International Paper (IP) Q1 2020 Earnings Call Transcript

International Paper (IP -2.07%)
Q1 2020 Earnings Call
Apr 30, 2020, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentleman, thank you for standing by, and welcome to the first-quarter investor 2020 earnings day conference call. [Operator instructions]. Please be advised today's conference is being recorded. It's now my great pleasure to turn the conference over to Guillermo Gutierrez, vice president of investor relations.

Please go ahead sir.

Guillermo Gutierrez -- Vice President, Investor Relations

Thank you Moly. Good morning, and thank you for joining International Paper's first-quarter 2020 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, including the impact of COVID-19. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S.

GAAP financial measures is available on our website. Our website also contains copies of the first-quarter 2020 earnings press release and today's presentation slides. Relative to the Ilim joint venture and Graphic Packaging investments, Slide 2 also provides context around the financial information and statistical measures presented on those entities. I will now turn the call over to Mark Sutton.

Mark Sutton -- Chairman and Chief Executive Officer

Thank you, Guillermo, and good morning, everyone. Thank you for joining our call. We'll begin our discussion on Slide 3. The COVID-19 pandemic is unlike anything we've ever experienced.

This pandemic brings unprecedented challenges and requires us to focus on what we, as a company, need to do to remain strong and resilient for all our stakeholders in the short-term and the long-term. International Paper entered this crisis in a position of strength. No strength is more important than the talent and commitment of our 50,000 employees worldwide. Our most important responsibility is the health and safety of our employees and contractors.

I want to take this opportunity to thank our employees across the company and all of the business and support groups for their commitment and ability to adapt in this challenging period. I'm especially grateful to our frontline employees in manufacturing and converting facilities around the world. They ensure our customers can continue to supply essential products to consumers around the world. We also entered this crisis with world-class manufacturing and supply chain capabilities.

Our scale, flexibility and geographic reach allows us to meet our customers' rapidly changing needs, which is more important than ever in times like this. And we have a strong balance sheet and liquidity position that provides us financial flexibility to navigate through this period of great uncertainty. Turning to Slide 4. International Paper is a critical part of the supply chain required to produce and deliver essential food, pharmaceutical, hygiene products and emergency supplies for consumers around the world.

This privilege comes with enormous responsibility to our employees and our customers. We've taken significant steps to protect our employees and contractors. We also implemented contact tracing protocols in all of our facilities. Our COVID-19 measures are proving to be effective, and we have not had any material disruptions to our operations.

I'm proud of the collaboration, ingenuity and commitment of our employees to take care of our customers during this pandemic. Some of our teams have generated product and service innovations for customers, while others have found ways to simplify and streamline work, all of which is essential to navigating effectively to the enormous dislocations caused by COVID-19. A few examples, our packaging business developed corrugated separators to allow citrus customers to run their packing operations with appropriate social distancing protection at the height of the harvest season. Our Global Cellulose Fibers business is ensuring customers have real-time visibility of their orders, which is especially critical when ocean supply chains have stretched out.

And our papers business quickly introduced new packaging sizes that allow safe home delivery of uncoated freesheet products. As I said earlier, International Paper entered this crisis in a strong financial position. Due to the unprecedented uncertainty regarding the ultimate economic impact of COVID-19, we are taking prudent actions to further strengthen the company's liquidity and preserve cash. We are undertaking vigorous sensitivity and scenario testing to make sure we make informed principal-based decisions, and we managed each phase of this crisis with a view toward both the short-term and long-term success and sustainability of the company for all of our stakeholders.

Now let's turn to our first-quarter results on Slide 5. We delivered a solid performance with EBITDA of $802 million and free cash flow of $363 million in a very rapidly changing environment, as containment measures across the globe accelerated. I'm inspired by the commitment and resilience of our teams who under unprecedented circumstances delivered strong operational performance in our mills and converting plants. In our packaging business, we were able to mitigate the impact of significant production loss in our Rome and Bogalusa mills.

We leveraged the scale and flexibility of our system to meet strong demand for corrugated packaging and absorbent pulp. And through outstanding collaboration across our commercial, supply chain and manufacturing organizations, we adapted quickly to meet our customers' rapidly changing needs, all of which contributed to solid performance in the first quarter and further strengthens our position, as we navigate the uncertainty that lies ahead. I'll turn it over now to Tim to cover performance across our business segments, our second quarter outlook and details on actions we've taken to further strengthen our liquidity. Tim?

Tim Nicholls -- Senior Vice President and Chief Financial Officer

Thank you, Mark. Good morning, everyone. I'm on Slide 6, which shows our first-quarter results. As Mark mentioned, EBITDA and free cash flow were solid.

Operating earnings were $0.57 per share, which included an unfavorable Ilim F/X noncash impact of $0.13 in the quarter. Moving to the quarter-over-quarter earnings bridge on Slide 7. Price/mix was a headwind as expected due to the prior index movements in North American packaging and Global Cellulose Fibers. Volume was mixed.

Strong demand for corrugated packaging and pulp was offset by a sharp decline in demand for printing papers as stay-at-home measures accelerated. Operations and costs were favorable. Our mills and converting plants performed well, and we successfully managed through the incidents at Bogalusa and Rome. We also had the lower benefit cost of $40 million across the businesses that will not repeat in the second quarter.

Input costs were also favorable, driven by lower energy, distribution and chemical cost. Recovered fiber costs increased rapidly in the latter part of March as generation decreased, but it did not impact the first quarter materially. Corporate items and taxes were unfavorable due to onetime items. Equity earnings were essentially flat quarter over quarter before adjusting for a $0.13 noncash currency translation loss at Ilim.

Turning to the segments and starting with Industrial Packaging on Slide 8. Our business performed well in the first quarter. We adjusted our system to meet our customers' strong demand for packaging as COVID-19 containment measures accelerated in March. In North America, we leveraged the scale and flexibility of our system to manage the impact of production losses in Bogalusa and Rome.

Our converting facilities performed well in a rapidly changing environment to meet strong and often irregular customer demand. Our European packaging business delivered strong year-over-year earnings growth driven by margin recovery and the successful ramp-up at the Madrid mill, which performed at 100% despite challenging conditions. Across the segment, price and mix was unfavorable due to the impact of prior index movement in North America as well as the mix impact of higher containerboard exports. Volume improved sequentially, driven by strong customer demand following COVID-19 stay-at-home measures.

