International Paper Co (IP) 2016 Q4 法說會逐字稿

Welcome to International Paper's fourth-quarter and full-year 2016 earnings conference call.

(Operator Instructions)

It is now my pleasure to turn the call over to Vice President Investor Relations, Jay Royalty, to begin. Please go ahead, sir.

Thanks, Maria, and good morning, everyone and thank you for joining International Paper's fourth-quarter and full-year 2016 earnings conference call. Our key speakers this morning are Mark Sutton, Chairman and Chief Executive Officer, and Glenn Landau, Senior Vice President Finance and Incoming Chief Financial Officer.

During this call we will make forward-looking statements that are subject to risks and uncertainties which are outlined on slide 2 of our presentation. We will also present certain non-US GAAP financial information. A reconciliation of those figures to US GAAP financial measures is available on our website.

Our website also contains copies of the fourth quarter and full year 2016 earnings press release and today's presentation slides. Lastly, relative to the Ilim JV, slide 4 context around the joint ventures financial information and statistical measures. With that, I'll now turn the call over to Mark Sutton.

Thanks, Jay, and good morning everyone. Thank you for joining us this morning for our call. Before I get in to the slides I wanted to acknowledge that while, as Jay mentioned, Glenn is joining me to review our results and outlook this morning, Carol is also here with us in the room along with other members of the Senior Leadership Team at International Paper.

So, I'm on slide 5 -- make some opening comments. Before we go through the quarter and full year results, I wanted to make a couple of comments about the incident we had at the Pensacola Mill last week. And first and foremost, we are very thankful that no one was injured in this incident.

Our priority is on the health and safety of our colleagues, contractors that work with us, and the residents of the community. We're doing everything we can to help restore the surrounding community and get things back to normal as quickly as possible. I'd like to thank everyone involved for their extraordinary efforts and commitment over the past couple of weeks. Glenn will provide more details later on the call as far as impact and our outlook for Pensacola.

So, as we go back to the content of slide 5, International Paper delivered another year of strong performance with free cash flow, $1.9 billion and a return on invested capital of about 10%. Nicely exceeding our cost to capital. We made substantial progress on many fronts.

We further strengthened our North American Industrial Packaging business, we completed the acquisition of the Weyerhaeuser pulp business in December which we have combined with IP's Legacy pulp business to form our new Global Cellulose Fibers business. We converted a machine at the Riegelwood Mill from Coated Paperboard capability to Fluff Pulp, which gives us the capacity to grow both Fluff and high value specialties pulp products within the larger, more capable, new cellulose fibers platform.

In Europe we acquired a top quartile mill asset in Madrid, which we will convert later this year to light weight, high performance recyclable Containerboard to support our European box business. And finally, we finalized the sale of our Asia industrial packaging converter business further focusing on strengthening the IP portfolio.

On the capital allocation front, our Board of Directors authorized 5% increase in IP's annual dividend moving it to $1.85 a share and making it the fifth consecutive year of a dividend increase. Now while 2016 didn't play out exactly how we had envisioned, a year ago as we were sitting here talking about the year, I feel good about what we accomplished and how we executed in a pretty tough global environment. As we go through the call today, an outline where we are now and the key catalysts that we have for 2017, we have line of sight to grow our EBITDA this year by 10%.

So on slide 6, and turning to the full year financial results, just talk a bit about a few of the metrics. The majority of the revenue decline that you see on this slide is attributable to the sales of the Sun JV and Asia Box business, as well as the sale of our coated bristols brand and that business.

Lower earnings were primarily due to margin pressure across most of our businesses through most of 2016 along with escalating input cost in the latter portion of the year. We did see signs of strengthening in some of our key markets in the second half of the year, which enabled us to announce and implement a number of price increases across various businesses that will all benefit us in 2017. Debt levels were increased through 2016 primarily to fund the pulp acquisition and as we've commented on previously, our priority in 2017 will be debt reduction.

Moving to slide 7, IP continued a strong and sustainable -- it shows trend for suitable free cash flow in 2016. This gave us the horsepower to execute our strategy, creating value for our shareholders.

Moving to slide 8, we also delivered another strong year of return on invested capital, solidly above our cost of capital. This is our second consecutive year with an ROIC spread to our weighted cost of capital more than 200 basis points and seven straight years of ROIC above our cost of capital. I'm going to now turn it over to Glenn and ask him to cover the performance across our businesses as well as provide an update on the balance sheet and our outlook. Glenn.

Thank you, Mark, and good morning, everyone. It's great to be here.

Let me just begin by extending my sincere thanks and enormous congratulations to Carol Roberts who is sitting here beside me as she used closure of this chapter of her professional life and to (inaudible) in the next.

And as I know I can speak for so many here in the room and across the company, as well as many on the line today, you've made a difference for International Paper and have positively impacted so many of our (inaudible) leadership and support. So, Carol, all the best and we will miss you.

