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International Paper Co (NYSE:IP)
Q2 2021 Earnings Call
Jul 29, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. Thank you for standing by. Welcome to today's International Paper Second Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn today's conference over to Guillermo Gutierrez, Vice President, Investor Relations. And Guillermo, you may begin.

Guillermo Gutierrez -- Vice President of Investor Relations

Thank you, Shelly. Good morning, and thank you for joining International Paper's Second Quarter 2021 Earnings Call. Our speakers for 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 two, including certain legal disclaimers. For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties. We will also present certain non-US GAAP financial information. A reconciliation of those figures to US GAAP financial measures is also available on our website. Our website contains copies of our second quarter 2021 earnings press release and today's presentation slides. Lastly, relative to the Ilim joint venture, slide two provides context around the joint venture's financial information and statistical measures.

I will now turn the call over to Mark Sutton.

Mark S. Sutton -- Chairman and Chief Executive Officer

Thank you, Guillermo, and good morning, everyone. We will begin our discussion on slide three. International Paper delivered solid earnings growth and strong cash generation in the second quarter. We continue to see very strong demand for corrugated packaging and containerboard and solid demand for fluff pulp. And in our papers business, demand recovery accelerated in the second quarter across our key geographies. We grew revenue by 15% as compared to the second quarter of last year with price realization accelerating in all of our business segments. Our mills and converting system performed well. However, we operated with extremely low containerboard inventory across our packaging network due to two facts: the lingering effects of the winter storm in the first quarter and then our planned maintenance outages in the second quarter.

These operating conditions severely stressed -- along with severely stressed transportation environments, adversely affected volume and operating costs in the second quarter. Input costs and freight were a significant headwind in just about every category. I would call out the sharp rise in recovered fiber cost in North America and Europe. Although it certainly had a significant cost impact, it is another indication of the strong demand environment. Our Ilim joint venture delivered outstanding performance with equity earnings of $101 million in the second quarter and a strong outlook as we move into the third quarter.

On capital allocation, we're making significant progress strengthening our balance sheet. In the second quarter, we reduced debt by $796 million. We also returned $258 million to our shareowners, including $57 million of share repurchases. During the second quarter, we monetized our remaining stake in Graphic Packaging. I'm really pleased with the return on our investment. We structured the transaction in 2018, maximized the value of the Consumer Packaging business for our shareholders. Looking ahead, we're making excellent progress on the spinoff of our Printing Papers business, which we expect to complete on October 1. Across IP, the team is doing an outstanding job managing complexity. We remain diligent in applying COVID-19 layers of protection for our employees and contractors.

And I really appreciate our team's commitment to execute well, take care of each other and take care of our customers as we work together to build a better IP for our shareholders and really all of our stakeholders. I'm going to turn to slide four now, which shows our second quarter results. We delivered EBITDA of $793 million and free cash flow of $633 million, which brings our free cash flow generation to more than $1 billion for the first half of 2021. Revenue increased by $750 million or 15% as compared to last year, driven by higher average prices in our three businesses as well as volume growth in our packaging and paper businesses. Margins improved sequentially with price realization outpacing higher input and transportation costs. We expect margins to expand meaningfully in the second half of the year as price realization outpaces rising input and transportation costs and importantly as we step down from our highest maintenance quarter of the year.

Now I'll turn it over to Tim, who will cover our business performance as well as our third quarter outlook. Tim?

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Thank you, Mark. Moving to the quarter-over-quarter earnings bridge on slide five. Second quarter operating earnings per share were $1.06 as compared to $0.76 in the first quarter. Price and mix improved by nearly $0.50 per share sequentially, driven by very strong price realizations across all of our business segments. Volume was essentially flat versus last quarter. Demand for corrugated packaging is very strong and demand for fluff pulp is solid while demand for papers continues to recover in all key regions. Second quarter volume in our North American packaging business was constrained by severely low containerboard inventory and fluff pulp shipments were hampered by significant forward congestion.

Our mills and converting system performed well. Operating costs were adversely impacted by a highly stressed supply chain environment for both our inbound materials and outbound shipments as well as the exceptionally low containerboard inventory conditions in our North America packaging system. Maintenance outage costs increased by $0.18 sequentially as we completed our highest maintenance outage quarter of the year. On an absolute level, maintenance costs were $250 million in the second quarter. Input costs were a significant headwind for most materials, and energy costs remained elevated, providing little relief following the winter storm. OCC represented about half of the sequential increase in input costs.

