International Paper is here to present again. Mark Sutton is here. We'll be making formal remarks. Also in the room are Tim Nicholls and the Investor Relations team as well of IP. Obviously, Tim Nicholls, Chief Financial Officer of the company. Mark became Chairman of the IP Board of Directors on January 2015 and CEO of the company in November of 2014. Prior to that, he was President Chief Operating Officer of the company and basically has spent his entire working career at International Paper to very great effect. Again, we are honored you're here. Mark, stage is yours. Everybody, join me in welcoming Mark Sutton, International Paper.
Thank you, George. Very happy to be here at this conference. Thank you all that are here in the live audience for your interest in International Paper and for those of you that are on the webcast. As George said, I do have a few prepared remarks I'd like to share with you, and then I'll join George for some Q&A. Before I begin, just a reminder, as always during this presentation, I'll make some forward-looking statements that are subject to the risks and uncertainties that you would normally find in business. On slide two, you'll see important legal disclaimers. Also, importantly, reconciliations of our GAAP to non-GAAP measures are available on our website. With that said, we'll go ahead and get into some of the material I want to share with you.
So looking ahead, we expect positive momentum through the year driven by favorable market trends and significant earnings benefits from IP-specific catalysts. Beginning with the market, we believe the demand environment will continue to improve across our portfolio. Based on feedback from our customers and looking at trends across each of the segments we serve, we expect industry demand to grow about 3% this year in both packaging and in fluff pulp. We also have seen prices across our businesses improve as index movements have turned favorable and export markets have stabilized. In addition to positive market momentum, our teams across International Paper are taking actions to maximize profitability, and we expect these catalysts to generate more than $400 million of earnings benefits in 2024. This includes commercial initiatives focused on mix and margin, both segment mix and type of customer.
Improvements across our portfolio in both mix and margin is the focus of our commercial initiatives, specifically our go-to-market strategy, which we recrafted over the 2023 period and now are putting it into action in our packaging business and what we're calling our optimization strategy in our Global Cellulose Fibers business. This also includes actions we've taken to significantly reduce costs across our operations by optimizing our mill footprint and by leveraging better technology and analytics, which I think provides tremendous opportunity for the future for us. Naturally, as always, there are some offsets as we expect higher costs for OCC and general inflation on labor, transportation, materials, and some services where inflation continues to actually be existing. The inflation that occurred over the last two years is pretty sticky.
It's like anything else, supply and demand of some of these specialty services are what's keeping the labor rates up. It's for things that we don't do ourselves in a maintenance outage, for example, or specialty type of services. We feel good about the overall momentum, and we're making investments to reduce costs and improve the capabilities that will benefit International Paper beyond 2024. I think it's a good story of turning the corner on earnings improvement in 2024. A lot of the investments we're making, the analytics, some of the capital investments, are going to set us up for earnings improvement well beyond 2024. If we turn to slide four, I'll talk about specific actions we are taking to improve profitability in our packaging business.
This is a version of what we just covered on our earnings call for the fourth quarter and full year at the first couple of days of February. On our last earnings call, I highlighted our go-to-market box strategy. This initiative is about making choices that create value for our customers and for International Paper while maximizing the profitability of our packaging business. We are investing in our plants and in our people. It's very important for you to hear when we say invest. It's plant and equipment for sure, but it's also in the skills and in our commercial teams. Our leader of that business, Tom Hamic, answered a question on our earnings call about adding commercial talent and salespeople.
He went through that, how we're approaching putting more commercial people on the ground, changing incentive plans, the kinds of things that will bring in more profitable top line. So we're investing in our plants and our people to strengthen our service model and improve the customer experience. We're leveraging these capabilities and our strong customer value propositions to improve our profit margins and mix. As a result of this strategy, we expect to achieve about $68 million of price and mix benefits in the first quarter of 2024. As a reminder, this does not include impacts from any prior price index movements. As we continue to execute this strategy, our focus will be on value over volume. And I've gotten some questions on that when we said that so plainly on our earnings call. It doesn't mean volume's not important.