Now, back to business. I'm on slide 9, which is our full year operating EPS bridge from 2015 to 2016. As Mark already shared, year-over-year earnings were impacted by price erosion and weaker mix across many of our businesses this past year, driving a $0.70 unfavorable swing versus 2015 levels.

Biggest movers were Containerboard for export, global pulp and boxes in North America, which declined modestly through the first three quarters of the year, largely precipitated by the January 2015 index increase. All prior to our implementation of our October box price increase late in the fourth quarter.

Volume was a net positive for the year, primarily a function of improving North American box demand. Operations, despite solid and improving performance across our mill system, were a drag on earnings in the year and have been impacted by several items including our Riegelwood fluff pulp conversion and ramp-up, Hurricane Matthew, and a significant non-cash LIFO inventory re-evaluation associated with our October Containerboard increased implementation.

And while lower input costs were a tailwind for much of the year driving a net positive, we saw a meaningful shift in that trend over the last few months of 2016 as many inputs began to turn higher. We'll get more in to that later in the call as we speak to the outlook.

So, moving across the bridge, a lower effective tax rate and interest expense combined for a dime of improvement, and Ilim contributed to the positive largely driven by FX. And lastly earnings association with our acquisition of Weyerhaeuser's pulp business, in the month of December, added $0.03 to the year.

Now turning to slide 10, International Paper delivered solid results in the fourth quarter supported by increase in box demand and higher prices of Containerboard and boxes in our North American Industrial Packaging business. This all against the backdrop though of fallen pulp prices and rising input costs, primarily OCC and energy.

On the operations and costs front, continued solid mill performance was unfavorably impacted by seasonality. And what I mean by that is higher consumption of energy and raw materials associated with colder temperatures, as well as a handful of non-repeating items including the impact of Hurricane Matthew, our year-end LIFO inventory re-evaluation, as I mentioned in the previous slide, and as well as higher expenses related to medical claims in the quarter. All of which, if you remember from our third quarter call, were expected and part of our outlook.

Further the Ilim JV delivered another strong quarter of results with operational EBITDA of $180 million. And strategically we closed the acquisition of Weyerhaeuser's pulp business marking the beginning of our newly combined Global Cellulose Fibers business segment, of which the integration is off to a great start and we're delighted to welcome 2,000 new colleagues to the IP team, creating a preeminent, Global Cellulose Fibers business in this dynamic and growing space. It's a long way runway of value creation so more to come on that.

The quarter-over-quarter bridge on slide 11 depicts what I just said. High prices for Containerboard and boxes in North American Industrial packaging were offset by lower pulp prices in IP's Legacy pulp business. And despite four fewer shipping days for North America box shipments, volume was flat sequentially due to a higher daily demand for boxes of 5% in the quarter, which was really meaningful.

Operations and other costs were down $0.18 quarter-over-quarter, about half of which was due to seasonality, mainly higher energy consumption, and the other half due to non repeating items as I described on the previous slide. If this were a headwind, that OCC continued to escalate as we exited the quarter.

Turning to the businesses and starting with Industrial packaging on slide 12, initial benefits of the price increase were realized as expected in the quarter. The domestic Containerboard increase was fully implemented, up to the $40 index move, and North America box prices were up $4 per ton on average quarter-over-quarter. Volume was strong but higher Containerboard exports and better than expected daily box demand rate only partially offset the impact of four fewer shipping days though.

In operations and other costs, our largest business the brunt of the previously mentioned non repeat items and input costs were higher with OCC accounting for half of the total impact with an increasing trend driving a higher exit rate than average in the quarter.

The next slide on 13 is intended to provide some additional color on how we're thinking about 2014 full year benefits associated with the October 2016 domestic Containerboard and price increase. Starting with the upper left hand portion of slide, you can see that IP has roughly 10 million tons that are within the scope of this announced increase.

9 million tons of US integrated box business and about 1 million tons of domestic Containerboard sales. So the simple math here, given the $40 expectation I referenced earlier, is about $400 million annualized. While we expect to realize $400 million in absolute terms, there are several factors to consider relative to the year-over-year earnings impact.

Moving your attention to the graph on the top right, and factoring initial benefits we saw in the fourth quarter, year-over-year exit rate US box prices remain below fourth quarter 2015 levels. As we report quarterly independent, North American box prices on average are down $18 per ton versus the fourth quarter 2015, largely due to the impacts related to the $15 per ton index reset in early 2015 and normal erosion we see prior to our October increase.

So, roughly half of the expected increase benefit essentially goes to price restoration and, considering the rising OCC cost escalation trend, another material portion of the increase just covers this headwind. All that said, the increase execution is moving along smoothly and we expect full implementation by the end of the first quarter.

Okay, now on slide 14, I'd like to turn to our newly combined business, Global Cellulose Fibers, which beginning with this fourth quarter release will be reported as a standalone business segment. As you can see on the map the combined business has a solid fleet of mills strategically positioned across the southeast US along with a couple of specialized processing facilities in Mississippi and Poland.

