International Paper Co (IP) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter and full year 2017 earnings conference call. (Operator Instructions)

I will now turn the conference over to Mr. Guillermo Gutierrez. Please go ahead, sir.

Thank you, Crystal. Good morning, and thank you for joining International Paper's Fourth Quarter and Full Year 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 fourth quarter and full year 2017 earnings press release and today's presentation slides. Lastly, relative to the Ilim joint venture, Slide 4 provides context around the joint venture's financial information and statistical measures.

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

Thanks, Guillermo, and good morning, everyone. Thank you for joining International Paper's Fourth Quarter and 2017 Full Year Earnings Call.

I'm going to start on Slide 5. International Paper delivered a strong year of performance in 2017. When we entered 2017, we said it would be a year of 2 halves, and we made a commitment to a strong second half performance in order to deliver more than 10% EBITDA growth for the year. I'm very pleased to share with you today that we delivered 16% EBITDA growth in 2017, excluding the Consumer Packaging business, which we are reporting as discontinued operations. The 16% EBITDA growth includes 10% of organic earnings growth and 6% of earnings growth related to the Pulp acquisition. Including Consumer Packaging, we delivered $3.9 billion in EBITDA in 2017 or a 13% year-over-year growth. Our performance was driven by excellent commercial execution across our businesses and solid synergy realization in our Global Cellulose Fibers business.

We continued to grow value for our shareholders with an ROIC of 10%, solidly exceeding our cost of capital. We also made substantial progress on many fronts, including the outstanding integration of our Global Cellulose Fibers business as well as accelerating strategic investments for growth in Industrial Packaging. We also made an important strategic move in Consumer Packaging that further enables us to focus on growing value in our core businesses. We generated strong free cash flow of $2 billion in 2017, which enabled us to strengthen our balance sheet and increase our dividend for the sixth consecutive year.

I would also like to take this opportunity to highlight the continued strong performance at our Ilim JV, which delivered solid operational and financial results and provided more than $130 million in cash dividends to International Paper in 2017. So overall, I feel very good about what we accomplished in 2017 and as importantly, I'm really excited about how we are positioned as we enter 2018.

Turning to our full year results on Slide 6. And I'll remind you again that Consumer Packaging is now reflected in our financials as discontinued operations from 2013 onwards. Do keep in mind that our free cash flow does include discontinued operations. For 2017, we grew revenue by 11% driven by the Pulp acquisition and excellent commercial performance across our businesses with improvements in volume, pricing and mix and those improvements accelerated throughout the year. This enabled us to offset significantly higher average recovered fiber costs and other input cost headwinds, such as transportation, to grow our margins and deliver solid earnings and free cash flow in 2017.

Moving to Slide 7. International Paper continues to be a strong and sustainable cash generator, which enables us to execute our strategy and optimize capital allocation to continue growing value for our shareholders.

On Slide 8. International Paper delivered another strong year of return on invested capital with a 300 basis point spread to our weighted average cost of capital. This marks our eighth consecutive year of value creating returns for our shareholders.

I'll now turn it over to Glenn, who will cover the performance across our businesses and a few other financial topics, including our first quarter outlook. Glenn?

Thank you, Mark, and good morning, everyone.

Let me begin on Slide 9 in the presentation, which shows our full year operating earnings per share bridge from 2016 to 2017. Notably as you can see, price and mix improvement played an important role in our earnings growth in 2017 and was largely driven by realizations associated with increases announced in our North American Industrial Packaging and Global Fibers businesses early in the year. Operations, on the other hand, were negatively impacted by 2 significant hurricane events and the interruption of production at Pensacola. However, maintenance outage and legacy operations were a partial offset coming in at $0.09 favorable versus 2016. Our reported higher outages in our acquired Pulp business are captured in the Pulp acquisition column. Input costs were a clear and sustained headwind through most of 2017, driven by significantly higher recovered fiber costs, OCC, on a year-over-year basis along with higher energy and transportation costs, especially during the latter part of the year.

Moving across the bridge, I'll point out the negative swing at Ilim was due primarily to FX. And lastly, we have the baseline carryover benefits of the Pulp acquisition whose positive contribution accelerated as the year progressed.

Now let's turn to Slide 10 and focus on our results for the fourth quarter, which show a strong finish to a solid year. International Paper delivered record operating EPS in the fourth quarter of $1.27 and continued to see healthy demand in U.S. and globally.

Our North American Industrial Packaging business and Global Cellulose Fibers business both had record volumes in the quarter and we benefited from the full realization of first half price increases and continued price gains in export markets across our portfolio.

Global Cellulose again, outpaced our plan delivering more synergies and faster. And our Ilim JV delivered strong performance with $64 million in equity earnings underlying the strength of that platform. All in, we had another very solid quarter capped with strong free cash flow and generation.