It means value in moving our profitability per unit up in certain segments that we grew dramatically in during the 2020 and 2021 period needs to come with the appropriate margin. If it doesn't, we're willing to trade that volume for something more profitable. We will grow at or above market in the long term. In order to reposition the portfolio to get profitability where it needs to be, we will choose value over volume. As we continue to execute this strategy and focus on value over volume, there'll be trade-offs, and we'll make choices which will likely cause us to trail the industry for the next few quarters. Also something I mentioned on our earnings call. That's trail the industry in units produced and sold. It's not a definite, but it could happen, and we're willing to make that investment to improve our earnings.
But while that is happening, you should see our earnings improving through the process. And as I said, we expect to grow at or above market over the long term. We're also investing in projects that target lower cost and improve productivity. And productivity is really important in this period of time. It's always important in an industrial manufacturing company. But when you think about what happened to labor in manufacturing over the last few years, there's a lot of energetic, eager, younger, more digitally savvy employees. They're just not sure how to make boxes at the same level that the people they replaced did, that retired or left the workforce early during the pandemic period. But their potential is through the roof. And so we're making investments to get our new employees up the learning curve very, very quickly.
They are very comfortable with some of the technology that we're putting in place. I see that as a temporary dip in productivity with a real good upside. We also are investing in capacity. We have capacity constraints. It never works in corrugated and averages. It matters in regions. We may have plenty enough capacity in the Upper Midwest, and we may be completely out of capacity in Southern California. Not economical to ship from the Upper Midwest to California. You have to solve your capacity issues where your customers are. We do have some spots where we cannot grow with what the market's offering today because of capacity issues. We're making investments in that area as well. In summary, we have significant opportunities both commercially and operationally to improve profitability in this business.
So turning to slide five, I'd just like to reinforce my view on International Paper and how we're positioned for the future. Our financial foundation is strong. Over the last 5 years, we've focused on strengthening our balance sheet, and maintaining a solid balance sheet is a key priority because we believe it is core to our capital allocation framework. As I shared with you today, we anticipate continued demand recovery across the markets we serve along with margin improvements from our commercial and cost reduction initiatives. As I look to the future, I'm confident we have the right strategies to create significant value for our shareholders. We will invest to strengthen our Packaging Businesses in North America and Europe and drive profitable growth primarily through those businesses.
We will continue to optimize our Global Cellulose Fibers business by aligning our resources with the most attractive customers and segments. Given our strategic customer relationships, our talented teams and world-class assets, and our market expertise, I'm highly confident in the future success of International Paper. So with that, George, I'd be happy to join you for some Q&A.
Thanks, Mark. Great rundown. Again, appreciate you being here. You talked a lot about, and others do as well, evaluating the value opportunity for a specific amount of volume. You're going through that process now. Part of the exercise relies on IP having done an effective job of calculating what that value is, right? Because if you misprice it, you either wind up with lower margins than you'd like or you priced above what the value is, and you lose volume that you otherwise could have kept. So I know you don't have a spreadsheet with you, but help us understand why IP is doing a better job of that or an effective job, continued effective job of that, and how that'll help you as you make that analysis of value or volume the next couple months or years.
Yeah. It is a lot of analytical work to try to understand what the value proposition really is for a customer. We rely on our commercial teams. We have new and different leadership in our box business that's much more commercially astute than what we had prior. That's really helping us see. We brought in some outside help to really help us launch this go-to-market strategy. Look, I am a leader who will never blame a customer for our profitability issues. We had a really good customer mix heading into 2020 and 2021. We were producing above 20% EBITDA margins. With that customer mix, a lot changed during that period. We had commercial arrangements that were constructed in 2018 and 2019 serving a market in 2021, 2022, 2020, but it was totally different.
So in some cases, some of our really good customers grew so much that we had to actually and we had contracts with them, and we're an honorable company. We're going to meet our objectives and our contract requirements. We had to squeeze out some really good smaller customers or some really good customers that we didn't have the same obligations with to meet the demand need that we had signed up for. So a lot changed in our mix by region, by customer type, and by actual customer that created some profitability issues. So as those new arrangements are now up for renewal, we can't operate with those same great customers with the same terms and conditions we had in 2019. So we're either going to improve it or we're going to move to some different customers. And it's not personal.