In addition we have acquired a highly capable and competitive northern [softwood craft] mill in Alberta, Canada. So in total, IP's Global Cellulose Fibers business has a combined 3.6 million tons of capacity for softwood and fluff pulp, as well as other specialties applications and is extremely well positioned to serve our global customers in these attractive and growing segments.

Looking forward, given our current fixed utilization depicted in the pie chart in the top right, there are significant product mix upgrade opportunities to fluff and our specialty products, as well as installed incremental fluff capacity post our Riegelwood conversion to grow with our customers' increasing demand. So, with this exciting combination, IP could not be better positioned to take advantage of this very attractive global markets.

On slide 15, just as some background, I'm taking a closer look at global fluff pulp markets, we have a nice mix of both established and higher growth emerging markets geographically and a wide range of products with different levels of maturity in the marketplace. So for example, North America and Western Europe continue to grow in line with expecting population trends, while emerging markets like Asia, Latin America and the Middle East will drive most of the growth rate expected to be 4%.

Primary applications for fluff pulp are spread between baby diapers, feminine hygiene and adult incontinence products and with our additional capabilities of the Weyerhaeuser system, we have the technical and human resources, as well as the manufacturing capacity, to drive innovation and product development in to other high value specialties in the pulp space that will provide further growth opportunities beyond those reflected here.

Turning to slide 16 and taking a look at our pro forma results for the combined business, there was a significant reduction in earnings from 2015 to 2016. This was primarily due to two factors. One was the costs associated with the Riegelwood conversion and ramp-up in our Legacy business, which amounted to roughly $80 million in 2016. The other was price and mix erosion, which was experienced evenly across both Legacy businesses, as both softwood and fluff prices came under pressure in 2016.

Further, IP saw the negative mix impact associated with the Riegelwood capacity, which ramped up our market softwood pulp in the second half of 2016 as we were working toward fluff qualification with our customers. So a negative mix effect there.

The outlook for 2017 is a mix of both favorable and timing-related unfavorable items with a slant to positive. To the upside we have the expected demand growth, the synergy opportunities, and our recently announced price increases for softwood and fluff pulp products.

But, clearly exit rate prices for 2016 were lower than average prices for the year and the large extended average in capital investment project underway at the Port Wentworth mill had a significant cost impact in the quarter. With that said, this large project to upgrade the recovery boiler, turbine and power system at the mill has attractive energy savings benefits and we'll enjoy those, following completion, for years to come.

On 17, back to the integration, you can see the synergy opportunity and associated timeline for realization of the newly combined businesses. There are three major buckets of synergies: overhead, commercial mix improvement, which are both fluff and specialty opportunities, and a large bucket of manufacturing, supply chain and sourcing opportunities that we will leverage.

Looking at the chart on the right, you can see the expected ramp-up and run rate targets for year end 2017 and 2018. We expect a run rate of $100 million in synergies by the end of this year adding approximately $50 million to earnings for 2017.

One-time costs will be treated as special items and are expected to be around $85 million, of which about half were expense from December and the balance will be spread over this year and next, all will be treated as special items as I just said.

Related to synergies, we know how to do this. We've done it before. The teams are off an running, have line of sight to the target and we'll work hard to exceed expectations.

Turning now to the consumer packaging business on slide 18. We had a light quarter as we saw continued price pressure in elements of the folding carton segment and on plate stock along with seasonally lower volumes. Operations were as expected, but costs were higher due to seasonality. Planned maintenance averages were also higher given the planned techno outage.

Now moving into Printing Papers, slide 19. As we said earlier, given the new Cellulose Fibers segment, reporting for beginning this quarter will no longer include pulp. In terms of results, price mix was impacted primarily by higher export sales out of North America. However we experienced good volume mainly due to seasonally stronger volume in Brazil.

Operations and costs were negatively impacted by a challenging operational quarter at a couple of our European mills, Hurricane Matthew in North America, and seasonably higher operating costs and higher medical claims in the quarter that I mentioned earlier. Planned maintenance outage expenses were higher in the quarter and we experienced some unfavorable FX impacts in Brazil due to the strengthening real.

Now moving to Ilim on slide 20, the JV had another strong quarter, capped off what we consider a great year. All three mills set production records for both periods, the quarter and the year, and strong demand primarily in China led to higher sales volume in the fourth quarter with total volume up a little over 5% for the full year.

Looking to the first quarter, JV expects modest pulp price improvement to be more than offset by normal seasonality, resulting in lower sales volume and higher input costs, primarily wood. Additionally the board of directors at the JV has authorized a cash dividend to be distributed in March of which IP will receive $100 million.

Moving to the balance sheet on slide 21, IP experienced a step up in leverage ratios in 2016 as you can see, primarily due to increased debt taken to facilitate the pulp business acquisition, but also impacted somewhat by our lower EBITDA performance. Our pension gap decreased by $200 million as we made voluntary contributions totaling $750 million in the year, some of which was offset by a 30-basis point decline and discount rate by the end of the year. However, the discount rate did improve significantly in the fourth quarter as we exited the year versus prior quarter trend, so really better than it could have been.