Moving to the quarter-over-quarter EPS bridge on Slide 11. We saw more price realization in the fourth quarter now driven by further gains in containerboard exports and higher prices across all pulp grades. Volume was strong as well with record shipments in North America box, containerboard exports and our pulp grades in the quarter.

Unlike the year-over-year trend, inputs provided some relief in the fourth quarter as OCC moved off its historical highs established in the third quarter. This was partially offset though by seasonally higher wood costs, higher chemical costs and higher transportation associated with tight rail and truck capacity. And lastly, Ilim delivered sequentially strong results on higher pricing and solid demand.

Relative to our segment performance, I'll start with Industrial Packaging on Page 12. As I already mentioned, we realized meaningful price gains in containerboard exports on solid demand across all international channels, backed up by record shipments in North America box. Baseline operations improved sequentially as well even excluding the nonrepeating items of both the hurricane impact in the third quarter and the benefit of the final tranche with Pensacola insurance recovery of $14 million in the fourth quarter.

Maintenance outage expense decreased by $10 million as we had our lowest maintenance outage quarter of the year and input costs improved as OCC pulled back from the third quarter historical high, although partially offset by seasonally higher wood costs and very difficult transportation operations, primarily availability, which again reflects the strong underlying demand environment that we're experiencing.

Taking a closer look at our Industrial Packaging business in the fourth quarter, our margins expanded meaningfully as expected, driven by several factors. First, we continue to see strong global demand for our Corrugated Packaging as reflected by record shipments in North America box and containerboard exports in the fourth quarter. Second, our multichannel go-to-market strategy continues to be an important driver of our platform performance. These channels to market, which include the integrated box business and our domestic and export containerboard segments, provide choices for International Paper to maximize value. This was especially evident in the fourth quarter where we saw significant margin expansion, largely due to higher realized prices. And lastly, I want to address our Industrial Packaging mill optimization initiatives. We've now brought online about half of the 250,000 tons of capacity we announced in 2015. This added capacity is not only providing us with the needed flexibility to optimize our product and geographic mix, it has enabled us to keep up with strong and steady market growth, no more apparent than in the fourth quarter.

So now moving to Global Cellulose Fibers on Page 14. This business delivered solid results in the fourth quarter with earnings of $98 million and an EBITDA margin of nearly 23%. This was driven by outstanding commercial performance driving price and mix improvement across the portfolio. We continue to see strong demand across all grades but particularly in our fluff segment. Executing our plan to qualify our Riegelwood 18 machine on fluff on an accelerated basis allowed us to serve the growing demand from our customers and increase our mix towards more fluff pulp, ultimately providing margin uplift better than planned. And on the synergy front, we again accelerated our realizations in the fourth quarter, and I will come back to that with some more color on the next slide.

Moving on and with full transparency, fourth quarter operations did benefit by $15 million from the inventory valuation associated with our LIFO accounting convention and maintenance outage expenses remained low during the fourth quarter and input costs were moderately higher on seasonal wood cost. All in, we are very pleased with the progress made integrating the Global Cellulose Fibers business. And just to make one underline before we move on, we are extremely well positioned to service our customers globally and have made outstanding progress in bringing synergies to the bottom line.

I do want to point out though as we enter 2018, we do have higher maintenance expenses planned and we will have a significant step up in corporate allocations to this business impacting reported results only at the segment level.

Turning to Slide 15 and taking a closer look at Global Cellulose Fibers synergies, the business delivered very strong performance in the fourth quarter, capturing $53 million across the enterprise and bringing the full year to $155 million. You will recall that our original 2018 exit target was $175 million, which we then revised upward to $200 million. We can say proudly that we are closing 2017 at $205 million run rate, exceeding our target a year ahead of plan.

In summary, we are capturing more synergies faster, exceeded our target and, therefore, had executed an essential pillar of our earnings growth commitment associated with this acquisition. With that, we officially close out our synergy reporting and move to the next step of further optimization. And as you can see in the table, meaningful optimization opportunities are still in front of us in 2018 and behind -- and beyond, particularly in manufacturing and supply chain operations.

Moving to Printing Papers. Results came in better than expected on improved commercial performance, particularly in Brazil where we benefited from stronger-than-expected seasonal volume gains, better mix directly correlated with higher domestic demand. We also saw realization in the quarter across all our paper segments confirming more recent initiatives have good traction on price. Maintenance outage expenses were higher than the third quarter as expected and input costs were impacted by higher wood costs, particularly in Russia operations as well as higher pulp costs in Brazil.

So coming back to North America, our operations were impacted by seasonally higher operating costs and unusually cold weather as well as higher distribution costs due to the constrained availability of trucking options in this environment.

Now on to Ilim on Page 17. The JV delivered very solid results driven by higher pricing and strong volumes, only partly offset by higher seasonal wood and energy costs. There were no maintenance outage expenses during the quarter and our equity earnings benefited from a noncash FX gain on the JV's U.S.-denominated debt.