Export containerboard demand was strong across all regions. Operations and costs were favorable, mostly due to the non-repeat of last quarter's positive LIFO inventory adjustment. The first quarter also includes $15 million in costs related to incidents at Bogalusa and Rome as well as the expected $20 million in cost related to the Riverdale conversion. Maintenance outage costs increased sequentially.

We did, however, adjust the scope and timing of planned outages in response to unplanned production losses and broader cash conservation initiatives. Input costs were favorable across the segment, driven by lower energy and chemical costs. As mentioned earlier, recovered fiber costs rose rapidly in the latter part of the quarter due to significant dislocations to traditional channels. We expect recovered fiber to be a significant cost headwind in the second quarter.

I'd also note that we are extending the Riverdale conversion schedule to manage contractors' staffing levels to ensure appropriate social distancing practices. The expected start-up moves out a quarter to the third quarter of this year. Turning to Slide 9. Let's take a closer look at North American corrugated packaging segments and the impact we're seeing from COVID-19.

Consumer behavior changed rapidly in response to containment measures. This resulted in immediate changes to packaging demand for our customers, both positive and negative. I would just mention green obviously shows the benefit from some of the changes and red shows the unfavorable impact from some of the changes. In our near-term outlook, yellow indicates a moderating from elevated levels of demand as we are in April.

We experienced strong initial demand in March and April, driven by processed food, protein, chemicals, tissue and towel and e-commerce. Conversely, customer segments oriented toward goods deemed nonessential as well as those with higher exposure to restaurants and food service experienced a sharp pullback in demand. The near-term outlook we provide on the slide is our best view of current demand across our segments. Keep in mind, the environment remains fluid, and there is variability within the segments.

Growth in processed food is stabilizing after strong initial customer demand. Consumer demand for meat and poultry remained strong. However, recent processing plant shutdowns are expected to slow demand for packaging in the near term. Produce remains weak due to significant exposure to restaurants and food service.

E-commerce is seeing unprecedented growth. Consumers have greater reliance on e-commerce as a primary spending channel as a result of the containment measures. And lastly, we're seeing a sharp pullback in packaging for durable goods. Corrugated packaging plays a critical role in supply chains to bring essential products to consumers.

We will continue to take care of our customers' changing needs, as communities around the world start to ease containment measures. Turning to containerboard exports on Slide 10. Demand remained strong, and customer inventory levels are normal to low. Demand in Latin America and Europe is solid, driven by resilient consumer demand for bananas and citrus.

Demand in the Middle East and North Africa is solid but expected to slow as the citrus season ramps down. Demand in China is strong. Industries are restarting following COVID-19 closures and customer inventories are low. And in the rest of Asia, we see strong demand in the Philippines, which is focused on banana exports.

Slide 11 recaps the status of Bogalusa and Rome mills following the incidents in March. As I mentioned earlier, we had a $15 million impact in the first quarter. Looking ahead, we expect a $30 million impact in the second quarter after the initial insurance recovery. We continue to assess the full cost impact of these incidents and are working with our providers to determine the potential insurance recovery.

Global Cellulose Fibers on Slide 12. We experienced very good demand as our customers responded to strong consumer demand for absorbent hygiene products and tissue products as a result of COVID-19. Across the segment, price and mix was unfavorable due to the impact of prior index movement. Absorbent pulp shipments improved 13% year over year, driven by improved supply/demand conditions and our successful customer contract season in late 2019.

Maintenance outage costs increased sequentially. For the full year, we will reduce the scope of planned outages and defer spending to preserve cash. Operations and cost management were strong, and inputs were favorable. On Slide 13, let's take a closer look at our Global Cellulose Fiber segments and the impact we're seeing from COVID-19.

In absorbent pulp, which represents about 75% of our mix, we experienced strong initial demand in March and April. All absorbent hygiene product categories were strong, although adult incontinence and sanitary wipes saw particularly strong consumer demand. We expect strong demand for fluff pulp in the near term. However, we could start to see the impact of lower consumption as behaviors due to economic hardship, especially in emerging economies unfold.

In market pulp, which represents about 25% of our mix, we experienced strong initial demand in tissue and towel segments and a sharp decline in printing papers. We expect recovered paper shortages to support demand for our virgin pulp in the near term. However, we could see destocking of tissue and towel as containment measures ease. Looking at Printing Papers on Slide 14.

The business delivered earnings of $96 million in the first quarter. Price and mix decreased due to the flow-through from prior periods across the segment and weaker geographic mix in Latin America. Volume decreased sequentially. COVID-19 containment measures drove unprecedented demand declines in all regions, which accelerated in March.

Operations and cost management were solid. Planned maintenance outages were executed well and at a lower cost than planned. Our North American business successfully managed the first quarter of operations without Riverdale 15 capacity, which had previously represented about 240,000 tons of Printing Papers per year. Input costs were favorable across the segment on lower fiber and chemical costs.

On Slide 15, we'll take a closer look at the Printing Paper segment and the impact we're seeing from COVID-19. Across our regions, we experienced an immediate and unprecedented decline in demand for cut size as work-from-home and other containment measures accelerated. We continue to work closely with our customers to support shifts to online and home delivery platforms by adapting packaging designs to meet customers' needs. We also experienced unprecedented declines in Commercial Printing segments due to a significant pullback in print advertising.

The near-term outlook we provide on the slide is our best view of current demand across regions. We remain focused on optimizing cash and working capital and will match our production to our customers' demand, as we manage through a very challenging environment. Looking at the Ilim results on Slide 16. We had an equity loss of $35 million in the quarter, which includes a noncash foreign exchange loss on Ilim's U.S.

dollar-denominated net debt, of which IP's after-tax portion was $51 million or $0.13 per share. Volume was essentially flat sequentially. Average price decrease on the flow-through of prior period price movements as expected. Ilim achieved record production in March on successful de-bottlenecking projects completed in 2019.

Demand for softwood pulp in China is solid, driven by consumer demand for towel and tissue products. We expect volatility in the ruble exchange rate to continue due to fluctuations in global oil markets. As a reminder, operationally, about 60% to 70% of Ilim's revenue is in U.S. dollars.