The additional debt taken on this year largely to fund the acquisition, was done (inaudible) tranches at an average interest rate of 2.7%. Our plan as we work to pay down debt to restore leverage ratios in line with our target within the next two years will be to take out new (inaudible) cost debt.

Okay, (inaudible) matrix and before I speak to the specifics regarding outlook for the first quarter, I'd note that given the evolving situation at Pensacola, our matrix does not reflect any of the impacts associated with the mill interruption. But I will speak more to that following this slide.

So back on slide 22, starting with price and specifically we expect to see significant benefits from implementation of the North America price increase in both domestic Containerboard and US box in the range of about $70 million. For volume, additional shipping days in North America will be largely offset by a lower daily shipping rate and we expect earnings from the additional volume from the first full quarter of the acquisition in Cellulose Fibers to also be offset by normal seasonal decline in Brazil. So net-net, flattish in this volume bucket.

Within operations and costs, the non repeats of the impact from the one-off items from the fourth quarter, remember the hurricane, LIFO, and medical claims, are expected to be a benefit for $30 million for packaging and $20 million for papers in the coming quarter. So the red that jumps off the page are our underlined plans, maintenance outage expenses in the quarter, which would be $102 million higher sequentially, so really just timing along with the addition of outages associated with our expanded cellulose fibers business.

Input costs are expected to increase primarily across North American operations by $40 million versus the fourth quarter driven largely by OCC and natural gas. And finally, relative of a couple of the items in the other categories, we're expecting a higher tax rate in Q1, around 33%, so back to a more normalized level. And results at the Ilim JV are expected to be lower primarily due to seasonally lower volume and seasonally higher input costs.

So, turning to slide 23, let me provide a brief update on the Pensacola mills digester incident, which occurred on the evening of Sunday, January 22, and for those of you not familiar with the digester, it's a large pressurized vessel that cooks wood chips, turning wood chips in to un-bleached cellulose fiber. And relative to the incident, the digester vessel failed, causing separation of its top and associated damage to the adjacent powerhouse due to flying debris.

At the instant of the failure, the pressurized contents within the digester, primarily raw pulp, water, and pulping mister, were released to the surrounding areas. Thankfully not a single person at the mill was injured. And of course our immediate response was to ensure the health and safety of our employees, contractors, and neighbors, in and around the site.

We accomplished this and shortly after, the following day, a unified command was formed, including representatives from the Escambia County health department, the Florida Department of Environmental Protection, the US Environmental Protection Agency, as well as International Paper. The unified command took full control and led the development and execution of plans to clean the impacted areas and to address community concerns.

At this point we have already made significant progress on the cleanup and will not stop until the area is restored. In terms of our progress towards bringing the mill back to an a operating state, earlier this week we restarted the powerhouse and resumed partial operations of the pulp line, which is supported by a different set of smaller batch digesters.

Today we continue to ramp up production of fluff pulp and expect to be fully online by the weekend. Relative to Containerboard though, repairing the damage of the continuous digester will take some time. And while we're working toward a firm estimate, what we do know now is that startup will not take place in the first quarter. We'll continue to use our extensive Containerboard mill network to meet customer needs over the next several weeks.

As you can appreciate, just 10 days post the incident, it is difficult to estimate the full financial impact as well as the timeline associated with this situation. With that said, we know there will be major costs incurred. In this quarter and beyond and at this point we expect the total impact to be in excess of $50 million. This will not be a special item. But we do have property damage and business interruption insurance that we expect will cover a significant portion of the costs.

Relative to our insurance, we will have a deductible up to $20 million which you can say, essentially, that's a cap on our exposure. With that said, timing of the insurance recovery will be uneven and there will likely be some lag associated with getting our claims covered. Net-net, we see this all trued up by year end.

Finally, the (inaudible) year digester, which was the primary equipment impacted, is fully depreciated so no write-off will come with at least this primary piece of equipment. So, given the evolving nature of the situation, we commit and plan to provide a more specific estimate of timing and costs publicly before the end of the quarter, so more to come on this.

Lastly on slide 24, here we have some of the key financial metrics we normally provide to build a picture of our planning assumptions for 2017. CapEx will be higher at around $1.5 billion, which includes the expanded Cellulose Fibers business, approximately $100 million of the delta, as well as the mill conversion in Madrid. We expect 2017 depreciation also to be up to roughly $1.4 billion, including $140 million of depreciation carried over from the recently acquired pulp assets.

Interest expense is impacted by our hard debt profile and corporate items and our effective tax rate will stay within normalized levels into 2017 based on what we know today. Also given the escalating input cost backdrop, we have included our current view relative to this impact year-over-year in the range of about $180 million to $200 million higher in 2017. And as this item we see this as directional only, and we note that there's no likely incremental risk, as many of these items are already looking to be pushing the upper end of the range.

So with that, I will turn it back over to Mark.

Thanks, Glenn.

