Good morning and thank you for standing by. Welcome to today's International Paper's investor call. All lines have been placed on mute to prevent background noise. After the speaker's remarks, you will have the opportunity to ask questions. To ask a question, please press star one on your telephone keypad. To withdraw a question, press the pound key. I'd now like to turn today's conference over to Guillermo Gutierrez, Vice President of Investor Relations.
Thank you, Maria. Good morning, everyone, and thank you for joining our call this morning. 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, including the impact of COVID-19. We may discuss certain non-US GAAP financial information. A reconciliation of those figures to US GAAP financial measures is also available on our website. Our website also contains copies of today's press release and presentation slides. I will now turn the call over to Mark Sutton.
Thank you, Guillermo, and good morning, everyone. Thank you for joining us today. I'm excited to share with you the significant actions we are taking to accelerate value creation for IP and our shareholders. Today, we are announcing plans to create two focused leading companies through a spinoff transaction. IP will be a highly advantaged corrugated packaging-focused company. We will build on the proven strength of our corrugated packaging business to drive shareholder value. By leveraging IP's strong foundation, the company is poised to accelerate profitable growth. The spinoff of the papers business will create a well-positioned global paper company. Spinco will have the ability to pursue its own strategy to unlock value. We're confident that this transaction will enhance strategic flexibility and management focus for the long-term success and value creation of both IP and Spinco.
Over the past few years, we have focused the company's business and geographic profile to align with our strategy of creating advantaged positions to serve attractive markets. Today's announcement is about taking IP to the next level to achieve sustainable, profitable growth and position IP and Spinco for accelerated value creation. Looking ahead, we are building on IP's strong foundation, creating a platform to drive sustainable long-term value. We will unleash the full potential of IP through commercial and operational excellence, a leaner organization, and a business model designed to accelerate profitable growth and free cash flow generation, all of which is underpinned by our values, a commitment to our capital allocation framework, and clear principles for investment excellence. The spinoff transaction will create two focused leading companies.
IP will be a highly advantaged corrugated packaging-focused company with about $17 billion in sales, 85% from packaging and 15% from Global Cellulose Fibers. IP's focused portfolio provides significant earnings growth catalyst. Spinco will be positioned for success as a pure-play global paper company with about $4 billion in sales. The new company will have a talented team, highly valued brands, and substantial scale and capabilities across key geographies with potential to unlock further strategic value. With regard to Spinco's leadership, it is my privilege to announce that Jean-Michel Ribiéras has been named CEO of Spinco upon completion of the transaction. Jean-Michel has been with IP for 27 years and currently serves as the SVP of our industrial packaging business, The Americas. In addition, John Sims has been named CFO of Spinco. John has been with IP for 26 years and currently serves as SVP of corporate development.
Additional members of the Spinco management team and the board of directors will be announced over the next several months. I'm excited by the opportunity that this separation creates to accelerate the strategies of both companies while continuing to deliver value for our customers. I'm now moving to slide 5 . Through this spinoff, we are focusing IP's portfolio around corrugated packaging. Our packaging platform offers world-class capabilities and innovative solutions for our customers. Further, the markets we serve are very attractive. We're excited to enhance our position through this transaction and bring our expertise and skill to build a better IP. Global cellulose fibers will remain part of our portfolio. We have opportunities to turn IP's superior customer solutions into profitability. Our Ilim partnership is well-positioned to deliver on attractive investment opportunities centered on containerboard and pulp, primarily to serve the growing China market.
IP's more focused portfolio positions us to take meaningful actions to accelerate profitable growth and materially lower our cost structure. We are committing to deliver $350-$400 million in incremental earnings growth by the end of 2023. We are poised to take business performance to the next level. By the end of 2023, we will deliver $50-$100 million of incremental annual earnings growth in our businesses through commercial execution and investment excellence. IP has the premier corrugated packaging business in North America. We have excellent profitability, but we have lacked consistent profitable growth. That changes now. We are putting IP on an accelerated path to enhance profitability and growth. We will also deliver $300 million of structural cost reduction in three areas. First, we will streamline and simplify our organization to enhance our effectiveness.