It's got to work for us, and it's got to work for our customers. And we're seeing that's a big part of this $68 million in the first quarter. Our customers recognize that we have a unique position of geographic reach. Some of the large national buyers of corrugated need people who can be close to their operations, and we're one of the few companies that can do that. And no one wants to pay more. No one wants to be charged for more services. But when they do their due diligence and they look at their alternatives, so far, there's been very limited volume loss, and we're improving our economics. So it's just business. It got away from us a little bit because of the macro, and it's our job to correct it. And we have a lot of good people working on it. We have tremendous relationships.
I've been at this a long time. This is when you know if you've got the equity you think you had with your customers.
If I could, so let's envision a discussion with a customer now versus a discussion that would have happened five years ago. What is being presented differently to the customer now about IP and its capabilities and all the things that the customer should value about you that's different than five years ago?
I think one of the things that we probably didn't spend as much time on with our customers is the value beyond the product. The value beyond the product, meaning never, ever, ever having our customer run out of a box from IP. We've been replaced a few times on price, which happens, only to have that same customer come back three months later saying, "Well, we replaced you, but the supplier we replaced you with has run us out of packaging, which shuts our lines down three times. So can you come back?" And the answer is yes. If we have the capacity, the answer is not right now if we don't. One of the frustrations for me is we find ourselves it's the strangest thing, actually, where we actually have limited capacity in our converting operations.
You might say, "How can that happen?" Well, equipment gets older over time, so you have to invest to make sure you maintain it. But two things changed. We were heading into this period of 2021 where the demand really shot up, finishing up a multi-year investment program in our mill system with plans to begin to build in new plant and equipment and converting.
That's right.
But we got caught. The music stopped, if you will. Demand took off before we were ready to do it. Now, everybody knows most packaging plants are not 24/7. So the way you solve capacity in the short term is with labor. You just add a shift, and you run those days on the weekend that you're normally down, or you at least run one of them. And in many cases, pre-pandemic, employees in IP and probably most manufacturing companies actually relished a little bit of overtime. It boosts your earnings, and it's something you can manage in your personal life. And that's how we did it. We just added people, or we worked more hours. And as the workforce started to evolve and change, that's not an automatic anymore. People aren't looking for that as much. Forcing it causes you to lose more good employees.
Our latent capacity that was being solved with just extra labor while we were investing in plant and equipment, it didn't completely go away, but a lot of it went away. It left us with a meaningful percentage of less capacity. That's part of what we're having to solve. Innovation, technology, where we can run the same amount of volume with less people, not forcing them or asking them to work overtime if it just doesn't work for them at this moment in their life, and then adding, like we did in Pennsylvania, a brand new plant, and then adding equipment, net new equipment in plants where we already have the building and the plant, and we have room for more box-making equipment. It's an all-of-the-above capacity strategy.
We, I guess, never thought we would be in a position where we would actually go backwards in the amount of hours of converting time we have to sell to the market, but we did.
In fairness, I remember you on this stage more or less saying that we're done with the mills. We love the mill system. Now it's time to invest in the box plants. You're right. Demand came more quickly than we all expected. Mark, if you can, have you talked about how much you're going to invest in the box plants from a capital standpoint?
So we haven't talked about a specific number, but what we have said, and Tim has said this on our earnings calls, I think, in prepared remarks, is that we believe the level of capital investment that we've been spending, that investors are used to us spending in the billion-dollar range, is sufficient for us to be able to fit that new investment because really part of it's a shift in CapEx from some of the strategic projects in the mills. And I'll give you some examples very quickly of it. Think about the Riverdale conversion to white top liner. That's a really big, $several hundred million project. We don't have any of those in the pipeline right now that we need to do. That money just shifts over to the box business.
But the $1 billion-ish capital expenditure, which I know investors like to model, where is cash going to go? It should fit pretty close into that.
Yeah. I mean, frankly, the question is coming not even so much from, "Okay, we're trying to figure out our free cash flow models," which is obviously important, but also that reallocation because you can make a lot of money in box plants if they're well invested and well situated, which is what you're getting to.
