International Paper Co (IP) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2017 International Paper Conference Call. (Operator Instructions)

It is now my pleasure to hand our program over to Guillermo Gutierrez, Vice President of Investor Relations. Please go ahead.

Thank you, Kristen. Good morning, and thank you for joining International Paper's Third Quarter 2017 Earnings Conference Call. Our speakers this morning are Mark Sutton, chairman and Chief Executive Officer; and Glenn Landau, Senior Vice President and 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-U. S. GAAP financial information. A reconciliation of those figures to U.S. GAAP financial measures is available on our website. Our website also contains copies of the third quarter 2017 earnings press release and today's presentation slides.

Lastly, relative to the Ilim JV, Slide 4 provides context around the joint venture's financial information and statistical measures.

With that, I will now turn the call over to Mark Sutton.

Thanks, Guillermo, and good morning, everyone, and thank you for joining our call. I'm going to begin today's presentation on Slide 5.

International Paper delivered strong results in the third quarter, with earnings growth across all of our business segments. These results were driven by continued solid business fundamentals and price realization, particularly, within our North American Industrial Packaging and Global Cellulose Fibers businesses. Our Global Cellulose Fibers business also generated $52 million in synergies, which contributed to solid margins for the business in the quarter. Our papers business delivered solid results as well, underscoring the resiliency of our overall portfolio.

Unfortunately, our operations were impacted by 2 hurricanes during the quarter. And even as our teams managed the recovery extremely well and safely, often through very challenging personal circumstances, it was nevertheless a significant headwind in the quarter.

We also faced record high OCC prices in the third quarter, with average prices $14 per ton higher than in the second quarter. Our Ilim JV delivered solid operational results, driven by strong underlying demand and price realization.

And yesterday, we announced a strategic decision to transfer our North American Consumer Packaging business to Graphic Packaging. I'd like to take a few minutes to share some thoughts regarding this announcement.

So turning to Slide 6, I'd like just to start by revisiting how we think about strategy and value creation and how that framework shaped our decision to transfer our business, our North American Consumer Packaging business, and to essentially invest in a stronger Graphic Packaging. Quite simply, our strategy is to create value in fiber-based packaging, pulp and paper by establishing what we call advantaged positions and serving attractive markets. What this means is that when we choose the right products and the right markets and the right customers in those markets, and importantly, when we execute successfully, we create the most value for our shareholders.

So turning to Slide 7, when you look at our North American Consumer Packaging business, we have a talented team of people, very good assets and really great customers. However, we also realize that our business does lack the overall scale and broad portfolio offering and the integration levels between board and converting required to grow value in this segment today. At the same time, we recognize the strong potential of the Consumer Packaging space overall and wanted to find the best way to participate and create the most value for our shareholders.

And so after evaluating a range of strategic options, we concluded that putting the business together with Graphic Packaging could unlock the full potential of our business today. And at a high level, we're transferring the business and establishing an ownership interest in Graphic Packaging through a very tax efficient structure that captures the greatest value for our shareholders.

IP is investing in a strong Consumer Packaging platform that is well positioned for long-term value creation. We are creating option value in the Consumer Packaging space while we remain focused on growing and improving our core businesses.

And with that, I'll turn it over to Glenn, who will walk you through the details of the transaction and the rest of our third quarter performance discussion. So Glenn?

Thank you, Mark, and good morning, everyone. I'm speaking now to Slide 8 in the presentation, which outlines the key points of this transaction that combines our North American Consumer Packaging business with Graphic Packaging.

First and foremost, we considered a $1.8 billion consideration for our existing Consumer Packaging business to be an excellent value for International Paper shareholders, given the implied multiple of 8.6x our adjusted 2017 estimated EBITDA for the business. We believe strongly the transaction captures the underlying value of North America Consumer Packaging business today, while also allowing International Paper to participate in value-creating potential of the combined entity going forward.

Regarding the specifics, IP is contributing our North American Consumer Packaging business into a subsidiary of Graphic Packaging that will hold the assets of the combined businesses for $1.8 billion in the form of an ownership position in the new entity of 20.5%, which was valued at approximately $1.14 billion at the time of the agreement and has appreciated by approximately $70 million by the close of trading yesterday. We will also receive $660 million in cash proceeds from a new loan that will be assumed by Graphic Packaging.

The agreement incorporates a 2-year lockup, whereby IP cannot sell its ownership interest in the partnership and a 5-year standstill whereby IP cannot increase its ownership interest. From a financial pro forma standpoint, we expect this transaction to be earnings neutral to slightly accretive for IP in 2018, and it's also important to note that no current cash taxes are due at the time of the transaction, given the efficient tax structure we put together. Further we intend to use the $660 million cash proceeds to pay down existing debt, ultimately keeping the transaction leverage-neutral.

Going forward, we expect to receive dividends of approximately $25 million per year beginning in 2018 based on Graphic Packaging's current dividend policy.

So let me sum up this discussion by saying that we feel very good about this agreement, which should close in early 2018, pending customary regulatory approvals and conditions, and International Paper is investing in a new, stronger and premiere Consumer Packaging platform that's well positioned for shareholder value creation, while further enabling our company to be focused on growing meaningful value in our core businesses of Industrial Packaging and cellulose fibers.