The organization will be designed to support a packaging-focused company with a more focused geographic footprint. Organizational focus starts at the top with the executive leadership team and will cascade throughout the entire organization. Second, we have re-examined our processes and have had a process of doing that underway for the last year and have identified several areas of opportunity to increase efficiency and reduce costs. Here are a few examples. In maintenance and reliability, we have identified $50 million in annual savings by implementing a needs-based approach to technology and processes in order to drive safe, reliable, and low-cost operations. In distribution and logistics, we expect to achieve annual savings of $50 million by optimizing our distribution network through the consolidation of third-party logistics providers and by leveraging technology and data analytics.
In sourcing, supplier rationalization and enhanced data analytics is expected to deliver another $25 million in annual savings. As I mentioned, an internal team has been working with outside experts to identify opportunities and develop our action plans. We have a defined path, and we are very confident that we will achieve these savings. Third, we're identifying how to better optimize our fleet of assets. This means making the right products with the right assets, improving our cost position, being more capital efficient, and aligning our footprint with more attractive market segments. We will optimize what we make and where we make it to best serve our customers and increase our capital terms.
We are committing to deliver $350-$400 million in incremental earnings growth by the end of 2023 through $50-$100 million in annual earnings growth in our businesses and structural cost reduction of $300 million. Moving to Slide 6, we are building on the strength of our corrugated packaging business in North America and EMEA. The corrugated packaging market in North America is highly attractive. IP's advantages align well with structural growth drivers around sustainability, e-commerce, consumer preferences for healthier lifestyles, and retail supply chain and shelf-ready packaging trends. We expect these trends to continue to boost demand for corrugated packaging. IP's highly advantaged corrugated packaging business understands the needs of our customers through their value chain all the way to the end consumer. Today, we are delivering packaging solutions to more than 20,000 customers.
Our boxes are tailored to meet the needs of each of our customers' unique supply chains. When you think about all the combinations of fiber, basis weights, and structural design options available, the packaging options and solutions we provide our customers are almost limitless. Our designers and innovation teams work with our customers as strategic partners to develop packaging solutions that produce just the right box for each application. Our team of packaging experts is backed by IP's world-class converting capabilities to deliver the right structural and print solutions for the unique needs of each customer. Our converting system also provides the broadest geographic reach in North America, ensuring that we have the right capabilities at the right place. The strength of our converting system is reinforced by IP's world-class, low-cost, high-quality, flexible mill system, which offers an unmatched suite of fiber, basis weight, and print surface options.
When you put it all together, IP has the premier packaging business in North America with excellent profitability. However, as I said earlier, we have not always delivered consistent profitable growth. We are actively working to change this, putting IP on a path to enhance both profitability and growth. We have superior capabilities to serve fast-growing segments such as e-commerce, protein, and fresh produce. We will continue to invest further to further enhance our capabilities. We will explore bolt-on M&A opportunities when it is the right path to drive value for our customers and IP. North America corrugated packaging is our most attractive channel, and no one is better positioned than IP to deliver value to customers and drive profitable growth. We will take commercial execution to the next level to drive profitable growth and improve customer and channel mix.
In EMEA, we are building on our strong foundation and materially improving our margins. By integrating our world-class lightweight recycled containerboard mill in Spain with our box network in Southern Europe, we're providing customers with a broad array of packaging solutions. Our recent converting acquisitions in Europe are performing well and are delivering returns ahead of our investment outlook, providing additional integration opportunities with our mill in Spain. We are also making meaningful progress in our box system by leveraging the skills and resources from across the company. We are committed to leveraging and building on the strength of IP's corrugated packaging business in North America and EMEA to turn our advantages into profitable growth. Turning to slide 7, many of you know and we acknowledge that our current performance in Global Cellulose Fibers is challenged. We will drive meaningful improvement in performance in the near term.
We will accomplish this by focusing on enhancing margins by achieving 85% absorbent pulp mix, matching the value we provide with the unique needs of each customer, creating innovative products that our customers value, improving our cost position without investing a lot of capital, and aligning our system with the more profitable segments. We remain committed to getting this business to the cost of capital returns over time. I'll now turn to Slide 8 . Spinco is well-positioned to succeed as an advantaged global paper business. The business will operate eight competitive low-cost mills across key geographies. In addition to its scale as a standalone company, it will have the focus, talent, capabilities, and low-cost positions to pursue its strategy and succeed. Spinco will have a capital structure that provides operating and strategic flexibility with the potential to unlock value.
I am excited for the future of Spinco, and I am confident in its ability to create value under Jean-Michel Ribiéras's leadership. Now I'll turn it over to Tim, who will cover IP's capital allocation framework and an overview of the spinoff transaction. Tim.
