box plants, being able to optimize within that system versus sort of something that might be stand-alone, I'm making it up, but in Czechoslovakia, right, one box plant. It's got to stand on its own. And if it doesn't, then we are probably making decisions around what we do with that.

So -- but in terms of our ability to roll out 80-20. Just the concept culturally has gone very well. And the ability for us to push the lighthouse concept into Europe is also something that we expect to reap the benefits of.

Great. Great. I don't know if there's any questions in the room, anything? Can you -- as we look to '26, and we think about demand, you obviously have thousands of customers, all different end markets. Can you talk about what your customers are telling you and maybe forecasts, outlooks for '26. Can you remind us what your kind of long term -- at least for the '27 targets, like what kind of like volume growth you're expecting? And then just sort of where it feels like we're at now?

Right, right. Well, a lot of the work that we do is looking probably at a lot of the same work that others in this room are around what the economists are telling us, right, Oxford, others around sort of the outlook. But I would say what we are expecting is over the course of the next 2 years to revert to the mean in terms of our ability to grow at, call it, 1% to 2%, a little bit faster probably in Europe, maybe a little bit slower in North America on a sustainable basis, but sort of a reversion to the mean. It just feels like that's where we are today.

We talked a little bit last night around -- when I -- I don't have as long a commute anymore now, that I don't live in Houston, I live in Memphis, but the commute that I have, I get to listen to CNBC in the morning and there seems to be a lot of talk -- not a lot of talk about how weak the sort of the industrial goods economy is. There's a lot of exuberance around AI or a lot of discussion around AI and technology and chips, but what's not talked about as much, I don't believe, is just the health of the goods economy. We talked a little bit about it last night, which is things are slow. The consumers dealing with how do I deal with the inflation. Our customers directly are dealing with a consumer and they're dealing with the tariff issue and liberation day. And then on top of that, we have a slow housing market, one that really hasn't recovered since COVID.

And so there's a big piece of our business. It's estimated anywhere from 10% to 20%, so let's call it 15% of the corrugated market that's tied to the housing business. So all of those seem slow. But in the midst of all that in North America, we still feel very tight from a supply-demand perspective, right? Some of that is work that we have done this year and taking tons out of the system and others. So all we need is a little bit of spark on the demand side, and I think it would be really good for business.

Great. In North America or Europe, do you think corrugated is gaining share or losing share, like versus poly bags, mailers, resin?

Yes, we look at that quite a bit. And as an outsider, I feel like I get a little bit more leniency to test that, and asking the organization. And do I see secular change? I really don't. And while someone might say, well, there's more plastic Amazon bags that are showing up, I think that in North America, for example, as long as there's more of those plastic bags showing up, there's more goods moving through the system that at some point was in a cardboard box. So how does that net out? I'm not so sure, but I'm okay with just more churn in the goods economy.

In Europe, it's moving away. It's actually moving towards the sustainable packaging piece. And while some of it may be more paper-based envelopes, et cetera, again, I go back to as long as goods are moving through the economic system, that's good for us.

And in terms of pricing, I'm -- not future pricing, but can you talk about sort of philosophically how you think about pricing in terms of what drives it, how you've tried to price differently maybe on the box level, like...

Yes. I'll be -- I'll be really careful about -- I'll be really careful around the pricing topic, given where we are and some of the legal stuff that's going on in the industry. But, look, I would say it's very encouraging in North America to see where we are from a supply-demand perspective vis-a-vis where it feels like we are in the cycle. So I go back to sort of this -- sort of the doldrums of the industrial goods economy today. And we know that it won't last like this forever. And I feel like there's more potential upside in terms of demand from where we are today going forward. So I feel good about that. And I think that, that has implications when you have a tight system that we all understand from our Economics 101 class.

I think in Europe, it's going to be about us rightsizing our cost structure, right? Just the behavior around supply/demand is such that it is more loose. And so for us, it's about getting our cost structure right and our footprint and understanding where we want to play and where we want to compete that delivers the most profit and return to the business.

Any questions? I guess, as part of the Analyst Day, you gave the '27 targets, and you also kind of revised those when you revised the '25 targets. Can you just maybe remind us where the '27 targets are? And I guess, is that delta just a function of everything that happened this year?

Yes. It really is. I mean so our targets then were $5.5 billion to $6 billion. What we shared on our last earnings call was a '27 target of $5 billion, which is still a hell of a transformation, in my opinion, as sort of the new guy and watching how much work is going into transforming really this company. But yes, it's effectively a function of the fact that we've lost a year and when you only have a 3-year target, you don't have a lot of room to make up and we're not going to have sort of a demand environment that overcomes that in a short period of time. And so our view was best to be intellectually honest with our investor base about the market. We know we don't control it, but making sure that we do stay focused as an organization on the things that we do control.

And I sort of used the analogy last night about the earnings power of the engine in this business, making sure that this company remains focused on doing the things that matter, controlling the things that we can control, to improve the earnings engine of the business such that when the market does come back, that we'll be ready to take advantage of it based on our reset cost structure, based on the way that we approach our commercial initiatives, and how we serve our customer, I think you're going to be very, very powerful.

And we're coming up on time, so maybe I'll save the best question for last. But when you get to '27 and you're generating that earnings, can you talk about sort of the cash generation power of the business and what you're able to do with that cash?

Yes. So number one, I look forward to the debates. Andy and I have -- on what we do with the excess free cash flow. Andy and I have a very similar philosophy. I think you have to be really careful around share buybacks. I'll just go there. We want to make sure that if there is a need, and I think what he has shown historically, I think, is a great case study in how to really optimize that excess free cash flow, which is maybe we carry a little bit more cash than we need during the good times and really use that as firepower when the bad times occur to make sure that we are buying low and not buying high in terms of the share buyback.

So I have the same philosophy. Nothing has changed in terms of the overall cash return to shareholders and the framework that we provided in the spring at the Analyst Day. I think that, that still is strong and still exists, and that is definitely on the forefront of our minds. But yes, I mean, look, I think as we get into 2027, and we get the cash investment portion of the transformation behind us, so we had a significant cash investment in 2025. We were clear about that at the Analyst Day. There's still a lot of that, that will exist maybe a little less than half if you include the transaction fees and everything associated with DS Smith, but we'll be reducing that. But there will still be a significant investment in Europe -- cash investment in Europe around the transformation '26. But by the time that we get through '26, then there may be a little bit of a tail, but most of the cash investment costs around the transformation will be done and we'll be at our full free cash flow earnings power, right, that conversion. And I think we'll be earning significantly more than what we need to even post dividend.

Great. Great. Well, we're coming up on time. So Lance, thank you.

Thank you. Thank you, everyone.

Thanks for joining us. Happy Veterans Day. Thanks for making it through all the logistics with the government shutdown, et cetera. My name is Ghansham Panjabi. I'm the packaging and materials equity research analyst. Over the next 3 days, we have 20-some-odd companies. We'll host through a fireside chat format, including some uncovered ones, and that brings us to International Paper.

So International Paper, we have Andy Silvernail. Andy, I had the pleasure of hosting you last year at our conference. We also have the IR team, Michele and Mandi as well. So thanks again for joining.

I'm going to turn it over to Andy, and we'll start with maybe an overview of International Paper. We'll build the conversation. This is uncovered. So please send your questions to [email protected]. So with that, Andy.

Well, first of all, good morning, everybody. It's good to be here, and it's always good to be back at Baird. So thank you for having me. It's -- I always reflect when I come back here. I think the first time I came here was 2000 -- no, sorry, it was 1994 or 1995. So I've been coming a lot of years to the conference. I was an analyst back then, and I came a long time when I was CEO of IDEXX and second time back to International Paper, so it's good to be back here.

So a little bit about International Paper. We always kind of laugh a little bit because as we think about our name, it actually is no longer really representative of who we are. After the sale of our Global Cellulose Fiber business, which should happen over the next few months, to be executed then, we'll be 100% a sustainable packaging business. We'll be the largest sustainable packaging business in the world, about $24 billion in just packaging revenue.

And we are on a transformation journey. So I started in May of last year. I had a perspective that, frankly, that the markets had not really understood the core of the packaging business and the value of the packaging business. Today, we are about a 30% market share player in fiber-based packaging in North America and about a 20% player in fiber-based packaging in Europe. In both places, we are the largest player. And in both places, in different ways, we are undergoing a very significant transformation. And that is one of moving from what I'll call a production kind of focused -- internally focused organization into a customer-driven organization, where we are utilizing the methodology that I have really utilized throughout my career, which is operationalizing the 80/20 principle and actually in lean principles also together as you really think about where is the point of impact for the customer, what drives value for the customer and then really reengineering your organization around those value flows.

And so we have -- as we have launched this, we've moved very aggressively. In the United States, EBITDA is actually up about 40% on -- if you look at the trailing 12 months through the third quarter, EBITDA is up about 40% from about $1.7 billion to call it on a run rate of about $2.3 billion, somewhere in that range. And so we've had a great run so far in North America. At the same time, while facing huge headwinds in the marketplace. We came into this year with an expectation of market growth of somewhere north of 1 point of volume. And we're going to -- the year is going to finish in the U.S. market, probably down about 2. And so that 3-point swing is worth somewhere north $200 million, $250 million of operating profit of EBITDA to our business.