So now back to the quarter. Turning to Page 9 to review our third quarter financial results. The company delivered solid margin expansion and free cash flow during the quarter, driven by healthy demand across our businesses, price realization and lower seasonal maintenance outages.

In terms of the quarter-over-quarter bridge depicted on Slide 10, we saw significant price lift in the quarter, mainly driven by our North American Industrial Packaging business as well as continued pricing momentum in Global Cellulose Fibers. Volume was down sequentially with 1 less shipping day in our North America box business and seasonally slower demand in Europe.

Our North American mill operations were impacted by the 2 hurricanes resulting in a $30 million higher cost in the quarter, which we do not expect any insurance recovery on.

Maintenance outage expenses were lower and input costs were sequentially higher, driven mostly by record high OCC prices, which peaked in the quarter.

Corporate and interest expenses were also higher and effective tax rate is more favorable due mainly to investment tax credits on energy projects. And lastly, earnings from our Ilim JV were strong on improved pricing and favorable FX.

Now turning to the businesses, beginning on Slide 11, earnings in Industrial Packaging improved sequentially on continued price realization and lower maintenance outages. Pricing in our North American box business flowed through as expected and the 2017 spring increase is effectively complete. We also continue to benefit from higher pricing and flow-through in export containerboard markets.

Volume again was lower due to 1 less shipping day in North American packaging versus the second quarter as well as seasonally softer volume conditions in our EMEA Packaging business.

As we said, our operations were impacted by 2 hurricanes, with a net impact just to Industrial Packaging of $20 million during the quarter. Beyond the hurricanes, our mills were also affected by certain isolated reliability issues, which combined put additional cost pressure on our system which continues to run full to meet a strong demand.

Input costs in the third quarter were also higher, driven by record high OCC prices and marginally higher wood, chemical and distribution costs associated with the impact of the hurricanes. And lastly, the business received $5 million in insurance proceeds related to Pensacola during the third quarter.

On Slide 12, we've outlined some of the details of our recent announcements to convert our #15 paper machine at the Riverdale Mill from uncoated free sheet to high-quality virgin white top containerboard. This, again, is an excellent example of our strategy that Mark outlined, to establish and leverage advantaged positions in attractive markets and to grow value by investing in high return projects that support growth in our strategic segments.

Further, given our refocusing of resources to our core businesses, this project will be funded within our existing annual capital investment -- allocation run rate. We're aiming for a mid-2019 start-up, which is timed well given our outlook on incremental demand.

Now on Slide 13, our Global Cellulose Fibers business delivered very solid results as well in the third quarter. Earnings improved $45 million, driven by better pricing, lower maintenance outage spending and strong synergy realization despite having to -- having overcome a $5 million headwind from Hurricane Irma.

All in, we're very pleased with the progress in Global Cellulose Fibers, which improved to a 19% average EBITDA margin in the quarter, again, exemplifying our commitment to allocate our resources to growing profitable businesses. Project to date, Global Cellulose Fibers is performing well ahead of our initial acquisition financial model expectations.

Turning to Slide 14. As you can see, our Global Cellulose Fibers business delivered very strong synergy realization performance in the third quarter, capturing $52 million across the enterprise, including approximately $17 million onetime benefits for tax credits related to the energy projects I spoke of earlier.

All in, we have high confidence in our ability to continue to deliver synergies at a faster rate than originally outlined, and we also want to take this opportunity to reaffirm our new synergy target of $200 million, which we view as an essential pillar to the sustained earnings potential of the business.

Moving to Printing Papers, results came in better than expected, driven by improved price and mix, particularly, in our Brazil business, as well as continued price realization in European papers. Maintenance outage expenses were significantly lower in the third quarter as expected, while input costs were impacted by higher fiber and energy.

On Slide 16, as you can see, our Consumer Packaging business results improved sequentially across all components of the financial bridge. Commercially pricing continued to improve on realization of the April's 2017 price increase and planned mix upside was delivered. Lastly, maintenance outage expenses were significantly lower in the quarter, again, as expected.

Moving to Ilim, the JV, again, delivered solid results, driven by higher pricing which was partially offset by lower volume related to the Bratsk maintenance outage, and equity earnings also benefited from a noncash FX gain on the JV's U.S. denominated debt.

So let me now turn to Page 18, this is our outlook for the fourth quarter. We expect to see flow-through benefits from the spring 2017 North American containerboard and box price increase as well as further price realization in export markets, which in the fourth quarter alone should amount to an incremental $20 million.

In Global Cellulose Fibers, we anticipate additional price realization and mix benefits of $15 million on continued strong global demand, particularly, in China. We also want to note that Brazil papers -- in Brazil papers, we expect an additional $10 million earnings on better seasonal mix.

On volume, our North American box business will be unfavorably impacted by 1 less shipping day even as we expect demand to remain very strong. Across our other businesses, we anticipate stable volumes with some modest seasonal improvement as noted in the heat map for a total benefit of about $15 million.

In operations, our North American Industrial Packaging business will improve by $35 million, as we put the hurricanes and other operational issues we discussed earlier behind us. Within our Global Cellulose Fibers business, operating cost will be modestly higher and planned maintenance outage expenses across the entire enterprise are expected to increase by $11 million in the fourth quarter.