Thank you, Mark. Good morning. This morning, Mark has highlighted the meaningful actions that we are taking to grow earnings and cash generation. Our capital allocation framework has one objective: to maximize value creation for our shareholders. Here's what you can expect as we move forward. We will maintain a strong balance sheet, and we remain committed to our current investment-grade rating. Our targeted debt to EBITDA of 2.5-2.8 times on a Moody's basis does not change. It's an important pillar that supports the strength of IP and provides us with the financial flexibility to maximize value creation.
We will return cash to our shareholders through a sustainable dividend and share repurchases. We remain committed to a competitive and sustainable dividend with a targeted range of 40%-50% of free cash flow, which we will review annually as earnings and cash flow growth, and we will be evaluating our free cash flow and intrinsic value to ensure that share repurchase opportunities are weighed against other capital allocation options, always with a commitment to maximize value creation. As we move forward, investment excellence is essential to growing earnings and cash generation. Strategic investments will be grounded on clear strategic and financial objectives that allow us to turn IP's advantages into profitable growth with a meaningful spread above cost of capital. You can expect strategic capital to be mostly deployed to our packaging business.
We will continue to build out capability and capacity needs to ensure that we have the right packaging solutions in the right geographies to meet our customers' needs and drive profitable growth. We will continue to assess disciplined and selective M&A opportunities to supplement our goal of accelerating profitable growth. You can expect M&A to focus primarily on bolt-on opportunities in our packaging businesses in North America and Europe. Any potential opportunity we pursue must align with our strategy to create advantaged positions to serve attractive markets and must create compelling value for our shareholders. We view our capital allocation framework as a foundational lever to accelerate value creation for our shareholders. Turning to Slide 10, we take a look at the separation in more detail.
We will implement the spinoff through the distribution of Spinco shares to IP shareholders, which we expect to complete late in the third quarter of 2021. The transaction is expected to be tax-free for U.S. federal tax purposes. As part of the spinoff transaction, Spinco is expected to raise debt in order to pay a substantial dividend to International Paper. It is anticipated that IP will use these funds to pay down debt. We've had constructive conversations with the rating agencies and expect to maintain IP's current investment-grade ratings with a stable outlook. For Spinco, the anticipated leverage will provide the new company with appropriate operating and strategic flexibility with an expected strong sub-investment-grade rating. We also anticipate retaining just under 20% of the shares of Spinco with the intent to monetize that position within one year, providing additional proceeds to International Paper.
With respect to the dividend, we expect to reduce IP's dividend by 15%-20% in proportion to the cash generated by Spinco upon completion of the spinoff. This is consistent with IP's dividend policy of a competitive and sustainable dividend with a payout of 40%-50% of free cash flow. Spinco is not expected to pay a dividend at the outset, but we anticipate the new board and management at Spinco will evaluate their distribution plans after the spin. We will provide additional details as we get closer to the spin date, and with that, I'll turn it back over to Mark.
Thank you, Tim. Our vision is to be among the most successful, sustainable, and responsible companies in the world. Today's announcement is about building a better IP and taking the company to the next level.
Our unwavering focus will be to drive sustainable, profitable growth and accelerate value creation for our customers and our shareholders. We are charting an exciting path. IP will be a highly advantaged, corrugated packaging-focused company, strengthened by our differentiated capabilities and world-class resources. We are taking meaningful actions to accelerate profitable growth and lower our cost structure to deliver $350-$400 million in incremental earnings growth by the end of 2023. Spinco will be a well-positioned global paper company with the ability to pursue its own strategy to unlock value. As we move forward, we will be guided by our values and a commitment to our capital allocation framework. I look forward to updating you on our progress as we move along this journey. So, Maria, with that, we are ready to take questions.
As a reminder, to ask a question, press Star 1.
Withdraw a question, press the pound key. Again, that is Star 1 to ask a question. Thank you. We will pause for a moment to compile the Q&A roster. Our first question comes from Mark Wilde of Bank of Montreal.
Thanks. Good morning, Mark. Good morning, Tim . I'm just curious if you can give us some sense of what you think the two companies can do separately that they wouldn't be able to do as part of one IP.