Turning to the balance sheet on Page 18. During 2017, although we expected, we delivered step change progress towards bringing our leverage ratio back to our stated target of less than 3x debt-to-EBITDA on a Moody's adjusted basis. Our pension gap decreased by $1.4 billion on a $1.25 billion voluntary pension contribution, which was partially funded by a $1 billion debt issuance at very attractive terms. Internal to the plan, very strong pension plan investment returns were only partially offset by a 50 basis point decrease in the discount rate. Further, and as we discussed earlier, during 2017, we took meaningful measures to derisk the plan, including transferring approximately $1.3 billion of pension benefit obligations to a third party, effectively reducing the cost of our PBGC insurance premiums. Going forward, we will remain fully committed to a strong balance sheet and as we enter 2018, we will continue to deleverage by paying down additional debt in order to meet our commitments and sustain our investment-grade credit rating.

On Slide 19. I want to take this opportunity to update you on the impact of the Tax Cuts and Jobs Act to International Paper. First and foremost, with regard to broader tax policy, our position has been clear, the tax policy should help drive economic growth and level the playing field with competitors around the world. While a lot has been achieved here, we continue to evaluate the impact of these significant changes and many smaller changes to International Paper, but there is no question, the main impact to us is the headline corporate tax rate, which moves from 35% to 21%. Correspondingly, you will notice that we recognized a $1.2 billion noncash benefit in special items in the fourth quarter, which includes the remeasurement of our U.S. deferred taxes to the new corporate tax rate. I'll remind you that we do not have any U.S. Federal NOL carryover, so essentially, International Paper is a full taxpayer at the new corporate tax rate. Of course, we also pay state and local taxes, which takes our projected global operational tax rate to approximately 25% to 27% in 2018.

Another important impact of the tax reform to International Paper is the accelerated depreciation, which will allow us to deduct the full amount of our U.S.-based capital investments within the same year through 2022 versus 50% previously.

Lastly, relative to the repatriation of cash, also known as the transition tax on accumulated foreign earnings, this means we are no longer taxed when bringing cash back from our foreign subsidies. With that said, we do have to pay for this flexibility, and we currently estimate this cost, net of foreign tax credits, to be approximately $200 million to be paid over the next 8 years. Net-net, however, this flexibility is a strong positive to International Paper. All in, we expect a positive cash tax impact exceeding $200 million in '18 and beyond.

Now turning to our first quarter outlook on Page 20. We expect to see a $10 million benefit from additional price realization in containerboard exports and a $5 million benefit on improved pricing in our paper segment associated with announced 2017 increases. Volume will be down seasonally versus the fourth quarter as we go into this normally slower period and, therefore, expect a $40 million impact in North America Industrial Packaging and a $20 million impact in Brazil paper. We will also see a modest decrease in Global Cellulose Fibers of about $10 million driven by the impact of Chinese New Year.

Our North American mill operations affected by the severe weather experienced at the beginning of this year, summing to a cumulative impact of $35 million, primarily in our Industrial Packaging and Global Cellulose Fibers businesses. And also recall that during the fourth quarter, our North American Industrial Packaging business had a $14 million insurance recovery payment for Pensacola and our Global Cellulose Fibers business had a $15 million benefit for inventory valuation, LIFO. But this is more about timing and neither of these items will repeat in the first quarter.

During the first quarter, we will also see $15 million in higher costs in our European packaging business, primarily related to the Madrid mill startup. Given our uneven outage schedule, planned maintenance, outage expenses will increase by $145 million in the first quarter. And further, input costs will be a headwind of $35 million across our businesses driven by higher wood, energy and transportation costs.

Lastly, in the other items category, we include corporate expense, interest expense, tax rate and the equity earnings from our Ilim JV and our ownership interest in Graphic Packaging. I'll note here that our equity earnings from Graphic Packaging will be before tax and the effect of approximately 1% is included in our tax outlook. Net-net, we are off to a strong start in the first quarter despite seasonal and timing noise and our confidence in the full year remains robust.

Turning to Slide 21. You can see some of our key planning assumptions for 2018. As stated previously, we expect higher maintenance outage expenses due to the impact of an 18-month cycle and extended outages at several mills, all of which is an investment in the future as we position them for longer maintenance cycle schedules, saving costs in future periods. For more specificity, you could find the 2018 quarterly maintenance costs by business on Page 27 of the Appendix. And as has become the norm, it is important to point out that more than 70% of our outages are planned during the first half of the year.

Relative to capital expenditures, we have allocated $1.5 billion for 2018, including $500 million in strategic capital as we fund value trading opportunities in our core growth business, which I will discuss further on the next slide. Lastly, please note our estimates for D&A, interest expense, corporate items and our new effective tax

rate.