Input costs, again, in North America Industrial Packaging are expected to improve by $35 million quarter-over-quarter. This is driven by lower OCC costs, but partially offset by higher wood and chemical costs. Across our other businesses, we anticipate $15 million in higher input costs, partly driven by the lingering effects of the hurricanes, primarily in wood and chemicals.

Lastly, in the other items category, we included our refined outlook for corporate expenses, interest expenses, tax rates and equity earnings from Ilim JV.

So to close, on Page 19, for me and before I hand the call back over to Mark, we wanted to address our capital allocation priorities. While we speak often about our balanced use of cash approach, it all starts with strong cash from operations, and we remain confident in our ability to continue to grow our cash generation.

With that said, in the near term, we are clearly in a deleveraging mode following our pulp acquisition last year, as we aim to bring our leverage back to less than 3x debt-to-EBITDA on Moody's adjusted basis by the end of next year. And as noted earlier, the cash contribution of the Graphic Packaging transaction was structured to ensure we have no obstacles and a clear path toward meeting our balance sheet commitments.

At the same time, within the quarter, we also took material risk off the table with targeted moves inside our pension plan, including the recently announced annuity purchase that essentially transferred $1.3 billion in pension benefit obligations to a highly rated retirement benefits provider. All this enabled us to continue to increase our dividend.

Earlier this month, we announced our sixth consecutive annual dividend increase since restoring it to prerecession levels in 2011, keeping with our commitment to a competitive and sustainable dividend as earnings and cash flow expand.

And lastly, we will continue to reinvest in value-creating projects, and -- with a healthy spread above the cost of capital, such as the Madrid and Riverdale conversions we have discussed in detail.

So in summary, the takeaway here is that we are confident in our cash generation and reinforce our commitment to a balanced use of cash as we enter 2018.

And with that, let me turn the call back over to Mark.

Thanks, Glenn. International Paper is well positioned for a strong fourth quarter and with solid results across the board and solid cash generation. We continue to see healthy global demand across our key businesses, and we expect additional margin expansion from our first half pricing initiatives.

On input costs, we expect some relief from record high OCC prices in the third quarter, with some offsets on seasonally higher wood as well as higher chemicals and energy. We also anticipate another quarter of strong synergy generation in our Global Cellulose Fibers business and a seasonally light maintenance schedule across our mill system. Net-net, we are optimistic for a solid performance in the fourth quarter, with excellent cash generation and a very strong year for International Paper.

With that, let me open it up for questions.

(Operator Instructions) Our first question comes from George Staphos with Bank of America Merrill Lynch.

Just housekeeping, folks. I just want to double check on the bridge sequential that you provided, unless I'm double counting something, I kind of came up with something between $0.15 and $0.20 sequential pickup in earnings fourth quarter versus third quarter. Is that in the ballpark or did we miscalculate something?

That's roughly in the ballpark. There's certainly sequential uplift, George, quarter-over-quarter.

Okay. Second question I had regarding Consumer, obviously, you're putting the North American Consumer business into the venture with Graphic Packaging. When we think about Kwidzyn, obviously, that was part of Consumer, it produces a lot of different grades, but one of them was coated board. What's the role of Kwidzyn in the strategy for International Paper on a going-forward basis?

George, that's a great question. We do have a board machine at Kwidzyn. We also have one at our Svetogorsk mill in Russia. They serve targeted segments that are generally in the Consumer Packaging. That's not part of this transfer into Graphic Packaging. And when we think about what we do in Europe, we have -- we serve a number of markets, Packaging, Industrial and Consumer, uncoated free sheet, we make boxes. We don't do any Consumer Packaging converting. And really, when you look at mills in countries like Poland and Russia, you tend to have the model where you use the wood advantage and you make some of the products that the market needs locally in all kind of segments. So that's still an important part of our EMEA paper and packaging portfolio.

Okay, Mark. My last 2, and I will turn it over. One of the things that we were picking up at a recent industry conference is -- and we're seeing a little bit in your results here as well, some building impact from inflation throughout the supply chain, everything from input costs to labor. Can you comment on that? And to the degree to which your customers are beginning to ask you, maybe mostly in the box and containerboard business, how you might be able to help them either with the systems or machinery approach or some other approach that help them take cost out of the supply chain and how are you dealing with inflation as well on your business? And then Riverdale, a little bit more costly conversion than what we've seen in the most recent round of conversion. I know white types -- white top is a consideration there. Is there anything else that we should consider in terms of the capital cost per ton on that conversion?