Ilim is committed to the health and safety of its employees and is practicing appropriate containment measures. The business has not had any material operational disruptions due to COVID-19. And lastly, in April, International Paper received $141 million dividend payment from Ilim. This brings total dividends received from Ilim to more than $1 billion since the inception of the joint venture.

Turning to Slide 17 and our outlook. In light of the uncertainty regarding the impact and duration of COVID-19, we are withdrawing our full-year adjusted EBITDA and free cash flow outlooks. We intend to continue to provide an update on business conditions and a quarterly outlook. Keep in mind that our second quarter outlook is our best view at this time in a fluid environment.

So let me start with Industrial Packaging. We expect price and mix to be down $5 million on the flow-through of prior index movements in North America, which is partly offset by favorable price and mix in our export channels. Volume is expected to be down $70 million, as demand slows from an elevated level as well as the impact of one less shipping day in the second quarter. Operations and costs are expected to lower earnings by $60 million due to the non-repeat of lower medical claims and higher costs related to the Rome mill in the second quarter.

Staying with Industrial Packaging, maintenance outage expense is expected to decrease by $27 million and input costs are expected to be higher by about $55 million due to higher recovered fiber cost. In Global Cellulose Fibers, we expect price and mix to increase by $20 million on the impact of prior index movements. Volume is expected to be sequentially flat. Operations and costs are expected to lower earnings by $25 million.

Maintenance outage expense is expected to decrease by $25 million, and input costs are expected to remain stable. Moving to Printing Papers. We expect the impact of price and mix to be flat. Volume is expected to be down about $50 million due to the impact of COVID-19 in all of our regions.

Operations and costs are expected to lower earnings by $85 million, mostly due to the impact of unabsorbed fixed cost. Maintenance outage expense is expected to decrease by $12 million, and input costs are expected to remain stable. As noted in the segment details I just shared, maintenance outages all in are expected to improve by $64 million in the second quarter. Details by business and quarter are included in the appendix.

In response to COVID-19, we now expect maintenance outage expense for the full year to be about $480 million versus our original forecast of $585 million. And lastly, under equity earnings, you'll see the outlook for the Ilim joint venture. Turning to Slide 18. I want to take a moment to update you on how we're thinking about capital allocation as we navigate COVID-19.

Our allocation framework does not change. We will continue to make thoughtful choices as we navigate circumstances. I'll start with the balance sheet. Our commitment to a strong balance sheet and investment-grade credit rating does not change.

We reduced debt by $1.5 billion during the past two years and closed 2019 around the upper end of our leverage target. Our leverage could be adversely impacted if negative global economic conditions persist, but as Mark said earlier, we entered the COVID-19 crisis in a strong position. That strength extends to our pension plan. It remains sufficiently funded and previous actions to de-risk the plan help preserve the funding ratio at about 90% as we exited the first quarter.

Returning cash to shareholders is a meaningful part of our capital allocation framework. In the past five years, we have returned nearly $5.6 billion to shareholders or about 60% of free cash flow. Given significant economic uncertainties, we're suspending share repurchases. We paid the first-quarter dividend in March.

We are not making a change to our dividend policy at this time. We continue to evaluate it with our Board of Directors, as we conduct testing on the impact of COVID-19 under different economic scenarios. Looking at investments. We intend to reduce capex to $600 million in 2020.

We will fund only mission-critical needs, including the completion of the Riverdale Conversion. We will not compromise the health and safety of our employees nor take any environmental or regulatory shortcuts. We're taking a deliberate approach to funding decisions to ensure we continue to have the right capabilities to provide the best solutions for our customers and are well-positioned for the eventual economic recovery. Taking a closer look at debt and pension on Slide 19, our maturity profile provides us with financial flexibility as we navigate through the crisis.

We have no commercial paper debt outstanding and no near-term bond maturities. I'd also note that we reduced our annual interest expense by about $100 million since 2017. As I said earlier, our pension plan is sufficiently funded at around 90%. At this time, we do not expect any required contributions in the next five years.

During the past few years, we've taken meaningful steps to de-risk the pension plan on a structural basis. You see the result of these actions on the chart. Our pension gap is essentially unchanged, as we exit the first quarter despite significant market volatility. Turning to Slide 20.

We have about $3.8 billion of liquidity as we exit April, which includes cash of about $1 billion and committed credit facilities of $2.8 billion. We've taken prudent actions to further strengthen our liquidity as the COVID-19 crisis accelerated. We entered a new $750 million bank revolver. We also extended our AR facility and changed it from uncommitted to committed to ensure access.

All our facilities are available and unused at this time. In addition, our credit ratings provide attractive access to the bond market. We like the financial flexibility our liquidity position provides, given the severity of the economic crisis and the uncertainty of the shape and pace of recovery. On Slide 21, we summarized some of the cash levers available.

Given the significant economic uncertainty, we chose to take prudent and early actions to maximize liquidity. We will continue to evaluate conditions and make decisions based on the best information available and our view of risk. As a reminder, we monetized $250 million of our stake in Graphic Packaging in the first quarter. This puts us on a monetization path, and we will continue to be thoughtful on our approach.

The net of all of this is that we are well-positioned with our operations, balance sheet and liquidity to manage the current economic crisis. And with that, I'll turn it back over to Mark.

Mark Sutton -- Chairman and Chief Executive Officer

Thank you, Tim. We began today's conversation by sharing with you how International Paper is navigating the COVID-19 crisis. We've weathered many storms during our company's 122-year history. And every day, I hear another inspiring story of how our employees are stepping up to the current set of challenges.

And I'm proud of their steadfast commitment to International Paper, our customers and each other. Our company plays a critical role in the supply chain required to produce and deliver food, pharmaceuticals, hygiene and other essential products to consumers. And as I said earlier, it is a privilege that comes with enormous responsibility to take care of our employees and our customers. They are the foundation of how we create value for our shareholders.

I'm confident that the company we've built and our strong financial footing positions us well to succeed in the near-term and the long-term. And with that, Tim and I are happy to take your questions.

Questions & Answers:

Operator

[Operator instructions] Our first question is going to come from the line of George Staphos, Bank of America Merrill Lynch.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Hi, everyone. Good morning. Thanks for taking my questions. Thanks for all your doing on COVID, both for us and your employees.