What I'd like to do on the last slide of our prepared remarks is wrap up with our focus for 2017. We expect, as I mentioned earlier, to continue the trend of strong cash generation and returns above our cost of capital. And as I mentioned in my opening remarks, given what we know today and the catalyst we have in play, we have line of sight to grow full year EBITDA by 10%.

We have great opportunity to integrate our newly acquired pulp business, drive synergies and improve our overall mix. The acquisition brings us great people, best in class assets, and second to none capabilities. Together with IP's business, we'll create significant value for our customers and shareholders over time.

We expect higher earnings in our North American Industrial packaging business due to benefits from the previously announced price increase, growing demand from our customers, and our own internal improvement initiatives. We also expect to improve margins with continued strong operations and ex-tensive cost reduction efforts across many of our other businesses.

Everything is on track for our planned conversion of the Madrid mill in the second half of the year, which will enable a better offering for our customers and earnings improvement for our European Industrial packaging business. The Ilim JV is well positioned for another strong year of performance.

And with the strong free cash flow that comes from all of this, we'll continue to allocate capital to create value with a near term focus on debt reduction. I feel good about how International Paper is positioned and the opportunities we have in front of us that we're working on.

With that, I'd like to open it up for questions.

Thank you. (Operator Instructions)

Our first question comes from the line of Anthony Pettinari of Citi.

Good morning and best wishes to Carol and Glenn in your transitions. In terms of box shipments I was wondering if you'd give us color on how those trended in the first weeks of January, and then given the outage in Pensacola, I was wondering if you could talk about how comfortable you are with your inventory levels? And if you could give any additional color on what steps you're taking in your system to meet customer needs.

Hi, Anthony. It's Tim. On box shipments, January was pretty strong for us. We don't have final numbers just yet, but absolute we think will be somewhere between 4% and 5% and roughly flat on the daily. Everything that we saw in the fourth quarter continued over into January.

In terms of Pensacola, obviously, first of all, we're fortunate that we've got such a great team and we've got such a really good manufacturing system for Containerboards. So we've got one mill down. Our inventories, we had told you in the fourth quarter, were tight and we're already managing a very complicated supply chain.

Having said that, we've got tremendous flexibility in the system we have so we're looking at all our options as to how we accommodate the capacity that we need and make sure we keep our customers with product. I don't think that's going to be a problem in the first quarter. So, we're lean and we're running hard but I think we've got a lot of options around the other 15 mills in the United States to make sure that we're meeting all of our commitments.

Okay. That's helpful. And then regarding the first quarter outlook for Cellulose Fibers, you've got a headwind from higher outages and some higher costs but you've got also the Weyerhaeuser acquisition and price hikes and synergies. I guess my question is, would you expect that business to be profitable in the first quarter or maybe closer to break even following the loss in 4Q?

Hi, Jean-Michel speaking. We expect it to break event for Q1, that are very heavy (processed) quarter. So, that, except with the (inaudible) that cut out. Despite all of the positive things going on (inaudible) I would say break even.

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

Our next question comes from the line of Mark Wilde of BMO.

Good morning. First question is if you look at where you stand at the end of the first quarter, from a price cost standpoint in the Containerboard business, the benefit of the autumn hike and then the increase and costs that we've seen over the last six to nine months, are you going to be ahead or behind where you were, say, last spring?

Hey Mark, it's Tim. We'll be behind from a margin standpoint. I think price increase, as we exit the first quarter, will probably have 85% to 90% of the price increase implemented and we expect a full realization, the offset obviously is the pressure that we've seen with input costs.

Okay. All right and then as a follow up, I just have a trade question. I just noticed that Brazil has raised its import duties on fluff pulp from 4% to 14%. It looks to me like this is an attempt to allow (inaudible) to ramp up its new fluff pulp mill and enter the fluff market.

I just wonder from a trade standpoint, is there anything you can do about this? You're the biggest pulp producer in the world and it seems like the government down there is just trying to help the Brazilian producers enter this market by providing them a closed market for a little while with this tariff.

We just learned about that tariff. So, we're just trying to clearly understand why and how it's affecting us (inaudible). I understand your concern in general, we are more for fair trading and free exchange. Don't know exactly what are their motivation with (inaudible) from that one. I understand your comment I think.

My point is just -- you've tied a lot of capital up in the fluff pulp business and this is pretty clearly an attempt to prime the pump for some new entrance.

For us it's not a big market in (inaudible) of that in Latin America. So, just specifically if you asked us to -- we're not expecting a big impact on the (inaudible). So I understand on the context. But on the reality of the numbers, it's (inaudible) a very, very small impact.

Okay, great. I'll turn it over.

Our next question comes from the line of Mark Weintraub of Buckingham Research.

Thank you. I just wanted to follow up to make sure I understood, Tim, your comment that margins would be lower at the end of the quarter, going out of this quarter, than they had been last spring. That puzzled me a little bit.