And so even with that headwind, we have made that transformation. And I would say there are really two things that are fundamental to that. The first one started before I joined the company, and I'll give Tom Hammick, who runs North America for us, a lot of credit, who has really the courage to aggressively reinvest back into our converting business. So on the front end of the business, we started that a little while before I came with the recognition that we had underinvested for a long period of time in the front end of the business.

And so with that, a couple of things. First, massive changes in customer service. So when you look at -- if you went back 3 years ago, even 2 years ago, we were probably in last place amongst the majors in terms of customer perception, how they viewed us in terms of our engagement with them. In a very short period of time, we have moved to a clear #1. And that's been driven by attention to detail around on-time delivery, around quality and very specifically around engagement with the customers. We dedicate teams to very specific customers. And what comes out of that is innovation. So that focus there.

The other part is really the investments back into the business into the capability of converting because we had been a business that had grown up as, for lack of a better term, in a production-focused world, we really thought of converting as a place where paper went versus that was the front end of the business, and that's what the customer cared about. So that change has been dramatic. Related to that also has been the really aggressive restructuring of the business. This is a business that had too much overcapacity, had capacity in the wrong places, was focused on the wrong markets, had under-invested in its business for a long period of time. And I'll give you a sense, just a couple of data points in North America that I think are really excellent proof points.

If you look at our spending in our mill system, so our spending in our mill system and our spending in our converting plants on a capital basis of the strategic assets we have kept. So we have -- we've eliminated about, in total, 3 million tons of capacity we've taken out of the market, 3 million tons. We've shut over 10% of our converting capacity and reinvested back into that converting capacity. But if you look at that investment, it is up 50% year-on-year into the strategic assets in each mill and in each converted plant, the average mill and the average conversion plant that we have decided to keep in our system is seeing a 50% increase in spending and that will continue for the next 2 years after this -- that level of reinvestment back in the business.

So we've seen the movement on the customer side and the result of that is a turn in market share. So we went from a business that has consistently given up market share over the last decade to a business that won market share last quarter. And we have a very good line of sight for next quarter, this quarter that we're in and through next year. And so we've seen that happen.

The other part is we have radically restructured the cost base of the business. So I talked about the 3 million tons of capacity that we've taken out. We've also exited nonstrategic or poor return on capital businesses, both mills and on the front end of the business. And we have completely decentralized our corporate entity in Memphis. When I joined, we had almost 2,700 people in Memphis, who were -- what you would define as the center. That number today is about -- is under 400. And not all those people left the company, but about 1,700 were back into the businesses and the rest of them exited the business.

And while there are savings in that, that was not actually the goal. The goal was focus. And that is what -- if you were to ask me a singular thing, what do I care about? It is focus, relentless focus on the customer, and getting a cost base right that allows us to reinvest back into that so we can win the business, so then we can grow profitability. That's what's really happened in North America.

Europe has been a different story. We completed the acquisition of DS Smith and look, we finished that at the end of January. It's been painful. There's no other 2 ways. There's no other way to say it. And anything else would frankly be BS. And it's been painful because the markets have been really tough. People -- we knew the markets would be soft. We knew capacity was coming on. But the underlying weakness in the European economy, the combination of tariffs and the war in Ukraine and real concerns in Europe around retirement has led to pretty aggressive savings rates increases. And so demand has softened. And with that demand, unlike what's happened in North America, which has a much more solid supply-demand dynamic in Europe that doesn't, we've seen pricing drop there also. And so the total is almost $300 million of year-over-year impact to profit in Europe.

And so we are aggressively administering the same playbook. It comes in a little bit different flavor in Europe because of the structure in Europe, but we are very aggressively restructuring Europe. And so what the things that I talked about in terms of the front end of the business in the United States, we've already announced a number of proposed changes. And I'll use that language very carefully because you have to go through a consultation process. You have to go through good faith negotiations. And so you can't show up and say, "I've got an answer and here's my number." It doesn't work like that in Europe. You have to go through the proper discussions. And so we're going through that.

And -- but with that, we've already announced major changes in terms of very similar, a decentralization and a deconstruction of a bunch of centralized structures and people and assets. We have already announced a number of closures, and we are going to continue down that path in a very similar way.

And so there's been a lot of activity. It's been a lot of ups and some downs along the way, but we have an enormous faith in the strategy that we have. And I think if there's a single message that I think is important for people to hear from us today, is we believe in the strategy that we have. And the ups and downs of what the markets have been, it's not that I ignore them at all. I take serious messages around stock reactions. And I don't -- I think you're a fool if you ignore the signals that are coming.

That being said, when I think about the way to win in both of these businesses, and they're very different in terms of market structures, how they sit in the world, how they compete and we shouldn't conflate them, right? We should not treat them exactly the same. But the playbooks are very similar in terms of eliminating waste, redeploying, focusing at the point of impact on customers, and then the return profiles that can come out of that. So we are going to absolutely stick to our guns in terms of that strategy. Now we're seeing it. It's already paying huge dividends in North America, and we have real faith that it will do the same in Europe.

Okay. So [email protected] or I'll open it up to the floor at some point, too. So thank you for that, Andy.

You bet.

So you joined -- obviously, a lot happened last year, right, with -- when you joined, you laid out an ambitious vision about the operating model, the 80/20 philosophy, and so on and so forth. DS Smith, you talked about divestitures, you executed on some of those. So maybe we could disaggregate that. On the 80/20, how is that embedded the culture? How is that permeated?

It's gone exceptionally well. I think the benefit of having done this for the last 15 years is I've seen the movie. And a huge piece of this, right, is actually getting people -- getting the organization to see the benefits of doing that. So any time -- for any of you who have been through a large-scale change, I kind of think of change as 3 pieces, and it's more of an exponential equation than anything. It comes down to focus first. It comes down to energy, which is really people and assets and investment and then you have to catalyze, right? You absolutely have to catalyze that change. And when you are engaged in 80/20, what 80/20 does is it's incredible common sense about focusing on profit pools. That's all it is. It's focusing on what matters most and how to get at them, but it is not commonly applied. And the reason that the tenants are not commonly applied to my experience is that they are hard. They are really hard. They force people to look at facts that you can no longer ignore and those facts demand that you take action and you actually have to look at those facts and make a decision. You have to look at them and say, "Am I willing to keep 1 million tons of capacity that doesn't earn money that has a $300 million capital call, am I willing to do that?"

And when businesses don't look at things in that disaggregated fashion, it's very easy to make an argument. Well, I have an export business and I sell to the export business, and I need excess capacity and you create these stories in your mind about why you want to do these things when you get rid of these stories and you just look at economics and you go through a cycle, it doesn't earn its cost of capital. Why are we keeping it? Why are we going to spend $300 million when we can spend that money down the road at our Riverdale mill and build a lightweight paper machine that's going to earn a 20% return on capital when I'm putting $300 million-plus into something that's not going to return it. So it forces you to really look, honestly, add things, but then you've got to catalyze people to change. And we've had a number of catalysts come our way, right, whether it was people who had expressed some interest in potentially buying the company, the poor performance that has existed for a long period of time, there are lots of catalysts.

But you got to get people to understand that it's in their best interest to win. And so you've got to start putting points on the board. And I think in North America, those points have come on the board I was just talking to an investor a moment ago who was out in our Atlanta complex last week, I think it was, we had a bunch of analysts and seen that just immense difference in Atlanta that has happened in just under a year. And once you start getting that kind of momentum, people want to -- they want to be part of it, right? They want to be part of that momentum. So I'm excited about that. I'm excited to get that same momentum in Europe. So the change is going well.

Look, turnarounds are tough. Turnarounds are not for the [indiscernible] That's for sure. I feel very fortunate that I got the opportunity to do this at this stage of life where I've been a CEO for a dozen years beforehand. And I'm doing this for very different reasons than first time around being CEO.

Okay. Very good. The divestitures, just take us through what's been happening in the company.

Yes. So we have -- we've done a whole bunch of small divestitures that you guys don't see, a whole bunch of assets that we have sold and exited things that just, frankly, were not central to the focus of the organization. And then the biggest piece is the Global Cellulose Fiber business or GCF, as we call it, that we're in the final stages of that. And it's just -- we're down to the basics of regulatory approval, right? Just getting the last little pieces of it. So sometimes our goal had been by the end of the year. I think we still have a shot at that. If we -- unfortunately, we can't make the regulators move too much faster. We can do the best we can, but I feel confident we'll get that done soon.

And any stranded costs and so on?

Yes. There's about $60 million of stranded costs. We talked about that. One of the problems, and I really appreciate having been a long time ago an equity analyst in your guy's shoes, one of the issues when you go through something like this transformation is it's just muddy, right? As you're following -- looking at the data, it's just messy. It's like, okay, we'll accelerate depreciation is how much? And what are the real earnings look like? How does this -- and then we're investing so aggressively back in the business, what are the real cash flows, sustainable cash flows of the business, all those things. And so as those things start to clear themselves out, but one of those was around stranded cost. And so what it did was it made the GCF business look like it was super profitable in the third quarter and then it brought down the other pieces when it's not $60 million of stranded costs, it's covered in a TSA or Transition Services Agreement that we'll have in place and then we'll take that out of the organization. But that will be done over the next year.