A couple of questions to start. Mark, Tim, could you talk a bit about what kind of growth you're seeing in e-commerce either in the quarter or maybe the current run rate as we're in April? And then related point, what kind of volumes are you, in fact, seeing in box shipments to the extent that you can comment in April? And I had a couple of follow-ons.

Mark Sutton -- Chairman and Chief Executive Officer

George, this is Mark. On e-commerce, normally, we talk about double-digit growth. We're experiencing extremely strong double-digit growth. So orders of magnitude above the normal double-digit growth.

And in April, our indications through April are that we are still seeing, although moderating from the heavy March that we showed at 4.7 to more normalized levels, we're still seeing positive activity in the box market in April in the neighborhood of 2%.

George Staphos -- Bank of America Merrill Lynch -- Analyst

OK. And then recognizing some of this is just going to be driven by COVID and social distancing. Can you comment on where you found the opportunity to cut back a bit on both capital spending and maintenance on the latter? It seemed a fair amount of that was on North American industrial packaging. And if you can provide a little bit more color in terms of what can be cut permanently and what gets reutilized pushed into 2021?

Mark Sutton -- Chairman and Chief Executive Officer

Yes. George, I'm going to make just an opening comment, ask Tim to give you a little more color on capital and maintenance expenses. We make these decisions from a principal basis. Number one, and we often get credit, whether credit is the right word or not, for having really good assets and spending a lot of money maintaining them.

Our asset quality is really high, and we're not operating typically in crisis mode. So our ability to adjust, and I don't think of it as cutting, I think of it as delaying, adjusting, changing the timing of capex and maintenance expenses. We are allowed to do that, managing the risk because we keep our equipment and our processes in very good shape. So there's a number of areas that we are just looking at before we really understand what is going to happen to the consumer, GDP and demand that we don't tie up cash in projects, in areas that we may not need to as early as we originally planned.

And Tim, if you want to give some additional examples?

Tim Nicholls -- Senior Vice President and Chief Financial Officer

Well, I think you just said it well, Mark. The only thing I would add is, and Mark referenced it, but this is not a cutting so much as waiting and see. So all of the measures that we've taken, we can begin ramping them back up as we see less volatility and a return to some type of normal. But I think Mark characterized it well.

We do have great assets. It gives us flexibility.

Mark Sutton -- Chairman and Chief Executive Officer

An example, just to give you a little more, George, we have cost reduction projects every year. Most of that is related to consumption of input materials. So any type of input, trying to be more efficient, consume less of it. In an uncertain economic environment, those projects don't pay as early as you think if you're not using that input anyway because of low demand.

So until we have better clarity, we can change the cash outflow timetable and end up in keeping the company's cash in and cash out in a much stronger position. And that's really all we're doing here.

George Staphos -- Bank of America Merrill Lynch -- Analyst

OK. And it sounds like it's more proactive than just social distancing. And my last one, could you comment a bit further on Bogalusa and Rome, what do you think the production loss for the year might be? You gave some preliminary timing for the restart at Rome, if you could go into what is required there, that would be great? I'll turn it over. Great.

Thanks for taking my questions. I'll turn it over.

Tim Nicholls -- Senior Vice President and Chief Financial Officer

Yes. We've got — Bogalusa is back up and running; and Rome, we're looking at June as the likely restart. So we're going to lose a quarter at Rome. We lost much less than that at Bogalusa.

We don't typically give out capacity numbers and things like that, George. So I'll refrain from that.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Yes. Understood. I figured in this circumstance you could, but I appreciate it, guys. Thank you.

Operator

And our next question will come from the line of Mark Weintraub with Seaport Global.

Mark Weintraub -- Seaport Global Securities -- Analyst

Thank you and thank you for the very helpful presentation slides and all the actions you're taking for your constituents. The one thing I was trying to get about understanding is on the volume side and in Industrial Packaging. I think you said a negative $70 million hit. And I think you also indicated that in April, box shipments were looking like they're up about 2% domestically.

And I realize that there's international as well as domestic in here. But if I look at the slides for the just ended quarter, you had like an $18 million benefit from volume. It just seems like a very large negative expected impact from that. Can you help understand why it would be quite as big as that unless you're expecting a very sharp fall off, which I don't necessarily get from the slides you put out in volume for the second quarter?

Tim Nicholls -- Senior Vice President and Chief Financial Officer

Mark, it's Tim. Well, you're right. April has been very good. Our cut up is between 2% and 3%.

That's not a shipment number, that's the consumption, as we produce boxes to satisfy orders. But we won't know what shipments look like, of course, until we close the books at the end of the month and see all of that. There is some uncertainty in Europe, as Europe starts to reopen. And I think, unfortunately, it's just where we are.

There's a lot of fluidity and uncertainty around everything. Three or four days ago, we had protein packaging plants being down, and now they're going to be coming back. And so that's just how quickly things can change. We do have one less day in the quarter, in the second quarter in North America.

So that has a not insignificant impact. But we're looking at what we're seeing in the moment where short cycle, short order cycle business, we can only really gauge on order and take out a couple of weeks. So we're just trying to triangulate across all these segments segment-by-segment as to what we think we're going to see in May and June.

Mark Sutton -- Chairman and Chief Executive Officer

So Mark, just want to add a piece of color. If you go back to the slide with the market segments for box that Tim walked us through with the red, yellow and green. Again, our best view right now as multiple states and jurisdictions attempt to try reopening strategies, we didn't have a view of whether that was going to be successful or not, but let's assume part of it is more successful than we're all carrying in our heads. You've got flow-through in food service and some of the other weak segments that would be all upside too.

As we sit here today, none of that has happened. So trying to call it. We're just trying to be very transparent and say this is what we see now. But as Tim mentioned, on the protein plants, and I think they will figure that out and on successful reopening.

And then anything else that gives the consumer confidence, therapeutics that we reported earlier this week with some traction, those are all views that could give us upside in the demand cycle. But to put that out there, as we see it as International Paper, seems to be a little bit wishful thinking. But all of it is moving and real and could be upsides to our near-term outlook.