George, it's Tim. On Riverdale -- I'll start with that -- start with Riverdale, and then I'll go back to your -- the previous question, and Glenn may have something he wants to add. But on Riverdale, we know that internally a machine is not a machine, a mill is not a mill, and so it depends on what you're trying to do. This is going to be a 2-ply sheet, it's a bit more of a sophisticated -- I mean, we understand it, we've done it before -- but sophisticated investment. And when you look at it on an annual ton basis, we still think it's very attractive with very attractive returns. So we're going to be making a white top liner, not a brown product as the lead product on the machine. So I think it's understandable on that basis. Your inflation question. I mean, just from a box standpoint and Industrial Packaging standpoint, we work with our customers all the time on trying to help them take cost out of their system. And we do it through a number of means. We have technical experts inside. We're either looking at case erecting equipment or we're looking at process flow. So it's pretty much ongoing. And we don't often talk about it, but just in general inflation internally to the business, we have a significant lift every year that we have to try to cover and then have initiatives that create value on top of that. So I'm not familiar with the conference you're referencing or the comments, but that's just a little color on what we do.

Tim, the internal inflation, I'll let you go here, what is that roughly? Can you remind us?

It varies from year-to-year, but it's significant. I mean, it's over $100 million, so. And in recent years, medical costs have jumped up a little bit. So it's not uncommon for us to have $120 million to $130 million of just general inflation built into the business that we have to cover.

George, this is Mark. Just a final comment on inflation. One of the things we target in our internal improvement is something we call nonprice initiative. So reliability improvements in our manufacturing operation and cost improvements in all our business processes. We target to overcome that internal inflation at a minimum and maybe in some cases do better than the internal inflation. And then we work on input costs and all of that with our commercial terms. So it's part of our philosophy of how we need to operate every year. One last comment on Riverdale. Capital costs are also relative to what system you're investing it in. And the way we look at this is this will be the 17th containerboard mill in our world class system. So the investment in Riverdale also enable savings in other parts of the system that don't show up in just a capital cost per annual ton. We are currently buying bleached fiber to make white top in a mill that was designed to make brown linerboard. That mill will now be free to make brown linerboard. So there's system effects when we have a system our size that the capital cost per ton can be a little deceiving.

Our next question comes from the line of Steve Chercover with Davidson.

I had a question on pulp actually. It looks like the pulp price realizations are up $33 a ton year-over-year, with presumably a richer mix. But list prices are up easily $100. So evidently the discounts are growing, and I guess, question one is, is there a pent-up pricing that we're going to see in the future that we're going to start to catch up with realizations?

Steve, Jean-Michel speaking. I think there's a couple of things to look at. First of all, there's a big mix effect too in the price of pulp because you get a price which includes fluff, which includes softwood, in general. So sometimes it doesn't appear really like it is because if you just take fluff, our realization is more like $65. So it's kind of higher what you have here. The other thing is we -- when we take -- what happens usually in the market, but what happened this year is after the contract negotiation in '16, that's a question of rebate or whatever. In general, the prices went down in Q1. So when we compare to last year, you have to be careful because you have the drop of $20 in Q1, that we have tendency to forget. So if you take December to today or quarter-to-quarter, you have the increase we've done plus the drop which we make up for. So the actual price increase realization is more than $65.

Jean-Michel, does it make sense to reduce the discounts so that the realizations are closer to what the lists are?

So -- to be honest with you, this is a -- it's complicated and complex question. Some customers wants to work with an index. And the reason is relatively logical, which is because we do multiyear contracts. And they feel that it's better with an index. But I'm not always sure that an index and discount is the right way to make price. Even if -- when you look at long term, ultimately it comes to the same number. But we don't sell any on the index. Let's not forget that we have a lot of customers, which are list price quarter-to-quarter or monthly price, so the mix of contracts and list price is always another difficulty to do. But I understand your point. This being said, as of today, we haven't found a better way to look on very long-term contract pricing. That doesn't mean we're not trying to find one.

Got it. Okay. And then just a quick one on the Graphic Packaging deal. So I guess, we're going to create a second equity earnings line similar to Ilim, and you'll get a $25 million annual dividend. Is that the way to model it?

There will be an equity earnings line, and we'll also get, from a cash basis, a $25 million dividend.

Great. And if you were to monetize it -- and it looks like a great investment, in couple of years, would you get 64 million shares in GPK plus the 4% cash component?

So essentially, it would be broken down. So [19%] of that would be in shares and the remaining would be in cash.

I was thinking it was [16% or 17%].

Our next question comes from Mark Weintraub with Buckingham Research.

One -- obviously, wastepaper OCC has been very, very volatile. I wanted to get your take as to what you're seeing currently and what would you expect to happen in the months ahead?

I'm sorry, Mark, that was for OCC?

Yes.

Mark, Tim. I don't know that my crystal ball or our crystal ball is any better than anyone else's. I think that we believe that there may be some elements in the China market that are starting to buy again. I think there was a period of review, given permit levels and making sure that no one exceeded permit level in China for this year caused a bit of review and may be a cessation of some part of purchases. And now it may be some of that is starting to come back as we approach the end of the year. But I think the full effect of what's happened in China is still rippling through the North American market. So in big picture terms, I think OCC goes higher. It's hard to put an exact time on it until we see exactly what China does around, not only reissuing permits, but at what levels.

And do you have any intelligence on where that dialogue on contamination levels in particular might be? And if, in fact, where do we at the 0.3%. What type of capability do you have in your system to, for instance, bring OCC to meet those levels and then how might the market play out if in fact the very aggressive limits on contamination levels were to be put in place?