Okay. DS Smith, obviously, you mentioned Europe being tougher. That's true for most companies I cover.

Yes. Yes.

And what about asset quality positioning? Where are you in terms of implementing 80/20 sort of in that asset base?

So asset quality front end on the box plant side, what I would say is most of the box plant system is actually in really good shape. It did not have the systemic underinvestment that the North American box plant system did. That being said, it's a little bit different than what I just said holds true when you're around most of the metro areas. And then as you get into what I'll call kind of singular assets that are in more distributed areas, that tends to be less true, and it tends to be less true because the economics aren't as attractive. So that spiral of reinvestment, like is it positive or is it negative, you get some of that. And so you have a little bit of that. But generally, the box plant assets have been well invested in. The mill system construct is very different than the North American mill construct. About 60% of what we make for paper, we consume ourselves and then we buy about 40% of our own paper. So it's very different in the U.S. In the U.S., we are 100% integrated from a paper perspective.

And then we have -- so about 40% of the paper that we make goes out into the open market into things that are not in a box business for us. And so the work that we're doing and the things that we're really looking at our integration rates, see through return on capital, kind of how you think across the entire system and then strategic versus nonstrategic assets. Again, the mill system is well invested in, but where we sit on the cost curve is not as advantageous as we are in the U.S. In the U.S., you'd make the argument as a whole. We're certainly in the top third, maybe even the top quartile of our -- in terms of performance position in the U.S., we're more in the middle in Europe. But a lot of that has to do with what I'll call the nonstrategic side of the mill system. So the parts that are in the box system are more aligned, and that's where investment has got to go to drive down in terms of a total cost position.

Okay. You said -- I think you said 10% cut in North American converting capacity, right?

Well, we took out -- I should say, we took out 10% of the -- we've taken out a little bit more than 10% of the box plants. We actually haven't cut capacity, which is the interesting part because we have improved overall capacity -- capability throughout the rest of the...

Optimization. So what have you done in Europe?

Yes. So far, we have announced a number of things in the U.K. and a number of other countries to go through the process. So we have not been specific about numbers like that because we really can't be at this stage.

Okay. If we switch to the operating conditions by region, what changed in North America this year, relevant to...

Yes. You always want to avoid getting yourself in trouble in these things. But frankly, when the whole tariff discussion started, you just saw an absolute tick down in the market. So when the first noise if it started before Liberation Day was announced, you saw -- we saw it in our numbers. We saw a tick down and then after Liberation Day, you saw another major tick down. So the correlation between the two is undeniable. And I think that's just reality. If you look at the major packaged goods companies and you look at their volume, it looks exactly like what's happened there. And so I think it's a part of it is pressure on the average consumer, right? So as we see the stock market boom and we see all the kind of headline numbers, I think we all know that the reality is the average consumer or even the average plus consumer is not faring very well right now.

You're seeing them trade down. You're seeing there was a great article in the Journal last week or 2 weeks ago, around consumers and how they're stretching out their use of goods. And then while we don't send our goods across borders, the things that go across borders that we -- that are packed in the U.S. or packed in Europe that are crossing over, that velocity has come down as we all know pretty dramatically. So look, I am hopeful that a bunch of the structural issues that are holding the markets down, but we can't bank on that. Because if you look in the U.S. and you say, we got a really good news story in the U.S. with a bunch of headwinds that are actually enormous. So you think about that, you think about the trade and tariffs, you think about where housing is and housing accounts for somewhere between 10% and 20% of all packaging. So it flows through that portion of it. So if you think about what's happened with housing, if you think about the impact of trade and tariffs.

And then if you look at my old world from IDEXX, the industrial world, which has really been in an industrial recession here for a while, right? You're just starting to see positive comps in terms of year-over-year orders in that world. Those three things, I actually -- while they've been painful, I actually make me really excited about what's going to happen in the U.S. because I see all of those as tailwinds as we move forward at some point. When they happen? I don't know, and I think -- and they're all interrelated. But it makes -- it gives me a very positive outlook in the U.S.

In Europe, I think we have to face the fact that it's just going to be longer. It just is. And because the things that you're dealing with are things that you absolutely have no control and the markets can influence. But whether you're dealing with trade and tariffs, don't know. The war in Ukraine, God someone tell me, I have no idea. Those are things that are hard to get your head around. And so with the structural overcapacity in Europe, as those things have come into play, that's what we're dealing with.

The good news in Europe, if you want to say, hey, where is the good news? Our positioning is excellent, right? So our competitive positioning is excellent, number one, which I think is great. Our ability to take cost out, it takes longer and it's more expensive in Europe, but you still love the ROI. It's not 100% ROI that you have in the U.S. but it's still a 50% ROI. And I think all of us would take a 50% ROI any day, but you got to go through it, and it just takes time. And so I feel really good about how those things play out in terms of the positioning of Europe.

The other part is, look, the bottom quartile in Europe in terms of cost position, they are under cash cost at this stage, right? You're now seeing people who are radically cutting capital, doing shift shutdowns, all the things to delay actually closing things, you're seeing all those things happen. I am not naive enough to believe that there are going to be mass closures in Europe. I don't believe that there are too many forces, family-owned, state sponsorship, you name it, that will hold on longer than anybody wants it to and that -- I think we should face that reality. And frankly, anyone who's waiting for the market in the U.S. or in Europe to bail you out, I just think that's a mistake. And I think you got to control what you can control.

You haven't given 2026 guidance yet, right?

No.

You can change that, if you'd like.

Right. Yes.

But you did talk about a $600 million sort of EBITDA improvement. Can you just expand on that?

Yes. Let me walk through it. So what we did is, obviously, we talked about finishing this year, and we talked about 2027. And just -- and we really debated whether or not we wanted to talk specifically about 2026 guidance. And we decided to not go all the way with it for a couple of reasons. One of the biggest ones is, there are a number of things that we know are going to change between now and when we have fourth quarter announcements. And so -- the fourth quarter earnings. So we thought, boy, it's kind of -- there's no sense in doing that, and let's be sensible about that.

And so what we did was we talked about the -- what we know is in the bag, so to speak, that has been executed and is rolling over into next year, and that's about $600 million worth of benefits in total. So that kind of gets you to about $3.6 billion. Now you're going to have inflation, so you're going to have kind of $200 million, $300 million of inflation. So your starting point, call you starting $3.3 billion. And we believe that we can get to $5 billion by 2027. And so what we've talked about is what's that bridge. So how do you think about that bridge? Well, I talked about $300 million of inflation you're going to have another $300 million in the following year, so call that in the neighborhood of $600 million of inflation.

So where do you find the rest of it? Where does that all come from? You've got a little over -- we got about $1.1 billion of cost out that we've targeted from here through -- to impact through 2027. That's probably 60-40, 65-35 U.S. versus Europe in terms of that cost coming out. That's structural cost and its productivity. It's really a mix of those two things. We have an assumption that the U.S. will get to what we believe is updated mid-cycle pricing, which is, call it, somewhere between $20 and $40 a ton, so call that just pick a middle, call it, $300 million. And another couple of hundred million in pricing in Europe, which is way down on its historical basis. So call it plus or minus about $0.5 billion or maybe slightly more in terms of pricing.

You've got about another $0.5 billion that comes out of just organic growth. So if I think about organic growth in the U.S., we think the U.S. market next year is soft. We think that's a flattish market in terms of volume, and we think we'll grow a couple of points above that. We think Europe is probably 1% to 2%. I think that's a pretty good number. And those 2 things combined, you kind of compound that over a couple of years, that's worth about $0.5 billion and then about a little over $1 billion in cost out.

Okay. The targets that you changed as per your 3Q slide deck on 2027, that was just the GCF divestiture or...

No, no. So we had -- when you really looked at 2027 and you look at the market forces, so we've lost, as I heard -- I talked about it in the pieces. But in total, it's about a half -- actually, it's north of $0.5 billion of profit impact this year, right? So we had guided $3.1 billion to $3.6 billion for the packaging business itself in terms of EBITDA back in March. And we're going to come in roughly around $3 billion. We believe we gave that and as we talked about the fourth quarter, with a $0.5 billion headwind of the market difference. And so the reality is you're not going to make that up, right? So we had guided $5.5 billion to $6 billion in 2027. We talked about $5 billion because it's going to take time to make up that loss from this year.

Okay. All right. In terms of the earnings profile, obviously, last year, $1.13 or so, just reading off consensus numbers. This year, about $0.58, and then next year, the Street has a nice little uptick. I assume that's cost related, right?

Yes. Well, it's everything I just walked you through.

Yes. Okay. All right. In terms of the stock price, obviously, it's been a tough year for the stock. When I hosted you last year, I brought to the point that there's been about 50% drawdowns in your stock and it's almost back to that level versus the peak of last year. What is the perfect operating environment for IP?

Perfect operating environment. A relative -- that kind of classic Goldilocks benign operating environment is a place where that works really well for us. In that kind of 1% to 1.5% U.S. volume growth, Europe is going to be a little bit better because they're much further ahead on materials conversion moving from plastics to fibers. And so that trend is going to continue and accelerate in Europe. So that will probably be a little bit better over time. That's a great environment.

