Good morning, and thank you for standing by. Welcome to today's International Paper Second Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, you will have an opportunity to ask questions. [Operator Instructions] I'd now like to turn today's conference over to Guillermo Gutierrez, Vice President-Investor Relations. Guillermo, you may begin.

Thank you, Shelly. Good morning and thank you for joining International Paper's second quarter 2021 earnings call. Our speakers this morning are Mark Sutton, Chairman and Chief Executive Officer; and Tim Nicholls, Senior Vice President and Chief Financial Officer. There is important information at the beginning of our presentation on Slide 2, including certain legal disclaimers. For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP financial measures is also available on our website. Our website contains copies of our second quarter 2021 earnings press release and today's presentation slides. Lastly, relative to the Ilim joint venture, Slide 2 provides context around the joint venture’s financial information and statistical measures. I will now turn the call over to Mark Sutton.

Thank you, Guillermo. Good morning, everyone. We will begin our discussion on Slide 3. International Paper delivered solid earnings growth and strong cash generation in the second quarter. We continue to see very strong demand for corrugated packaging and containerboard and solid demand for fluff pulp. And in our paper's business, demand recovery accelerated in the second quarter across our key geographies. We grew revenue by 15% as compared to the second quarter of last year, with price realization accelerating in all of our business segments. Our mill and converting system performed well. However, we operated with extremely low containerboard inventory across our packaging network, due to two facts: the lingering effects of the winter storm in the first quarter and then our planned maintenance outages in the second quarter. These operating conditions severely stressed along with severely stressed transportation environments, adversely affected volume and operating costs in the second quarter. Input costs and freight were significant headwind in just about every category. I would call out the sharp rise in recovered fiber costs in North America and Europe. Although, it certainly had a significant cost impact and it is another indication of the strong demand environment. Our Ilim joint venture delivered outstanding performance with equity earnings of $101 million in the second quarter and a strong outlook as we move into the third quarter. On capital allocation, we're making significant progress strengthening our balance sheet. In the second quarter, we reduced debt by $796 million. We also returned $258 million to our shareowners, including $57 million of share repurchases. During the second quarter, we monetized our remaining stake in Graphic Packaging. I'm really pleased with the return on our investment. We structured the transaction in 2018, maximized the value of the Consumer Packaging business for our shareholders. Looking ahead, we're making excellent progress on the spin-off of our Printing Papers business, which we expect to complete on October 1. Across IP, the team is doing an outstanding job managing complexity. We remain diligent in applying COVID-19 layers of protection for our employees and contractors. And I really appreciate our team's commitment to execute well, take care of each other and take care of our customers as we work together to build a better IP for our shareholders and really all of our stakeholders. I'm going to turn to Slide 4 now, which shows our second quarter results. We delivered EBITDA of $793 million and free cash flow of $633 million, which brings our free cash flow generation to more than $1 billion for the first half of 2021. Revenue increased by $750 million or 15% as compared to last year, driven by higher average prices in our three businesses, as well as volume growth in our Packaging and Paper's businesses. Margins improved sequentially with price realization outpacing higher input and transportation costs. We expect margins to expand meaningfully in the second half of the year as price realization outpaces rising input and transportation costs, and importantly, as we stepped down from our highest maintenance quarter of a year. Now I'll turn it over to Tim, who will cover our business performance as well as our third quarter outlook. Tim?