That's a great question. I think it's a bit of wait and see. I don't know that we would say we have any differential capability that anyone else does not have. It's a challenge, though. It's very low level. I think it's going to impact some grades of waste fiber more than others, obviously. But it's very low and I don't know how that ultimately gets worked out. So...

So Mark, let me add just a little bit. This will settle out given the importance of this input material for the global packaging business. So, for example, if capital is needed to better screen OCC at different quality levels and the economics are there, because by not doing it, you've eliminated part of the supply, the capital will be spent. There are other ways to manage fiber quality -- the fiber quality gradient by treatments on recycled paper machine. So my view is this is a really important long-term input material for the global packaging business. And as the market grows, the fiber quality will be stretched. And over time, you will find capital solutions or other types of workarounds to manage a different quality of fiber, just like you manage in some cases different qualities of virgin wood fiber. And so there's an engineering solution to most of this that the economics will drive.

Makes sense. And 2 real quick ones. Can you tell us where your box prices were exiting the quarter versus where they were on average versus the quarter? And then maybe just what current demand trends through the first 2 weeks of October in containerboard and corrugated board?

Demand has been good. We're having a very solid October so far. It -- and you know, it's a tough comp, given what happened seasonally last year. When we exited the quarter higher on pricing, we were probably $8 to $10 above what the average there is in the appendix. And we think we're getting full realization on both the $40 from last fall and the $50 from the spring. If you recall, there's a little bit of -- it's customer by customer, but some customers were not impacted by the published down early last year. And so instead of getting $40 or $50, they got $25 to $35 depending on the movement. The other thing is it did not apply to all time. If you're looking at the number and thinking that it's below the $90, there is still a little bit more realization to go. And some of the segments like agriculture, pricing was already set as price increase announcements came through and so that will catch up over time.

Our next question comes from Brian Maguire with Goldman Sachs.

Last month, obviously, some of your competitors quoted a price increase in containerboard. And I know you guys make your own determinations on price. Obviously, you chose not to participate in that. But just wonder if you could comment on what the decision-making process was like there and your thoughts on the ability to pass through some of the inflation that you're seeing in some part of the business now?

Yes, we don't talk about forecasting price going forward. I can share a little bit about the type of internal dynamics in general that we look at when we consider pricing. There's a number of macro factors that go into that consideration. But it's not just a numbers exercise. We try to think both tactically and strategically about pricing and how we want to manage through cycles. So we're looking at a number of factors, OCC, cost being one of them. And trying to take into account -- at the end of the day what we're trying to do is we're trying to grow margin sustainably. And so all of the decisions that we take, whether it's commercially or operationally, is about creating value and doing it on a sustainable basis.

Okay. And a question on Riverdale. I was wondering if you could comment on what made that the right asset to convert and once the conversion is done, where do you think that it will -- where you think its cost position will lie against your other containerboard assets versus the North American industry in general.

Yes, good question. Well, we like Riverdale. It's a good mill. It's in a good fiber basket. And it's got good access to all the geographies that are important to us. So we like the mill a lot. We've got a great team there. And so we're excited to have those team members become a part of Industrial Packaging. What was the second part of your question, I'm sorry?

Just a sense of where you think, like, maybe a quartile-wise, it will fit on the cost curve yet?

Well, yes, comparing brown and white really doesn't make a whole lot of sense. From a white standpoint, we think it will be first quartile. So we get a cost advantage. It's going to be a very high-quality sheet. So just everything about it, look at it, as Mark said, it does free up other machines that were producing white top for us, they will now produce brown, so we get a benefit there as well.

Okay, one last one. Any initial thoughts on 2018 maintenance expense or capital -- CapEx numbers?

Yes. This is Glenn speaking. Again, we'll lay out the full view of 2018, either later in the quarter or after the end of the year. But as we look at our outage schedule into next year, we have a heavy outage schedule coming at us as we move -- continually move forward into our 18-month outage program. So net-net, we can expect higher outages next year, but we did not quantify that for today.

Our next question comes from Gail Glazerman with Roe Equity.

In terms of the Graphic Packaging deal, is there any significant kind of corporate -- like overhead that might kind of be stranded with the company? Like do we expect a fairly higher corporate line next year just as you work through that?

I think you're right on target, Gail. Certainly there will be some stranded overhead that we're going to put our energy around mitigating to the largest extent. We will plan to keep that at the corporate line next year as we work it down. We haven't quantified that exactly yet, but that's an expectation that was factored into all the analysis.

Okay, but you'll quantify it as they start modeling next year. And just about the outages and issues that you had in containerboard between Pensacola and Orange this year, can you just give us any sense of where you are with your inventories? And where you might think you'll be kind of as we enter next year?

We've been tight all year, Gail. In fact, it's -- starting with Hurricane Matthew last fall, and working through that and then Pensacola has managed now 2 hurricanes that impacted 2 different containerboard mills. So it's tight. We're managing it. We're getting better at how we manage it. I think we are on steady footing at the moment. And I expect us -- when you run tight, you build capability, and so I think we have demonstrated to ourselves that we can run with lower levels than we've carried in the past. One wrinkle in all of that is what's happening with the transportation markets, which have been somewhat disrupted due to the same influences, but also a lot tighter given what some of the rail lines are doing around business model but also trucking. So when supply chain delivery time start stretching out, then we need to start working with more inventory to support our network.