I think the number one thing that we believe will be improved is focus. By having a focused IP primarily packaging, we can continue to organize around that focus: two geographies, a core business, and there's a lot of efficiencies that we believe we can build in with that. And that's what we talked about on one of the slides called Lean Effectiveness.
With the paper business, it's the world's largest. It's the best in the world. As a part of our overall IP, it's been run to generate cash, limited investment, limited strategic opportunity. We think that business has a lot of opportunity if it's a standalone company. So really, Mark, it's about giving both companies the best chance to accelerate their value creation strategies as opposed to having it co-mingled.
Okay. And I guess it's just a follow-on. Tim, you mentioned that you would have a strong sub-investment-grade rating at the Spinco. I'd just like to get your thoughts around that on two dimensions. One, the business is structurally declining. So just capital structure in a structurally declining business. And then also that capital structure, when clearly the business is going to need to undergo kind of consolidation and rationalization over time.
Yeah. I think we want Spinco to have a structure that provides it with the flexibility it needs to operate and the flexibility it needs to pursue its own strategy. So it'll be a balance, and we'll share obviously more as we get closer to the point in time when we spin it out. But we think a strong sub-investment-grade credit rating is in the right zone for the capital structure. And then once it spins out, it's going to be up to management and its board to decide what its capital structure looks like going forward.
Okay.
This business, as you know.
I'm sorry, Mark, go ahead.
No, no, no. Go ahead.
As you know, this business has generated a significant amount of cash over time. COVID has hit it, but it's already beginning the recovery from that, and we think that as the vaccine plays out, more recovery will come.
And even in this environment, it's still generated a fair amount of cash in the current year. So its cash generation capabilities, we think, are strong.
Okay. And just finally, will Selma and Georgetown, will they market their paper through the Spinco or is that still an issue of TBD?
We're going to work through that. I mean, we will retain the two. We will have some type of commercial arrangement for the products, but the volumes are small. We don't think it's a major issue, and we'll obviously have more details as we get closer. That's the only two places where we have that particular issue, so it's not a significant item.
Okay. I'll turn it over. Thank you.
Our next question comes from George Staphos of Bank of America.
Hi, everyone. Good morning.
Thanks for the details and good luck with the transaction over the next year or so, guys. I guess the first question I had, I want to come back to the overall profit enhancement that you are targeting. And I recognize the answer is probably just going to be around focus. But had the company stayed together, if there were two or three examples that you could share, why would you not be able to generate that same level of profit improvement within the existing organization? That's my first question. The second question that I had a follow-on, what does this move suggest about the incremental investment that you think you need to make in industrial packaging or packaging more broadly from here? We recognize that it's going to get the lion's share anyway because of its size and the portfolio.
But what does it tell us about the growth and the investment behind the growth that you see for packaging? And then I have one last follow-on.
George, those are great questions. On the first part, it's a big part of focus, but part of being a packaging-focused company allows you to organize. The business is designed entirely differently than, for example, the paper business. Focusing on investment excellence, commercial excellence, and those three categories of cost reduction in a more packaging-focused company allows us to identify and capture these savings faster and make them more permanent. The company, IP, will be a lot less complex just based on geographies and the other things that you have to do as a public company to run in all those regions. So there's several examples, tangible examples that focus will allow us to do these things faster.
In the second area, our investments in packaging are primarily, and they have been for the last year or so, increasingly focused in the converting area. We have the containerboard we need with the completion of Riverdale. We now have the one product we didn't really have in our portfolio, high-quality white linerboard for print surface. We are now really been focusing on converting organically and inorganically in both capacity in the right geography and capability where we need it, including adapting to some of the emerging segments like e-commerce. So that's where we see the majority of the investment, and it's already started to shift that way as we've gone through 2020 and completed Riverdale.
And George, I think the first part of your question, obviously some of what we're working on, we have been and we could do whether we spun papers or not.
I think Mark points out that it gets accelerated quite a bit with this transaction.
Got it. And my last question, and I'll turn it over. Are any of the profit enhancements within the remaining IP going to show up as cost back at the Spinco level? And then do you worry at all about losing optionality from not having those paper mills that could help you generate containerboard capacity either in North America or South America over time or the degree to which you're now going to be incubating competing capacity? Thanks, guys, and good luck.
Thanks, George. Yeah, on the cost, no. I mean, Spinco is going to be an extremely viable company, and so this is not about improving RemainCo at the detriment of Spinco.