Mark Weintraub -- Seaport Global Securities -- Analyst

I appreciate that. And just real quickly, if I could. Obviously, wastepaper costs are moving really fast, or OCC, it's moving really fast. Can you give us a sense as to where you see them currently? And how that flows through into your business? And what, if anything, can you be doing to mitigate the impact? You've got a big collection system, etc.

Tim Nicholls -- Senior Vice President and Chief Financial Officer

Yes. Well, they are up significantly three or 4x what they were earlier in the year. The good news is we have tremendous flexibility across our system. So we do have some facilities that are 100% recycled, but most of our facilities are a blend of virgin and recovered fiber.

And so on a normal basis, we go about some amount of balancing and arbitraging cost facility by facility. So we'll have some flexibility to work around that. But again, it depends on with the reopening. It depends on how fast and to what degree because this is really a generation issue for certain parts of the supply chain, for OCC have been impacted quite negatively.

Mark Weintraub -- Seaport Global Securities -- Analyst

Thank you.

Operator

Our next question will come from the line of Anthony Pettinari with the Citigroup.

Anthony Pettinari -- Citi -- Analyst

Thanks again for all the details, especially with what you're doing on safety. Maybe just following up on George's question, it seems like this experience may accelerate e-commerce and e-grocery at the expense of physical retail. If that's true, how do you think about the long-term impact to your corrugated business, either from your ability to engage those customers? And then any difference in the margin profile, if there's any difference from some of the other traditional customers you serve?

Mark Sutton -- Chairman and Chief Executive Officer

Anthony, it's a great question. We are well-positioned to serve e-commerce where it's business-to-consumer both in the general retail sense and the e-commerce, that's business-to-business in the more industrial products. Since we have a position with almost everybody who is anybody in that particular type of business model, we have product and service platforms that do very well in there. And I think the margin comparisons are not a big issue.

Some of the retail is replacing lower margin retail. Some of the food through e-commerce is replacing some of the average margin in the process of center store stuff. So when you look at it all, e-commerce is a good business for us, and it's not a margin arbitrage issue that we look at in the long-term.

Tim Nicholls -- Senior Vice President and Chief Financial Officer

And relative to the total size of the market, it's still relatively small in the segment, and the segment is not homogeneous. E-commerce is not e-commerce as we look at the customers that we supply.

Anthony Pettinari -- Citi -- Analyst

Great. Great. That's very helpful. And then in Printing Papers, I think you anticipate essentially stable price/mix in 2Q.

Just wondering with demand down, 40% globally, wanted to gauge whether the shutdowns that are being taken are sort of appropriate to balance supply to demand? And then as you move from March to April to May, are you seeing sequential weakening or stabilization in Printing Paper demand? Any kind of thoughts there?

Mark Sutton -- Chairman and Chief Executive Officer

It's like we said, when we covered it on the slide, with 40% to 50% lower order intake is, as we said, unprecedented. So again, these are short-order cycle businesses, and we don't have — unless it's an export shipment, which has a little bit longer lead time, you don't get tremendous look-through to what it might be a month or two months out. We're just going to have to see how. I think it's going to be a function of how quickly and how successfully things reopen.

And we're taking all of the steps we need to take to match our productive capacity to our customers' demand. The last thing we want to do, as we referenced earlier, is tie up cash where we don't need it. And so it's better for us to adjust our productive footprint in the short-term than tie it up in inventory.

Anthony Pettinari -- Citi -- Analyst

OK. That's helpful. I'll turn it over. Thank you.

Operator

And our next question is going to come from the line of Steve Chercover with D.A. Davidson.

Steve Chercover -- D.A. Davidson -- Analyst

Thank you. Good morning, everyone. First of all, do you anticipate? I think you do future insurance recoveries from the outages at Rome and Bogalusa. Tim said that they were initial recoveries.

So maybe what's the deductible? And how much more can we perhaps expect?

Tim Nicholls -- Senior Vice President and Chief Financial Officer

Yes. We have a $10 million deductible in each of the mills for the two incidents. We're just going to have to wait and see how it plays out. This is still an ongoing process.

So we'll have more to say about it in future quarters' results.

Steve Chercover -- D.A. Davidson -- Analyst

OK. And sticking with containerboards, I guess, the implications, RISI had suggested that you were perhaps trying to fast-track the Riverdale Conversion in order to offset the impact at Rome and Bogalusa. I mean, I think it's fine that you're doing it safely, and it's even a quarter pushed backwards. But was that just pure speculation on their part? Where do they get that?

Tim Nicholls -- Senior Vice President and Chief Financial Officer

I have no idea where they get it. It wouldn't even be accurate in terms of grade or product because we're going to be producing a totally different product to Riverdale than we are at those other two mills. So I can't speak to what they write or how they obtain it. We're just managing the project.

We're trying to protect our employees and our contractors and do it in a very responsible way.

Steve Chercover -- D.A. Davidson -- Analyst

Sure. OK. Well, we don't always know where they get their stuff. And then a longer-term, if you can think about it, view on paper, is it possible that post-COVID, like there might be many other long-term impacts that we're not anticipating.

For instance, e-commerce might have a permanent boost. Might there be a permanent negative shock to printing paper demand?

Tim Nicholls -- Senior Vice President and Chief Financial Officer

It could be. I wouldn't argue that something is not possible. We just don't know. Just anecdotally, I tried to refrain from printing, as I work remotely at home, but then I found myself printing two reams at a time to catch up with all the things that I would normally print.

So it depends. We know on the print advertising side, that still a combination of online platform marketing and direct mail marketing is the most successful type of marketing approach. So we'll have to see what happens as things start to open up again.

Steve Chercover -- D.A. Davidson -- Analyst

And last question on fine paper, and it's on your specialties, don't you make a lot of the cores for Q-tip swabs, for instance? Are there any benefits on your specialty side?

Tim Nicholls -- Senior Vice President and Chief Financial Officer

Yes, we do make those. It's a much smaller product. So the amount of fiber goes into it is much less. But yes, we do make those.

We're one of — we may be the only at this point, but we're one of the few producers that actually make it.

Steve Chercover -- D.A. Davidson -- Analyst

OK. Tanks. Stay healthy.

Tim Nicholls -- Senior Vice President and Chief Financial Officer

Thank you, Steve.

Operator

Our next question will come from the line of Debbie Jones, Deutsche Bank.