Okay, and maybe just one last one. I don't think you quantified, but can you give any sense of what your box shipments have been doing year-on-year through what you've seen in October to date? I appreciate it's a tough comp, but...

Tough comp, but we are running on an absolute basis of about 4% so far through the month. So it feels very strong to us right now.

Our next question comes from Chip Dillon with Vertical.

First question has to do with the Riverdale conversion. If you could give us the timing of when that starts to switch over from white paper? Is it going to be one like 3-month or 2-month period, where you're doing all the work or are you going to stage it like one of the other conversions we know about? And then secondly, that's a lot of white top at once, are you planning to tweak your system where maybe you'll focus more on your white top production at Riverdale and deemphasize it elsewhere or how should we think about that?

Chip, it's Tim. That's exactly the play. Move it from where it's being produced today, get a better cost structure, get a very high-quality sheet and then free up those assets that are currently running it today to run other products. So, that's exactly the play. On the conversion, we said mid-2019. The long lead time on all of that is finishing the detailed engineering, getting the equipment on order, getting the equipment delivered, getting everything ready to go from a project standpoint. The actual conversion really doesn't take that long, 30 to 45 days and it can come off of uncoated free sheet and be back up on containerboard.

Okay, and then one other quick one. When you look at the pulp situation, I know there was a question earlier, but -- and you mentioned discount. I would imagine that varies when you restrike contracts. And if you could just remind us -- I understand that about maybe 1/3 or so, maybe 40% are actually renewed or subject to renewal each year, and that's when that discount is addressed and I would imagine there's some movement there based on where the market is overall at that time. Is that a fair way to look at it?

Jean-Michel speaking, again. Yes, you're correct. We're in the middle of -- almost at the end actually, the contract renegotiations. Some are more than 1 year. So every year, roughly we do have 30% to 40% of our contracts, which are being renewed. It's really customer per customer because it will depend on the volume they want, the product they want, the mix. So it's difficult to give a trend. I would say so far renewal, which is the most important because it shows the confidence from our customers, is going very well. So I think that's the first thing. That means the customers are satisfied with the new GCF, and this is what we wanted to achieve first and foremost. And then customer per customer, really it varies tremendously.

Our next question comes from Mark Connelly with Stephens.

So, in your white paper outlook, you called the outlook stable in most places. I'm curious what your expectation is for white paper imports? And I was also hoping you can give us a sense of what the demand looks like from the Brazilian white paper perspective.

Mark, I'm going to ask Mike Amick, who runs our -- most of our paper -- white paper business globally to take a shot at that. Mike?

Thanks, Mark. Mark, welcome back. Yes, on demand from an import standpoint, as you know, North America is down about roughly 20%. We saw that continue in the third quarter. And with respect to the outlook, I don't know that it will change a whole lot. We also, with respect to building demand, and particularly across Latin America, we posted 2 positive quarters in Brazil domestically, but the sale is about 0.5%, so it continues to be a little on the light side. I wouldn't call it robust. We do -- are moving into a seasonally stronger period, and we expect to see that pickup in demand right now both across the Americas looks pretty good as we kind of close out the 3rd week in October.

Okay, that's super helpful. And just -- I'm sorry to come back to Riverdale again, but as you move that white top to Riverdale and reoptimize at the other mills, is that going to actually free up productive capacity as well?

Yes, absolutely right, Mark. We currently produce white top at 2 other Mills in our system, and we would move all of that to Riverdale and then have the benefit of producing other products in those 2 mills.

And as you produce those products, is that going to reduce your changeovers, et cetera? And will that actually increase the capacity of those assets?

It will increase a little bit. Incrementally it's just we'll be producing products that are easier to produce and so we should be able to squeeze a little bit more volume out of those 2 mills.

Our next question comes from Chris Manuel with Wells Fargo.

Just a couple of follow-up questions here. One, if I could come back to that cellulosic business. Jean-Michel or Mark, whichever of you want to take this. Just so I make sure I understand this right. When we look on a year-over-year basis, there is somewhere between $130 to $160 per ton higher for various grades, whether it's SBSK, fluff, et cetera and You guys produce about 4 million tons there, just a tick under. When we think about -- and appreciating that some of that, may be $20 is already down or some movement in there, I mean, there could be directionally $100 million of price lift year-over-year, that could be a $400 million swing. Help me understand how that might phase in or help us scale and size what the opportunity may be appreciating that maybe not everything happens in 1 year and you talked about indices and different components, but, I mean, it sounds like a pretty big swing and help us understand how this phasing could occur.

Yes, so let me come back. We produce roughly 3.5 million metric tons. I'm always in metric tons. This was in metric tons when I started. At most -- we have on that about 65% fluff and specialty and 35% market pulp. So they, as you know, move differently. The market pulp moves faster. Even if in the NBSK from Grand Prairie, we work a lot with contracts too, because NBSK from Grand Prairie is very, very well appreciated. When you look at -- a bit on prices compared to when we started the year, it's big. It's already in our number now that you can see it does create an amount which is maybe not far from the number you mentioned. And it's a known number now. I don't think there may be a little bit more if Q4 continues to be strong like that. So yes, it is a strong dynamic. I mean, if you take 3.5 million and you get just $20, an increase at $17 million, so any increase in pulp is very strong for us.