Maybe you could just clarify. I assume what you were talking was that the impact of the prices falling at the beginning of last year, combined with the cost inflation would offset or outweigh this single-price increase. I just wanted to make sure I understood what you're saying.

Yes, I think that is right, Mark. Looking at it year-over-year you remember the price was published down in January. But that had a bit of a delay as it rolled in based on contracts. There's a lot of contracts that get impacted, and then we had more favorable input cost in the first part of last year than certainly we had at the end of last year and that's continued into the first quarter of this year.

Okay. On Pensacola, just one clarification, too. Does the $50 million number you threw out there, and for that matter the way business insurance coverage would work, on the opportunity cost of tonnage that didn't get produced that you were making money on, A, is that included in the $50 million, and how would that get treated by insurance if at all?

Again, that $50 million is an estimate and that's a greater than $50 million -- but to your specific question, Mark, this is Glenn, yes, business interruption, lost sales, mix, freights, all those factors would be covered by the insurance after the deductible.

Okay, great. Thank you.

Our next question comes from the line of Philip Ng of Jefferies.

Hey, guys. First off, congrats Carol and Glenn in your new role. Carol, it's been a pleasure working with you.

My first question was really around your 10% EBITDA growth target mark. Was that off the pro forma base on apples to apples bases with Weyerhaeuser acquisition and does that account for the impact from Pensacola?

Philip, hi. The 10% comment is including Weyerhaeuser so that is one of the caveats that I mentioned. And then the improvement in the rest of the company, those two put together, we have line of sight.

I haven't factored in a big piece of Pensacola based on Glenn's comments one what we think it might end up being net-net given the insurance and all that. But no, it was pre Pensacola and it included Weyerhaeuser.

But just to be clear, the 10% base, 2017 versus 2016, does the 2016 number include Weyerhaeuser on a pro forma basis, or is that just -- ?

No, it's from an actual -- closed on the deal in December so we didn't have any Weyerhaeuser number in our 2016 results. So, it includes Weyerhaeuser going forward.

Okay, that's helpful. Then on your consumer packaging business, there's been some continued pricing pressure on the folding carton side of things. Can you talk about that dynamic, how you're thinking about pricing going forward and are you starting to see that stabilize in light of potentially some concerns from imports on the FPB site? Thanks.

Hi, this is Cathy Slater. Clearly we're monitoring the (inaudible) but this is the first year we actually have seen any meaningful decline in our ability to export. But overall, with the changes we've made internally with Riegelwood we're very pleased with the mix that we have and feel like we're very well positioned with our current footprint. Our focus will be really on what we can control which is operating wells, managing our costs and also meeting our customers' expectations.

(Operator Instructions)

Our next question comes from the line of George Staphos of Bank of America Merrill Lynch.

Hi, everyone. Thanks for taking my question and again best wishes to Glenn and Carol. Thankfully no one was injured at Pensacola but I wanted to ask some questions around that or a question around that.

Can you talk about at this juncture what the lead times would be required to restore the continuous digester back to its pre incident state? And do you expect that, on an interim basis, you might be able to use some of the batch digesters that you use on the fluff line to produce Containerboard?

And then the related question would be, Tim, in answering one of the other questions, I forget who asked it, you said you should be able to fulfill customers' needs on products through the first quarter. Did that suggest that as the year progresses, if you maintain this level of progress as we get in to seasonally higher periods that you might have more challenges with that? I just wanted a little bit more clarity on those two things.

Sure. First on the first part, what Glenn covered earlier is really the estimate we have at the moment. We're pretty well convinced that we will not be starting back up in the first quarter. The startup will fall outside.

We've got more work to do only being 10 or so days in to it. (Inaudible) feel comfortable with our exact estimate but I think as we go through the quarter, we'll know that and we'll be able to update everyone accordingly when it happens.

To your question on batch, it's not our plan. Our focus is getting the continuous digester back up and getting the line back up the way it's configured to run. In terms of customers, you're right, I don't think we have any expectations at this point in customers in the first quarter. A little hard not knowing exactly the estimate as we go out in to the second quarter, but at the moment I think we'll be okay.

We've got any number of options in terms of how we can manage the system and we're exploring all of those and starting to put plans in place. I'm pretty confident the team is going to respond very well. I think we'll be in good shape. If anything were to change in a material way of course we'd update.

Tim, I appreciate that. If I could just ask a quick follow-on just for clarity, lead times on some of this equipment can't be three months, right? Some of this would likely take a couple quarters. Is that an inaccurate statement? Again any color you can provide would be helpful. Thank you, guys. Good luck in the quarter.

I'd say for the extent of the damage we have and those pieces of equipment, I can't tell you when it will happen. I know it won't happen this quarter but we don't have any indication that it's going to be in the second half of the year that we're still working on this. I think we've got the ability to replace the equipment that was damaged in a shorter timeframe.

Understood. Thank you, guys.

Our next question comes from the line of Gail Glazeman of Roe Equity Research.

Just starting off, can you give some perspective on OCC, what you think has been driving it and are you seeing any signs of leveling off or stabilization?