Debbie Jones -- Deutsche Bank -- Analyst

Hi. Good morning. Thanks for taking my question. I know you touched this before, but just can we just get a little bit more granular on what you're seeing in the export markets? And if there is anything notable by region and kind of how things are trending right now? And what you expect in May?

Tim Nicholls -- Senior Vice President and Chief Financial Officer

Yes. The summary comment is that it's been really relatively strong across all of the products and regions that we ship to, both for export containerboard as well as our pulp business. Pulp on the strength of hygiene products and some towel and tissue. And on containerboard, remember, inventories were much lower as we entered the year, and demand has actually been good to this point.

And so we think the inventory levels and customers around the world that we service are normal at best and low in some cases. And the pull for banana and citrus has been strong.

Debbie Jones -- Deutsche Bank -- Analyst

OK. And then I wanted to ask a question about the dividend. You mentioned just the Board reviewing it and stress testing it. Could you talk about what goes into that? My thought would be that looking at the first half of the year, performance seems fine, and you're taking a lot of steps with the balance sheet and capex that you shouldn't be in a difficult position.

But what kind of stress testing are you doing at this point?

Tim Nicholls -- Senior Vice President and Chief Financial Officer

It's a great question. And as I said, there's no change to our dividend policy. We paid the dividend in the first quarter, no change to the policy at the time. But with all prudence not only for dividend, but for all aspects of our operation, we're doing as robust economic scenario planning as we know how, starting with the impact that we saw during the financial crisis back in '08 and '09 and then working to lower levels of performance from that experience.

We don't know. Given that this is a different type of crisis with health implications, we don't know how severe it can be. So we're looking at a whole range of testing and scenario planning and trying to be as robust as we know how. I would say this, in terms of the actions that we've taken, they've been taken out of caution and prudence, and because we have flexibility to lower capital and lower maintenance because of the asset quality, we just stopped for a moment in time.

We can always resume if things appear normal. So there is an amount of sequence of the cash mitigation levers that we have. The ones we've taken so far are ones that we can turn back on if we want to, but we thought in the moment, back in March, as things accelerated, it was very uncertain, these were prudent things to do at that point in time.

Operator

And our next question will come from the line of Adam Josephson with KeyBanc.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Good morning, everyone. Hope you and your families are safe and healthy. Mark, one on demand. I know Mark asked you earlier about that, the delta, the $70 million delta.

But just more broadly, I know you look at a number of economic indicators, whether it be GDP growth or nondurable industrial production or otherwise, and there's historically been about, I think, 150 basis point gap between GDP growth and box demand. I'm just wondering how you're thinking about that relationship this year, just given how unusual, obviously, the first quarter whereas particularly March, and April was good as well, box demand wise, likely much, much better than what the actual economy was doing. So how are you thinking about that relationship this year in the context of what you saw in 1Q up about 3% and then you were up two-ish in April?

Mark Sutton -- Chairman and Chief Executive Officer

It's a great question, Adam. We do have a demand model that we use for International Paper. It's not only looking at GDP, but the construct of GDP and then some other inputs that correlate very closely with corrugated demand. And we use that model under different scenarios of GDP put out by others, not our own number, but well-recognized external sources.

And then when we look at for this particular disruption, you're right, it's different. It's a lot about the duration of the disruption. And we look at what we think recovery patterns will be not one letter in the alphabet, but by segment. And it's likely to play out differently by different types of segments.

So what role the consumer plays in the largest part of corrugated packaging, which is in the food and nondurable section really determines what we're going to see in demand. And that may, for several quarters, be completely dislocated from the broader GDP, if that's being driven down by capital investment or other components of GDP. So we're not looking at a delta or an offset to GDP and then calculating historic relationship for box demand. It's much more granular than that.

And one of the biggest sources of input we have to our demand model is actually talking to our customers and seeing what they're seeing. And that's why we think for the kinds of products we make and the role they play in the supply chain through an environment like this. This isn't a bunch of luxury products that you can buy them or not buy them. Most of what we do is essential to everyday life.

And so we believe we're going to weather all these dramatic forecast and GDP pretty well.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

I appreciate that, Mark. And Tim, one on recovered paper. I know you talked about the expected sequential drag in Industrial Packaging from higher OCC costs. I'm just wondering, embedded in that, if you're expecting another, call it, $20 to $30 jump in the price in May? And then what, if anything, thereafter? And then more broadly, how long do you expect this spike to last? I know it depends on how long the economies have effectively shutdown for and how long commercial collection stays down for.

But any thoughts you have about how much you're expecting OCC to go up again in May? And then where you think it shakes out thereafter based on how quickly the economy reopens?

Tim Nicholls -- Senior Vice President and Chief Financial Officer

Yes. I think it's just that as we called out, we're expecting a $55 million impact on higher input costs, most of that being recovered fiber and the core. And I think you said it. I think it depends on how quickly and to what degree the shape of the reopening takes.

And retail has been significantly impacted unless it was nonessential. The food restaurant and food service segment has been significantly impacted. So I think it's going to depend on how quickly and how successful those come back.

Mark Sutton -- Chairman and Chief Executive Officer

Yes, Adam, another point on this to add to what Tim said is this retail component is really going to be interesting to watch because around almost 30% of OCC generated in the U.S. begins its life as a box being imported to the U.S. from somewhere else. Many of those type of products end up through the U.S.

retail chain, and they're definitely impacted right now, and not all of them are in that essential category. So again, duration of the stay-at-home orders, the confidence of consumers getting back into society, whether there's medicines and other treatments, all of that fits together. But there's a full — almost 30% of our recovered fiber that's available for recovery in the U.S. that begins somewhere else.

And that's really ratcheted down a lot right now and likely will take a while to come back.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks so much, Mark.

Operator

And our next question is going to come from the line of Dr. Mark Wilde with BMO.

Mark Wilde -- BMO Capital Markets -- Analyst

Hi. I wondered if either of you could just give us a sense of how you're responding to these declines in printing and writing paper consumption in the various regions around the world? I think you produce in the U.S., Brazil, Poland and Russia.