In an environment like that, you're able to get volume growth. It's not so hot that the market gets out of control, right? And you're able to drive productivity as you reinvest back into the business. In that kind of environment, this is a business that can grow, call it, 1 point on -- or 1.5 points on the basis when a little bit of market share. Historically, this is a business that's done a great job of passing through inflation, done a terrific job of doing that. And then if you can drive a point of productivity, that turns into -- if you just kind of think about that math, that turns into high single-digit EBITDA growth over time and then the ability to really drive return on capital through that. That's a great environment to be in.

Okay. Perfect. In the last minute or so, we're asking all our companies about artificial intelligence and implementation. And I get the irony about packaging and materials analysts asking that question, but anything you'd like to share on that?

No. Yes, it's actually fantastic. It's -- look, I think -- I think of it a lot like when I was talking about being an analyst, right? That was the Internet boom and I graduated from business school as everything was kind of hot as hell and then it blew up over 2 years. And everyone said it was going to change the world and they were right, it just took longer than they thought. And I think the difference here is the practical application is happening way faster than people thought 2 or 3 years ago. And so whether you see it in market intelligence, in pricing, in variation reduction in machinery, in supply chain analytics, service and support, I mean, literally, there is not a place that it isn't showing up in one way or another.

I think the key that nobody has proven yet is just how much real productivity is going to show up on the bottom line. I'm a believer that it will be real. I don't think it's going to be 10% and 20% in numbers like that. I think what it's going to allow you to do is get back on a track of a 1 point or 2 of productivity every year. And I mean if you go back and you really think about a huge value creation is your ability to grow above market a little bit and your ability to drive a little bit of net productivity, that math is explosive in terms of earnings growth. That's where it's going to come into play.

Andy, we are out of time.

Thank you.

Thank you very much.

So good to see you.

Nice to have you. Good to see you as well.

Good to see everybody. Thank you.

Good morning, and thank you for standing by. Welcome to International Paper's Third Quarter 2025 Earnings Call. [Operator Instructions] It is now my pleasure to turn the call over to Mandi Gilliland, Senior Director of Investor Relations. Ma'am, 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, Mandy. 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 -- in 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 continue 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 of 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 to 370 basis points -- 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 nonstrategic 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 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 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 our more details, 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 sale of these proceeds 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 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 strategic -- nonstrategic 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 costs -- 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 nonstrategic 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, 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 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 bags 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 towards better scalability, cost efficiency and positioning IT in our businesses to deliver operational and customer excellence. We're brapeful 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. We -- 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 this [indiscernible] 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 East 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 bar includes 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 to 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 execute 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 [indiscernible] strategic commercial wins in North America and EMEA, partially offset by exiting the nonstrategic 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 or $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 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.

[Operator Instructions] Our first question comes from the line of Mark Weintraub with Seaport Research Partners.

Congrats on progress in a tough environment. Kind of first question for me. I heard Lance's explanation in terms of kind of the opportunities in EMEA. But 1 thing I'm just trying to really understand is the difference between what you're going to be doing in EMEA versus North America and sort of 2 points on that. One, so there was a lot of opportunity in North America to take out excess capacity that had developed in the system, and you basically didn't have to walk away from any business. So there wasn't a negative commercial impact that, say, is related with Savannah for a lot of the stuff done earlier. Are there those types of opportunities in EMEA? Or is it more the second type, where it's going to be improvement over time, tough decisions being made?

And then second, in North America, there also had been commercial decisions made a few years prior that had hurt and essentially, you're able to make changes, and we've seen lots of benefit from that. Are there things like that in EMEA, too? Or is that -- how is the commercial opportunity in EMEA different from 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?

[indiscernible]

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

Yes. No, that's super helpful. And then just 1 other follow-up in parks I'm getting this 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, absolutely. Mark, first, I realized I didn't answer your second question, so let me get to that. So on the commercial decisions, there are not those same magnitude of commercial decisions that have to be made in Europe, right? So the issue that we had in North America is that we had priced a number of contracts dramatically underneath the market. And as you saw the different pieces, we reversed that, both in terms of the capturing the margin and now winning market share, which I think is very important.

In Europe, we have some commercial challenges in Europe, but it's more of actually focusing the resource. We have an awesome set of resource in Europe around the commercial side in terms of customer focus, helping our customers through their value chain and driving innovation. So that's a real skill that we have in Europe, but it's probably too diffused. And we've got to focus it more on those large key customers that we call our [indiscernible] customers. So that -- so Mark, I'm sorry, remind me of the question you asked before that?

of the $1.4 billion.

how much is cost and how much is commercial, yes. So of that, Mark, on a net basis, it's about 50-50. On a gross basis, as you'd imagine, it's more cost because you got inflation, right? So -- and to your point, yes, there is some price baked into that. As we have said all along, we have an expectation that we would get to mid-cycle pricing in North America by 2027. We still believe that to be true. That's probably I'm guessing 1 price rev away, and I would guess, if you would see an improvement in the U.S. market, that's probably likely. We don't have that built into, as you saw in our bridge of 2026. We specifically didn't talk about benefits from market growth, from price or from future actions that we haven't executed yet. So we don't have any of that baked into that $3.6 billion that I just outlined.

To get to the $5 billion, yes, you would expect that, and we would expect a modest rebound in Europe. And you see that being tested constantly, right? You've seen that be tested 2 or 3 times this year. It's gone up and retracted a little bit. Look, about the bottom 25% of paper producers in Europe are in a very, very tough position right now, right? On a cash basis, they're in a very tough position.

I'm not foolish enough to believe that there's going to be some kind of mass decision-making to take out capacity. You see a lot of resilience in terms of holding on by privately held long-term family companies. And so I'm not looking for a miracle there, and we should not. We should be executing as we can. We would expect, however, modest price improvement 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 comp is 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 2-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 in 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, you bet, Matt. So on -- relative to Riverdale, importantly, we mentioned it in the script, but the decision on Savannah, as you looked at that, right, we had all the economics that screened about Savannah and why we didn't want to put an incremental $300 million into that, but also the opportunity of Riverdale was really around moving to lightweighting, as you know. And so that's about a $250 million investment plus or minus. And we would expect near 20% returns on that. And so it's a really attractive spin from a business that, for the long -- for a very, very long time, and it definitely was going to be under its cost of capital to a business that has an attractive future and attractive return 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 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 1 follow-on.

Yes. Let me do the second first. No, those have not changed. So that's consistent on the second question. On the first question on cash flow, it really -- it's vastly the slowdown in the market, right? So that $500 million -- if you look at the $500 million of profit, actually, it's a little more than $500 million of profit that we would have expected to have captured if the market had been at the expectations we talked about at our Investor Day, we would be right on, if not a little bit better on the cash flow from a cash flow perspective. So it really is attached to the market. There are some incremental costs that are higher than we expected because we've been more aggressive in terms of timing of some of the actions, but it's not a giant number. It's not a huge number on a relative basis. It's probably $50 million to $100 million more than we had expected to spend.

And importantly, right, we have a decision to make, and I've made that decision, which is not to back away from the transformation plan, right? We have the balance sheet, we have the proceeds from GCF. We've sold a number of smaller businesses. We have the operating improvements that we have. And I think it would be a fundamental mistake to slow down our transformation by pulling back on CapEx. I really do believe that. And so as long as we're in the area that we're in, we need to move at full speed. You're seeing exactly what happens when we get this right in North America. It's not linear. It's not perfect. It's not going to be perfect and it's not going to be linear. But the level of improvement that we can drive in this business, when we get the asset balance correct, and we are investing in the commercial front end of this business, you can see what happens. If you just kind of put North America in perspective, you go back a year ago, we were losing market share. We were getting crushed on volume, and we were seeing declining incremental margins, right? And so therefore, we were cutting capital. We were in a spiral that you cannot be in, in a business.

We have reversed that spiral in 18 months. I mean, it's -- I'm incredibly proud of that team. EBITDA is up 40% year-over-year through the third quarter, 40% year-over-year, and we've gone from losing market share to winning market share. And we will finish this year above our cost of capital in North America. That's a pretty awesome turnaround. Europe will be harder. I'm not a Polyana, right? There's more hard work to do. It takes longer and it costs more. But the playbook is the same, and we're going to go after it. And so we're going to stick to this. So that's critically important.

I appreciate that, Andy. I guess my second question, and it's kind of a 2-parter, but they are tied together. You did see -- and congratulations to you, at least in the results in terms of a pickup in box shipments in September, and you're looking for the positive in the fourth quarter, as you mentioned. What's been driving that? Are there any particular end markets where you -- the new IP approach is particularly gaining traction as we're seeing it. And then the related question, bigger picture, if I look at the results you've put up that some of your peers have put up, the narrative is, everyone is -- I shouldn't say everyone, but individually, each of the companies is really trying to produce to market you're seeing your margins do fairly well, 17% or better, but there's a lot of volume being sort of reintroduced back into the market, which means there's another portion of the market that's really not earning a very high margin. Is that a comparatively good place for IP shareholders to be? And/or relative to where you were back in March, a more dangerous place or IP shareholders to be where there's a lot of players out there with a lot of volume and not necessarily a lot of margin?