Although some of the pressure in input costs could be transitory, such as the impact of heavy rainfall on our wood cost in the Gulf region, the extremely tight transportation environment will continue to put pressure on all inbound materials. Every mode of transportation is tight, and we expect them to remain tight as we move to the second half of the year. Corporate expenses benefited from favorable reserve adjustments. Our tax rate of 24% in the second quarter was sequentially lower, primarily due to discrete period tax benefit. And equity earnings improved substantially on very strong performance from Ilim. Turning to the segments and starting with Industrial Packaging on slide six. We continue to see strong demand across all channels, including boxes, sheets and containerboard.

As Mark indicated, we operated with extremely low containerboard inventory in the US system. These conditions impacted volume and operating costs in the quarter. We are working to replenish inventories following the winter storm and maintenance salvages as we manage through a tight transportation environment. Taking a look at our second quarter performance, volume was sequentially flat. Strong demand in our North American box and containerboard channels offset lower seasonal demand in our EMEA business. Volume across our US channels grew by 10% as compared to last year, which includes our US box system, open market containerboard customers as well as our recent equity partnerships with strategic sheet feeders. Price and mix increased by about $110 million in the quarter. We're making excellent progress on the realization of our barge increase.

Our mills and converting systems performed well. However, operating costs were impacted by severely low containerboard inventories and stressed transportation environment with congestion across all modes. Maintenance outage costs increased sequentially as we completed the highest maintenance outage quarter of the year. In our Industrial Packaging business, we've completed about 75% of our planned maintenance outages in the first half of the year. Income costs were a significant headwind in the quarter, primarily driven by higher costs for OCC, chemicals and distribution. About $10 million of the sequential increase in input costs occurred in our EMEA Packaging business, primarily for OCC and energy. Taking a closer look at OCC. We consume about five million tons annually across our US mill system and Spain.

We see the rise in OCC cost as a reflection of the underlying strength in global demand for corrugated packaging. We expect OCC costs to rise further in the third quarter even as seasonal generation improves. We expect continued US and export demand, especially from India and Southeast Asia, which were largely offsetting pre-restriction OCC exports to China. Turning to slide seven. We're well positioned for strong earnings growth and margin expansion in our packaging business in the third and fourth quarter. Demand is strong across all of our channels. We expect continued robust volume growth across our US channels.

And we are making excellent progress on the price realization of our margin increase. Our mills and box clients are positioned for strong second half performance following the impact of the winter storms and the significant maintenance outages in the second quarter. Replenishing our containerboard inventories will enable operational and supply chain efficiencies as we move through the second half of the year. We do expect further input cost inflation in the third quarter with the substantial pressure on OCC and transportation costs. Our teams are doing an admirable job managing costs in a tough environment. We expect further opportunities to be more efficient as inventory. In addition, our commercial initiatives are outpacing cost pressure and position us for strong margin expansion in the second half of the year.

Turning to Global Cellulose Fibers on slide eight. Demand for fluff pulp is solid and the end-use demand signal for absorbent hygiene products is healthy. Looking at our sequential earnings, price and mix improved by $104 million in the second quarter with price realization accelerating across all regions and segments as expected. Volume was moderately lower due to significant US port congestion and frequent vessel schedule changes, which delayed our shipments. Mill performance was strong.

However, operating costs were impacted by the tight supply chain environment. We expect these conditions to continue in the third quarter. Maintenance outage costs decreased as expected and input costs were moderately higher with lower wood cost in the Mid-Atlantic region offset by higher chemical and energy costs. Turning to Printing Papers on slide nine. Our papers business delivered earnings of $76 million in the second quarter with continued strong cash generation. Our Printing Papers business carries strong momentum as we approach the spinoff on October one and then continues to recover in all of our key regions.

Additionally, our volume recovery is outpacing the industry through the strength of our global brands and commercial excellence. Looking at the second quarter performance. Price and mix improved by nearly $30 million with price realization across all regions. Fixed cost absorption improved with no economic downtime in our North American mill system. However, operating costs were impacted by the tight transportation environment. We executed the heaviest maintenance outage quarter of the year as well. And on input costs, we experienced pressure on wood, chemicals and freight. As I said earlier, we're on track to spin off the papers business on October 1. Separation planning is progressing well and we expect to file the Form 10 with details of the spinoff in the first half of August. As you would expect, there is significant complexity.

Our teams are doing an outstanding job managing the business as we prepare for a successful separation. Looking at the Ilim results on slide 10. The joint venture delivered equity earnings of $101 million in the second quarter with an EBITDA margin of 47%, driven by strong price realization for pulp and containerboard. Volume improved sequentially on strong demand for pulp and containerboard as well as more shipping days in the second quarter following the impact of the Chinese New Year in the prior quarter. Underlying demand is stable following inventory restructuring during the first half of 2021. Shipping capacity is tight and supply chains to China are stretched.