Thank you, Mark. Moving to the quarter-over-quarter earnings bridge on Slide 5, second quarter operating earnings per share were $1.06 as compared to $0.76 in the first quarter. Price and max improved by nearly $0.50 per share sequentially, driven by very strong price realizations across all of our business segments. Volume was essentially flat versus last quarter, demand for corrugated packaging is very strong and demand for fluff pulp is solid, while demand for papers continues to recover in all key regions. Second quarter volume and our North American packaging business was constrained by severely low containerboard inventory and fluff pulp shipments were hampered by significant port congestion. Our mills and converting system performing well. Operating costs were adverssely impacted by a highly stressed supply chain environment for both inbound materials to help down shipments as well as the exceptionally low containerboard inventory conditions and our North America packaging system. Maintenance outage costs increased by 18% sequentially as we completed our highest maintenance outage quarter of the year. On absolute level, maintenance costs were $250 million in the second quarter. Input costs were a significant headwind for most materials and energy costs remain elevated, providing little relief following the winter storm. OCC represented about half of the sequential increase in input costs. Although some of the pressure in input costs could be transitory such as the impact of heavy rainfall on our wood cost in the Gulf region. The extremely tight transportation environment will continue to put pressure on all inbound materials. Every mode of transportation is tight and we expect them to remain tight as we move to the second half of year. Corporate expenses benefited from favorable reserve adjustments. Our tax rate of 24% in the second quarter was sequentially lower, primarily due to a discrete period tax benefit, and equity earnings improved substantially on very strong performance from Ilim. Turning to the segments and starting with Industrial Packaging on Slide 6, we continue to see strong demand across all channels, including boxes, sheets, and containerboard. As Mark indicated, we operated with extremely low container-board inventory in the U.S. system. These conditions impacted volume and operating costs in the quarter. We are working to replenish inventories following the winter storm and maintenance outages as we manage through a tight transportation environment. Taking a look at our second quarter performance, volume was sequentially flat. Strong demand in our North American box and containerboard channels, offset lower seasonal demand in our EMEA business. Volume across our U.S. chnnels grew by 10% as compared to last year, which includes our U.S. box system, open market containerboard customers, as well as our recent equity partnerships with strategic sheet feeders. Price and mix increased by about $110 million in the quarter. We're making excellent progress on the realization of our margin increase. Our mills and converting systems performed well. However, operating costs were impacted by severely low containerboard inventories and stress transportation environment with congestion across all modes. Maintenance outage costs increased sequentially as we completed the highest maintenance outage quarter of the year. In our Industrial Packaging business, we've completed about 75% of our planned maintenance outages in the first half of the year. Input costs were a significant headwind in the quarter, primarily driven by higher costs for OCC, chemicals and distribution. About $10 million of the sequential increase in input cost occurred in our EMEA packaging business, primarily for OCC and energy. Taking a closer look at OCC, we consume about 5 million tons annually across our U.S. mill system and Spain. We see the rise in OCC cost as a reflection of the underlying strength and global demand for corrugated packaging. We expect OCC costs to rise further in the third quarter, even as seasonal generation improves. We expect continued U.S. and export demand, especially from India and Southeast Asia, which were largely offsetting pre-restriction OCC exports to China. Turning to Slide 7. We're well positioned for strong earnings growth and margin expansion in our packaging business in the third and fourth quarter. Demand is strong across all our channels. We expect continued robust volume growth across our U.S. channels and we're making excellent progress on the price realization of our margin increase. Our containerboard inventories will enable operational and supply chain efficiencies, as we move through the second half of the year. We do expect further transportation in the third quarter with substantial pressure on OCC and transportation cost. Our teams are doing an admirable job managing costs in tough environment. We expect further opportunities to be more efficient as inventories are little while. In addition, our commercial initiatives are outpacing cost, pressure and positions for strong margin expansion in second half of the year. Turning to Global Cellulose Fibers on Slide 8. Demand from fluff pulp is solid and the end-user demand signal for absorbent hygiene products is healthy. Looking at our sequential earnings price and mix improved by $104 million in the second quarter with price realization accelerating across all regions and segments as expected. Volume was moderately lower due to significant U.S. port congestion and frequent vessel schedule changes which delayed our shipments. Mill performance was strong, however, operating costs were impacted by the type of supply chain environment, we expect these conditions to continue in the third quarter. Maintenance outage costs decreased as expected and input costs were moderately higher with lower lead cost in the Mid-Atlantic region offset by higher chemical and energy cost. Turning to Printing Papers on Slide 9. Our papers business delivered earnings of $76 million in the second quarter with continued strong cash generation. Our Printing Papers business carries strong momentum as we approached the spinoff on October 1. And then it continues to recover in all of our key regions, additionally, our volume recovery is outpacing the industry through the strength of our global brands and commercial excellence. Looking at the second quarter performance, price and mix improved by nearly $30 million with price realization across all regions. Fixed absorption improved with lower economic downtime in our North American mill system. However operating costs were impacted by the tight transportation department. We executed the heaviest maintenance outage quarter of the year as well. And on input costs, we experienced pressure on wood, chemicals and freight. As I said earlier, we're on track to spinoff the papers business on October 1, separation planning is progressing well and we expect to file the Form-10 with details of the spinoff in the first half of August. As you would expect, there is significant flexibility. Our teams are doing an outstanding job managing the business as we prepare for a successful separation. Looking at the Ilim results on Slide 10. The joint venture delivered equity earnings of $101 million in the second quarter with an EBITDA margin of 47% driven by strong price realization for pulp and containerboard. Volume improved sequentially on strong demands for pulp and containerboard, as well as more shipping days in the second quarter, following the impact of the Chinese New Year in the prior quarter. Underlying demand that stable following inventory restricting during the first half of 2021, shipping capacity is tight and supply chains to China are stretched. Third quarter volume is expected to decrease moderately as Ilim executes the majority of its annual maintenance program. So now we'll turn to the outlook for the third quarter on Slide 12. As Mark said earlier, we expect meaningful earnings and margin expansion as we move to the third quarter. Looking at industrial packaging, we expect price and mix to improve by $110 million on the continued realization of our March, 2021 price increase. Volume in North America is expected to improve by $10 million, while volume in Europe is expected to decrease by $10 million. Operating costs are expected to improve by $5 million with the North American system benefiting from a gradual recovery and containerboard inventory levels. Staying with industrial packaging, maintenance outages expenses are expected to be down by $122 million. Input costs are expected to increase by $85 million with OCC representing about 60% of the expected increase. In Global Cellulose Fibers, we expect price and mix to increase by $60 million on realization of prior price movements. Volume is expected to increase by $10 million. Operations and costs are expected to decrease earnings by $5 million on continued supply chain stress due to port congestion. Maintenance outages expense is expected to decrease by $15 million and input costs are expected to increase by $10 billion on higher wood and chemical costs. In printing papers, we expect pricing and mix to increase by $25 million. Volume is expected to increase by $5 million. Operations and costs are expected to be unchanged. Maintenance outage expense is expected to decrease by $23 million and input costs are expected to increase by $10 million, primarily due to higher wood cost. And under the equity earnings, you'll see the outlook for our Ilim joint ventures. I want to take a moment to update you on our capital allocation actions in the quarter. We're committed to maintaining a strong balance sheet, we're comfortable taking it on leverage below the target range of 2.5 times to 2.8 times debt-to-EBITDA on a Moody's basis. In the first quarter we – in the second quarter we reduced debt by $796 million, bringing our debt reduction to $904 million in the first half of 2021. Returning cash to shareholders is a meaningful part of our capital allocation framework. In the second quarter we returned $258 million to shareholders through dividends and share repurchases. Sharing repurchases were $57 million, which represented 1 million shares at an average price of $60.80. We have about $1.5 billion available under the company's share repurchase authorization at the end of the second quarter. Lastly, in the second quarter we monetized our remaining stake in Graphic Packaging for about $400 million, this brings our total cash proceeds on the investment to $1.3 billion before expected cash taxes of about $300 million in the second half of 2021. As a reminder, we also have a tax receivable agreement with Graphic Packaging under which we expect to receive about $100 million in cash proceeds during the second half of 2021. With that, I'll turn it back over Mark.

