Andrew K. Silvernail
Chairman and Chief Executive Officer at International Paper
Thanks, Mark. Good morning, good afternoon, everyone. I'll begin on slide three. After my first six months in the seat, I'm encouraged by the pace of improvement and proud of the team for aggressively engaging in IP's transformation. We're building a performance-driven culture at IP that will enable us to create significant value for our employees, customers and shareowners. That work begins a strong alignment around a very clear and compelling strategy. We'll drive profitable growth by being the low-cost producer and the most reliable and innovative sustainable packaging solutions provider in North America and EMEA. We're using our 80/20 approach to guide investments and align resources to win with our most attractive customers, reduce complexity and cost around the company and drive transformational performance.
Ultimately, building great teams and a customer culture are foundational to our improvements. We're passionate about delivering a superior experience to our best customers and best-in-class returns for our shareowners. Let's turn to slide four. We're on a way to driving transformational changes at IP. We've conducted 80/20 training with our top leaders across the company and are actively deploying the methodology. We will continue to embed this practice with our commercial teams at the mills, at box plants and with administrative functions. I was delighted that about 80% of our active investors joined us for the 80/20 overview session in August. Importantly, we're completing 80/20 segmentation across the company. We're looking at our portfolio and business segments, markets, customers, products, suppliers and assets and facilities.
We are completing zero up analysis to determine our key resource needs, and we're developing implementation plans and aligning resources to position our businesses to win customers. We have fully entered the implementation phase by engaging our teams and taking actions to accelerate our strategy and significantly improve IP's performance. I'm now on slide five. I'll share some strategic actions we're taking in the fourth quarter to position IP for success. What all these actions have in common is that they give us greater focus on strategic customers and markets, align resources and investments to win and simplify all aspects of IP, which reduces complexity and COGS. While we're confident that these actions are necessary, they include some difficult decisions that impact our team members, their families and the surrounding communities. One of the great strengths of IP is our values. We make these decisions with care and compassion, ensuring that we treat people with dignity and respect, while providing support, outplacement and severance to help people in their transition. Our actions at the enterprise level are centered on reducing complexity and shifting resources into the businesses and closer to the customer to accelerate strategy.
This is the fundamental principle of 80/20. We are simplifying to enable greater focus and collaboration, improved execution, have more agility, improve the customer experience and lower cost. Within our North American packaging business, we're investing for outstanding service, reliability, productivity and enhanced capabilities to win with customers, while optimizing our total system and reducing structural costs. As I mentioned on the Q2 call, we have two regional optimization pilots underway in our box system. We are reducing complexity and investing in equipment and people to improve safety, product quality, on-time delivery, while lowering cost. Importantly, we are seeing a 20% to 30% productivity improvement in these early stages at these pilot areas. There's opportunity to apply this approach across our national box network. This will be a key lever for delivering profitable market share growth now and in the future. Recently, we announced five plant closures in regions where we have excess capacity and an opportunity to optimize our footprint, working closely with our customers to transition their business to other IP plants.
We expect to retain 100% of our strategic customers, and we're making investments in remaining facilities for future growth. Importantly, we have identified multiple opportunities for greenfield and brownfield box plan investments that will be industry-leading in all aspects of safety and performance. You should expect to see announcements and investment soon to increase our strength in strategic markets. After a strategic review, we've decided to evaluate opportunities to better position GCF for long-term success. Our Board has authorized us to pursue strategic options. We have engaged Morgan Stanley as our adviser. GCF, as a leader of fluff pulp, is very well positioned in a growing global market. We have a talented team and a strong market position and great technical expertise. We have a highly advantaged mill system. And as I mentioned, [Technical Issues] of global supply position. Throughout the process, we are fully committed to support our business and committed to serving our customers. We'll update investors when the process is completed.
Regardless of if we sell or if we keep GCF, it will be positioned to win for the long term. While we are engaged in this process, we will continue to accelerate their strategy to focus on fluff and improve business performance. The decision to close the Georgetown mill allows us to exit about 300,000 tons of commodity SBSK and low-value specialty grades across the system. This move significantly lowers complexity and costs, improves returns and reduces earnings volatility. We expect to retain 100% of our fluff grades end customers and increase our absorbent mix to about 80%. GCF will continue to have plenty of capacity for growth with key customers. These actions strengthen GCF, make them a stronger supplier of high-quality fluff pulp to the market and for our strategic customers. And again, regardless of the outcome, GCF has the potential to be an attractive business with meaningful upside potential. I'm now on slide six.