Slide 22 shows additional details on our $1.5 billion capital investment priorities for 2018. Approximately $900 million will go toward maintenance and regulatory projects to maintain our safe and sustainable world-class mill system with low-cost, advantaged assets, ultimately keeping a lifetime of added benefits of improved reliability. Further, we will also invest $100 million in high return cost-reduction projects where we have a healthy pipeline in our core businesses with IRRs of 30% or greater, which we will fund over time to optimize our advantaged assets. And lastly, we will invest $500 million in strategic projects with healthy spreads above our cost of capital. These include, for example, the Madrid mill conversion from newsprint to lightweight recycled containerboard where we will see the benefits starting in the second half of the year. And the recently announced Riverdale machine 15 conversion from uncoated free sheet to virgin whitetop containerboard with a total capital investment of $300 million over 2018 and 2019. Again, we are taking this additional step to unbundle our capital expenditures to scale and emphasize the meaningful shift to value creation in our growth businesses.

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

Thanks, Glenn.

We are very pleased with the progress we made in 2017, and as I mentioned earlier, with the momentum we're carrying into 2018. We're confident in another year of 10%-plus EBITDA growth, driven by continued strong outlook in our core businesses and the full year price flow through of 2017 increases. We continue to see healthy demand and solid fundamentals across our portfolio. We're making great progress in our optimization initiatives as we improve our world-class manufacturing system. We have great customers in all of the important segments in the businesses that are core to International Paper. In addition to our EBITDA growth, we're also confident about our equity investment outlook. The Ilim JV is well positioned for another strong year performance, and we will start to see the benefits of our investments in Graphic Packaging. All in, we expect another year of strong cash generation and we'll continue to allocate capital to grow value for our shareholders.

And with that, we'll open up the call for questions.

(Operator Instructions) Our first question comes from the line of Lars Kjellberg with Credit Suisse.

I just wanted to have a couple of clarifications on the input costs to -- talked about $0.60 for the full year 2017. Do you have any sense what you're going to get to your 2018? And also, if you can comment a bit on fluff prices. There's, obviously, to some degree of time lags, should we not have expected a bigger positive from pricing in fluff in the first quarter?

Why don't we start with that first, and I'll turn that over to Jean-Michel.

Good morning. Fluff prices, as you know, has always -- as mentioned, from time difference and we actually -- we established it by region and on to price increase for February. So we mostly expect to see the benefit of these price increases in Q2. We did announce a small price increase in Q4, but it was only captured and officially reported this month. So again, I think some of the announcements we had in Q4 were not clearly taken. And because now they are officially -- I think we will see the benefits in Q2 but not in Q1 or very small in Q1.

Okay. So Lars, can you repeat the question on input, please?

Yes. You talked about a $0.60 hit, I guess, in one of the references you made in the presentation. Could you kind of -- yes. So how do you think input costs -- what sort of impact do you see for the full year in 2018?

Well, in the full year in 2018, what we spoke to is $35 million across our businesses driven by higher wood, energy and transportation costs.

And I appreciate that, but if you kind of look at it at a full year basis as opposed to just the first quarter. Do we have any view on...

Yes. Our view on full year basis, we're looking -- go ahead.

Yes, do you want to refine that?

No, Lars. What we've outlined is the 35 -- we've outlined the first quarter. And we're continuing to refine as we look forward for the balance of the year.

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

Just 1 clarification on the guidance. The 10% EBITDA growth. There'd been a couple of price increase announcements in the last week or 2 in a number of your different product ranges. Just wondering if that's contemplated in the guidance or if you think you can get to that sort of an EBITDA growth level even before the impact of those price increase announcements recognizing that even if they did happen, they would be impacting you more later in the year.

Yes. I think our outlook is based on our exit rate performance and our initiatives. And we don't include any outlook of initiated increases in that number.

Okay. And just a question on the balance sheet. You're getting a little closer to your leverage targets, the pension looks like it's in pretty good shape. I think you've outlined before, not a lot of cash needs there. And you're obviously getting a fair amount of money, a benefit from the tax law change. Just wondering if you have any updated thoughts on uses of cash going forward. Do we see the dividend maybe move up in line with some of the -- giving some of the cash tax benefits back to the shareholders? And any kind of priorities you've got for use of cash at this point?

Brian, this is Mark. That's a great question. And if you think about our capital allocation framework, we don't plan on changing that framework. It's a balanced framework with shareholder return through dividend and occasional share buyback with balance sheet maintenance to maintain a strong and flexible balance sheet, investment grade, as Glenn mentioned in his remarks. And a certain amount of that cash we generate for our strategic projects, small acquisitions, things that are creating value across the company. So our tax savings flows more into free cash flow. That free cash flow goes through that balanced framework just as it did before.

Okay. Just one last one for Glenn, just on the cash tax rate. I think you mentioned you get some accelerated depreciation benefits. Any guidance on how that would compare to the book tax rate of 25% to 27%?

All in. So we factored all of the points I related to earlier into that new effective tax rate.