Well, the good thing about IP is we don't have to wonder about it. We don't even have to look at competition that does better than us in some cases. We have so many box plants. I can draw circles around the best 40 or the best 100 that we have, and they look exactly like we want the whole company to look. They're relatively new, good, well-capitalized, well-trained workforce, and they make a lot of money. I just need the whole business to get to that level.
So if I don't have Riverdale's coming $500 million plus a year in box plants?
It could be. It could be. And that's maybe not all what you would think of as normal capital. We would consider upgrading existing machines with capital investment, not replacing the machine, but upgrading it as valuable as really as building a new plant. And the reason I can say that is there's a few spots in the U.S. where we can use a couple of more total new plants, but we have so many plants. We're present in just about every market that we can leverage that presence. And where we have the physical space in our plant, we can just add equipment to that plant and not have to do the expense of buying dirt and building a building. There'll be a few spots where we need to do that. That's what led us to the plant that I mentioned in Pennsylvania.
But our network allows us to incrementally add capacity and capability in the markets where we need it. It was difficult during the supply chain disruptions to get. We had the money. We didn't have the OEM equipment, and it took forever to get some of it. A lot of it is in now and being installed. And part of my confidence in the future and not worrying about capacity holding us back from growing with the market is, and what investors can't fully see, they can't see all the people turning wrenches and installing equipment right now in our company because it's finally here. It's uncrated, and they're putting it in. And I know that's going to be deployed to the market right around the time that the market looks like it's really going to be picking up. So I feel really good about that.
It was the craziest period of trying to get those types of things done when you just couldn't get the equipment or the people to install it.
You've obviously talked about Pennsylvania. Are there any other areas that you could talk to where you may be a little bit tighter than you'd like to from a converting standpoint and where perhaps we'll see new assets?
We have some real chronic capacity issues on the West Coast. We have in a market for corrugated that's really emerging. It's always been a good market, but it's growing a lot. I'd say in the kind of Dallas metro area, Houston metro area, we need capacity in those areas. There's a little bit of a relief now with a brand new plant in the Northeast, but that plant will be consumed in no time. And so I think we'll have to look further at the Northeast. I think the Midwest, we're in probably the best shape. But again, that can change pretty quickly. If you end up winning a bunch of business, you just absorbed all of your capacity that made you feel like you had room for growth.
Mark, you went through a number of comments here and also during earnings and very thoughtfully, as always. The skeptical question could be, "Well, International Paper is the largest company in North America in corrugated. How are you going to grow at or above the market over time aside from, all right, you're recovering from maybe a somewhat more difficult period?" So how do you sustain that? I mean, it'd be very difficult to do the number one guy growing beyond the market over time.
Yeah. We recognize it's a challenge. So that's why picking the right customers and segments, let me just give you an example. If we can be as good at selecting customers and segments like we were and still are in e-commerce, which is up over 30%, I know it's not the biggest part of the market, but it's an important part of the market. We're up over 30% in that segment from 2019. A few wins in the faster-growing segments. One of the areas where we are over-indexed is in fresh foods, protein, and then fresh fruit and vegetables. Those are still very corrugated-intensive, and corrugated plays a unique value proposition. Those industries have cycles like any other industry. There's issues in protein now with pricing and inflation.
But the fact of the matter is, relative to the other segments, the discretionary durables and all that, we are well-positioned already if just capturing the market growth in those segments plus our ability in e-commerce. We have an ability, due to our exposure, to grow at least with the market. It is harder when you're bigger. There's no doubt about it. It's the law of big numbers. But we think we can have the right value propositions, the right customers. And again, when I make that statement, I'm qualifying it with a market that grows in the low single digits. If the market starts growing more than that, it gets even harder for the biggest company that has more than a third of the market to grow faster than the market unless you really have an innovative solution to something that no one else has. And that's not impossible.
We obviously work on that. But I'm being realistic. This is probably a 2%-3% growth market over time with ups and downs. But if you draw a line through it and trendline it, we think we can hit that number.