This is about, and what we're showing you is a net number, so there will be some stranded cost in RemainCo just because of the dis-synergies from splitting it out, but we will cover that and then put $300 million to the bottom line with the initiatives that we have. So Spinco will have its own cost structure. It has to decide how it's going to organize, and it will have some functions in the future that it doesn't have today, but its management and board will have to work through what those small adjustments are.
George, on the question about asset optionality, it's a great question. We talked about this a lot, and we've evaluated it extensively before we decided to make this decision.
And what we have done with our assets in terms of moving them from one product into packaging, we believe, is setting us up for the foreseeable future. When you look at the assets that are in Spinco, they are extremely competitive in the paper business, among the best in the world. Both in North America, we have basically what you have is one specialty mill in New York that is not a containerboard candidate, and probably one of the top three or four uncoated free sheet mills in the world in Eastover, South Carolina with a wood basket that's a little more conducive to what it's making, and so we don't see that as an economically viable conversion as far as the eye can see. In Latin America, again, world's highest quality, most competitive uncoated free sheet.
Uncoated free sheet's still a big market, and we believe that economics will drive that, and those mills are in the right economic marketplace for what they can do. So we've evaluated it, and we are not concerned about losing optionality. As I said on the prior question, we really are satisfied with the containerboard we have and the range of capabilities we have for, again, for quite some time, and just based on any kind of projection you could use for market growth.
Thank you very much.
Our next question comes from Anthony Pettinari of Citi .
Good morning.
Mark, you've had an emphasis on ROIC that's been positive for IP, and I'm just wondering if you could talk directionally about the ROIC profile of the new IP and Spinco, maybe both on an absolute level of returns and then the cyclicality or volatility of those returns maybe going forward.
Both companies will be operating above their weighted average cost of capital, and in a non-COVID environment with a nice spread above that cost of capital. And that'll be the case after the spin-off. Volatility in the paper business has been almost nonexistent from an ROIC standpoint until 2020. On IP, it's also 85% packaging is going to really drive the ROIC for the foreseeable future, and that's been very stable. Double-digit, well above our cost of capital, and we plan on keeping it at least 200 basis points spread.
Growing our ROIC is an important part of value creation. We don't have an artificial limit on having a stronger ROIC.
Okay. Okay. That's very helpful. And then just with regards to George's previous question, we've seen a lot of graphic paper producers convert into containerboard. And in terms of the risk that Spinco or its assets could end up competing with you in containerboard, is it accurate to say that there aren't any formal agreements in place that would prevent that, or is it just the position on the cost curve in printing papers as such that you think it just wouldn't be economical at any point to convert those into containerboard?
Yeah. What I said earlier is that we believe economics drives these decisions, and those assets are just outstanding cash generators in paper and will be for a long time.
Even in a declining market, it is still a huge market, and there's going to be some level of opportunity. And I think the Spinco team is going to really just wow the investment base when they come up with some of the interesting strategies they can do as a standalone company. That company will be standing for a long time, and those assets are very competitive.
Okay. That's very helpful. I'll turn it over.
Our next question comes from Adam Josephson of KeyBank.
Thanks, Mark and Tim. Good morning. Mark or Tim, just one question about what will come of the paper production and capacity at each of the two at IP and then Spinco. So Spinco will have a million tons of capacity. I think IP will have, what, 650.
So just wondering what the viability of each of those paper businesses will be, and will there be a need for more consolidation that Spinco would participate in? So I'm just wondering what IP's planning to do with your remaining paper capacity and if you think Spinco will need to participate in consolidation or if you think a two-mill system in the U.S. is really sufficient.
So Adam, I think the numbers, I'm not sure. I'm not tracking with your numbers. The Spinco's going to have about 3 million tons, almost $4 billion in revenue. The only uncoated free sheet, and it's really not, in one case of Georgetown, uncoated free sheet. It's not printing papers. It's other specialty grades and one machine at Riverdale. That'll remain with IP.
As Tim answered an earlier question, the plan is to develop a commercial arrangement so that we haven't worked it all out yet, so that Spinco really can benefit from the paper that's left inside the IP hybrid system where, in one case, Georgetown makes fluff pulp and some white paper, and in Riverdale, of course, we just converted over half the mill to containerboard.
Yeah. The capacity at Riverdale's roughly just around 300,000 tons on the one machine, so it'll have an arrangement with Spinco.
Got it. Yeah. No, I appreciate it.