Tim, thank you very much for all the detail. As we look forward, we're positioned for strong earnings and margin expansion in the second half of 2021. My confidence in making a statement saves on the following. Our commercial initiatives are driving revenue growth and our building converting systems will regain meaningful operational and supply chain efficiencies, as we replenish inventories. Although raising input cost will likely linger, uncertain we can successfully navigate the environment, given the strong demand backdrop. Our papers business carries strong momentum as we approach the October 1 spinoff. Our team is doing an outstanding job, managing the business and taking care of customers. I want to take this opportunity to thank our employees for their tireless efforts as we plan for a successful separation. As we moved through 2021, we had a significant operating and non-operating cash catalyst, and we are laser focused on the capital allocation framework that Tim just described. All of our cash will flow through our framework with one objective, maximizing value creation for our shareholders. I'm excited about the actions we're taking to build a better IP or accelerating earnings growth and building a foundation for long-term success. We're looking forward to sharing more about that with you in the months ahead. With that, we're ready to take your questions.

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

Hi, everyone. Good morning. Thanks for the details. Thanks for taking my question. I guess my first question, Mark, you and Tim have talked about this in the past about running the cash flow generation that the company has both from an operating standpoint and non-operating, since you have so many transactions that have been occurring this year and will continue to occur this year through your framework. What should we take away from that in terms of what tools that you have in your quiver may be more applicable now versus what might have been the case three and six months ago? And Tim, what gives you comfort and why you think it's appropriate in your view for leverage to drop below your target range? What are the things that you think make that prudent strategy, if you can give us a couple of thoughts there? And then I had a follow-on.

Sure. Good morning, George.

Good morning, Tim.

The way we're thinking about it is, we are trying to maximize value. We have a lot of cash coming in, in a moment. We do – everything looks positive as we go forward, but we recognize this as a cyclical business to some extent. And so, the relation to the balance sheet where we are trying to build strength, reduce risk and also the flexibility and optionality. And so taking it down below the target range, which is really a target range through a cycle, sometimes we'll be below and sometimes will not be a little bit above. But we just view it, that coupled with our attention performances, derisking the company share repurchases and dividend is very important. And so that is over time as we not necessarily quarter-by-quarter, but over year-by-year. We look to be returning substantial amounts of cash to shareholders, and then everything else gets tested, whether it's organic or small bolt-on types of acquisitions, it gets tested against that.

As a follow-on, would the accelerating performance that you are seeing into the second half be any way guide or compass point for you in terms of how you may further allocate capital, especially, to value return over the rest of the year into 2022? Or is it really not so much because you look at this on a longer-term basis? And what are the whys and why not on that? And then my related question, I'll turn it over for everyone. Do you have any kind of view that you could share with how much cash Sylvamo will need to operate on an ongoing basis? Thank you very much.

Yes. Just on the last, we do. And that will be - the Form 10 is going to be coming out here in short order and I think that will answer all the questions. To your first part of your question, I think, we try to look at both. We try to look at circumstances in the moment, but we definitely have a long-term view and we're thinking about how to create value and what our value is over time. So I hope we try to take those into the calendar for time.

Tim, if I could and George just wrap up that was a lot of ground covered in the capital allocation questions that you asked. And we do take a long-term view. And as I said last quarter, one of the things we're really excited about is that we've got IP position for the first time in really almost forever or definitely recent memory for our entire capital allocation levered set, strong balance sheet, ability to pay strong dividend, share repurchases at the right times, and very importantly, smart investments in our business, as Tim said, organic or inorganic. We have all of those levers available at the same time. And our past history, as all of you know, is we’ve had two or three or maybe two out of four, sometimes only one out of four. And that's what we really are excited about as we're going forward. As we separate into two companies, the new IP is going to have a capital allocation posture that we haven't had in a long time. And that's very exciting for our shareholders. It's very exciting for the company, because we have options to grow the businesses that are growing to manage our return of cash, all generating, hopefully, outstanding shareholder return.