Mark Sutton -- Chairman and Chief Executive Officer

Well, I think the way we're responding is we're taking care of our customers. We're managing inventory very closely, to Tim's point about not tying up cash. And we've got a very flexible system in Europe and in the U.S. Not a lot of individual mills left in that business, but they're large and important.

And we've got — for the same reasons, we usually talk about it in packaging, when we have supply and demand dislocations. We've got the same marginal cost shedding model and systems in place. We just don't use it very much in printing papers, and we're able to shed a big portion of our marginal cost and variable cost to match our production with our demand. And so we're set up to do it, but we take care of our customers, and we take care of our inventory and cash tied up there, and we adjust our production.

Mark Wilde -- BMO Capital Markets -- Analyst

So Mark, both of your two biggest competitors domestically have sort of put out press releases and told us what they expected to pull out of the market in the second quarter. Is it possible for you to give us anything like that either domestically or for the offshore businesses?

Mark Sutton -- Chairman and Chief Executive Officer

No, it's not. But we did give you a cost number in the outlook slide Tim walked through. I think it was $80 million, $85 million of unabsorbed fixed cost. And so that gives you some indication of what we're expecting.

But no, we never give forward views of our planned production output. We just don't do that.

Tim Nicholls -- Senior Vice President and Chief Financial Officer

We don't do it. We do quantify it after the fact every quarter.

Mark Wilde -- BMO Capital Markets -- Analyst

Yes. Right. That's OK. The other question I had is for either of you, can you talk a little bit about how you're thinking about kind of foreign exchange and the strength of the dollar? And I'm curious about this, both from a translational standpoint, but also the impact for largely a U.S.

dollar-based producer of dollar-denominated commodities, what it means in terms of both potential for kind of demand and price?

Tim Nicholls -- Senior Vice President and Chief Financial Officer

Yes. It's a great question, Mark. It did strengthen some at the beginning of the crisis. It's been roughly in the same zone for a few weeks now, maybe a month or 2.

We tend to get a bit of a wash around the world when you look at our different businesses. A weak AI relative to dollar helps that business as they go to export markets. The Ilim joint venture has all of its costs for the most part in rubles and is exporting and selling in dollars. It does hurt us to some degree at times depending on strength of demand and supply on exports from the U.S., but again, a lot of what gets exported out of the U.S.

is in our pulp business, which is a unique product and benefits from the fiber characteristics that we have in the southern part of the U.S. So when we put it all together, over a long period of time, it seemed to have been mostly net neutral.

Mark Wilde -- BMO Capital Markets -- Analyst

OK. And just the last quick one, Tim. Can you just update us on Ilim's capital plans?

Tim Nicholls -- Senior Vice President and Chief Financial Officer

Yes. In this environment, you'd expect that they would pull it back. They have done. They've taken some measures to cut capital in the moment.

They are still progressing on the large project at Ust-Ilimsk, and don't see any real significant delays to that, but they have other places to balance out capital spending across the rest of the business as well as that business is particularly good at managing their cash and taking any cash mitigation measures that they need to.

Mark Wilde -- BMO Capital Markets -- Analyst

OK. Fair enough. I'll turn it over.

Operator

And our next question is going to come from the line of Gabe Hajde with Wells Fargo.

Gabe Hajde -- Wells Fargo Securities -- Analyst

Thanks for all the detail and hope you guys are doing OK. I was curious if you could comment at all. Tim, you touched on some, I think, export customer inventory levels, but maybe your domestic inventory levels in the industrial business? And I appreciate there's a balance in that going on right now with bringing up one facility, Bogalusa, another one being out until June. But if demand kind of plays out as you see it or as you're projecting, where you might expect your inventory levels to be at the end of the second quarter versus where you're at today?

Tim Nicholls -- Senior Vice President and Chief Financial Officer

Yes. I guess what I would say, as you know, we don't publish or share our specific numbers and levels. I would say we're on the low side here domestically. We've had a strong demand pull across the entire business, all channels, so far this year given the factors that we talked about.

So we're low-inventory levels and a lot of demand through this point in time that we've seen in the export channel. And you've seen the results that we had in the integrated channel here in North America. And so to this point, it's been about balancing our supply to make sure we are trying to take care of all of our customers. At the end of the second quarter, I wouldn't venture a prediction at this point.

Gabe Hajde -- Wells Fargo Securities -- Analyst

OK. And maybe to try to dig a little bit deeper on Adam's question kind of on Slide 9. Mark, you talked about trying to get into weeds a little bit in terms of underlying demand drivers for corrugate. As we think about maybe corrugated intensity through the supply chain for food and beverage specifically going through retail as opposed to food service, is there a way that maybe high level you can help us think about? Is it more corrugate intensive for that channel versus — and I appreciate again, sometimes you don't necessarily know what your customers do with the product once it leaves your facility?

Mark Sutton -- Chairman and Chief Executive Officer

I understand your question, Gabe. I don't have a good clean answer to corrugated intensity per unit of output. But just suffice it to say, that both channels, the retail channel, which doesn't — it's corrugated intensive, but as you know there's been a lot of innovations with beverage and other things that don't use as much anymore, and the food service channel are very, very important to our corrugated demand. And I would say the food service channel, given the way product moves and the bulk in which it moves and the quantities, has a very large component of corrugated.

You think about even anecdotally, if you think about watching a restaurant get supplied from the backside as a food service truck is there, there's a lot of corrugated delivering, multiple units of ingredients and supplies. So it's definitely important for our demand, and it's important for corrugated usage. And so as we see some success in reopening, even at reduced capacities, it's not just restaurants, though. Of course, schools and cafeterias and other things are large users of the food service supply chain as well.

But it's meaningful and important for us.

Gabe Hajde -- Wells Fargo Securities -- Analyst

Thank you. Good luck.

Operator

And our next question will come from the line of Mark Connelly with Stephens.

Mark Connelly -- Stephens Inc. -- Analyst

Thank you. Just two things. Riverdale obviously represents a nice opportunity to bring all that high-value board in-house. Are you whitetop customers any more or less essential in corporate terms than average? I'm just wondering how to think about the customer side of that ramp up?

Tim Nicholls -- Senior Vice President and Chief Financial Officer

Well, Mark, it's Tim. A large portion of what we produce is around food. So whether it's produce or other types of food products, a lot of the usage of whitetop goes into that. So without giving you a hard number, I don't have a hard number off the top of my head, but there is a big component to consumer, goods and food products.