There was a lot in that question. So if I don't -- if I miss it, help me out here a little bit.

We know where to find you.

Thanks very much. So relative to what's going on in the marketplace. So first of all, we just -- we don't comment on competitors ever. That's just not a good thing to do. And so we won't do that. Everyone's got to make their own choices. Relative to our perspective, in terms of rightsizing ourselves and focusing on the right kind of markets, we think we're getting the balance correct there. And in terms of the things, we're trying to utilize our strengths in the marketplace. And so where we are winning over market is really on select initiatives around very specific customers in those markets that we find attractive.

Now as you imagine, we touch pretty much every market, budget our sheer size and scale. We tend to be, I'm going to call it, medium-sized to larger customers that tends to be, but we have lots of great smaller customers all over the world. Our strength in fruits and vegetables and protein has absolutely shown up. And we've gotten very -- we've gotten highly engaged on strategic customers. We're doing -- we're just putting a lot more time, energy and resource into those customers that we believe are critical to our future. And so I'm not going to go into the specifics around those, but it really is customer centricity. It's about putting resource on the most attractive customers fit our business model.

To your second question around what's happening in the overall marketplace and margin, again, I'm going to speak for us and not speak for anybody else. I think what's happened in the industry just collectively is at times people have chased the incremental cash benefits of getting incremental volume, right? So in our world, if you've got excess capacity and you're sitting on fixed cost and you bring in something, we sit in North America, as an example, we sit at a 65% to 70%, what I call material margin. So think of contribution margin, not including direct labor. That means that the next dollar in on our average piece of business comes in at $0.70 or the next $1 out leaves at $0.70 of profit either way. And so even if a competitor picks it up at $0.20 off, right, at 20% off and they pick up $0.50, in the very short term, that sugar high feels good. right? And you see that, and you've seen that play out a lot over the years. I've looked at this a lot of kind of how people have played this. And what that does is it stops us and others from actually doing the right thing. And that means that eventually, that business that you bring in has to be invested in. It's going to require capacity. It's going to require investment at some point. And all of a sudden, that sugar high goes away. And so -- and then that kind of gets passed around.

What we are doing is we are having the discipline to not do business in that way. What other people do is up to them. But we're going to have our own discipline to go after markets that can earn an attractive return on capital. Importantly, in that, the 3 pillars of our strategy, they really matter in concert. Number one, have an advantaged cost position. A huge piece of what we're doing is driving cost out of the system, so we have an advantaged cost. That does not mean that we intend to sell the lowest price. What that means is we have optionality for margin expansion and reinvestment that competitors can't if we have a lower cost position. Second, around the customer experience. We just talked about that we're invested heavily. We've added 22% more salespeople this year than we had last year. We changed our pay for performance. We've changed our innovation process. All of those things are around really driving that customer experience. That's backed up by major improvements in quality and on-time delivery that our customers are noticing.

And then finally, we want to have a relative strength in the markets that matter to us, and we're going to invest in that. So if we do that, that will have discipline. If other competitors decide that they need to get their house in order, that's for them to decide.

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 Savanna. And can you help us understand the EBITDA benefit associated with those closures. Because when I look at previous closes, like Orange and MedRiver, you guys called out specific either adjusted EBIT or adjusted EBITDA benefits associated with those mills. But I don't think 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 [indiscernible], such as what you're doing at Riverdale? And only what I'm probably 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 do this and then Lance, if you want to add some color to it, please do. Let me talk -- I'm going to split Savannah and Riceboro because they're different. So with Savannah was principally shipping into the export market, and what I would call the low value piece of it, which was effectively an outlet on volume. And when I look at that and you look at it over a cycle, we did a ton of work on this. What you see is that at some point in the cycle, you are making positive cash, right? You're actually creating cash. But through the cycle, you are not, right? You are actually -- it is not generating above its cost of capital. So we were destroying value. And it requires an ever-increasing capital investment to go into the system. And shutting Savanna down and then exiting what I'll call that low-value export market, it's effectively a push, right, on an EBITDA basis. It's effectively a push. But very importantly, right, you're talking about something that on a replacement asset value is north of $1 billion, right, maybe quite a bit north of $1 billion if you had to build that mill from scratch. You would never build that mill from scratch to service that market, right? You'd never do that. And so on an ROIC basis, it's a huge win.

However, you do have that sugar high comment that I just mentioned a moment ago, that's part of the thing that you get trapped in, right? You get trapped in that when the export market taught like a little bit like I remember last year, we had a few months where it was really good, it feels great. And then when it comes off, you really hate it. And so -- and you get caught in that trap and then you just say no, we have to look at this from a long-term return on investment, what's the right thing to do for capital employed. And so that trade that I talked about with Riverdale is a really, really important trade. And those are the kind of decisions that we're making throughout the company, right? That's really important here. And I know how many moving parts are in this. And the transformation is, again, they're not clean, but that's the kind of stuff that we're doing to drive this business. Riceboro is different. Riceboro was a mill that simply was never going to have the cost position to compete. And so it made sense to move that volume to other mills, and so that's modestly positive. But to be clear, that's a very small mill.

Got you. And now, Andy, you had now -- it's very helpful. Just -- are you at out a point in your U.S. mill system, though, where you can't reallocate tons? You need to make -- you actually need to make no investment, such as what you're doing in revenue?

Yes. I mean in terms of are we going to take more capacity out, not in the near future, that's for sure. The -- if you look at the drive now, you get a few things that are -- we're very focused on in the mill system. Number 1 is, as I talked about last quarter, and I referenced modestly this quarter, we have a lot of costs that are in the system from the lack of investment over 10 years. And we started this last year, and we're going to keep going, and that's why I made the comment on sticking to the strategy.

If we invest aggressively in that mill system, we can capture a huge chunk of that kind of $400-ish million that I think is in that -- that's kind of -- it's waste in the system that when the mills are running well, you can get a huge chunk of that $400 million. You're not going to get all of it. There's always going to be things like the Valiant Gas situation, it stinks and you hate to have it. It's taken way longer to address than we thought it would. Those things are going to happen in these big complex systems. But what you shouldn't have are things that are breakdowns and issues from maintenance that's being deferred.

And I think our investments, we can go and capture a whole bunch of those, as you know, right, those aren't -- those take time. You have to invest and they take time. But over the next couple of years, we should be able to get the vast majority of that to our bottom line.

The second part that I think is very important is the reinvestment in ongoing productivity. If you look at the last 10 years in our business, and you were looking for any kind of what I'd call net productivity, it hasn't been there. As a matter of fact, it's gone the other way. And we all know the math around that. If you can get -- if you can -- if the market is growing in that 1% to 1.5% range, and you can get modest market share gains over time, that's good. If you can get that, plus productivity over time, you knock the socks off. And so what we need to do is get that productivity engine moving. And we know how to do that. It's just a matter of -- it is going to take some time. So it's those 2 pieces together.

Got it. And just 1 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've captured those in our -- in the numbers that we laid out. So if you look at the bridge, most of that stuff that we've talked about will be realized. Most of it will be realized in '26, except there will be a tail of some, right? There'll be some tail that will roll to 2027. So all of the different things, the mill closures, the IT, et cetera, those are in that bridge that I put out for the most part. It's probably 3 quarters or more that are in that bridge. And so you'll get a little -- you get 20%, 25% that will roll over into 2027 somewhere in that neighborhood.

In terms of future actions, we still have a long way to go, right? We know that. But in terms of kind of the big structural stuff in North America, we've gotten after an awful lot of it. And now we have to drive those things to resolution. We've got to go after the cost structure in the mill system. There's still more overhead to address. And then obviously, we're just starting the journey 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 Savanna 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?

Yes. It's about 90% that will be consumed in our box system, plus or minus. We have partners in the box world in North America, and we'll still be -- we still have some export that goes out. And the export that we have, we like that business. It's highly strategic. It's profitable. It earns its cost of capital and above. And it's an attractive piece of business. And obviously, our partners. They've been long-term partners, they're great partners, and they're going to continue to be. and then the export piece is, it's like 6%, 7%, somewhere in there.

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're okay in terms of our capacity utilization. So if you look at operating rates, we're okay there. We are going to make sure that from a paper strategy perspective, if we get a bump up in activity, we're being very mindful this has been a soft market. If the market bounces back and you get a quick pop back, our paper strategy, we want to be smart about that, absolutely, as we drive productivity into the system. And look, if we're driving productivity into the system, what that does then that allows us to capture that 1%, 1.5% growth without adding fixed costs. And that's where that magic is that's really, really important.

And so I'm not worried about that. We -- the plan here on Riverdale is late next year is where that's really going to start being up and going. And we think that, that's good timing and certainly positioned well relative to a growing segment of the marketplace.

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 peer 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, ikn the medium term? And is there a good way to think about your on integrated and integrated business in Europe, is there like a massive spread in terms of margins?