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

First, just coming back on a question Brian just asked. So what would the cash tax rate be, Glenn, in '18 and '19? Do you have any guidance on that?

No, Mark. We don't give guidance on the cash tax rate, but I underlined that we are a full taxpayer. The incremental savings due to the tax reform is around $200 million a year and roughly you can think about that as 1/3 of our tax obligation.

Okay. I wanted to step over to kind of capital spending in light of the -- some of the tax law changes and also in light of the weaker dollar. And I'm just wondering whether these changes are going to affect your kind of capital spending cadence over the next few years given the fact that you can accelerate the depreciation on new capital programs, and also whether it's going to pivot the IP back more to a domestic focus?

Well, Mark, we have a balanced approach as we speak too often in terms of our capital allocation. Clearly, we've unbundled our strategic capital projects, and we've already oriented them to our core businesses of the Industrial Packaging and Global Cellulose Fibers where most of those assets are in North America. So we were moving in that direction earlier and this accelerated depreciation just helps us along those lines.

Yes. I would add that the cadence of capital is really driven by the opportunity to get returns and the demand signal we have for the businesses we're in. Where we spend it, obviously, our regions compete on returns. So there could be an opportunity to do more cost reductions sooner, for example, in a U.S. asset than somewhere else. But we're not going to spend more capital because of the depreciation change. It's going to change the economics of some of the capital we spend, but it'll all be based on solid, strong returns and a demand signal that says our customers need better products or more products. And on the internal side, we've got lots of opportunity across the entire -- the entirety of International Paper to get better on the cost and productivity side.

Well, I guess kind of following on that, Mark, then the -- in your biggest business, in the Industrial Packaging business, the box fines have picked up pretty markedly over the last 18 months from what we had seen over the last several years. Is that a change in the demand signal in your view? Or is that just a cyclical element?

I think it's a change in the demand signal if you look at the absolute growth of the box market. But you have to remember, converting capacity is very flexible. So with a system the size and the geographic scope of IP, we have had the capacity to address that in our box making operations. Where you've seen us add some capacity starting with -- way back with the Valiant -- restart is adding containerboard capacity to match more of the box demand we're seeing through all 3 of our channels, most importantly, our own box channel where most of our containerboard goes. So that is true demand and our box plants in certain regions are a lot busier. We've hired people, we've added shifts, we're creating jobs in areas where we have entire shifts of business that we didn't have before. So again, matching what our customers want with our core capabilities and doing it all in a profitable way is what drives all of these investment decisions.

Okay. And then lastly, just on one of the capital elements is this Selma conversion, which I think you've talked about is $300 million. But according to some stuff in the trade press, you've talked about a $500 million investment in some local meetings down in Alabama. And I just wondered whether that's like money that you're spending in kind of preparation for the second machine conversion down there or if the trade press just has it wrong.

Ultimately, Mark, you just need to focus on the $300 million. That's what's associated with this project.

Yes. And Mark, this is Tim. The other is normal maintenance and regulatory spending that would be done over a long period of time. So Glenn's right. $300 million is specific to the project.

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

A couple questions for you. And I guess to kind of come back to the cash tax component, I appreciate you're not necessarily giving us guidance that way, but we're trying to, I guess, get a sense of the differential. So when we think of $1.5 billion you're spending this year in '18, and I think it's going to be a pretty chunky number next year, what portion would be U.S.-based that would be able to accelerate the depreciation on? Or how would we think about that?

It's going to be the lion's share. You could count on $1.2 billion of the $1.5 billion on a run-rate basis.

Okay. So in short then, we would expect at least for the next year or 2 that the cash tax rate probably is a little below book then. Would that make sense?

We're not going to forecast that but the $1.2 billion will be the write-off on that capital.

Okay. And then my second question was, when we look at box -- to Mark's question earlier, box has picked up a bit the last few years. But when we look at, particularly just even this last quarter, I think your volumes were modestly higher or still continuing to lag a bit. I guess that at times things ebb and flow, but how would you have us think about on a go-forward basis that -- and I think most of us are kind of looking for box shipments with the economy getting better and with e-commerce and different components being 2% to 4%. How would we think about IP participating in that? Should we anticipate that you'll kind of be at industry rates? Should we anticipate maybe there are some leakage there? Or how would you have us think about it?

So -- this is Tim. Over time, we expect to be at market rates. And they do ebb and flow. And I think you saw in the second half of the year, we started picking up just through normal turn of business and customer wins. But we saw really strong demand right through the end of the year and it's continuing in January.

Okay. And just -- a sense of what January is at for you?

Right -- through January and there are preliminary numbers, but we were up a little bit over 4% in January.

Our next question comes from the line of Chip Dillon with Vertical Research.

Just a couple of questions. First, you mentioned that the fluff business or cellulose business would get a bigger part of the corporate allocation. Can you let me know how much per quarter roughly that will be in 2018 versus 2017?

Yes. Think about it about $30 million of new allocated for the full year.