Thank you very much.

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

Good morning, Mark and Tim. Thanks for taking my question. I guess not to deliver the point here, but – and I appreciate that there is somewhat of a wall of worry out there. But I think one of your peers kind of talked about potentially, a structurally higher level of demand for corrugated for various reasons, whether it's e-commerce or potential onshoring and manufacturing activity. So I guess, ask the question a little bit differently. Your balance sheet and pension probably have not been in as good as shape for two to three decades. Is there something that you see around the corner that gives you pause in terms of any of your businesses and it sounds like again, pretty near – constructive near-term outlook? I'll stop there.

No, Gabe. I think we also do the corrugated packaging market as potentially having a bit of a reset through this last year-and-a-half. We listened to our customers on that, which I'm not sure where it's 8% every quarter-over-quarter and quarter out like it was in the last quarter. But definitely, a step up from the low single-digit growth rates, and that's what we want to be positioned for. When we talk about growing at a minimum with the market, we mean over time and a reasonable assumption of growth on the U.S. market, and that's a number that I think is leaning towards the higher end, just because of a couple of things. The adoption of e-commerce through the pandemic, which has, I think proven to be very sticky and valuable proposition that fiber-based packaging represents to people in terms of its circularity, renewable natural resources, making energy in carbon-neutral biomass way, and a high recycling rate is finally with all the talk about sustainability and climate and a number of other issues finally getting attention all the way down to the consumer level. So we're very excited about the corrugated packaging outlook. And we want to make sure we're there with the right asset base, the right customer list, the right technical capabilities to grow – to sharing that growth.

All right. Thank you, Mark. And I guess switching gears, are you guys prepared at all, it's been call it eight months or so since you've announced the $350 million to $400 million of cost reduction to provide maybe a little bit more detail either, cadence of that of how we might expect it to flow through. I'm assuming maybe we've seen a little bit here in the first half, but – and then maybe by segment, what you expect to see or is that something you maybe prefer to wait to talk about?

Yes, Gabe, we plan on starting that as we head towards the third quarter release and then for the end of the year to get an expectation about 2022 performance.

Thank you.

Your next question comes from the line of Anthony Pettinari from Citi.

Good morning. On Industrial Packaging, the FPA and AF&PA data would suggest that sort of industry inventories are kind of closer back to a normal or more of a normally historic level for July. I'm just wondering if it's possible to quantify or put a finer point on how far below you are sort of normal or comfortable levels of inventory and sort of where that was exiting the quarter, and maybe as we're here at the end of July?

Yes. It's – I mean through the second quarter, we saw the lowest inventory levels in our system that we've probably ever experienced. Coming out of the second quarter into the July, we're able to start recovering a little bit of that, but look we're – I mean the winter storm impacted us hard 145,000 tons followed by that normally high outage quarter in the second quarter. So it's going to take a little bit of time for us to recover that as we go through third quarter and probably into the fourth quarter to some extent. So yes, we were at our lowest levels we've ever seen in the second quarter.

Anthony, I think the other perspective on inventories and I've seen a lot written by analysts on normal inventories and one, just thing to remember the way we look at it. Normal inventories averages from the past, tend to correlate with more normal supply chain environment, so normal transportation, velocity, so forth and so on. And we are nowhere near any kind of normal supply chain performance by third-party partners in the transportation world. So our inventory view in IP for the next quarter and the quarter after that is also influenced and adjusted by what's happening in the transportation and supply chain networks. So I would expect that normal right now should be higher levels of inventory to perform the same with customers as we had when transportation velocity was much higher.

Okay. That's very helpful. And the point well taken, and then just maybe following up on capital allocation. In terms of – you talked about the willingness to potentially go under the 2.5 times to 2.8 times range at what is, I think a pretty positive part of the cycle. As you look to the spin, would you look at revisiting that 2.5 times to 2.8 times target range either up or down? I mean, you're going to have a more durable, higher quality business with industrial packaging and pulp. At the same time you have a publicly traded competitor and containerboard that's been operating closer to one turn or certainly below two turns. So just wondering if you could talk about the range and maybe your willingness to revisit it over the long-term?

Yes. It’s a great question, Anthony. And certainly, we – none of this is static, right? So we wanted to be understood and we want to be consistent and true to the framework as we talk about it. But that doesn't bother us from reevaluating based on portfolio and other specifics potential changes that we think are beneficial to our investors and stakeholders, so nothing now, but something that we will turn over time.

Anthony, I think the way you should probably think about how we make that decision together Tim and his team and me is, we try to look at the company and its optimal weighted average cost of capital, a portion of that is what credit rating we need to have that delivers and supports that. So you're absolutely right, we're going to be a different company going forward, that analysis is something that we do continuously, we’re relied at the credit rating target we have based on the company, we will continue to look at that and try and make sure that our ROIC is constructed in the most effective way to get the best solid high quality return we can for shareholders and definitely debt ratios and credit ratings are part of that.