Yes. Good question. So specific to the noninternally consumed product, we're evaluating that whole thing. We're going through that right now. And frankly, it's not even necessarily tied to the economics of it just tied to the economics of it because it's really around the strategy, how it fits with our business. In terms -- I mean, if you look at it right now, Europe in total is, from a cash flow basis, right, is using cash and because of the restructuring that we're going to entail on it. So we do have to restructure that, so we're going to do that. I do believe, however -- I know, however, that we have pockets of our business, both in the mill system and in our box system that are losing money on a cash basis. There's no doubt about that. And so as we go through that, that has to be rectified and through commercial and/or cost actions to get to an attractive return on capital.

And so in terms of the split, we haven't talked about that. We haven't gone into that level of detail, and I don't think it's good to do that. I don't think competitively it's good to share that kind of information. And so -- but we know where the pockets of profit and loss are. We know we have a road map that we're working on. Obviously, anything and everything we do in Europe has to have the discipline around the consultation process, and we need to follow that appropriately. And so we'll do that in all of our public comments and all of our private engagements.

That's helpful. And then pricing Europe is a little newer for all of us. Lance, you mentioned on the prepared remarks that you're going through a work consume 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 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 2017 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 1 more in, something perhaps you could talk about a little more freely. Good to see progress on box 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 the -- 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.

All right, guys. I'm Phil Ng, Jefferies Paper and Packaging analyst. We got International Paper here. Representing the company, we've got Andy Silvernail.

Well, Andy, hopefully, we keep this a tradition. This is year 2.

Yes, absolutely. Yes, we will.

And you've been in your role for about 1.5 years. You've been a very busy man.

Yes, a very busy man.

So maybe this is a good venue for you to kind of at least convey some of the puts and takes and how you kind of envision this transformation playing out?

Yes, yes. So where do you want to run to today? Where -- directionally, just want to talk about how -- where we are to date or you want to talk -- how do you want to handle it?

However you want to kick things off, just kind of reflect.

Yes. So look, after 1.5 years, I would say the base case is very much what I expected it to be, minus a weaker markets, just generally, if you look at the overall economic growth. Maybe I'll just touch on that first, Phil, and jump into it. So -- and I'll start with the U.S.

The U.S., we had expected in this year to be up about plus 1. It's actually going to be -- we think it's going to end up being down about 2 in the marketplace. So it's about a 3-point swing for us in general. And the question that I think everybody has, we've talked a lot about this at dinner last night, was around kind of is there structurally something different in the market, kind of expectations, how do you think about that? And we've dug a ton into the marketplace to ask that question.

And there's really no evidence at this stage. There are always puts and takes around medium -- kind of thinking about the offsets of mediums and what are you using for materials. But there's really kind of nothing structurally. The thing that always sticks in people's minds is, well, I'm getting more things in my house that are arriving in bags, right? So is that bad for packaging?

And a couple of things is that's something that happens all the time. If you look at the historical trends in packaging, those sorts of things are constantly moving. And the relative volume in the marketplace is actually pretty small. And so you look at that structurally now. And if you actually kind of ask yourself a simple question, well, what's happening? It's just the velocity of good movement. I mean it's really quite that simple.

And in the U.S., I would say there are really 2 factors that appear to be the biggest drag. One is around -- I think we're all very aware around kind of trade and tariffs and how those have played. And literally, you guys have heard me say this many times, but we saw the -- when the first barrage of conversations happened kind of post January, we saw a little bit of a tick down in the market.

And then on so-called on Liberation Day, we saw another tick down and that has stayed really consistently the same in both markets in the U.S. and in Europe. And as I talk to my peers, as I talk to our customers, so much is just driven on the unpredictability of the marketplace and, therefore, the willingness to spend. And so I think we're going to live with this a little bit until you get through some of that until you annualize some of that where you get some stability.

The second one in the U.S. is really around housing. And one of the conversations we had last night is if you just kind of think about the last time you moved and you think about the packaging intensity that happened in that move, and you think about where we are in terms of people actually buying and selling houses and in people in moving right now, we're at a historically a pretty depressed level in that regard.

And so those 2 factors have been hanging on, on the overall packaging market. And the good news in both of those is it's hard to imagine those being systemically sticky, right? It's hard to see -- go, as I look at some point in the future, it's hard to imagine that we're going to wake up 5 years from now, and it's going to be the exact same story. And so I think that's actually a very good news story in the U.S.

Europe is different to some degree, right? One is you have -- certainly, you have the challenges of trade and tariffs. But the overhang of the conflict on the eastern front in the Ukraine, that's pretty substantial. And I spent about 10 weeks in Europe this year after we closed the DS Smith deal and just understanding that. And when you're physically there and you're actually talking to people day in and day out, you understand the weight of these 2 things pretty heavily in Europe.

Long term, there's really no reason to believe that structurally something has changed in the markets in terms of volume growth over time. They're both kind of 1% to 2% volume growth markets over a cycle for different reasons, right? In Europe, there's more of a material change component to it. And that kind of drives that in the U.S., it's a combination of economic growth and a little bit better demographics than in Europe. So that's kind of on the market side.

And what I would say is what we're experiencing is that sluggishness. It's what we talked about in the second quarter, that has continued. There's no doubt about it that, that sluggishness has continued. And it's at this stage, right, my plan is how do you win in that sluggish environment and not bet on the comp. I am never a believer and I'm going to wait for something -- for something in a marketplace to bail us out or bail me out. I just simply don't believe in that.

When that does happen, what we want is we want a cost base and we want a resource-centric focus around customers and around asset quality and around our people that allow us to be in the best possible competitive position. So everything we're doing now, all the restructuring that we're doing is fundamentally about having the best competitive position in the marketplace, and I can talk about that in more depth.

And so what I would say is if you really -- if you categorize it very simply, if you took -- if you said the markets were growing at the rates that kind of everybody in the industry had expected coming into it, it's actually more than $0.5 billion of profits for us. That's about the number that you would tie to it. It's actually a little bit north of that, frankly.

But in the U.S., it's really around the volume losses there. And in Europe, it's a combination of the volume and price softness that we had versus the expectations. So given that, right, and given where we are, I'm actually pretty happy with it structurally what we've gotten after. And if you want me just talk about that a little bit the structural side?

Sure.

Yes. So in the U.S., we really -- we launched the 80/20 methodology in the U.S. in June of last year. And we made a whole series, as you know, a whole series of announcements that have happened over the past year. And if you kind of look at the laundry list, it's actually kind of breathtaking that when you look at the number of actions that we have taken and the impact that we've had.

And if you simplify, if you kind of break it down and say, well, what are we actually doing? If you look at what we announced 10 days ago, if you look at that on the Thursday of -- actually, it's almost 2 weeks ago now, it's -- if you look at that, that's actually a great encapsulation of strategically what we are doing in the U.S. and in Europe. So I'll take a second and use that example because I think it's actually really informative at what's happening.

So in the U.S., we did effectively did 3 things, right? We announced the sale of GCF. We announced the closure of Savannah and Riceboro, and we announced the investment in Riverdale, right? So those are the 3 big things that happened in that announcement. And so what does that tell you about us.

Number one, we are a packaging company and only a packaging company. And that's really important, right? The history of International Paper has been as a broad-based fiber company, right, that has had up to, I think, 8 or 9 very large-scale business units with a really large, centralized structure. We blew up the centralized structure last year. We radically decentralized back into closer to the customers, closer into the field. And we're focusing on packaging.

And so if it doesn't lead to packaging, we really don't have much interest in it and that's fundamentally. And so being an integrated packaging player is the right movement for us. We're further ahead in the U.S. Europe is going to have a little bit different flavor around integration, but we're going to be a packaging company. Why?

Structurally, it's just a better business, right? So if you look at returns on invested capital of the industry, if you look at the marketplace and you take the paper-based businesses and you actually look at returns on capital, those that are packaging centric versus everything else, it's not even close. And so being in that. And it's also a hell of a lot less volatile than people think, right?

If you actually look at kind of a range of growth rates over time, there's about a 4-point range of outcomes in that packaging world through a cycle, except in a severe recession, right? And my point of that is it's far less volatile than people kind of think of a paper-based business being just in terms of volumes.

The volumes then drive the pricing volatility that's tied to that, right? So what you're seeing in Europe is that combination of a weak market and weak price coming with it, right? So that double whammy is really tough. It's really -- it's a big time wind in your face. In the U.S., because structurally, it's a better marketplace, we've had a weaker market, but price has held up better than it has in Europe. And this business, structurally, if we get this right, when we get this right.

Structurally, it's a much, much, much better business. And I think people associate with a paper-based business generally. So that's kind of -- that's that part of it. The restructuring of Riceboro and Savannah, if you think of it, there's really there's 2 components to it.

One is, it's volume that's moving through aged or strategically inferior assets. And in our business, strategically inferior assets are simply a problem, simply a problem. They drive all bad behavior. They drive terrible returns on capital. You have to be -- well, you don't have to, but you want to be in the, what I call the, good half of a normal distribution of the asset curve.

So if you think of all of the assets in the industry across a normal distribution, right. Those who are on the right half versus the left half, the good versus the bad, the outcomes are dramatic, right? And I'll give you the example of this. So -- and I'll move to Riverdale in a second.