Third quarter volume is expected to decrease moderately as Ilim executes the majority of its annual maintenance program. So now we'll turn to the outlook for the third quarter on slide 12. As Mark said earlier, we expect meaningful earnings and margin expansion as we move through the third quarter. Looking at Industrial Packaging, we expect price and mix to improve by $110 million on the continued realization of our March 2021 price increase. Volume in North America is expected to improve by $10 million while volume in Europe is expected to decrease by $10 million. Operations and costs are expected to improve by $5 million with the North American system benefiting from a gradual recovery and containerboard inventory levels.

Staying with Industrial Packaging, maintenance outage expenses are expected to be down by $122 million. Input costs are expected to increase by $85 million with OCC representing about 60% of the expected increase. In Global Cellulose Fibers, we expect price and mix to increase by $60 million on realization of prior price movements. Volume is expected to increase by $10 million. Operations and costs are expected to decrease earnings by $5 million on continued supply chain stress due to port congestion. Maintenance salaries expense is expected to decrease by $15 million. And input costs are expected to increase by $10 million on higher wood and chemical costs.

In Printing Papers, we expect price and mix to increase by $25 million. Volume is expected to increase by $5 million. Operations and costs are expected to be unchanged. Maintenance outage expense is expected to decrease by $23 million and input costs are expected to increase by $10 million primarily due to higher wood cost. And under the equity earnings, you'll see the outlook for our Ilim joint venture. I want to take a moment to update you on our capital allocation actions in the quarter. We're committed to maintaining a strong balance sheet. We're comfortable taking our leverage below the target range of 2.5 to 2.8 times debt-to-EBITDA on a Moody's basis. In the first quarter, we -- in the second quarter, we reduced debt by $796 million, bringing our debt reduction to $904 million in the first half of 2021. Returning cash to shareholders is a meaningful part of our capital allocation framework. In the second quarter, we returned $258 million to shareholders through dividends and share repurchases.

Share repurchases were $57 million, which represented one million shares at an average price of $60.80. We have about $1.5 billion available under the company's share repurchase optimization at the end of the second quarter. Lastly, in the second quarter, we monetized our remaining stake in Graphic Packaging for about $400 million. This brings our total cash proceeds on the investment to $1.3 billion before expected cash taxes of about $300 million in the second half of 2021. As a reminder, we also have a tax receivable agreement with Graphic Packaging, under which we expect to receive about $100 million in cash proceeds during the second half of 2021.

With that, I'll turn it back over to Mark.

Mark S. Sutton -- Chairman and Chief Executive Officer

Tim, thank you very much for all the detail. As we look forward, we're positioned for strong earnings and margin expansion in the second half of 2021. My confidence in making a statement stays on the following: our commercial initiatives are driving revenue growth and our mill and converting systems will be gaining meaningful operational and supply chain efficiency as we replenish inventories. Although rising input costs will likely linger, I'm certain we can successfully navigate the environment given the strong demand backdrop. Our papers business carries strong momentum as we approach the October one spinoff. Our team is doing an outstanding job managing the business and taking care of our customers. And I want to take this opportunity to thank our employees for their tireless efforts as we plan for a successful separation. As we move through 2021, we had significant operating and nonoperating cash catalyst.

And we are laser-focused on the capital allocation framework that Tim just described. All of our cash will flow through our framework with one objective: maximizing value creation for our shareowners. I'm excited about the actions we're taking to build a better IP. We're accelerating earnings growth and building a foundation for long-term success. And we're looking forward to sharing more about that with you in the months ahead.

With that, we're ready to take your questions.

Questions and Answers:

Operator

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

George Staphos -- Bank of America -- Analyst

Hi, everyone, good morning. Thanks for the detail. Thanks for taking my question. I guess, my first question, Mark, you and Tim have talked about this in the past about running the cash flow generation that the company has, both from an operating standpoint and nonoperating since you have so many transactions that have been occurring this year and will continue to occur this year through your framework. What should we take away from that in terms of what tools that you have in your quiver may be more applicable now versus what might have been the case three and six months ago?

And Tim, what gives you comfort and why you think it's appropriate, in your view, for leverage to drop below your target range? What are the things that you think make that a prudent strategy? You can give us a couple of thoughts there and then I had a follow-on.

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Sure. Good morning, George. The way we're thinking about it is we are trying to maximize value. We have a lot of cash coming in, in a moment. We do -- everything looks positive as we go forward. But we recognize this is a cyclical business to some extent.

And so in relation to the balance sheet, where we are trying to build strength, reduce risk but also flexibility and optionality -- and so taking it down below the target range, which is really a target range through a cycle, sometimes we'll be below it and sometimes we'll not able to be a little bit above. But we just view that, coupled with our pension performance, is derisking the company. Share repurchases and dividend is very important.