Okay. That's helpful. I'll turn it over.

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

Thank you. Wanted to first just get maybe more color on the targeted volumes, solid up 3.9% industry though was up 8.2%. You mentioned supply chain and other challenges you had. Did that actually suppressed where your volumes otherwise would have been, and if that was the case, is that business that when your system's operating easily comes back or can you kind of give us some color on how to understand the volume situation?

Mark, I think the way to think about the – I was looking at what we had – what we sort of put in our outlook in the first quarter call. And we actually had stronger performance and we thought we were going to have, but we didn't know like a lot of people didn't know the market was going to grow 8%. We had the inability doing a quarter in some cases to pick up incremental business, we didn’t lose any business, because our core customer lists that was coming into the quarter as business. There may be some business that we didn't bid, most of it is shorter-term business. So that the answer is, yes, we have people still call on us today. Can you supply me more boxes? In some cases we can, we just couldn't do it in the second quarter. So I'm not concerned about losing anything permanently. We basically had a classic mismatch between the available capacity in our system and the demand in a 90-day period.

And when you say the available capacity, is that because your capacity during these 90-days were constrained by unusual factors, or basically you're just pretty much running full to your system?

Yes, the two factors I mentioned Mark in my opening comments, we have more than one quarter of recovery from the winter storm, 140,000 tons just evaporated from our containerboard supply chain. And on top of that, we had a highest maintenance quarter in ITT in the last 10 years. So if you just normalize what was above normal maintenance plus that winter storm, that's a chunk of containerboard capacity that could not be converted into a box. And that's coming back, it's just going to take a little while to get it back. So what we had available ran wide open, but we have the capacity offline for maintenance and we have the lingering effect of the 140,000 tons from the first quarter. None of those are permanent, all of those will be significantly improved as we navigate through the second half.

Got it. And then just on pulp, as the great price mix showing in the quarter and you pointed to another I think it was $60 million or so for the third quarter. Does that pretty much reflect all of the benefit from – the pricing that's already happened, forgetting about what happens from here or, or the way your contracts set up? Is there meaningful additional lag that might come through based on what's happened previously with posted prices?

So that's a complicated question, because of the nature of some of these contracts by customer type by region. But let me just kind of state – restate what we talked about the last two quarters, that a, you could expect, quarter-by-over – quarter-over-quarter improvement in this business, steady improvement in this business, and we're seeing that. But our strategy is to have the kind of margins in this business that reflect the value that fluff pulp provides for the end use customers. So we're taking a very structured, very measured approach to each market segment and to the agreements we currently have in those segments with individual customers. And so, as we implement this approach, we would expect that there’d be some volume shifts and movement between segments. And our goal is to have mix improvement, better agreements with better economics that reflect the value of fluff pulp. And that is a kind of customer-by-customer region of the world by region of the world and I would expect and we're making progress, good progress on that. But given the length of some of these agreements and the way they're structured, we should expect to continue to see margins improve over the next several quarters. So that's a long complicated answer to whether we have any more price flow through, it's not just about price flow through, it’s about restructuring these commercial agreements and getting the proper value for this product.

Appreciate the color. Thank you.

Your next question comes from the line of Mark Wilde from Bank of Montreal.

Good morning, Mark; good morning, Tim.

Good morning.

Good morning.

I was wondered Mark or Kim, if you can just help us a little bit with kind of cadencing the pass-through of the spring containerboard hike. And then, I don't think you said anything about this perspective early August hike, so maybe if you could just give us some color around that as well, just as we think about the next couple of quarters and into 2022.

Yes. Hey Mark, it’s Tim. So I think the increase from the fall as we talked about last quarter went through a record amount of time, it was the fastest size I've ever seen. The pace on the second one, we were kind of expecting a normal historical rent up on it, it seems to be going faster, not as fast as the first, but still faster than what we've seen over time. We'll see as August comes, we'll see how that will plunge out. But right now we see our fundamentals looking very strong, we’ve seen strong demand and as Mark talks about, all of the complications from the supply chain are really stretching inventory tighter than they would normally be. So far this is the first two price increase implementations we feel really good.

Well. So can you give us a sense Tim, of how much benefit from that spring hike you've had in the second quarter? And just order of magnitude what we might expect in the third and fourth quarters?

Yes, I think if you look at the two of them combined, we'd be about 80% complete on implantation at this point.

Okay. All right. And then any thoughts on sort of how August would roll in?

Yes, I don't know, I mean that's forward-looking and we feel very confident at the moment, but I don’t want to speak to forecasting price at this point.

Okay. All right. That's fair. Mark, I just want to as a follow-up turn to the containerboard business from just a kind of a supply and demand standpoint. Does this continue to strengthen in global containerboard demand? Is it altered your thinking at all about investing in either the bottlenecking projects at the existing mills or potentially the timing on that second conversion at Riverdale? And are you also doing anything to kind of gear up capacity on the converting side as e-commerce continues to grow as a bigger and bigger percentage of the market?