Thank you. Any questions from the audience? Mark, I want to talk a little bit about the Orange Mill move. Obviously, it was a good mill. These decisions are difficult at times. They're difficult, period, not only at times. What reflections should we have about how you see the market longer term in terms of that move that you made in Orange to the extent that you can comment? And then questions that we've been getting frequently to the extent that you can comment. Can you give us an update from IP in terms of how the management succession planning process is going? And then last question, third thing here that we get frequently is just, can you update us, remind us on your M&A strategy and outlook and how we should think about that?
So George, that's a three-part question. When you do that on the earnings call, I actually have a piece of paper in front of me, and I make notes so I don't forget all three questions. But I'll do the best I can. Orange, a lot changed in global containerboard. Again, during this period we went through, we always had a position of about 15% of our containerboard output was not sold to our own box business. It was sold to the open market, which in some cases in the U.S. is actually more profitable than the sort of tail of the profitability in our own box plant. So we always did that trade-off. And then the balance went globally, kraftliner only for markets that needed it. Well, demand changed a lot during 2021 and 2022.
And we actually had so much demand in the U.S., we repatriated some of our export, which was probably the right thing to do. But again, we left some long-term customers. It's proven difficult to get back to some of those. They had to find alternatives. In some cases, that's the kind of thing that'll force a customer to try something they never wanted to try before, blended boards, things like that. So I think our export position is permanently changed a bit for us, or at least there's a reset. And when we realized how 2023 was unfolding and the amount of economic downtime we were taking at a level twice the level we've ever taken before, a part of it was the demand side of the equation had structurally changed.
We don't know if it'll stay that way, but we made the determination that we've got such a demand reset for all three channels of containerboard that we needed to relieve some of our capacity. If we're wrong because you're right, Orange is a great mill, and our employees are fantastic employees. I'm thankful they're in a region where there's a lot of industry, and a lot of our employees were already picked up by other industries as employment. We have certified power plant operators and maintenance people that are very skilled versus a mill that's kind of in the middle of nowhere. But they had their best quarter of operations the last quarter they operated. That's the kind of people we have in the company. But we felt like a reset of our capacity was necessary.
We let it play out to see what was going to happen through 2023, and then we realized we need to reset it. The contingency if we're wrong and we need that containerboard is the amount of money we were spending and not covering fixed cost and everything. That goes on for a little bit of time. You can always add back capacity, and maybe it's different and new and lighter weight in the future. So we don't think we made a mistake that isn't correctable if we overcorrected. But that was really the change. The past periods of time, a cycle, if you will, on demand would last two quarters, maybe three. It would result in an IP 14 million-ton system taking 600,000 tons of economic downtime, and we were at a rate of 2 million. So it's a tough decision.
It's never easy, but it's the right decision for the ongoing concern of the company. CEO succession was your second one. Our board is working very hard on this. I remind people all the time that our board, as we said in September when I announced that I asked the board to go to this next stage, that implies that there's a process. And we formalized our process way back in 2018, which is what good companies should do. And what I said in September was we were going to move to the kind of final stage of no rush, but let's move to narrowing the choices, internal and external, and move toward decision range. And so.
In fairness, IP has done this. They did it 10 years ago with your process, and they did it before with John Dillon. So.
Yeah. It's just what I think we believe we should do, and I think it's best practice in governance that you should be the old cliché for CEOs is one of the first things you need to start working on when you become a CEO is your own succession because it'll get here before you know it, even though you think it's a long way off. And so we are much closer to a decision today as we sit here in February than we were in September. But again, there's not an artificial timeline or a rush. The board has worked very hard with my input and some of our outside consultants we use for talent development to put a specification that's not necessarily trying to find a carbon copy of me or what they think a current CEO is.
They're looking for a person to lead our company that has the skill sets for the future. I would just describe those skill sets as they're kind of obvious. Our portfolio is more or less narrowed to the point that it's never been narrower. We got a large packaging business. We have to figure out value creation in cellulose fibers, no doubt. The portfolio is focused and pointed toward the right markets of where we want to be. The skill set for leadership at the CEO and the next level is commercial leadership and using the digital technologies and those types of things to take our company to that next level. It goes without saying we're 126 years old. There's a deep culture in IP. It's a very people-focused culture. The leader is going to be a person who's focused on talent and leadership.