But as you are moving out of strategically challenged assets and into good assets, which is the Riverdale move, we had a giant capital call in Savannah that was coming. We had to do some major repairs that basically drove no economic value, but you had to do it if you were going to keep the site open. For even less money than that was going to cost, we were able to invest in Riverdale. So as we exited Savannah, we basically pushed off a $300 million capital call, plus or minus. Excuse me, Savannah, [ instance of ] Savannah.

And then we are investing $250 million in Riverdale. The first one is a negative ROIC, right? I shouldn't say negative. It's below your cost of capital. You're going to destroy value in that first scenario. So you don't do that. You exit the export market that's associated with those assets, which is over through a cycle is pretty poor profitability. You now put that into lightweight paper, right, where the market has been moving and is moving and has a much better and very positive return on invested capital.

That trade, that $300 million or $250 million trade is a huge economic improvement. That is really what we're doing across the company. So we've been doing that in the U.S. for a year now. We've made some huge structural moves in the U.S. There's still more to do, but there's -- but we've done a lot already. We're just starting in Europe. And that process in Europe, you've seen us announce consultations in the U.K. Some of you may have seen the announcement of a consultation in Croatia, around the paper mill from the other day. So that same process is now happening in Europe.

And so structurally, we're going after that. And it's all about moving to better and more attractive profit pools and then moving the quality of assets up that curve and then moving financial resources and human resources to those to move to the right side of that curve. That's what this is all about, right? And ultimately, what it does is it puts you in a position to have an advantaged cost position, number one.

Number two, to be a service leader because you can invest those incremental resources back in the service and that's what we've been doing in the U.S., and that's why you've seen a huge spike in our service levels in the U.S. And ultimately, that allows you to win market share in the markets, in the geographic markets and in the vertical markets that you find attractive. So in a nutshell, that's the game, right? And that's what we've been up to.

So you've obviously announced some capacity closure, and that was great color, Andy. I guess in the past, just having that excess 2 million tons of capacity would lead to bad decisions. With that out of the way, what does that actually unlock in terms of behavior? How are you incentivizing your people from the sales side make right decision and training that bad business and economic downtime, what does that unlock from a profitability standpoint?

It's a great question, Phil. And so there's a lot of intricacy in that question. I'm going to simplify it some. I'll use an example because I think that might help. So let's use the Savannah example and then let's also talk about sales incentives. Those 2 things combined because I think that would be helpful. So in the Savannah example, when you have 1 million tons of excess capacity, if you have 1 million tons of capacity, it doesn't have a home in the box market. But it's sitting there, and you're sitting on a fixed cost base of a few hundred million dollars a year.

In this industry, what historically has happened is people have had assets that are on the bad side of the curve, right? You will basically effectively price that to marginal cost, right? Because to keep the availability of that asset, you'll price there. And then what happens is because you're now pricing at marginal cost, any capital that's going into that asset is coming in at a negative return, right? That's just fundamentally what you're doing.

And so what you then do is you then bootstrap that, right? So you don't invest properly, you kind of slow bleed it because you're like, oh, this is, I'll just -- I'll wait until the up-cycle. Well, guess what happens? The up-cycle happens. Now you've under-invested in the assets, so you're plowing money in a short window back into the asset for really, really, really crappy returns, right? You're just -- your chasing that. And so that just -- so think of that, that just -- that sign wave gets bigger and bigger and bigger over time, and you're chasing that with capital.

And then you have a sales structure. And the sales folks are being told don't lose market share, don't lose volume. So what are they doing? They have an incentive structure that's in place. We kind of -- we didn't really have a very good incentive structure in the past. And so they're just kind of following marching order, so to speak.

And so what you get in there is you get volume chasing price, chasing bad assets. And that's just a terrible combination and, frankly, what we've been doing for decades. And so what we're doing now is eliminating that. So you're eliminating the bad asset problem. You're eliminating the need to chase to fix at -- to win at marginal cost. And then we've changed the incentive structure.

So one of the things that we're going through our strategic planning process right now, and we look -- we did a review, Lance and I did on Tuesday. And we actually looked at a scatter plot of the U.S. of pay and performance of our salespeople pre the changes that we made last year to today.

And so think of that scatter plot. If I get a performance on one side, I got pay on the other, you want everything to be around the 45, right? That's where you'd want to see it. Well, guess what? You go back and you look at previous years, it's this crazy scatter plot blob in the left-hand corner with everything tightly around that.

So basically, everyone being paid the same with kind of no correlation to performance. It's absolutely fascinating. Now you look at the changes that we made last year, pay and performance, and it is literally hugging the 45. So we have every single salesperson plotted around that. That is an awesome thing to see. I don't think that makes sense to everybody what we're talking about.

That change is not small. That is an enormous change and you actually mix that with a quality asset set, right? We are not -- we don't have to chase crappy business to keep an asset full in the short term from a cash standpoint. Those 2 changes are -- and then you look at what we did. The example I just used from 2 weeks ago, that's a great example of the structural changes.

Super. Talk about how the game plan to win back business. What are you doing to provide value for your customers, how that progress is coming along?

Yes. So first of all, there is -- one of the great assets that I got to inherit when I joined International Paper in the U.S. was far and away the best footprint in the industry. So if you actually just take the footprint, if you were to take kind of chart out geography, so think of any major metro area and you are thinking about profitability and growth, and you were to take those and put kind of bubble charts, bubbles representing the size of a market.

And you were to look at us versus the rest of the U.S. marketplace, we, far and away, have an advantaged footprint. And I would argue we probably have an advantaged mill asset base once we're out of the low-quality assets. So as I look at that and I say, okay, how does that allow us to win over time? We have a terrific advantage. However, our business -- what a lot of people don't understand is, our business is actually hyperlocal, right? It is -- people kind of think of a fiber-based company and you think of a world global commodity, whatever. Our business is done within 250 miles of any metropolitan area.

And so that's where competition happens, right? That's where I experienced competition. And so I have to win in that local marketplace, which means I have got to have the cost position, the service and the competitive market share position to win in that local market. And so what our focus is on is let's drive the basics of service in those local markets. So quality, on-time delivery, speed of response, we have customers -- I mean, our major customers, we're responding to them same day, right? That's the level of responsiveness to our major customers. And that is, in my view, that's the price of entry is that level of intensity around service and support.

And the reason for that is that if you think about how packaging moves through our customers' facilities, the cost of that packaging relative to what they're doing is miniscule. The cost of failure is extreme. And they know it, and we know it. And so as we drive those service levels up, they actually are now taking their people out of their distribution centers or manufacturing plants, and they're reallocating people to other jobs or they're eliminating them all together.

And so as we embed inside our customers and we make their lives easier, right? They actually -- they gain and we gain. And part of big piece of what we gain is stickiness. And that stickiness is really important. And don't get me wrong. I don't -- I'm not going to overexaggerate the stickiness. But there is probably somewhere in the 10% plus range that customers, that's the cost of switching.

If you just kind of look at what -- as we look at our customers, when they're looking at a new contract or whatnot, the last thing they're going to do is switch for 1% or 2%. They are not going to go through that kind of disruption. You're talking customers that we're doing changeovers with now, this is a 6-month process because they need to prove. They're about to move all of their business from a competitor to you and it's our -- it's 40 of our plants doing business with 60 of their plants, right? That is not an easy switch. That's complex and they can't afford the failure.

And so we kind of think of this as -- well, I'll trade for a few pennies at price. Well, you'll do that if your service stinks or if your quality is bad. And if your service is really good and your quality is really good, it's not that, that becomes a definitive barrier for all time. But what that does is it definitely raises the switching costs.

There's no doubt about it. And it gives you entry into innovation. And that to me is where it gets exciting. Because now if I'm partnering with that customer, and we're working together on the entire value chain, we can take total cost out of the system, right, with us making money and them making money, right? We can both do that. And so that's where the service game really comes into play.

Super. It sounds like you had the foundation in place and the game plan in place for the U.S. market. Help us think through Europe. I think initially, at least part of the thesis in terms of synergies was DS Smith was short on paper. You could kind of backwards integrate yourself to the paper you export. You've obviously taken a lot of capacity out, right? So how has that equation changed? And what do you need to do to kind of get DS Smith right in terms of that transformation? The playbook -- just kind of expand on playbook.

Yes. So first, let me touch on the thesis here around one of the benefits. And when we looked at that, we thought there might be up to a $100 million benefit in DS Smith procuring paper from International Paper. And what that's proven as we dug into that, everything I talked about a moment ago, there's actually more economic value in choosing to not do that. And actually restructuring the U.S. market, there's more economic value to capture than in shipping paper over the ocean.

That's -- and a big piece of that is the amount of supply of paper in Europe, right? So the availability of high-quality paper in Europe is a different scenario than in the U.S., right? There are more independent assets in Europe than there are in the U.S. And so just looking at kind of which one do I want to choose? Well, I'd rather choose A because it's going to drive more economic value. But I do give up B, there's no doubt about it.

That being said, one of the best pieces of synergy that we have is our Madrid mill. So the Madrid mill, that IP bought and then refurbed over the last half decade or so. It's interesting because you hear some of the stories around that Madrid mill that are actually kind of funny about. We overspent on it. But when you actually look at it, I'd love to do 10 more of them just like that because it's the lowest cost, highest quality mill probably in Europe. It's certainly in the top decile of mills.