That’s three question Mark. And the answer is, coming into maybe the middle of 2020, we were saying, and I was saying, we feel really good about our containerboard capacity, we have what we need, the amount, the type of grades. When everything is running, we have enough capacity. But everything isn’t running every day, colleges and of course events that you don't predict like that winter storm issue. But yes, we are looking continuously at debottleneck and we've done a bunch of that in the last several years painfully, because we need that containerboard now. We are looking at different options for adding containerboard into our system, if it looks like this kind of demand level it’s going to be consistent. Remember we are structured maybe a little bit uniquely in the sense that we bring containerboard to market, if the three distinct channels, our own box network open market in North America to companies that provide a certain service in the box market and the long-term partners of ours, but we don't make the box and then our export. So much you have seen and you will continue to see is movement of containerboard within those three channels. And obviously, we have favored the U.S. box market as much as we can, but trying to continue over time, not just in the second quarter of 2021, but over time get the highest possible margins at our business by participating in ultimately those channels. Containerboards you're right, is a high demand product all over the law, but recycled and virgin, we obviously only export the virgin, we saw the virgin version of it. Box capacity, we've been actively investing locally with the acquisitions we did with that in the early part of the past period, we had a lot of opportunities to fill out existing plans by adding single or a double lines of box making equipment. We've built a few plants and we've acquired a couple of partnerships, but there's definitely opportunity for us to continue to invest in our converting network. The other option with converting as you well know, Mark is when you know demand looks like it's going to be solid. You can bring on more employees and actually fill out an extra shift in many plants. And you've got lean capacity turned into productive capacity. You obviously want to do that when you're pretty sure. And first do it with over time and then you do them with permanent employees. That's a challenge right now, given the main market dynamics, but we've got several levers to pull to continue to invest in not only box capacity, but the kinds of capability we have, e-commerce specific assets for example, is something that we're also bringing to market.

Okay, that's helpful. Thanks Mark. I'll turn it over.

Your next question comes from the line of Mark Connelly from Stephens.

Thanks. Tim mentioned that white paper price mix maybe about $30 million, but when I look at overall revenue per ton in this segment, we've got only a couple of bucks, which implies that maybe oversees price mix was flat or even down. Can you talk about price index across your system, particularly outside the U.S. on the white paper side?

On white paper side, it’s just a little bit muffled coming through. So when you are talking about looking forward, Mark.

No, I'm curious, what's happening in the system right now. It looks like you got some gains in the U.S. but you didn't really get much across the entire white paper business?

Yes. Well, I mean, all the regions we're seeing price increases or realization of price increases in some degree, some of this in other regions started earlier in the year. So Russia was kind of on the forefront earlier in the year, implementing a price increase. Brazil as well, domestically so those are sort of – they're running their course and playing out where we still see traction in North America and in some of the export markets as well.

Okay. Okay. That's very helpful. And Mark, just to switch gears completely I'm curious what your position is on this packaging stewardship legislation that we're starting to see, as states try to create incentives to reduce – you've pointed to the growth in e-commerce, which some of these states are pointing to as part of the problem. But how do you – ASPA is against containerboards being included? So how do you think about containerboard industry responsibility, what should it be, if the legislation should not apply to you?

I think if you look at the legislation in detail, there's a federal view that's kind of in its nascent stage. And there's a state by state view and we are actively working in the state by state legislatures. The big issue and the big goal of this extended producer responsibility tech legislation was really targeted non-recyclable or hard to recycle in many cases, plastics. In some cases that has led people to believe all packaging should be included. So the first thing is separating the facts of what corrugated packaging can do, and actually corrugated packaging could be a solution to the problem because of the high recycling rates. But that message has to get to policy makers. And we worked very hard on that. I spend a fair amount of my personal time talking to people about that. And in many cases, it's a new learning mark for people at the local level, that there is a completely different story on fiber-based packaging, it's made from renewable resource and a high recycling rate in the 90% range versus many of the other substrate choices. So I think that's the case we're making that is actually part of the solution, not part of the problem. But as usual in legislation, sometimes it starts with a blanket, all packaging needs to be managed in a different way and people need to be responsible for their packaging that they put out there when we have a system. So for example, we spend a lot of times and it's in there right now. On the infrastructure work that commerce is working on, in that bipartisan agreement, they made yesterday a significant amount of investment in recycling networks in the country is part of that. We'll see if it stays in there, but that's the answer is improving recycling rates for even to recycle and reuse materials. That's the value proposition for corrugated packaging, not being included in the intent of similar legislation.

That's super helpful. Thank you.

Your next question comes from the line of Philip Ng from Jefferies.

Hey, good morning, everyone. Appreciating the winter storms was a big hit for you guys, but Tim or Mark, do you expect inventory gaining back to a more manageable level for containerboard in 3Q, where you'll be able to better capitalize on the growth we're seeing and get operating costs back to more normalized level, making the past. You've always kind of targeted to grow faster than the market, but any color on kind of gained back on track on that goal.

Phil, we think it will be a steady progress. It won't be all solved in the third quarter. We think we'll make steady progress through the second half of the year. We have targeted to grow at or slightly above the market over time. We were really hampered in their ability to do that in the last couple of quarters because of the issues you just mentioned. But we will definitely have more options available for incremental growth as we go forward. Just based on the fact that we won't have so much of our system down for maintenance, but it will take a slow and steady progress month after month through the second half.