As far as your question about the future, again, I think that's going to be the Spinco board and management team to look at different opportunities, probably including consolidation opportunities, but obviously we haven't even formed the board yet, and the management team is just getting named.
But those are all the kinds of options we were talking about in our remarks.
Got it. And with respect to the benefit of focus, Mark, I think it was in response to the first question on the call. I mean, why keep pulp in that case? Pulp has been a considerably more problematic business over the past few years, as you alluded to earlier, than has printing papers. So why keep it as opposed to just not spin it off as part of this transaction? And why keep one and not the other?
Yeah. I think the real message in what we're doing is focusing the company primarily packaging-focused and then creating a Spinco that is a focused paper company. And our cellulose fibers business is not in the paper pulp business other than on the margins, and we're trying to move away from that.
It's really an absorbent pulp focus. It's got growth potential over time. I've acknowledged that we have some internal issues to fix in the business over time. We have great products and an outstanding customer list, and we believe longer term, and we're committed to getting the business to profitability, but longer term, that could provide IP with some interesting growth potential down the road. It will be a very small part of the new IP, 15% roughly, but we considered all of those options. It was less about trying to move things out of IP that we didn't like. It was more about how you make the paper business the most successful it can be and how you make IP more focused, and this is what we decided to do.
Thanks a lot, Mark.
Our next question comes from Mark Weintraub of Seaport Global.
Thank you.
First, you'd mentioned in your remarks about better optimizing your fleet of assets. You've obviously done a ton of that on the mill side already. Were you largely talking about your converting businesses? And maybe if you could provide some thoughts and color on what types of actions that might include.
It's a statement about all of our assets, including mills. We've done a lot of investment in our mills. That has given us the capability. It has given us the ability to, for example, make the same grades at multiple mills, which has a lot of system-wide savings. Now that we've finished that investment plan in containerboard and we made the acquisition of the Weyerhaeuser assets in pulp, we're stepping back and looking at ways to optimize all the way from the mills in the packaging chain through converting.
So it applies to all of our assets. But I'll take you back to what I said, Mark. It's matching our manufacturing and converting facilities with the most attractive market segments. That's commercial speak for really, really looking at segmentation, targeting, and positioning, and making sure we are consciously serving the best markets with the best profit margins that we can with the assets that we have. And if we don't have the right assets, how do we reconfigure them? If we've got assets we don't need, how do we move away from them? It's also about improving the cost position. We have a low-cost mill system, but we can get better in containerboard, and we can definitely get better in cellulose fibers. And it's also continuing with some modest changes and some modest investment to make the right products at the right facilities.
And then across all of our assets, we redesigned our entire capital investment process. We're using a totally new process. You've seen some of the results of that in just the total amount of capital. But we are committed to getting better at the capital investment that we deploy, whether it's return-generating or whether it's preserving today's cash flow through maintenance and reliability. That's what we mean by asset optimization.
Okay. So I shouldn't read too much into it, but certainly on the mill side, there was a point in time where you really stepped up or accelerated some of the actions and started to do things more aggressively, certainly it seemed to me. And at least outwardly, it hasn't been as visible on the converting side, some sort of move in those directions.
And I shouldn't read into it that we're at the beginning of what could be more aggressive actions on how you're reconfiguring your converting asset base. Is that fair?
I think what you should take away on the converting side is after several large transformational acquisitions, we integrated big converting systems, organized our plant network, and now we're growing it. We're growing inside of existing plants, and we've got opportunities with some small acquisitions. We built a brand-new greenfield plant in Mexico. We acquired some plants in the Iberian Peninsula to further integrate the Spanish mill. So you should think about converting as better boxes and more boxes in places where we need it geographically and segment-wise. We really have a tremendous converting network, and a lot of the consolidation in that network, we've completed really as we did those two large transformational acquisitions several years ago.
Now it's about investing in that, and you're seeing that show up in some of our metrics, in our growth numbers, in what we were able to do. I would say what we were able to do so far this year has a lot to do with what we did in 2018 and 2019 in our converting business. And we didn't plan on COVID, but we were ready.
And the other thing, Mark, that I would just add on to what Mark said. Mark mentioned earlier it's about making the right products in the right place. Some of the technology tools that we have invested in, we're currently investing in, are providing us better insights and better decision-making about the range of products we need to have. And that's not only a mill issue.