And so that is over time, as we -- not necessarily quarter-by-quarter but over year-by-year, we look to be returning substantial amounts of cash to shareholders. And then everything else gets tested, whether it's organic or small bolt-on types of acquisitions gets tested against that.

George Staphos -- Bank of America -- Analyst

As a follow-on, would the accelerating performance that you are seeing into the second half be any way a guide or a compass point for you in terms of how you may further allocate capital, especially to value return over the rest of the year into '22? Or is it really not so much because you look at this on a longer-term basis? And what are the whys and why not on that?

And then my related question, and I'll turn it over for everyone, do you have any kind of view that you could share with how much cash Sylvamo will need to operate on an ongoing basis? Thank you very much,

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

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

Mark S. Sutton -- Chairman and Chief Executive Officer

And Tim, if I could -- and George, just wrap up, there was a lot of ground covered in the capital allocation questions that you asked. And we do take a long-term view. And as I said last quarter, one of the things we're really excited about is that we've got IP positioned for the first time in really almost forever or definitely recent memory, where our entire capital allocation lever set, strong balance sheet, ability to pay a strong dividend, share repurchases at the right times.

And very importantly, smart investments in our business, as Tim said, organic or inorganic, we have all of those levers available at the same time. In our past history, as all of you know, is we've had two or three or maybe two out of four, sometimes only one out of four. And that's what we really are excited about as we're going forward. As we separate into two companies, the new IP is going to have a capital allocation posture that we haven't had in a long time.

And that's very exciting for our shareholders. It's very exciting for the company. Because we have options to grow the businesses that are growing, to manage our return of cash, all generating hopefully outstanding shareholder return.

George Staphos -- Bank of America -- Analyst

Thank you very much.

Operator

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

Gabe Hajde -- Wells Fargo Securities -- Analyst

Good morning, Mark and Tim. Thanks for taking the question. I guess, not to belabor the point here, but -- and I appreciate that there is somewhat of a wall of worry out there. But I think one of your peers kind of talked about potentially a structurally higher level of demand for corrugated for various reasons, whether it's e-commerce or potential onshoring and manufacturing activity.

So I guess, ask the question a little bit differently. Your balance sheet and pension probably have not been in as good a shape for two or three decades. Is there something that you see around the corner that gives you pause in terms of any of your businesses? And it sounds like again you're pretty constructive near term outlook. I'll stop there.

Mark S. Sutton -- Chairman and Chief Executive Officer

No, Gabe, I think we also view the corrugated packaging market as potentially having a bit of a reset through this last year and a half. We listened to our customers on that. I'm not sure it's 8% every quarter, quarter in, quarter out, like it was in the last quarter but definitely a step-up from the low single-digit growth rates. And that's what we want to be positioned for. When we talk about growing at a minimum with the market, we mean over time and a reasonable assumption of growth on the US market.

And that's a number that I think is leaning toward the higher end just because of a couple of things. The adoption of e-commerce through the pandemic, which is, I think, proven to be very sticky, and valuable proposition that fiber-based packaging presents to people in terms of its circularity, renewable natural resources, making energy in a carbon-neutral biomass way and a high recycling rate is finally -- with all the talk about sustainability and climate and a number of other issues, finally getting attention all the way down to the consumer level.

So we're very excited about the corrugated packaging outlook. And we want to make sure we're there with the right asset base, the right customer list, the right technical capabilities to grow with -- to share in that growth.

Gabe Hajde -- Wells Fargo Securities -- Analyst

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

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

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

Gabe Hajde -- Wells Fargo Securities -- Analyst

Thank you.

Operator

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

Anthony Pettinari -- Citi -- Analyst

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

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

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

Mark S. Sutton -- Chairman and Chief Executive Officer

Anthony, I think the other perspective on inventories -- and I've seen a lot written by analysts on normal inventories. And one just thing to remember, the way we look at it, normal inventories, averages from the past tend to correlate with more normal supply chain environment, so normal transportation velocity, so forth and so on. We are nowhere near any kind of normal supply chain performance by third-party partners in the transportation world.

So our inventory view in IP for the next quarter and the quarter after that is also influenced and adjusted by what's happening in the transportation and supply chain network. So I would expect that normal right now should be higher levels of inventory to perform the same with customers as we had when transportation velocity was much higher.

Anthony Pettinari -- Citi -- Analyst

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

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

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

Mark S. Sutton -- Chairman and Chief Executive Officer

Anthony, I think the way you should probably think about how we make that decision together, Tim and his team and me, is we try to look at the company at its optimal weighted average cost of capital, along -- a portion of that is what credit rating we need to have that delivers and supports that. So you're absolutely right, we're going to be a different company going forward.