Hey, Gail. It's Tim. It's a little bit difficult to know. I think some of the things that you'd look to, would be the usual suspects.

China demand has been stronger. We do know that during the course of last year there was some disruptions in Chinese internal OCC recovery because of floods and production issues and other things. So, who knows.

Here in the US, generation has been a little bit of an issue and I know people have mentioned the impact of e-commerce and supply chain seeming more fragmented in terms of box collection recovery. I think the big question though, not knowing exactly where it will go as we leave the first quarter and go in to the second.

The big question in my mind centers around China and how close they might be to practical recovery limits of internal OCC to the country. And if they are starting to bump up against that, then their OCC demand will have to be filled from other parts of the world.

Okay. Are you seeing it in the short-term? I think there have been some reports that China prices were leveling off. Is that translating into the US?

We haven't seen anything as (multiple speakers) and you have to keep in mind, Chinese New Year and the impact. And so, I don't think we'll know. There was fairly heavy buying ahead of Chinese New Year, we'll have to see what happens when they come out of the holiday and machines start starting up again.

Okay, and Tim can you give some other perspectives on demand, obviously you're seeing fourth quarter trends carry into the first quarter but some broader perspective on what you're expecting in boxes for 2017. And maybe specifically touch on what you might be thinking about for California ag in the short term and the medium term just given all of the wet weather out there?

Yes, it's been better. Certainly the rain has helped. There was some pretty easy comps though. So, you have to keep that in mind. We saw strong performance in our agricultural segment in the fourth quarter. No reason to believe that it won't be strong in 2017.

Just from a segment standpoint, we also saw processed foods recovering. Our fourth quarter was pretty good on that front. Protein, which after coming off a couple of years of issues that various segments (inaudible) were working through, we saw the beginnings of recovery there as well.

So we're in the midst of updating models for 2017. I think everything we've seen so far, we're still in the 1% to 1.5% range and really haven't seen anything that would make us think it's going to be less than that.

Okay. Thank you.

Our next question comes from the line of Steven Chercover of D.A. Davidson.

Thanks, good morning, and congratulations to everyone. First of all on Pensacola, we understand that Containerboard is off line for the first quarter, but given that the margins are better in Containerboard, could you run the machine in slow motion with the batch digesters in the long run or is it just too much of a mismatch in machine size?

I'm no technical expert but I think there'd be a lot of plumbing and rerouting of things. I don't think it's the most efficient thing for us to do. The best thing for us to do is focus on getting the fluff line up and running. We have commitments to customers that Jean-Michel could talk about, so we're going to work on that as a priority and then continuous digester up and running as efficiently and quickly as possible.

Got it. And just my quick follow up. We know you're about a third of the overall domestic Containerboard market. And if I recall, you're about 50% of Amazon's supply. So, can you just give us an update on how quickly eCommerce is growing versus traditional box business?

Yes, I don't want to comment on any specific customer. We service a broad range of online and distribution customers in this space. It's growing rapidly. I'd say fourth quarter I think we were up about 10%, just eCommerce distribution combined. And we expect that trend to continue.

Thank you, Tim.

Our next question comes from the line of Mark Connolly with CLSA.

Thank you. A while back we heard a lot about the changes in postal rates to take into account volume. Can you tell us how that's playing out now that you've actually been through a holiday season and whether you think it's going to continue to shift a whole lot? We're certainly not seeing it in my houses, my boxes are all coming in and they're mostly air.

Mark, hi. This is Mark Sutton. We've not seen a big impact. I think part of the calculus on that is the total cost of the delivery and the need for some of the online shippers to value propositions will get it to you quickly and there's always a trade-off on labor costs and supply chain costs versus a little bit of waste in the box and the volume pricing. I think markets tend to find an efficient solution.

And obviously, I think in the future we'll probably have less air in the boxes but I believe right now it's a trade-off of postage and all the other costs it takes to pick and pack and ship and get it to customers right away. But I think any time we've seen inefficiencies over time in a product or supply chain, you tend to sort them out. And we work on that all the time proactively.

That's super helpful. And just one quick question. You mentioned the pickup in volumes in your Brazilian white paper business. I wonder if you can give us a little more of a sense of local demand and supply demand balance down there?

Hey, Mark, this is Glenn. The fourth quarter is seasonally the strongest quarter for Brazilian paper. What happens there essentially, that's the build for the new school year that starts in the southern hemisphere and essentially in late January after Carnival, so it's a build for that demand pull. Net-net though, it was just seasonal demand.

While we saw some signs of growth in the third quarter, this is going to be a slow recovery in Brazil. We're not seeing or feeling incremental demand associated with recovery at this point and I think that applies as well to packaging. At this point in time, steady, not going backwards, but no real economic driven demand growth.

Very helpful. Thank you.

Our next question comes from the line of Brian Maguire of Goldman Sachs.

Good morning. Thanks for taking my question. Mark, on the comment about a line of sight to10% EBITDA growth, would you say that's the bottom end of the range of expectations you have for 2017? And if so, what things could maybe go right that isn't in that 10% number that could drive it a little bit higher?