This slide reflects some 80/20 early wins we're seeing across the company. Our teams are engaged. They've jumped in and they're not wasting any time for taking actions to win with our customers, reduce complexity and improve performance. And here are just some examples I thought I'd call out of all the great work that's happening with our teams. On safety, our intent is to set the industry standard as a great place to work, starting because we are the safest place to work. We're using 80/20 analytics to understand opportunities for safety improvement that include better root cause analysis and advanced technology. Simply put, safety must be above everything else. I've already talked about the pilot plants in two regions where we're seeing double-digit productivity improvements. Also, the corporate reorganization will allow us to focus on our customers and business results. We're moving from a matrix organization to a customer-focused organization. Importantly, we've changed our sales incentive programs.
They are simpler and better aligned with our commercial strategy to drive profitable growth and reward those people who deliver. Another great example is a large strategic customer who we partner with to look at their mix of business that was driving huge complexity. By working together, we reduced the complexity of their order pattern, which saved 1,300 hours to changeover time and significantly improved service levels. These kinds of examples can be found across the system for more opportunities in the future. We also had a couple of quick hit wins in sourcing in the U.S. and Europe, where we were able to partner with strategic suppliers to improve cost and terms. There is more to come, but we're encouraged by the level of commitment and excitement across the company as we work to deliver safe, profitable growth. All right. I'm on slide seven. There's good momentum in the company, but we're just starting our 80/20 journey, and it needs to take hold to every part of the company.
Ultimately, 80/20 is a powerful business model when it has lived not only in the C-suite, but with customers, at paper machines, and at shipping docks and box plants. Along with the progress at IP, we're very excited to complete the DS Smith acquisition. I'm sure you've all seen the strong shareholder support. We're bringing together two great organizations and building winning positions in the attractive markets of North America and Europe. We expect to close in the early first quarter upon completion of regulatory reviews. Our teams are actively involved in planning for the integration. I'm pleased to announce that after closing the transaction, Tim Nicholls will serve as the interim leader of the combined IP and DS Smith EMEA teams in addition to his responsibilities as CFO. We are fortunate to have outstanding finance teams at IP and DS Smith that enable us to do this. Finally, we're happy to announce that we will host an Investor Day on March 25, 2025 at Freedom Hall at the New York Stock Exchange. This will be an opportunity for us to share details about our strategy and value creation opportunities across the company.
Now let me turn to the third quarter performance and the outlook. First, I'll share some highlights and then turn it to Tim, who will walk us through the details. I'm on slide nine. Our third quarter earnings came in above our outlook for the quarter. Better performance was driven by strong price improvements across the portfolio. This included about $17 million of benefit from our Box Go-to-Market strategy. Volumes were seasonally lower as expected. Operating costs were higher sequentially due to lower volumes, seasonally higher labor costs, employee incentive compensation and some reliability issues in our mill system, which Tim will address as he covers the business segment performance. In terms of the underlying market, we continue to see stable to moderately improving demand and trends in North America across the various segments we serve.
In Europe, we have seen some softening, however. As expected, IP's packaging volumes lagged the overall market as we restructure commercial agreements to improve overall profitability. Relative to prior year performance, we've had higher sales revenues that were offset by higher costs, primarily related to inflation, employee incentive compensation as well as some reliability issues and spending to improve future performance. As I mentioned earlier, we are laser-focused on reducing structural costs across the company, and we're taking actions. As we look into the fourth quarter, we expect higher earnings across our packaging business as our price increases from the prior index movement stick. We also expect lower costs for improved operations and lower planned maintenance outages. We expect lower earnings in GCF as a result of prior price index declines and higher planned maintenance outages. In the fourth quarter, we're also calling out significant accelerated depreciation expenses associated with the facility closures that I mentioned earlier. With that, let me turn it over to Tim, who will provide more details of our third quarter performance and our outlook.