That analysis is something that we do continuously. We've aligned at the credit rating target we have based on the company. We will continue to look at that and try to make sure that our ROIC is constructed in the most effective way to get the best, solid, high-quality return we can for shareholders. And definitely, debt ratios and credit ratings are a part of that.

Anthony Pettinari -- Citi -- Analyst

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

Operator

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

Mark Weintraub -- Seaport Research -- Analyst

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

Mark S. Sutton -- Chairman and Chief Executive Officer

Well, Mark, I think the way to think about the -- I was looking at what we sort of put in our outlook in the first quarter call. And we actually had stronger performance than we felt we were going to have. But we didn't know, like a lot of people didn't know, the market was going to grow 8%. We had the inability during the quarter, in some cases, to pick up incremental business. We didn't lose any business with our core customer list that was coming into the quarter as business. There may be some business that we didn't bid. Most of it is shorter-term business.

So the answer is yes. We have people still calling us today, "Can you supply? We need more boxes." In some cases, we can. We just couldn't do it in the second quarter. So I'm not concerned about losing anything permanently. We basically had a classic mismatch between the available capacity in our system and the demand in a 90-day period.

Mark Weintraub -- Seaport Research -- Analyst

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

Mark S. Sutton -- Chairman and Chief Executive Officer

The two factors I mentioned, Mark, in my opening comments, we have more than one quarter of recovery from the winter storm, 140,000 tons that just evaporated from our containerboard supply chain. And on top of that, we had our highest maintenance quarter in IPG in the last 10 years.

So if you just normalize what was above normal maintenance plus that winter storm, that's a chunk of containerboard capacity that could not be converted into a box. And that's coming back. It's just going to take a little while to get it back. So what we had available, we had wide open. But we had capacity offline for maintenance and we had the lingering effect of the 140,000 tons from the first quarter. None of those are permanent. All of those will be significantly improved as we navigate through the second half.

Mark Weintraub -- Seaport Research -- Analyst

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

Mark S. Sutton -- Chairman and Chief Executive Officer

So that's a complicated question because of the nature of some of these contracts by customer type, by region. But let me just kind of state -- restate what we talked about the last two quarters that, a, you could expect quarter -- quarter-over-quarter improvement in this business, steady improvement in this business and we're seeing that. But our strategy is to have the kind of margins in this business that reflect the value that fluff pulp provides for the end-use customers. So we're taking a very structured, very measured approach to each market segment and to the agreements we currently have in those segments with individual customers.

And so as we implement this approach, we would expect that there'll be some volume shifts and movement between segments. And our goal is to have mix improvement, better agreements with better economics that reflect the value of fluff pulp. And that is a kind of customer-by-customer, region of the world by region of the world.

And I would expect, and we're making progress, good progress on that, that given the length of some of these agreements and the way they're structured, we should expect to continue to see margins improve over the next several quarters. So that's a long, complicated answer to would we have any more price flow-through. It's not just about price flow-through, it's about restructuring these commercial agreements and getting the proper value for this product.

Mark Weintraub -- Seaport Research -- Analyst

Appreciate the color. Thank you.

Operator

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

Mark Wilde -- Bank of Montreal -- Analyst

Good morning, Mark. Good morning, Tim.

Mark S. Sutton -- Chairman and Chief Executive Officer

Good morning.

Mark Wilde -- Bank of Montreal -- Analyst

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

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Hi. Mark, it's Tim. So I think the increase from the fall, as we talked about last quarter, went through a record amount of time. It was the fastest I've ever seen. The pace on the second one, we were kind of expecting a normal historical ramp on it. It seems to be going faster, not as fast as the first but still faster than what we've seen over time. We'll see, as August comes, we'll see how that will play out.

But right now, we see our fundamentals looking very strong. We see strong demand. And as Mark talked about, all of the complications with supply chain are really stretching inventory tighter than they would normally be. So far, through the first two price increase implementations, we feel really good.

Mark Wilde -- Bank of Montreal -- Analyst

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

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

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

Mark Wilde -- Bank of Montreal -- Analyst

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

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

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

Mark Wilde -- Bank of Montreal -- Analyst

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

Mark S. Sutton -- Chairman and Chief Executive Officer

That's a great question, Mark. And the answer is coming in just maybe in the middle of 2020, we were saying and I was saying that we feel really good about our containerboard capacity. We have what we need, the amount, the type of grades. When everything is running, we have enough capacity. But everything isn't run it every day with outages and, of course, events that you don't predict, like that winter storm issue. But yes, we are looking continuously at debottlenecking. We've done a bunch of that in the last several years, thankfully because we need that containerboard now. We are looking at different options for adding containerboard into our system if it looks like this kind of demand level is going to be consistent.