Are there not kind of contracts, for example, on the 2/3s that you make that's in the fluff side? Those are generally locked for a year and then they get reset the following year? Or -- I guess where I'm going is I don't feel like that's all been realized when we look at spot versus contract in the numbers. So is there another substantial step-up perhaps in '18? That's what I'm really trying to get at.

No, you won't have in '18 from what we've announced in '17. '17 what we've announced will be done by the end of the year. When we have contracts that move, they -- even if they are for 1 year, they're -- most them, most of them, again, is generality. The quarterly revision will index. So the time you get it, it's sometimes 6 months that you get it. And so far, most of our increase have been on the first half of the year. So we're getting it this quarter, we still look at another $15 million, and we're planning to get, on average, another $10 million or something like that, all grades included for next quarter.

To get the average annual cash.

Yes, the average annual cash will be there, yes, because we've been very strong in the second half if you compare to first half.

Okay. I'll follow up a bit later. One other question I kind of wanted to touch on was when I look at your corrugated business, it looks like you were -- perhaps, Tim, you can help me with this -- you were down a couple of points in the quarter. I think the market was up a couple of points. Was there something in particular about your mix, particular customer mix? Or we kind of expect that to go back towards market levels as you work through the next couple quarters?

Yes. We were actually -- yes, I mean, like any point in time in the business, like converting, there's things moving in and things moving out. So we have taken some decisions that hit us earlier. We also have some new business that's coming in that hasn't been fully ramped up yet. So I attribute it to -- I attribute it to just timing, and you'll see our growth numbers go up as we go through the next couple of quarters with those wins coming in.

Was there anything potentially hurricane-related that you had a bigger footprint to a region or something of that nature, but...

A little bit. But it was -- it hit us for about 7,000 tons. So big enough, but not significant in a way.

Our next question comes from Adam Josephson with KeyBanc Capital Markets.

Mark or Jean-Michel, just a couple on pulp, if you don't mind. In terms of the Chinese mills using more pulp in lieu of OCC at the moment, how sustainable do you think that is and why?

That's a very big question because I think it's sustainable in the condition of -- because they don't have the choice right now. I'm sure if they had more OCC or recycling product they could use, they would probably mix it up. So it's more a question of is the OCC or is that the recycled products going to be more available in China than anything. In terms of is it possible, it is. Actually you see in China that all grade prices are going up. So it's not only pulp or OCC. It's all the grades because pulp and other raw materials are more expensive. It has gone through and the prices are up. Is it sustainable? I can't tell you that. I don't know. Really no idea. I mean, if we stay that we are today in terms of what's going on with the imports or what's going on with the government limiting the recycler, it could stay for some time.

Right. Related question, Jean-Michel. I mean some producers -- pulp producers have talked about these global pulp market conditions being the best they have been in a decade, just given all the supply disruptions and the additional Chinese demand because of the recycled fiber import restrictions. How sustainable do you consider these conditions just based on all these unusual supply disruptions, the China situation, et cetera?

So I'm going to separate, if you allow me, market pulp and fluff pulp. Because in fluff pulp, we don't see that impact. Fluff pulp is into end-consumer consumption and they use fluff, they cannot swing from something to another. So the fluff pulp market worldwide continues to be very wealthy with a 4% to 5% growth. And we are growing about 4% to 5% as the market. So I think this is one thing you have to separate from the market pulp. The market pulp is today, probably, I would say more shake-up than it should be because there's a lot of things as you're mentioning, both from the demand standpoint and from the supply standpoint, which are all going out and tightening it up. How long it's going to last, I don't have a crystal ball, I don't know. But I do think with time, that pressure should not be as big as it is right now.

And one last question about fluff versus market. Over time, fluff and softwood have moved roughly in tandem with each other, do you have reason to think that will not continue to be the case? And if so, why?

So I think it is always a question of supply-demand as you know. And they will have some trend, but fluff is always much less cyclical. So when the market pulp goes very, very high, very, very fast, we go, but because not so fast. And when the market goes down, we don't go down as fast either. So it's a less cyclic market. Then of course, you have some products with some mill, which can go from fluff to SBSK, for example, so that can impact one market or the other. So this is more why I think you've seen some trends following each other. I kind of think that with time, it could be that, that link separates a little bit more.

Our next question comes from Debbie Jones with Deutsche Bank.

I wanted to go back to Industrial Packaging. I think you addressed some of the questions on price/mix and the hurricane impact. Could you talk about Europe and Brazil specifically? I think Europe was a bit lower than I was expecting and then just kind of the outlook for both of those regions going forward.

I can start with Brazil. Yes, we had a slightly better quarter, which was good to see in Brazil. Volume was a little bit better. We have actually been performing quite well on a volume standpoint. Our operations ran very well during the quarter in Brazil as well. We're nowhere near where we want to be, but it seems like the economy was starting to pick up a little bit more and volume was beginning to recover.