So we should still expect you to lag the market a little bit in 3Q and…

Not necessarily, not necessarily, a part in what happens in 90 days, but that's a pretty short period of time. Part of what happens in the 90 day period is your segment exposure and what happens in seasonality if you've got more of this versus that. And so I think you should – I wouldn't automatically assume the lag the market. But I think it will take us the next second half of the year to get to the point where we feel comfortable that our inventories are more sustainable. I think the first thing we'll see is we won't miss any sales. The second thing we'll see is our costs will come down.

Super helpful and then pulp prices appreciate its volatile nature. It's a commodity both softwood and fluff pulp prices really surge this year, but the market appears to have softened up a bit. What's your crystal ball saying in terms of pricing for fluffing softwood pulp globally? And do you have a view in terms of how much inventory levels are in the channel? It's tougher to gauge just given some of the logistical bottlenecks you guys are seeing in the market?

Yes. I mean, I wouldn't want to forecast price looking forward. I've talked about how we think about the mom of what we believe we're seeing. We're seeing a bit of a pullback in some of the markets. Our view at the moment is that things are more stable. And look at not only the underlying demand models but the transportation difficulties, which are really in effect extending supply chains at this point. So you're right, full commodity product, but our view at the moment is this is a bit of a correction, not a complete turn.

Okay. Super helpful, guys.

Your next question comes from the line of Adam Josephson from Keybanc.

Mark and Tim, good morning. Hope you're well. Mark, one more on pulp and then I have a containerboard question. I appreciate your comments that you expect segment margins to improve over the next several quarters. But when I looked at the last 10 quarters, it's been a pretty tough slog for the business. And as Phil just said, prices in China have been coming down of late. So I guess, what gives you confidence just given what's happened over the past two to three years, that this is a business in which you have a meaningful, competitive advantage?

Well, if you think about the remarks, I made a couple of questions ago about what we're changing in the business versus the last 10 months or the last 10 quarters. That's what gives me confidence that this is a very value creating material for our end user customers. And we just happen to always extract it that proper value that gives us a value creating return. And that's what we're working on. I think the growth rate will stay solid as economies around the world improve. So there's a growth component, but we're going to run the business in a different way than it's been run before. When we made the decision to invest in the business, it changes the profile of this being a legitimate first rate business for a company versus in many cases, a smaller side sideline type of business. And some of that's reflected in some of the way the commercial agreements have been made. And we're working on changing that for the better.

I appreciate that Mark. And just one on boxed and I think you mentioned earlier in the call that long-term you think the market could be at the high end of that 1% to 2% range that you were talking about? I just want to make sure I understand that. So let's say the market is up another 4% this year after 3.5%, you're talking about kind of an 8% step change upward post-pandemic in a market that had been growing at 1% per annum. Are you thinking that we're going to keep stay at these higher levels and grow on top of that or that there could be some correction as retail sales normalize, and then we'll get back to some kind of growth trend?

Yes, that's – I mean, it's hard to predict that with certainty obviously, but we believe that part of what’s happening is the goal that fiber-based packaging is playing in general commerce driven by a few segments, has taken a step change off. And so we think the base will be stronger. It depends on a lot of things and number one, the structure of the U.S. economy. And so if there is really action on some of the things that have been learned now around supply chains and global issues with supply chains and we do have more manufacturing that actually occurs in the U.S. for certain components, I think that'll bode well for the business and then how strong the consumer is going forward. Coming out of this, I think you're looking at maybe what's going to be close to two years of pent-up demand by consumers because of the things that happened during the pandemic and how that plays out and consumption will play a big role in what that growth rates going to be. I think the data, we have this model we use, I know others have models. There's third parties that are models, a correlation around GDP and has been slightly less, has been what's happened in the box market. And we think that'll still stand and it looks like we're poised to have a stronger consumption oriented GDP or at least as far as you can see right now.

Terrific, thanks a lot, Mark.

Your next question comes from the line of Paul Quinn from RBC Capital.

Yes. Thanks much. Just a question on pulp, I understand you guys are making some operational improvements and I’m just trying to balance that with the Q3 guide here, where you've got opt-in costs up five million stories, there's something on the cost side that more than offsetting the operational improvement that you're seeing. And then if you could give us sort of a scope as to what the big bogey is there for three to five years out in terms of the things that you guys can control. I, how much improvement do you expect that that segment to have over that period of time.

On the longer term part, I'll ask Tim to look for that cost offset part of your question. But on the longer term, we believe as a combination of how we operate. So in the manufacturing sector and the kind of the cost structure of our build system, and I've said this before, especially the part that was the legacy IP system, which is mostly converted mills from other products versus what we acquire with warehouse or which is most, all built for purpose. So they tend to have a better efficiency and lower costs. We've got opportunities to lower the cost, primarily in the legacy IP in factoring system, coupled that with commercial arrangements improvements that we're talking about and that we're doing now, you put those two together. We should have the margin structure to have a solid business above the cost of capital with a slight growth potential. So that's what we are working on. And we see a path to that. It will be a steady path, quarter by quarter and that's where we're heading. And the question on the cost on account, it's modest, but it's really transportation. I mean, we're continuing to battle the transportation in general. I think part of the transportation issue in this business, Paul is export port congestion, much more exposed to international causes break than the other businesses in the company.