Our leadership model we use in IP is elegantly simple. We talk about leaders having character, capability, and being a catalyst. The character piece is about having people trust you and building a followership. The capability piece is about learning all the way through the last day that you're in the job. I have young employees ask me all the time, "Why do you have to work on all this? You have the last job in the company." My answer is you should require your CEO to be better in year seven than they were in year one. It's just the culture of continuous improvement. The catalyst piece is just what it sounds like, injecting energy into a situation. That's what the board's looking for. I think they're doing a great job.
Like I said, when we have a decision, that's when we'll have an announcement. But the process, I'm very pleased with the way it's going. And your last question was on M&A. I'm amazed that I remembered all three of them.
See, you're progressing. You're getting better every day, Mark.
With no paper. I think what we've said on M&A is we want to grow our packaging business. We want to grow it organically and where it makes sense. We want to grow it inorganically. And that's both in the U.S. and that's in Europe. And we've done some M&A in Europe, small-scale. I think we bought four box plants in the last few years to round out our Iberian, southern European density. But those are the areas of focus to grow the packaging business because think about it. If we're going to grow International Paper, which earnings growth is the missing component to our value creation, our cash return has been solid through dividend and share repurchase. That's the first part of TSR for an investor. The second part is consistent earnings growth.
If you're not willing to invest in your packaging business, and that's 90% of your company, where is the earnings growth going to come from? So M&A will be focused on improving our packaging business in the two markets that are two really good markets, two of the most profitable markets in the world, and two of the largest markets in the world. That's where we would see our investments going.
Should we expect, recognizing it's hard to be pinned down and you won't be, you have the asset base in the mill side? You need to invest in corrugating or improving your operations, your footprint, and all that, and your capabilities. It would seem like transformational and larger deals are less the priority than things that add capabilities. But I don't want to put words in your mouth, and that question comes up all the time.
Yeah, it does. I think the way we think about it is value creation. But you're right. We have a very, very capable first step in the value chain, which is making the containerboard, especially in North America. And so I can't imagine well, I can't even imagine it completely being a thing that we would be allowed to do is to make some kind of major mill M&A. It just doesn't fit our strategy, nor does it fit our needs. We have, I think, the containerboard we need for the foreseeable future. Value creation's got to be starting with the customer. So it starts with the box plants. And then your decision on how you supply your box plants is do you own all of your own mills, or are you an open-market buyer? There are different models in different parts of the world.
That's what we would evaluate. So I think the value creation element of it is what will drive it. But for me, the word transformational is one of size, one of I'm getting in a totally different business or something like that, or I'm going to do something that changes my capital allocation strategy. We won't do that. We will maintain our balance sheet. We will maintain our investment grade. We're committed to our dividend. All of that has to fit in any M&A strategy as well.
Mark, my last one. If you're in our seat trying to watch your progress this year, what's the one or two things you'd have us evaluate as we're trying to evaluate whether you're on track with your expectations? And would it be fair to say early in the quarter and I don't want to get into trouble with Mark Nelson in the back room and Michele Vargas, are you at least trending in line with where you thought you were?
We are. Yeah. Everything we said on the earnings call around our outlook for the first quarter, since it was already in early February when we did our call, is on track.
What's the one or two things you want us to focus on?
I think you need to hear us report out on how we're doing with this earnings improvement, non-market pricing related, the stuff that IP is working on. So the equivalent of that $68 million in the first quarter, you need to expect us to tell you what we're doing in the second and third. And you can start annualizing that and doing the math that investors and analysts normally do. But you should hold us accountable for the strategy is the right strategy. Are we actually implementing and getting something for it? Prices look like they're going up right now. That's fine. We will get that, but I don't want to take credit for that in terms of the go-to-market strategy. The go-to-market strategy has to improve earnings independent of what's happening with market pricing.
Mark, thanks very much. Wonderful presentation. Always appreciate your thoughts. Everybody, please join me in thanking International Paper.