And on the volume recovery, do you have any sense of what specifically is improving and driving that? Because there's been a lot of comments about the backdrop in Brazil improving, and I don't see a lot of answers to what specifically is driving that.

We took a little bit of hit early in the quarter on [protein], given all of the disruption from the news that you -- I'm sure you've seen related to some of the political scandals. But that didn't turn out to be as bad as we thought it might and actually recovered through the quarter. But it's fairly broad-based, just seems like economic activity is picking up broadly in Brazil over the past quarter.

And Debbie, in relation to the EMEA question, you're correct, a couple of factors, one is the seasonality in the third quarter that we spoke to relative to box demand. The other factor is we are in the full conversion of the Madrid mill and we didn't have any -- or we didn't have material newsprint sales or production in the quarter, which put some stress on fixed cost absorption.

Okay, so when we look to 2018, then I'm assuming that European contribution becomes positive in that aspect.

Yes.

Okay, and then just final question, you talked a bit about the $210 million EBITDA for NA Consumer, but -- and you're going to quantify the corporate later, but were there any other onetime items that you could call out? I think there was something maybe related to maintenance to help us just understand the deviations that we're already noticing?

Inside the $210 million adjusted EBITDA that we're using, it was largely Augusta, Debbie.

And can you quantify that?

In the quarter, it was $15 million to $20 million.

And we have time for one final question this morning. Our final question will come from Dr. Mark Wilde of BMO Capital Markets.

Mark, you've got 2 businesses now that are going to be reported below the EBITDA line, and I just am curious as to whether this is making you think any more about potentially kind of raising your stake in consolidating Ilim going forward?

So Mark, the Ilim joint venture is, as you know, a very, very well advantaged business. And we continue to be happy with that investment and with our partners, and we will continue to grow that business together. The ownership structure, if we change it ever, will be done cooperatively and collaboratively with our partners. But having it below the line, isn't the driver, making sure it's the right thing to do for value creation. But I understand what you're saying around getting full recognition for that powerful EBITDA generation. And that's strategically, as we kind of think about what advantaged positions means, that's one of the criteria we look at is what's the best way to structure it and make sure that it's properly recognized and that our investors can see it for what it is.

Okay. Just another one. Glenn, can you just help us with the transaction yesterday. You guys monetized that position 2 plus years down the road. What's the tax implication there?

Okay, so essentially if we sold the business outright, we would basically have a [1.2] tax basis on the $1.8 billion, we'll pay 38% of that. On any appreciation above and beyond that down -- 2 years down the road, we do have a tax receivable agreement in place, so that would allow us to get an offset since there would be a -- there we would have a gain, but the JV would also have a tax basis step-up in the amount equal to that gain realized by us. So basically, Graphic would pay us the NPV of 50% of that gain back. So there's an offset on the accretion of the deal on taxes that we would pay if we exceeded our original tax exposure less the basis.

Okay. And then just a couple of things on containerboard. Can you tell us, Tim, did you get any benefit from that summer corrugating medium hike?

No, it's fairly neutral to us. We do purchase a little bit of medium through trades. And so it has a modest negative impact, but it's not -- it's not substantial by any means. And most of our contracts of the box side are in terms of price pass-through and whatnot are linerboard-based. There's a few that have a medium component, but not many.

Okay. Then, can you -- with regards to Riverdale, can you just help us think about sort of potential conversion of that second machine down there at some point, how you're thinking about that?

I think that it gives us tremendous optionality. So we look out in time, and there's still good demand on the uncoated free sheet side of the business for #16, but we have the option at a point in time, further down the road, of thinking about other uses for it.

Are there any inefficiencies in trying to run it as a split mill right now or going forward?

No, we do that in a number of places across the system where we have a landlord and tenant making multiple products. We know how to do that. So I don't -- it actually works quite well in terms of covering all the fixed costs that are in there and everything. We did look at a point in time what a conversion would look like and so we know that and it's just a matter of understanding what the business need is to support our customer growth at a point in time.

So Mark, one thing interesting about Riverdale, it's a little really unique from most of our mills. It was built by Hammermill and it was built as 2 distinct process lines. So many years later, it makes the conversion to one product on one line coexisting with another product on another line, actually a pretty good fit versus mills that were built to be multiline mills with a common pulp mill and a common back end. So it's really working in our favor now.

Yes, that actually gets to the question I was kind of -- I was really curious about. Finally, any thoughts about potentially converting white paper over to containerboard down in Brazil?

That's not on our radar screen right now, given the -- two things, one, it is probably the best place in the world to make high quality uncoated free sheet, and it's -- we competitively export it around the world. And two, you've got to look at the forest and most of the Brazilian softwood is spoken for, it will take a long time to plant and grow and we've got mostly eucalyptus forest. So the fiber basket is really conditioned for hardwood base grade, so at least in the near future.

That will conclude our Q&A session for today's call. It is now my pleasure to hand our program back over to Guillermo for any additional or closing remarks.

Thank you. And thank you, everyone, for taking time to join us this morning. As always, Michele and I will be available after the call for -- after this call. Our phone numbers are on Slide 21 of the presentation. Have a great day.

Ladies and gentlemen, thank you for participating in the Third Quarter 2017 International Paper Earnings Conference Call. You may now disconnect your lines.