That's how we run it through the whole value chain to the box customer. So that's part of what will drive some of these better decisions, make us more efficient, get the right products in the right place at a lower cost.
Great. And two quick ones on Spinco. One, in trying to understand the potential size of the dividend, can you share order magnitude what type of debt-to-EBITDA targets you might think would be reasonable out of the gate for the company? And then second, where would the new company be headquartered?
Yeah. Well, headquarters is a decision that the management team and its board will have to make. We're pointing to strong sub-investment-grade, obviously, as we further develop our thoughts around the capital structure and start putting things in place.
We'll have more details to share, but I would just leave it at strong sub-investment grade at this point. What you may have alluded to in your question about headquarters is domicile for the company, and for all practical purposes, we think it'll be a U.S. domiciled company. We haven't made a final determination, but that's likely where it ends up.
Thank you.
Our next question comes from Mark Connelly of Stephens Inc.
Thank you. Just a couple of things. Will there be any significant asset valuation adjustments to be made at the end of this year or before this transaction is finalized?
No, we're not anticipating any.
Great. Okay, so just my last question is really on cost. Mark, you spoke about the complexity of operating in so many regions, and I couldn't agree more.
Could you help us frame the cost savings that come out as you take out that entire layer of sort of global support management? And also, Tim mentioned that the stranded costs will be covered. How big is the stranded cost issue that you're facing, and how long will it take to axe that out?
So, on one of the slides, and I know this is a lot of information, but on one of the slides, we talked about that cost reduction, and we categorized one of the categories as lean effectiveness. That's about 30% of that cost savings number, that $300 million. And inside of that 30% is where we've got the organizational savings. So it's not all of it. Process optimization that I described and asset optimization was the other 70% of that.
So inside of lean effectiveness, there are some things we've been working on that are organizational, and it will allow us to be much more lean. Inside the company, we've been working on something called Streamline and Focus before we hit 2020. A lot of what we learned in 2020 accelerated our knowledge, like you did with a lot of companies, on what is really critical and what's not critical. And so part of our learnings, even in the case of medical benefits and other things that we've made tremendous improvements on in trying to lower our overall cost.
But I can tell you, when you have a clear focus in your value chain, which we will have largely as a packaging company, there are a number of changes you can make in addition to the global complexity of governance of a company that operates in all of these different regions versus doesn't operate in all those regions. And that's what that lean effectiveness, which again is 30%, give or take, 30% of the $300 million.
That's super helpful. Thank you.
Our next question comes from Gabe Hajde of Wells Fargo Securities.
Mark, Tim, good morning. I was wanting to ask about timing. And obviously, this year is proving pretty abnormal. But should we interpret this, I guess, from the outside world, that maybe you see more opportunity, obviously, in the industrial packaging side of the business?
Because I'm just thinking about, I don't know, buy low, sell high type of thing where the performance, obviously, in printing paper has been depressed by COVID. And perhaps you'd want to show a nice trajectory of improvement prior to doing something like this big strategic. But just curious from a timing standpoint if there's anything to take away from that.
Well, I think this is a strategic decision. So the timing of recovery of paper demand is not strategic to me. It's tactical. It's going to recover at some level, probably not to the level it was at before, and then it'll get back on its structural decline trend. And so timing of doing this, this is the right time for us to focus IP and the right time for the Spinco to get off the ground. And again, we won't be a company until next fall.
So we'll see how that goes. But it wasn't about timing tactically an earnings recovery that is simply coming off of an unusual demand decline because of this pandemic. Our focus here was really a strategic focus. Waiting what would be maybe a year to start to execute this just wasn't the right thing for us to do.
Understood. Thank you.
You had mentioned, I think, a couple of times that the incremental savings, the $350 million-$400 million hitting the bottom line. I had always thought about kind of non-material inflation across IP of $150 million or so a year. Should we take from that that you plan to offset that with normal cost savings investments over time? This would truly be incremental. Obviously, there's no guarantees in life. Just trying to understand how you're thinking about that.
Yeah, t hat's the right way to think about it. We're thinking about this as structural. Every year, we do a really good job of covering inflation through the initiatives that we have in the operations and across the company. And so we will continue to do that, and this will be incremental earnings.
Thanks for that.
And one quick last one. Within asset optimization, I'm not sure if this was where Mark was going. I didn't hear much about footprint consolidation or capacity rationalization. Would that be something separate, or is that maybe contemplated as part of that $90 million or so of savings in there?