Mark Connelly -- Stephens Inc. -- Analyst

OK. So you shouldn't feel too much of a drag there. And just one more question. A little more detail on Brazil.

Can you remind us what the split of business down there is in terms of cut-size versus roll? And how much of that business stays domestic, Brazil lately?

Tim Nicholls -- Senior Vice President and Chief Financial Officer

Yes. Roughly half of our production of memory sought of stayed in Brazil and then it varies up and down balance of it. The balance of it does either to let the Latin American region and some amount to Europe. The split is largely a cut-size business.

We have predominant brand in the country, Chamex, that is very well received by our customer base. We do some printing grades as well, but for the most part a lot of cut-size.

Mark Connelly -- Stephens Inc. -- Analyst

That's very helpful. Thank you.

Operator

And our last question for the day will come from the line of Brian Maguire, Goldman Sachs.

Brian Maguire -- Goldman Sachs -- Analyst

Thanks for squeezing me in. Hope you all are doing well. I just wanted to take another stab at the 2Q sort of volume outlook in corrugated. Just trying to reconcile a couple of conflicting statements kind of like April is off to a good start, at least on a year-over-year basis, and the heat map sort of showed some deceleration.

I'm guessing as the month progressed. But then the guidance on EBIT, again, down $70 million or so. Just wondering if that's kind of representing your worst-case estimate for how things could progress in 2Q if things maybe deteriorate even more from here? Or is it something you're actually seeing? I guess just trying to get a sense of how conservative you're taking a cut at the 2Q guide. And just sort of related to that, I understand pulling the full-year guidance, but why even give 2Q numbers if so much is sort of up in the air and uncertain at this point?

Mark Sutton -- Chairman and Chief Executive Officer

It's a good question, Brian. We always give an outlook. We're required to give an outlook. We try to give one as thoughtful as we can.

I would say April looks like it's turning out OK. We'll have to get into May and see again. I continue to mention that we're a short-order-cycle business. And so a lot of this is triangulating based on what we hear from customers and what we're seeing across all of the converting facilities that we have and looking at it segment by segment.

So it's our best estimate at this moment in time, but I think it's acknowledging that there is a lot of fluidity. And as I mentioned, with the protein example, one day it looks like 25%, 30% of supply is going to be constrained. The demand is there, but the supply is not. And then a few days later, there's changes in place, and protein plants will hopefully be starting back up at a point in time.

So just a lot of fluidity.

Brian Maguire -- Goldman Sachs -- Analyst

OK. And then just one last one, just to switch gears, maybe more of a philosophical or longer-term question on uncoated freesheet. Obviously, it's going to be off quite a bit this year. And as someone alluded to earlier, some of that could be structural, longer-term in nature.

Meanwhile, your corrugated business is performing well. Just wondering how you think about the interplay between the two in the industry, the potential for others who've talked about conversions from printing papers to packaging to maybe look to move forward on some of those as they need to shut some mills? And then your role as a leader in both markets. Do you guys view yourselves as somebody who would look to proactively, pre-emptively shut some more of your white paper capacity to try and keep others in the industry from trying to move toward a conversion mentality?

Mark Sutton -- Chairman and Chief Executive Officer

So Brian, I mean that's a difficult question to answer because it's so forward-looking. I think if you look at our track record on how we've managed our uncoated freesheet business over the years, it's been a combination of how we've matched the supply side to a structurally declining market. It's a mix of converting some facilities to a different product that we're already in, like containerboard and fluff pulp. Unfortunately, we've closed some facilities that didn't have a good conversion option.

And we've managed the business in, I think, a graceful way to meet the reality of the decline. All the other parts of your question are really unanswerable in terms of what we would do and why. We would do things and have done things with our printing paper assets and especially the talented production people we have at those plants to proactively help one of our other businesses. That would be the primary reason for making changes.

And so it's really early to figure out right now whether there's permanent structural step down and then a return to a steady structural decline or not. It's a good question. It's possible that could happen. But we're going to stay flexible enough to make sure we see what's happening before we make any conclusions on that.

But our uncoated finishing freesheet business is now less than 20% of the company. It generates strong cash. We've got great assets in good wood baskets that give us flexibility for the future. So that message hasn't really changed.

Brian Maguire -- Goldman Sachs -- Analyst

Thanks so much. Stay safe, guys.

Operator

I'll turn it over to Guillermo Gutierrez.

Mark Sutton -- Chairman and Chief Executive Officer

Thank you, operator. This is Mark, and I'm going to wrap up. First of all, I just want to, again, publicly thank our employees in International Paper for their courage and commitment to our company and to our customers and to each other as we operate through this. We think there's obviously more uncertainty as communities reopen their economies.

Our hope is that, that's done well and successful. That will help the people around the world and also help our company. The crisis has done one thing for us, we talk a lot about the purpose of our company, making products that people need every day out of renewable natural resources, and that has really brought our purpose to life. It reinforces the critical role our products play in people's lives and in the important supply chains.

And I'll leave you with International Paper and my confidence in our future. We have a strong financial footing. You can count on International Paper to deliver. You can count on our employees.

If you invest in International Paper, you can count on us to create long-term value and lead the company and manage the company with all of our important stakeholders in mind for the long-term. We've been at it for 122 years, and we're going to plan on being at it for a lot longer. So thank you for joining our call, and we look forward to talking with you in the future.

Operator

[Operator signoff]

Duration: 70 minutes

Call participants:

Guillermo Gutierrez -- Vice President, Investor Relations

Mark Sutton -- Chairman and Chief Executive Officer

Tim Nicholls -- Senior Vice President and Chief Financial Officer

George Staphos -- Bank of America Merrill Lynch -- Analyst

Mark Weintraub -- Seaport Global Securities -- Analyst

Anthony Pettinari -- Citi -- Analyst

Steve Chercover -- D.A. Davidson -- Analyst

Debbie Jones -- Deutsche Bank -- Analyst

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Mark Wilde -- BMO Capital Markets -- Analyst

Gabe Hajde -- Wells Fargo Securities -- Analyst

Mark Connelly -- Stephens Inc. -- Analyst

Brian Maguire -- Goldman Sachs -- Analyst

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