Okay. And then on the pension. Just to be clear, you show that you've got the ratio down to 3.3. But isn't it really a little below 3x or around there? Because I believe you didn't get the proceeds from the consumer sale until after the first of this year. So if you adjust for that, it's even lower or was it already adjusted?

It's already adjusted.

Okay. Okay. Got you. And then the last thing, Glenn, you mentioned that the unremitted tax payments that you have to make would total about $200 million over the next 8 years, net of credits. Now I guess it's fair to say you probably could use those credits at some other point. And if that's true, sort of what was the gross amount of -- was it closer to, say, $300 million or $400 million?

We haven't disclosed that, Chip. I mean, it's a meaningful number but this is the net.

Okay. And then I guess the last thing is on the -- in the fluff business. I think you -- if you could just repeat what you said would be some of the changes going from the fourth to the -- oh, I know what it was, the inventory write-off. Could you explain how that works? Is that a function of what pricing was doing? And is that something that could repeat in future years?

Repeat the question.

Remember, the fluff, you had a inventory benefit in cellulose, I should say, of $15 million from an inventory, I guess, a positive or credit. And could you just let us know how that worked and if that would likely repeat?

Sure, Chip. Certainly, that's something we measure over time, and it's somewhat hard to forecast. But that's a one-timer. That's LIFO. It's a onetime event true-up we do on an annual basis in the fourth quarter.

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

Congratulations on the progress in '17. I wanted to come back to the question on box volume. And I know you've made progress in this regard, but the 0.3% volume growth really is more, when we think about it, emblematic of the growth rates we were seeing prior to e-commerce hitting stride whatever it would have been or at least gaining critical mass 1.5 years ago. So is there something underlying in the business, Tim, that caused the greater growth to be flatter, perhaps, than we would've expected, considering especially your strong weighting with some of the larger e-tailers that are out there. Or was it very much as you'd expected? And if it was as expected, part 2 of this question, IP, given its scale, given its size, given its position as #1, we probably would expect not initially to lead the market every quarter. But it has generally trailed most of the publicly reported companies in terms of box growth over a number of periods. So when should we expect -- should we expect that gap to ever close?

Sure, George. Yes. I mean, we did trail in '17. We performed in line in '16. We had some customer turnover. We made some choices, started picking up businesses in the second half of the year. So it was in line with our expectations on what we thought we would do with our customer base. And I think it will continue ramping as we go through the first part of '18.

Okay. Fair enough. And you expect to be able to maintain more of an industry growth rate recognizing there are no guarantees in life. You need to monitor it month-by-month and quarter-by-quarter. But from what you'd see right now, there's no reason why you shouldn't be at least trending with the industry over the -- over 2017. Would that be a fair assessment?

Yes. I would put it this way. Our expectations that we would do over time, that we would pick our spots in terms of how we look at margin. And we will make choices from time to time where we think we are making the right decision for maximizing sustainable margins.

Okay. That's fair. I don't know if you can comment to this, but nonetheless, there's been some discussion in the trade press about International Paper being out with a containerboard price hike to customers. Can you comment as to whether you've been notifying customers in that regard? Or where you stand in terms of any pricing action in containerboard in North America?

No. I really can't, George. We talk to our customers, we don't talk to anyone else.

Okay. Fair enough. And I guess the last question I had to start bigger picture, actually 2 questions, and I'll turn it over. First, you mentioned, again I think, within the box business that you've been pleased with your commercial performance over time. How do you measure your commercial performance? Is it just the timing of which you get the containerboard price into the market? Is it margin in boxes? I know you can't discuss too much live, Mike. But how do you evaluate your commercial performance and which suggests in your view that you've been doing well in that regard? And the bigger-picture question is, going back a number of years ago, there is a much larger EBITDA target that the company had been hoping for and, obviously, the market and the company's portfolio have changed such that maybe that's not what we should ever be thinking about anyway. But what other things can IP do that would step change directionally the EBITDA closer to that 5 number than where it's currently been? Obviously, you've been making progress. What would you have us think about? Is there an Analyst Day, perhaps, coming up where you might be able to talk through that?

Thanks, George. There was a lot wrapped up there. Let me try to go back to the first part and unbundle some of it. I think at a macro level, we look at margins. We look at not just on box, but how we think about all the channels that we operate in and growth as a piece of that margin, price as a piece of that margin, structure, cost is also. On a more granular level, it comes down to customer-by-customer. And understanding our customers' needs, understanding where we can deliver value propositions that are meaningful to them, and we do that across our portfolio of customers. So we do it high level and we do it right down to how do we execute with any specific customer.

