Q3 2025 Earnings Call Transcript

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, Mandi. Good morning, and good afternoon, everyone. Let's begin on Slide 3. As we go through today's presentation, there are 3 key messages I want you to take away. First, we're making significant measurable progress on our transformation.

Our strategy is getting traction. Second, macro conditions in North America and EMEA continue to be challenging. Third, we're focused on what we can control. We're moving aggressively on cost initiatives to enable margin expansion and continued investment in our success.

This quarter represents an important step on our transformational journey as we continue to execute the strategy we launched last year. We committed to an ambitious transformation plan to reinforce our leadership in sustainable packaging solutions through an advantaged cost position and High Rel Supply Position in most -- 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 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 mill. 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 mill. 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 Bag business. And just last week, we executed the decision to outsource a large portion of our North American IT service and support functions, a strategic move toward better scalability, cost efficiency and positioning IT in our businesses to deliver operational and customer excellence. We're grateful to all employees affected by these actions.

Thank you for all of your contributions, and we wish you very well in the future. Now let me hand it back to Lance to walk you through EMEA's third quarter results.

Thanks, Andy. So now turning to Slide 13 in our Packaging Solutions, EMEA third quarter results. While we continue to see soft demand in EMEA, our business grew EBITDA and expanded margins sequentially. While Price and Mix contributed $13 million of improvement in the third quarter, this was below our expectations, primarily due to a recent downward price index movement.

Volume was also lower than expected in the third quarter, which we believe resulted from overall market softness and destocking in anticipation of paper price declines. Operations and costs were unfavorable by $10 million, primarily due to the pricing impact on the value of our inventory. As a result of the paper price decline, we experienced lower fiber costs of $19 million in the third quarter, all of which resulted in third quarter adjusted EBITDA for EMEA of $209 million. Turning to Slide 14. I'd like to discuss our fourth quarter outlook for Packaging Solutions EMEA.

Price and Mix are expected to improve by $12 million next quarter, primarily driven by continued box price realization due to the flow-through and timing of prior price index movement. Turning to volume. We expect an increase of $12 million in the fourth quarter based on improved seasonality heading into the holidays and the start of the citrus fruit season in Morocco. In addition, we expect operations and costs to be $24 million unfavorable, primarily due to increased costs related to the seasonally higher volume.

Finally, we expect favorable fiber costs to provide a $16 million benefit in the fourth quarter. All in, our fourth quarter EBITDA outlook for EMEA is approximately $230 million. As I turn to Slide 15, and we discussed in North America, we are showing a bridge for EMEA similarly that reflects the 80/20 progress and the anticipated EBITDA benefits we expect to realize in the second half of this year. For our commercial initiatives building towards our '25 EBITDA targets, we previously identified uplift from prior price index moves.

Since then, the European market has been challenged by demand softness and there have been several price index decreases offsetting that original gain. Our current view includes known adjustments to the paper price index. As a result of the challenged macro environment in EMEA, we are taking action to accelerate our cost-out initiatives. This quarter, we've proposed several closures across 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 [ known ] 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 progress in a tough environment. Kind of first question for me, and 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 pointed -- or 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?

No.

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, it's 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 comping positive in September, seemingly again, October is quite positive. You made the comment that you expect above-market performance in Q4 and 2026. Could you maybe refresh us on what kind of volume growth and volume performance versus market you've assumed in getting to the 2027 targets?

Yes. So all along, we've assumed a pretty soft market, right? So our assumptions going into this year were plus 1% to 1.5 % in the U.S., we had more robust assumptions coming in Europe, which were disappointing so far. As we look forward, our expectation would be 1% to 1.5% in North America and 1% to 2% in Europe over time.

As you know, Europe has a stronger secular trend around moving from other materials, plastics as an example, to fiber and a stronger consumer component related to that. So that's why you've seen kind of stronger growth over time in the European market. We would expect those trends to continue. Very importantly, when we sat and talked about adjusting our 2027 target, and we all recognize that we've gotten some questions already on, hey, why did you do that now?

It just was obvious. It was obvious that the $500 million that we've lost this year from the combination of volume and price, unless you expect a major pickup in volume to the tune of the U.S., you have to claw back a couple of points additionally and the same in Europe, unless you expect that over a 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 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 at 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 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 Pollyanna, right? There's more hard work to be 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 that 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 for 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?

Thank you. 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 the 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 that 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%, material -- 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 dollar 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 to 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 Red River, you guys called out specific either adjusted EBIT or adjusted EBITDA benefits associated with those mills.

But I don't believe anything was highlighted in your recent SEC filing for those mills. So that's question 1. And question 2, just are you now at a point in your U.S. mill system where you can't reallocate tons and need to actually make mill investments, such as what you're doing at Riverdale? And really what I'm trying to get at is you can't reallocate the tons from Savannah elsewhere in your system then there might be a negative EBITDA impact in 4Q and maybe early 2026. So any color you can provide would be helpful.

Yes. Let me 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 points 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 investments, such as what you're doing at Riverdale?

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 in 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 Vaillant 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. It's not 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 awful worried about that.

We -- that 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, in the medium term? And is there a good way to think about your unintegrated and integrated business in Europe, is there like a massive spread in terms of margins?

Yes. Good question. So specific to the non-internally 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 appreciate Europe is a little newer for all of us. Lance, did you mentioned on the prepared remarks that you're going through a work [ council ] process in Eastern Europe, Nordic and Italy. Can you give a little more perspective what's out there in terms of potential closures?

Are those box plants? Is that mills? Just kind of help us size how quickly could you see that? And perhaps, Andy, as you kind of accelerate this restructuring in Europe, how quickly you're going to move in?

And could we see some uplift perhaps in 2026? Or is this more of a '27 event where you see the big inflection in terms of cost-out savings?

Yes. So Phil, we have to dance carefully on this topic, right? And the reason I say that is there is a highly defined process in Europe around consultation. And so what that means is we're working hand-in-hand with the works councils and with the regulators to go through that process in a very detailed way.

And I appreciate the fact that we all want to put a number out there and put a date out there and talk about what's going to happen. That is different than the U.S. And so what I'll say, and then, Lance, you can add any color that you want is we are going to move aggressively toward rightsizing Europe. We have to, right?

As does everybody else, given the market conditions. Everyone's going to make their own choices around that, but the marketplace is going to have to decide what they're going to do. We are going to be aggressive about getting ourselves in the right economic position. That being said, it has to be in conjunction with the regulations and the laws and the practices in Europe.

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

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

Okay. And sorry, I just sneak 1 more in, something perhaps you could talk about a little more freely. Good to see progress on box shipments and you're calling up 1%. That certainly appears to be outpacing the market.

Given the line of sight and perhaps on the wins you already have in North America on the box side, is there a good way to think about relative outperformance that we could hope to expect in North America for you guys next year and some of the wins that you've had in terms of what type of customer mix of business?

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

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

Well, thank you very much. Thank you, everybody, for being with us on this transformation journey. The work and the focus on 80/20 and on the 3 pillars of our strategy are critically important, and we're working it, and we're working it hard. I'm delighted to see the progress in North America and what that team is doing.

Obviously, the North American team is facing headwinds that we didn't expect, but we're being aggressive with the realities of that. And so we're getting after it. In Europe, it's been a tough market. No doubt about it, right?

If we look at 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.