Remember, we are structured maybe a little bit uniquely in the sense that we bring containerboard to market through three distinct channels, our own box network, open market in North America to companies that provide a certain service in the box market and have been long-term partners of ours, but we don't make the box and then our export. So what you have seen and will continue to see is movement of containerboard within those three channels. And obviously, we have favored the US box market as much as we can but trying to continue over time, not just in the second quarter of 2021, but over time, get the highest possible margins in our business by participating in all three of those channels. Containerboard, you're right, is a high-demand product all over the world, both recycled and virgin. We have obviously only export the virgin, we sell the virgin version of it.

Box capacity, we've been actively investing. Luckily with the acquisitions we did with that in the early part of the past period, we had a lot of opportunities to fill out existing plants by adding single or double lines of box-making equipment. We've built a few plants and we've acquired a couple of partnerships, but there's definitely opportunity for us to continue to invest in our converting network.

The other option with converting, as you well know, Mark, is when you know demand looks like it's going to be solid, you can bring on more employees and actually fill out an extra shift in many plants and you've got latent capacity turned into productive capacity. You obviously want to do that when you're pretty sure and you first do it with overtime and then you do it with permanent employees.

That's a challenge right now, given the labor market dynamics. But we've got several levers to pull to continue to invest in not only box capacity but the kinds of capability we have. E-commerce-specific assets, for example, is something that we're also bringing to market.

Mark Wilde -- Bank of Montreal -- Analyst

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

Operator

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

Mark Connelly -- Stephens -- Analyst

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

Mark S. Sutton -- Chairman and Chief Executive Officer

On white papers, Mark?

Mark Connelly -- Stephens -- Analyst

Yes.

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Yes, it's just a little bit muffled coming through. So were you talking about looking forward, Mark?

Mark Connelly -- Stephens -- Analyst

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

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

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

Mark Connelly -- Stephens -- Analyst

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

Mark S. Sutton -- Chairman and Chief Executive Officer

Well, I think if you look at the legislation in detail, there's a federal view that's kind of in its nascent stage and there's a state-by-state view. And we are actively working in the state-by-state legislatures. The big issue and the big goal of this extended producer responsibility-type legislation, it was really targeted nonrecyclable or hard to recycle, in many cases, plastics. In some cases, that has led people to believe all of packaging should be included. So the first thing is separating the facts of what corrugated packaging can do.

And actually, corrugated packaging could be a solution to the problem because of the high recycling rates. But that message has to get to policymakers, and we work very hard on that. I spend a fair amount of my personal time talking to people about that. And in many cases, it's a new learning mark for people at the local level that there is a completely different story on fiber-based packaging that's made from the renewable resource and a high recycling rate in the 90% range versus many of the other substrate choices.

So I think that's the case we're making, that is actually part of the solution, not part of the problem but as usual, in legislation sometimes it starts with a blanket, all packaging needs to be managed in a different way and people need to be responsible for their packaging that they put out there when we have a system.

So for example, we spend a lot of time, and it's in there right now, on the infrastructure work that commerce is working on. In that bipartisan agreement they made yesterday, a significant amount of investment in recycling networks in the country is part of that. We'll see if it stays in there. But that's the answer is in improving recycling rates for easy-to-recycle and reuse materials. That's the value proposition for corrugated packaging, not being included in the intent of some of that legislation.

Mark Connelly -- Stephens -- Analyst

That's super helpful. Thank you.

Operator

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

Phil Ng -- Jefferies -- Analyst

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

Mark S. Sutton -- Chairman and Chief Executive Officer

Philip, we think it will be steady progress. It won't be all solved in the third quarter. We think we'll make steady progress through the second half of the year. We have targeted to grow at or slightly above the market over time. We were really hampered in our ability to do that in the last couple of quarters because of the issues you just mentioned.

But we will definitely have more options available for incremental growth as we go forward just based on the fact that we won't have so much of our system down for maintenance. But it will take a slow, steady progress month-after-month through the second half.

Phil Ng -- Jefferies -- Analyst

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

Mark S. Sutton -- Chairman and Chief Executive Officer

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

Phil Ng -- Jefferies -- Analyst

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

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Yes. I mean, I wouldn't want to forecast price looking forward. I talked about how we think about it at the moment, what we believe we're seeing. We're seeing a bit of a pullback in some of the markets. But our view at the moment is that things are more stable and there's no -- and you have to look at not only the underlying demand levels but at the transportation difficulties which are really, in effect, extending supply chains at this point. So you're right, full commodity product, but our view at the moment is this is a bit of a correction, not a complete turn.