George, I'll take the second part on the $5 billion that we shared back in 2012. You're right, the company is a significantly different company than we were back then. And I think the way we get EBITDA growing is put together years like we had in 2017 with double-digit EBITDA growth, and we think we'll do that again in '18 and positioning the company to have high returns. So our returns today, returns on invested capital are every bit where we said they would be at the $5 billion. What we haven't done is deliver the $5 billion. That's not the number to think about anymore. The number to think about is growing International Paper from where we are and maintaining a solid spread in actual returns above our cost of capital. And that's, we think, the best way to create long-term value. So we've positioned the company to have our strongest business get the most resources. And we positioned the company to have a growth profile. It's not a high-growth profile, but a growth profile with Packaging and a growth profile with Cellulose Fibers. And I think when you put that together, we'll have more opportunity to create more value than even the company that we described in 2012.

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

First of all, freight is becoming a hot topic again. And a few years ago, when it was tight, the industry raised their inventories. And I'm just wondering if you could, and I'm not sure that you can, would you do so again?

Steve, it's Tim. Let me just speak to Industrial Packaging. What we're trying to do is make sure that we have the capability to service our customers when they need to be serviced. So fourth quarter was a lot of commotion. Rail lines not running as effectively as we would have liked them to, knock-on effect between rail lines, knock-on effect to trucking, complications with structural issues and trucking itself. But we did, given our capability, service all of our customers, and so we were able to sort through that. But for me, thinking about it's not a level of inventory, it's the capability and we produced thousands of SKUs for 15,000 to 20,000 customers and making sure we have the right thing in the right place at the right time is how we go about managing our system.

Yes. I think, Steve, I'll add on to Tim and speak for the rest of the company beyond Industrial Packaging. The way we think about inventory, it's one of the choices we have in our value chain. And so when everything's working great in the transportation area, the velocity of the inventory is moving, their levels tend to be lower. If there are bottlenecks somewhere in the value chain, then that's a use of cash to have more inventory and spend less on emergency transportation. The whole goal is to serve the customers' needs. And so absolute inventory numbers are not something we design to. Velocity of that inventory through the system and meeting customer expectations at profitable levels is what we designed to it. And we have the supply chain systems in place, people, the way we're organized, what we've centralized, what we haven't and the IP systems to underpin it to be able to do that.

Yes. I appreciate that because it seems to me that people look at inventories in isolation, and it's just one factor, service customers and maximize profits. So then one other question on -- especially on cellulose. Pulp prices continue to go up. Have the discounts between list and [mill net] started to narrow? And was that part of the synergy capture that you mentioned?

It's Jean-Michel speaking. We -- maximizing our customer is exactly like in packaging. We're going to the best segments where our customers look at the long term, where the value of the products we do, especially the big portfolio of products we do, we don't have one fluff or specialty. We have multi-products of fluff. So this is even more important actually than the 1%, 2% discount change and whatever. We have a lot of customers know we actually sell net prices, don't have discounts anymore. So the optimization is much more in our capacity to answer our customer needs both in terms of products and innovation. And when you look at our growth in sales and -- thanks to our customer because we have had record fourth quarter. We've had a very nice year in terms of growth. The market is continuing to have a very strong demand, and we're winning this market. So I think this is clearly what is the main point. And just to be clear, in the synergy, you don't have pricing. Pricing is not in the synergy. So what you do have is mix improvement, for example. Let me give you an example. (inaudible) more capacity at Weyerhaeuser. We had Riegel with 18. Between the knowledge of our innovation center and the knowledge of International Paper, we're able to qualify Riegel with 18 much faster than we ever thought about it. And Riegel with 18 is a very big success in the market. And today, the machine is producing about 10% more than the initial investment and the machine is fully qualified. And for this year, it's sold out. This is well ahead of what we had planned. And that's one of the synergy we've had of getting together. But not pricing, there's no pricing in synergy.

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

Mark, just first one question was, how are you treating the Consumer Packaging and Graphic when you're giving up the EBITDA guidance of 10%-plus 2018 versus 2017?

It's -- basically, it's excluding consumer. Consumer is a discontinued operation and our 10%-plus is from the new base.

Okay. So if I understood you correctly, you said that the EBITDA guidance included nothing for the containerboard and could appreciate or -- pulp price initiatives that you also have underway, but that was just your exit. And so if I take 10% of that $3.7 billion, that's $370 million. And so you just do the math of what that would be and that's like $0.70 per share of accretion, all else equal. And then additionally, we have that lower tax rate, which adds $0.25 from last year as well. And then I guess we'd have to factor in what we think will happen with Ilim and then whether Graphics/Consumer does better or not. Is that an appropriate framework to think about how you see 2018 playing out using the exit from 2017?

Yes. I think in general, that's directionally correct. Certainly, any initiatives that have happened subsequent to the end of the year or not in the run rate are what we call the plus piece of that 10%.

I think, Mark, the other thing to think about is you get all top line changes that are all positive. The way it will work out, we just don't know exactly how, is if all of that happens that you just described, that probably means a really strong economic environment. When that happens, lots of things are unpredicted like where inputs go, transportation, we talked about earlier. So there's sometimes a margin squeeze on that strong economic background. It comes with activity everywhere in the value chain. So that's why...