I wouldn't think of it as the bottom end of the range. I think it's a reasonably good line of sight to what we know now based on what we have in our economic projections, what we see coming out of 2017 which has been discussed a little bit, rising Containerboard and box prices still very strong robust demand. A catalyst for the Weyerhaeuser acquisition and our own internal targets for improvement, that aren't always commercially related.

So I'd say it's more of a -- as we sit here on February 2 with a reasonable set of outlook assumptions, it seems like something we have line of sight to. Maybe that's a long-winded way of saying it's a mid-case but I think we feel pretty good about being able to do that, again given some of the specific catalysts we have.

Appreciate the color there. Just as a followup on slide 16, you talk about some of the pro forma change in Cellulose Fibers, EBITDA. We don't have the walk like we do with some of the other segments on the EBIT. So, I was hoping you could shed some light into what drove the decline there and related to that, when you acquired the Weyco, the Weyerhaeuser pulp business, you mentioned about a $350 million of EBITDA. Obviously it's lower at this point, but could you give maybe an updated forecast on where that stands, recognizing, of course, you'll get the $175 million of synergies on top of that. Maybe just an update on where that business is now. Thanks.

Hi, Jean-Michel speaking on the GLobal Cellulose Fiber, let me say that 2016 for both Legacy and Weyerhaeuser, was a year (inaudible) trust, where (inaudible) especially from the end of 2016 that's coming to impact the contract all around the year. So, that had a big impact on the results of 2016 and probably stopping point of 2017. And then we have the $18 million as you know of the Riegelwood startup, so that impacted 2016.

How do we see 2017? We see a good demand so far. I would say it's stronger than we expected. We are seeing strong ramp-up of the synergies.

So, if you take off the $350 million, which was the target of roughly what we had combined business, we are a little bit above that on a normal cycle I'd say, plus the synergies. So, if we take another look of the combined business before synergy and more on white collar, a normal price environment, we are in the $350 million to $400 million, to which I would add the synergies. So, I know we are a bit far from that, but we feel very comfortable we are going to get there.

Thanks very much.

Our next question comes from the line of Chris Manuel of Wells Fargo Securities.

Good morning, gentlemen and congratulations to Carol and welcome Glenn. If I could follow up a second on the last question, just to get -- I'm not trying to pin you to forecasts or things of that nature but if I kind of think of where the run rate should be for the cellulose fluff pulp business, when we think of coming out of 2018 or in to 2019, starting in your $350 million-ish base and with what you had in your existing business and synergies, something with a $600 million-plus of EBITDA, is that still a reasonable target to think of?

Yes, it is. That's our target actually.

Okay, that's very helpful. With regard to Pensacola, thinking about the mix and what you have down there, that was a place where you were making some board and some fluff as it said, having the incident, does that potentially make you rethink what the long term opportunity or right product to make out of that facility is?

No, this is Tim. I think we like what we have especially on the Containerboard side, fluff pulp operation is very good as well.

Okay, that's helpful. Thank you, guys.

Ladies and gentlemen, we've reached the allotted time for questions. We do have time for one final question. It will come from the line of Chip Dillon of Vertical Research.

Great. Thank you. And best of luck to you, Carol, and good luck, Glenn, good to hear your voice again.

Question I had was looking at the consumer packaging business, which is I know been gradually eroding for a number of years and it's a very competitive business. Away from you there's been more and more consolidation and I just didn't know what you thought about that, especially the last move might actually affect some of your tons given that I don't think you do much converting. Could you talk a little bit about how you see the strategic importance of that business and should there be any change?

Chip, hi, this is Cathy. I'd say that yes there's clearly been actions we've taken ourselves looking at what the future would look like with the change at Riegelwood but I'm not sure how much you are aware that we do actually supply a lot of our own packaging material into food service and we see a good customer support for that business with some really major customers and with our other product line that leads the Texarkana and Augusta facility.

That is some areas that we are continuing to work to find good high value homes for that. At this point, like I said earlier, our focus with the change in footprint is on making sure that supply chain is healthy and able to meet the customers' needs in a safe and a way to add value back to IP.

I see. I meant not converting cups. And then this last quick followup, Glenn, do you expect to need to make, if interest rates stay where they are, would you expect to make another pension or would it be desirable to make another pension contribution this year or next?

As you know, we'll keep all our options open but we do not have any required pension contributions in either one of the years you referenced, so not this year or next.

I see. Thank you.

Ladies and gentlemen, that was our final question. I will now turn the floor back over to Jay Royalty for any additional or closing remarks.

Thanks, everyone. That wraps up today's call. I appreciate you joining us this morning, and as always, Michelle and I will be available after the call to answer additional questions. Our phone numbers are on slide 26. And with that, have a great and safe day.

Thank you, ladies and gentlemen. This does conclude International Paper's fourth quarter and full year 2016 earnings conference call. You may now disconnect.