Phil Ng -- Jefferies -- Analyst

Okay. Super helpful, guys.

Operator

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

Adam Josephson -- KeyBanc -- Analyst

Mark and Tim, good morning. I hope you are well.

Mark S. Sutton -- Chairman and Chief Executive Officer

We are.

Adam Josephson -- KeyBanc -- Analyst

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

Mark S. Sutton -- Chairman and Chief Executive Officer

Well, if you think about the remarks I made a couple of questions ago about what we're changing in the business versus the last 10 months or the last 10 quarters, that's what gives me confidence that this is a very value-creating material for our end-use customers, and we just haven't always extracted that proper value that gives us a value-creating return. And that's what we're working on. I think the growth rate will stay solid as economies around the world improves, so there's a growth component.

But we're going to run the business in a different way than it's been run before. When we made the decision to invest in the business, it changes the profile of this being a legitimate first-rate business for our company versus, in many cases, a smaller sideline type of business. And some of that's reflected in some of the way the commercial agreements have been made, and we're working on changing that for the better.

Adam Josephson -- KeyBanc -- Analyst

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

Mark S. Sutton -- Chairman and Chief Executive Officer

Yes. I mean, it's hard to predict that with certainty, obviously. But we believe that part of what's happening is the role that fiber-based packaging is playing in general commerce, driven by a few segments, has taken a step change up. And so we think the base will be stronger. It depends on a lot of things. And number one, the structure of the US economy.

And so if there is really action on some of the things that are being learned now around supply chains and global issues with supply chains, and we do have more manufacturing that actually occurs in the US for certain components, I think that will bode well for the business, and how strong the consumer is going forward coming out of this. I think you're looking at maybe what's going to be close to two years of pent-up demand by consumers because of the things that happened during the pandemic and how that plays out in consumption will play a big role in what that growth rate is going to be.

I think the data -- we have this model we use, I know others have models, there's third parties that have models. A correlation around GDP has been slightly less has been what's happened in the box market. And we think that will still stand. And it looks like we're poised to have a stronger consumption-oriented GDP for at least as far as you can see right now.

Adam Josephson -- KeyBanc -- Analyst

Thanks a lot, Mark.

Operator

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

Paul Quinn -- RBC Capital -- Analyst

Yes. Thanks very much. Just a question on pulp. I understand you guys are making some operational improvements. And I'm just trying to balance that with the Q3 guide here, where you've got ops and cost up $5 million. So is there something on the cost side that's more than offsetting the operational improvement that you're seeing? And then if you could give us sort of a scope as to what the big bogey is out there for three to five years out in terms of the things that you guys can control, i.e., how much improvement do you expect that segment to have over that period of time?

Mark S. Sutton -- Chairman and Chief Executive Officer

On the longer-term part -- I'll ask Tim to look for that cost offset part of your question. But on the longer term, we believe that the combination of how we operate, so in the manufacturing sector and the kind the cost structure of our mill system, and I've said this before, especially the part that was the legacy IP mill system, which is mostly converted mills from other products versus what we acquired with Weyerhaeuser, which is mostly all built for purpose.

So they tend to have a better efficiency and lower cost. We've got opportunities to lower the cost, primarily in the legacy IP manufacturing system, coupled that with the commercial arrangements, improvements that we're talking about and what we're doing now. You put those two together, we should hit the margin structure and have a solidly -- a solid business above the cost of capital with a slight growth potential. So that's what we are working on and we see a path to that. It will be a steady path quarter-by-quarter and that's where we're headed. And the question on the cost offset, Tim?

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

It's modest, but it's really transportation. I mean, we're continuing to battle the transportation challenge.

Mark S. Sutton -- Chairman and Chief Executive Officer

A big part of the transportation issue in this business, Paul, is the export port congestion much more exposed to international ocean freight and the other businesses in the company.

Paul Quinn -- RBC Capital -- Analyst

All right. Thanks very much. That's helpful. Thanks a lot.

Operator

Your next question comes from Neel Kumar from Morgan Stanley.

Neel Kumar -- Morgan Stanley -- Analyst

Hi, good morning. You mentioned wood costs being higher sequentially partly because of the wet weather. Can you just give us a sense of the magnitude of inflation you're seeing there? Has it started to be more of a 3Q issue? Or could it carry over to the fourth quarter as well?

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Yes, it's -- I mean, it's really due to having access to the fiber and being able to get it out of the wood based on the rainfall that we've had. So we look at a very long lead time in terms of how we manage with inventories at mills and across basins. And it's really been the Gulf states that have been more heavily impacted but some of the Southeastern mills as well. So it will depend on the weather as we go through the rest of this quarter into the fourth.