Yeah. Asset optimization, when I gave the more detailed explanation that maybe didn't come across on the slide, would include everything. I mean, one of the outcomes is improving our capital turns across our asset base.
That's part commercial, obviously, the kinds of revenue streams and sources you have. It's also part of the investment base. So all of the things I described, including what you just asked about, are part of looking at asset optimization. We want our capital turns to play a bigger role in generating our ROIC than it has in the past.
Thanks for the clarification. Good luck.
Our next question comes from Paul Quinn of RBC Capital Markets.
Yeah. Thanks very much. Morning, guys. Just a couple of questions. One, when I'm trying to understand profitable material growth at IP RemainCo, should we think of this as really outside in North America, given your current position within North America?
I think the lion's share of the growth is going to come from the largest part of the company, which is North American Packaging.
We are seeing some very promising earnings growth in our European packaging business as we've completed that recycled mill, and now we are integrating it with more converting assets in the region. And I think this is everybody in IP. We are committed to significant material improvement in the cellulose fibers business as well. But clearly, the North American packaging business in this new IP is the largest contributor to the company's performance.
Okay. And then it sounds like you looked at spinning off pulp now but decided not to, given the priority on focus. Is that something that we should look forward to a couple of years down the road?
We are committed to improving that business. And as I think I mentioned on our third quarter earnings call and got a follow-up question on it, we're going to get it to cost of capital.
And when we get it to cost of capital, then we're going to work on the spread that we say we'd like to have and want to have and need to have in all our businesses. I think long-term, our view right now is that this business has a place in IP. It's consistent with our overall view of building advantaged positions and serving attractive markets. We believe the absorbent product market in the long term is an attractive market. Southern softwood fiber for absorbent pulp is the highest quality medium to make that product. And so we believe in this business. So we're not contemplating not having it. We're going to improve it.
Okay. And then just to help us separate on our models, if you could give us some kind of relative profitability of Selma, Georgetown relative to the rest of the segment.
No. I mean, Guillermo, can you assure we're not going to start parsing things out like that.
All right. That's all I have. Thanks a lot.
Thank you.
Our next question comes from Lars Kjellberg of Credit Suisse. Lars, your line is open. Make sure you're not on mute.
Maria, why don't we go to the next question?
And our next question comes from Neel Kumar of Morgan Stanley.
Hi. Good morning. Thanks for taking my question. Of the $350 million-$400 million in incremental earnings growth by 2023, can you just talk about the cadence of realization? And can you just talk about how you'd break that down across the Industrial Packaging versus Global Cellulose Fibers business?
We don't have a business-by-business breakdown of that. But as I answered the prior question, Neel, it's going to be everyone will contribute. Every business will contribute.
Cellulose fibers and industrial packaging, and every region will contribute, EMEA and North America. It'll be proportionally larger, obviously, in industrial packaging. I think the way to think about this is we have line of sight. We've been working on a lot of specifics during the year 2020, and we have a lot of line of sight to a big chunk of that $300 million in cost savings. You'll start to see that flow in more at the beginning of this time period, and the profitable growth, $50 million to $100 million, which is mostly commercial, you'll see be the sustaining growth lever as we move through the latter part and get to 2023. That's what I'm excited about.
I feel really good about the ability to bring large portions of those three categories of cost, lean effectiveness, process optimization, and asset optimization to the bottom line early in this process and solidify those as we're continuing to work on and generate the growth initiatives that make up the majority of that $50 million-$100 million of annual earnings improvement. So that's how you can think about it. We're going to report along the way, but we don't have a quarterly or that type of breakout to share right now.
Okay. That's helpful. And then in terms of the $4 billion in expected sales with Spinco, I think they're on track for closer to $3 billion in sales this year based on the printing paper segments breakout. Can you talk about the discrepancy in that?
Is there anything that's shifting around across the segments that maybe could explain it?
It's a little bit under four, but it rounds to four even in the current environment. And we expect some amount of recovery as COVID normalizes.
Thank you.
And that was all for final questions. I'd like to turn the floor back over to Mr. Mark Sutton, Chairman and CEO.
Thank you, Maria. Thanks, everyone, for joining. We're excited about this opportunity for IP and for Spinco. We look forward to continuing the conversation with you as we move forward with the project and the strategy. Thanks for joining today. Have a great day.
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