There's puts and takes.

Yes, no, I appreciate that. That's a very fair point. And I guess just -- the one thing that is, I don't want to say dissonant, but on the -- the 1Q guidance you're giving, it's certainly calling for a lower profitability than at least where expectations, I believe, but by my quick math on it than where people might have been expecting. But again, you're full year doesn't seem to be doing that at all. Maybe talk a little bit about -- and it does certainly seem like you have a lot of maintenance in the first quarter. That certainly could be part of it.

That's exactly it. I think we framed it as seasonally slow, heavy maintenance. And there are some non-repeats. The main message here is the full year that Mark underlined and we rated at 10%-plus. And this first quarter, as we've seen in the past, is timing. We feel good about the fundamentals in the first quarter.

Okay. Great. And then very quickly, lastly. So the box shipment data came out this morning and it showed average where you got 0.4%, which -- so I was just curious, what your -- what you had seen in December. It just seemed a little bit surprising given there had been talk about how strong December, in particular, was, albeit against a relatively difficult comp. And but for the full quarter, if you'd looked at the industry data, it wasn't actually that much ahead of yours. It's up like 1% on an average day basis. But again, a little bit antithetical to the notion that business is really good, which is what I'm hearing from everybody.

Yes. Mark, it's Tim. Yes, our fourth quarter felt very strong. We see the box market is strong in the fourth quarter. We see it continuing in the first. And you mentioned it, it was a tough comp. And if memory serves, I think it was the toughest comp of any month in the year. I believe December '16 was close to 6% daily. And so it was a beat on that comp in December. So I see it as a very strong market.

And can you share with us what your December, specifically, what your comparison was?

I don't have it off the top of my head. You saw the quarterly number. But December was strong for us, led by e-commerce again, which was over 20% for us. So yes, we had a very strong December.

Our next question comes from the line of Anthony Pettinari with Citi.

Just a couple of follow-up questions on costs. I think in the past, you talked about an annual labor inflation hurdle of $120 million to $130 million. Is that still a decent target for 2018? Or could you see something above that, given the tighter labor market in the U.S.? And then on the 1Q outlook, you quantified the impact from energy, wood and transportation. Is it possible to carve out how much of that was transportation or basically freight?

Okay. 2 questions. First one relative to inflation, I still think that's a good point that you mentioned relative to year-over-year inflation. We have contracts with employees, that's not going to change a lot in the near term. The variability that we would see in other inflation would be more along the [PPV] lines. Relative to the guidance of $35 million of input headwinds, that's certainly wood and energy but transportation is meaningful. It certainly kicked in as the businesses have spoke to it from constrained availability in the fourth quarter, we think that will continue in the first quarter and throughout the year. So while I won't give you a percentage, it's meaningful.

Okay. Okay. And then just switching to the 2018 outlook. One of the catalysts you identified was the Madrid startup. Can you remind us the time line there? And then more broadly, European Industrial Packaging, I think profit was negative in 4Q. As you look to 2018, what's kind of a time line there for margin recovery and profitability in Europe?

Well, that's a good question, Anthony. And clearly, as we have laid out, the Madrid mill is a big piece of that margin recovery. That gives us the vertical integration we were looking for in the recycled segment. It's going to be a low-cost first quartile mill. Candidly, as we have laid out, the time frame here, it has been delayed somewhat, mostly just due to engineering scoping. But we feel good about the ultimate outcome, and we should see those benefits in the second half of the year.

Our final question comes from the line of Debbie Jones with Deutsche Bank.

Just 2 quick ones from me. I just wanted to confirm on the annual purchase for key inputs slide that the delta between last quarter and this quarter is primarily due to removal of the consumer business just because some of the numbers seemed like a pretty big shift like caustic, for example. And then is this something that we would use then for assumptions for 2018 just because it says 2017 on it?

So on the inputs slide, in the Appendix you're talking about, yes. Those have all been adjusted for the removal of our discontinued operation of consumer, and they would be good estimates for full year.

Okay. And then just if you could just give us your updated comments on OCC. I didn't quite catch what rate you're assuming for your Q1 guidance and just what you're seeing in the market right now in terms of what China is doing.

Debbie, it's Tim. Permits have been granted. It feels like it'll be somewhat flattish in the early part of the quarter and then the best view we have from on the ground in China is that things would start accelerating again after Chinese New Year. I think you also have to consider though, this is one of the lowest generation times of the year. So it's what China's doing, it's what's happening with generation, and then transportation is going to have an impact as well, just trying to move fiber from one place to another.

I'll now turn the conference back to Guillermo for closing remarks.

Thanks, everyone, for taking time to join us this morning. As always, Michelle and I will be available after the call. Our numbers are on Slide 24 of the presentation. Have a great day.

This concludes today's conference call. You may now disconnect.