But our inventories are in decent shape, but they're a little on the low side and it's just going to cost more to get the wood out and get into the mills. Transportation is not helping either. I mean, we've referenced inbound materials and whatnot, and that's seemingly impacting everything.

Neel Kumar -- Morgan Stanley -- Analyst

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

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Well, we're still working through that. I mean, I think a good way to look at it and the way I looked at it, last year was an abnormally low year. This year is a little bit of out of range high year. When you put the two of them together, it looks roughly in line. I mean, our outages can be anywhere from 500 -- to $500 million to a little bit less or maybe some years a little bit more, pushing $550 million.

Last year, given all the uncertainty we pulled back and curtailed, this year, we're catching up on some of those outages from last year. So we put the two together, that's more normal. Next year, we'll -- we have to finish our planning. We always provide that as we near the end of the year and look into the coming year.

Neel Kumar -- Morgan Stanley -- Analyst

All right. Thank you.

Operator

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

Kyle White -- Deutsche Bank -- Analyst

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

Mark S. Sutton -- Chairman and Chief Executive Officer

I think on e-commerce, no disappointment, still very, very strong. And then we're getting into the period of the year where you start to build for the year-end demand increases as you move toward holiday season, so still a very strong story. We're continuing to invest in that segment. Foodservice continuing to improve.

I guess, there's a question mark about what happens with the Delta variant and COVID and whether everything continues to open. I think a big question mark or a big potential upside is as schools and events start to open, foodservice related to those, which obviously hasn't been opened during the summer, is another potential upside. If that, in any way, shape or form, gets delayed, then foodservice growth could slow a little bit. The only segment that I think, and it's kind of predictable, that maybe saw some flattening was processed foods.

And I think it's directly related to the general opening of the economy and a little less stocking up of kind of the center of the grocery store, if you will. So good strong performance across the key segments. And we believe listening to our customers and looking at order patterns, that's continuing as we go into the third quarter.

Kyle White -- Deutsche Bank -- Analyst

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

Mark S. Sutton -- Chairman and Chief Executive Officer

Well, internally, the best thing we can do on the cost side is to have our system optimized with the right inventories. And what that means is make a product in the right factory so that the transportation cost to the customer, or in the case of our Industrial Packaging business, our containerboard mill makes containerboard for box plants that are nearby, not box plants that are all the way across the country. So that's the number one thing on cost that we can do internally. We don't have our own trucking company or anything like that. It's about really optimizing our supply chain and any dramatic improvements we can make on cost.

To your first part of your question, I don't know this for sure, but looking at what the analysts that follow the transportation industry talk about is that there is a belief that labor and some of the impediments to truck capacity and the training that's required to bring on more employees and more assets in the rail industry will get better, that people will want to return to those industries. Many of those companies laid off a lot of people. You can't just bring people back in rail. There's required training and other things. Same thing for truck. And the belief is that, that will get better. So capacity should get better. If the economy stays kind of red hot, it's a good problem to have, but then I think capacity will get absorbed pretty quickly.

So the jury now is that we think it's really disruptive right now. Velocity is really slow for a lot of reasons. We think part of that, at least on the human labor side, will get better.

Kyle White -- Deutsche Bank -- Analyst

Got it. Thanks so much for the details.

Mark S. Sutton -- Chairman and Chief Executive Officer

Thank you. Let me go ahead and wrap up. Just a couple of takeaways I would like to leave with investors. First, you heard today that we are really positive on the strong momentum we're building for the second half in both earnings and margin expansion. We're absolutely laser-focused on capital allocation and a balanced approach to that.

And we are in very good shape on all elements of our capital allocation framework. And we're very excited about the prospects we have in front of us as we separate IP into two companies and we work on building a better IP going forward. So thank you for your interest in International Paper. We look forward to talking with all of you next quarter.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Guillermo Gutierrez -- Vice President of Investor Relations

Mark S. Sutton -- Chairman and Chief Executive Officer

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

George Staphos -- Bank of America -- Analyst

Gabe Hajde -- Wells Fargo Securities -- Analyst

Anthony Pettinari -- Citi -- Analyst

Mark Weintraub -- Seaport Research -- Analyst

Mark Wilde -- Bank of Montreal -- Analyst

Mark Connelly -- Stephens -- Analyst

Phil Ng -- Jefferies -- Analyst

Adam Josephson -- KeyBanc -- Analyst

Paul Quinn -- RBC Capital -- Analyst

Neel Kumar -- Morgan Stanley -- Analyst

Kyle White -- Deutsche Bank -- Analyst

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