Right. Thanks very much. Most of that's helpful.

That's a lot. Your next question comes from Neel Kumar from Morgan Stanley.

Hi, good morning. You mentioned would cost being higher sequentially, partly because of the wet weather. So you're getting a sense of the magnitude of inflation you're seeing there, and you certainly see more of a 3Q issue or it's going to carry over into the fourth quarter as well.

Yes, it's really due to having access to the fiber as being able to get it out of the woods based on the rainfall that we've had. So we looked at it very long lead time in terms of how we manage what inventories that mills and across basins and it's really been the Gulf states that have been more heavily impacted but some of the Southeastern mills as well. So depending on the weather as we go through the rest of this quarter into the fourth, but our inventories are in decent shape, but they're a little on the low side and it's just going to cost more to get the blood out and get it to the mills. Transportation's not helping either. I mean, we've referenced inbound materials and whatnot and that's seemingly impacting everything.

All right, thanks. That's helpful. And then in terms of your maintenance outage expenses, and you're now forecasting $642 million for the full year, I know it's early, but I'm just curious how you're thinking about 2022 maintenance, each I could expect down year-over-year are generally remain near 2021 levels.

Well, we're still working through that. I mean, I think a good way to look at it. The way I'm looking at it last year was an abnormally linear. This year is a little bit of a out of range high here. When you put the two of them together, it looks roughly in line. I mean, our outages can be anywhere from 500 to 500 million to a little bit less or maybe some years, a little bit more pushing 550 last year, given all the uncertainty we pulled back and per sales this year. We're catching up on some of those outages from last year. So we put the two together what's more normal. Next year, we have to take a short planning. We always provide that as we – near the end of the year and look into the coming year.

All right. Thank you.

Our last question for today comes from the line of Kyle White from Deutsche Bank.

Hey, good morning. Thanks for taking the question. I just wanted to talk about some of your end markets in a corrugated packaging. How is e-commerce performing relative to your initial expectations at the start of the quarter, any slowdowns there that you see, how's the recovery in food service going, any details on the end markets so you can provide?

Thank you. On e-commerce no disappointments still very, very strong. And then we're getting into the period of the year where you start to build for the year end demand increases as you move toward holiday season. So still a very strong story. We're continuing to invest in that segment. Food service continuing to improve, I guess, there's a question mark about what happens with Delta variant and COVID, whether everything continues to open. I think that a big question, Mark, our big potential upside is as schools and events start to open food service related to those, which obviously hasn't been opened during the summer as is another potential upside. If that in any way, shape or form gets delayed and the food service growth could slow a little bit, the only segment that I think it's kind of predictable that maybe saw some flattening with processed food. And I think it's directly related to the general opening of the economy and a little less stocking up of kind of the center of the grocery store, if you will. So good strong performance across the key segments and we believe listening to our customers and looking at order patterns that’s continuing has been going to the third quarter.

That's helpful. And then focusing on transportation, I know it's early, but when you look to next year. Do you see any real relief or kind of stabilization and transportation costs, or do you anticipate kind of continuing inflation headwinds? And is there anything internally maybe that you can do to provide some relief against these costs?

Well, internally the best thing we can do on the cost side is to have our system optimized with the right inventories and what that means is make a product in the right factory so that the transportation costs to the customer or in the case of our industrial packaging business, our containerboard mill makes containerboard for box plants that are nearby, not loss plants that are all the way across the country. So that's the number one thing on cost that we can do internally, we don't – we all have our own trucking company or anything like that. It's about really optimizing our supply chain and any dramatic improvements we can make on cost. So your first part of your question, I don't know this for sure, but looking at what the analysts that follow the transportation industry talk about is that there is a belief that labor and some of the impediments to Trump capacity and the training that's required to bring on more employees and more assets in the rail industry will get better and people will want to return to those industries. Many of those companies laid off a lot of people, you can't just bring people back in rail, there's required training and other things, same thing for trucks. And the belief is that that'll get better. So capacity should get better. If the economy stays kind of red hot and it's a good problem to have, but then I think capacity will get absorbed pretty quickly. So we think it's really disruptive right now and velocity is really slow for a lot of reasons. We think part of that, at least on the human labor side, we'll get better.

Got it. Thank you for all the details.

Thank you. Let me go ahead and wrap up just a couple of takeaways. I would like to leave with investors. First, you heard today that we are really positive on the strong momentum we're building for the second half. Both earnings and margin expansion were absolutely laser-focused on capital allocation and a balanced approach to that. And we are in very good shape, all elements that our capital allocation framework and we're very excited about the prospects we have in front of us, as we separate IP into two companies and we work on building a better IP going forward. So thank you for you're interested in International Paper. We look forward to talking with all of you next quarter.

Thank you for participating in today's International Paper second quarter 2021 earnings conference call. You may now disconnect.