And so we've gotten a lot of benefit from that in the Iberian Peninsula because we can now feed 100% internally. So that's played out well. The reality is that the European market, what I talked about before in that softness, that's just a big headwind, right? So in Europe alone, that you're talking about almost $350 million of headwind in volume and price from a profit standpoint, from our expectation of where -- just on those 2 alone, it's actually $375 million, if I remember right.

And so we're battling that headwind. But the key to it is to not let go of that crisis and to allow that to drive the restructuring, right? So how do we actually move as fast as we can to restructure the business. In many ways, probably 80% of the game plan is very similar to the U.S., right, which is structurally move to the right profit pools, the right assets aligned, the right people aligned to that. So we're moving down that path very aggressively. The difference is in the U.S., right, we're basically an integrated company for the most part.

In Europe, we're only about 50% integrated. So we're going to continue to move towards more integration there. But to be clear, I'm not going to go out and buy a bunch of assets at this stage, right? There's enough high-quality paper available that we don't need to go and put a bunch of money in the ground and buy assets. We need to optimize from here. So we need to exit those things that are nonstrategic and unattractive, frankly, structurally. And we have announced the start of that.

You're going to continue to see more of that. The kind of drumbeat that you've seen in the U.S. expect to see that in Europe. And we have to move aggressively to do that. The total bogey of just cost out structurally is $500 million to $600 million of just cost out that we're going to take in Europe. So that's moving along. It's going to take longer than the U.S. by the nature of the consultation process. So in the U.S., we basically say we announce it, and we do it, right?

In Europe, you have to announce a consultation process. You have to go through that in good faith, and that's very important, right? It's not a paperwork exercise. You have to go through the processes in good faith and you have to look at alternatives because alternatives do present themselves, and so you've got to go through that process.

And so we're doing that now. We're moving very quickly. We have announced a whole series of actions relative to consultation in the U.K. You've now heard me talk about Croatia. We've also talked about the country structure that were ongoing. And so that's just going to roll through the system here over the next couple of years.

Within that $500 million to $600 million bucket, would you be able to unpack what are some of the big cost out? Is it on the mill side, box side? Do they have a bloated corporate cost structure like the IP U.S. kind of things.

It's -- so let me do -- I want to take the last one first, and then I'll walk the other ones. So there was not a large central structure in London, like we had in Memphis up until last year. There was not that. But what you found was in Europe, what was happening was they were -- instead of managing the complexity at a corporate center, they were managing it at regional centers. And so you had a very small group of people in London.

You only had 100 -- a couple of hundred people in London in total. But what you had were these very large country structures and have these very large, very complex country structures. And so what we're doing is we're simplifying that, right? So that we're going -- I think it was from 13 structures down to 7 and taking out a whole bunch of the kind of middle stuff that's in there in terms of management. That really is about managing complexity, Phil, right? It's not a value-added piece, but it's just kind of managing the complexity. So you have to attack that.

On the converting side, the game plan around major geographic centers. So the game plan in Barcelona is the same as the game plan in Atlanta, right? So you have multiple converting plants in and around that area and you're looking at matching market segmentation with volume and mix, right? So the ability to match that. So you can specialize in certain areas around volume and mix, drive productivity, drive service levels up dramatically.

A bigger difference in Europe that you don't have is you have a lot more singular converting plants that are in a market, right? So in the U.S., we mostly have multiplant markets, not completely, but mostly multiplant markets. In Europe, you have -- you absolutely have multiplant markets, but you also have a lot of these one-off things. And so in that case, in the multiplant market, same game plan as the U.S., right? We'll restructure that and we'll optimize around those major geographies.

And then the singular plant markets, they have to stand on their own, right? They have to stand on their own, just like if any of us own them as an entrepreneur, they have to stand on their own and they have to win on their own. And if they can't stand alone, they can't win on their own, they don't have a history, right? They don't have a future, and that's just the reality of that. So we're going to go through that same process that we went in the U.S.

The paper side is very different in Europe than in the U.S. We are -- yes, we are a short paper, but if you actually look at the tons that we sell that move through converting and the tons that we manufacture, that we produce through paper, it's -- you go, well, you're not short paper. You go, what is it? Well, it's because half of what we make goes into other markets. It goes -- it does not go through our converting process into packaging and, ultimately, end up on shelves or at your door.

And just like I talked through a moment ago with export in the U.S., we're doing that same analysis around all of the assets in Europe and asking a simple question, which is, do they drive an attractive return or not? Do they have a strategic advantage or not. If they do, we want to keep those assets, and we want to focus on packaging. If they don't, they have a different future and probably not with us, if you can't drive the economic value. So we're going through that, those analytics.

As I mentioned before, in an ideal world, you do exactly what you did in the U.S., and you'd own high-quality paper assets feeding the packaging system. That doesn't make sense right now in Europe, right, to go and to build something or to buy at a premium, some kind of assets that damage the market in some way, makes absolutely no sense when you have availability, you don't have to put the capital in the ground, so we'll -- that's a little bit different. We'll play that as it makes economic sense over time.

Super. In the U.S., you've under-invested for many years. And how's that situation in Europe? Is there a capital investment element? And then from a commercial element, were you guys -- are you -- do you have the right type of customer mix you want? I mean it sounds like it's a lot of cost, it's a lot of complexity, but just kind of tackle those 2 things?

Yes. So Europe, what I would say, a couple of things that Europe has done different than the U.S. that are good because I've talked about the things that are a struggle. So the commercial organization in Europe has been historically a better commercial organization than we had in the U.S. It was more service-focused, much higher touch, touching more people in our customers' value chain. If IP -- legacy IP had 1 or 2 relationships within a customer kind of thinking of their value chain, DS Smith has historically had 6 or 8 touches in that chain. And that matters.

And the reason that matters is if your relationship is with procurement, right, that is a structural disadvantage. If your relationship is with design, engineering, manufacturing engineering, that's a structural advantage. And that's really where you want that advantage to go. And the reason being is that you're working early on in that relationship to drive value for both players versus it being a price discussion, right? And so as you think about what we've done in Europe, we've built a lot of service intensity and a lot of sales intensity, but we spread it really, really wide across the customer base.

And so the customer base is more fragmented anyway. And so we have a lot of resources that are being spread across markets that, frankly, the customer doesn't pay for. And so we need to focus that on a smaller subset of customers that really value and will pay for that level of service intensity. And so that's a difference that -- so that's something that's changing ultimately in that marketplace. And then it's also a more innovative market. And the reason it's a more innovative market is there's a lot more CPG content. And there's a lot more CPG content by the nature of the markets themselves, right?

There's a lot more packaging that happens on shelves in Europe. And for those of you who spent much time in grocery in Europe, you'll notice that because of demographics, because of the cost of labor, et cetera, et cetera. But also, you don't have the same industrial packaging infrastructure requirements that you have in the U.S. Just the distances to move things in Europe versus the U.S. is a different marketplace than the U.S. So you have -- there's more innovation. There's a higher service component content, and DS Smith has done that well. We need to focus those resources around that.

Okay. And just lastly, on the U.S. market, we're in a pretty good spot, right? I mean demand has been pretty muted, and it sounds like you're pretty the medium, longer term, but a lot of capacity has come out. What's your view on the cycle in the next few years? I mean I know your longer-term targets were predicated on mid-cycle pricing. But I mean, it's a pretty conducive environment with operates in the mid- to high 90s right now. So just kind of help us think through the cycle.

Yes. I think -- so number one, I would say that as I think of this -- the demand, where we are relative to demand, to me, it appears as though we are a lot closer to the negative -- we're in the range of outcomes. We're much closer to a bottom or a more difficult moment now than I can imagine in the future. I have a hard time imagining anywhere from 2 to 5 years from now, we're not in a very different place in terms of demand. It's hard to imagine that. As I talked about housing, I talked about some of the other structural issues out there.

It feels to me as though we're poised for that market to improve. And from our own perspective, and I'll only talk about us, it's been all about that design of getting high-quality assets, right, to get to the high-quality side of the asset curve and to not have a bunch of latent capacity that you -- that doesn't make money through a cycle. One of the long-term excuses for not dealing with inferior assets was, well, I need that capacity when the market comes back.

Great. Market comes back. But when you actually map it over a cycle, it doesn't ever make money with those crappy assets, right, and less attractive business. And so as we have structurally taken that out, our belief is that we would rather run tight than run loose through a cycle. It's a much better economic proposition to run tight than to run loose through the cycle. And so if we face a much better economy, great, and we have to make choices, you're going to make choices around the right sets of customers and the right sets of assets to capture that economic value.

So I would say the U.S. is in a good position. I can't pick timing, right? It's -- your economist gave a talk, I guess, yesterday, right? And he's going to be a lot more right than I am because I'm not an economist, although I'm not sure economists are ever right. So look, it's hard to predict the when of it, but I think structurally, the what of it and the value that gets created over time because of the restructuring of that market and what we have done, I think, is very attractive.

Okay. Well, Andy, thanks for all the great insight. Thank you so much.

Thank you, guys. Take care.