International Paper Co (IP) 2018 Q1 法說會逐字稿

Good morning. My name is Sarah, and I will be your conference operator today.

At this time, I would like to welcome everyone to the First Quarter 2018 International Paper Earnings Call. (Operator Instructions) Thank you. Guillermo Gutierrez, you may begin.

Thank you, Sarah. Good morning, and thank you for joining International Paper's First Quarter 2018 Earnings Conference Call. Our key speakers this morning are Mark Sutton, Chairman and Chief Executive Officer; and Glenn Landau, Senior Vice President and Chief Financial Officer. There's important information at the beginning of our presentation that you should take time to read, including certain legal disclaimers on Slides 2 through 7.

For example, 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. As noted on Slide 3, a reconciliation of those figures to U.S. GAAP financial measures is available on our website. Our website also contains copies of the first quarter 2018 press release and today's presentation slides.

Relative to the Ilim joint venture and Graphic Packaging investments, Slide 4 provides context around the financial information and statistical measures presented on those entities. As indicated by the information on Slides 5 through 7, International Paper's proposal to acquire Smurfit Kappa is governed by the Irish Takeover Rules. Under Irish Takeover Rules, International Paper management is prohibited from discussing any material information or significant new opinion that has not been publicly announced. Any person interested in shares in International Paper or Smurfit Kappa is encouraged to consult his or her professional adviser.

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

Thanks, Guillermo, and good morning, everyone. We'll begin the presentation on Slide 8. International Paper delivered solid first quarter performance and strong year-over-year earnings growth. We continue to see healthy demand and solid fundamentals across our global businesses. Price realization momentum continues across all 3 of our businesses and we remain focused on delivering differentiated and innovative solutions to the right segments and the right customers.

Operationally, we executed well in a heavy maintenance outage quarter and managed through weather-related disruptions and other unusual events. We completed approximately 35% of our scheduled maintenance outages in the first quarter, and we expect to have 75% of our total maintenance outages complete by the end of the second quarter. Transportation and other input costs were a headwind in the quarter with higher wood, chemicals and energy, more than offsetting the lower recovered fibers or OCC cost. And on equity earnings, our Ilim joint venture in Russia delivered record performance.

Turning to the financial results on Slide 9. Revenue increased by nearly 10% year-over-year, reflecting strong commercial performance and solid global demand. This includes record first quarter shipments of fluff and specialties in our Global Cellulose Fibers business. EBITDA improved 19% year-over-year. This performance reflects the solid business fundamentals and margin expansion across our businesses. In fact, we had record first quarter EBITDA in Industrial Packaging. Total equity earnings were $95 million, including our Ilim joint venture as well as our 20.5% ownership interest in Graphic Packaging. Cash from operations improved by $30 million year-over-year while free cash flow decreased, largely due to the fact that we spent nearly 1/3 of our $1.5 billion 2018 capital plan during the first quarter.

I'll now turn it over to Glenn who will cover performance across our businesses and our second quarter outlook. Glenn?

Thanks, Mark, and good morning, everyone. Let me begin on Slide 10 in the presentation, which shows our quarter-over-quarter operating earnings per share for the first quarter of 2018 of $0.94, bridged sequentially from the fourth quarter of last year as well as our 2017 first quarter results of $0.56 as a year-over-year reference.

Operating earnings improved year-over-year, largely due to $0.51 higher revenue driven by the flow-through of pricing initiatives across all our segments as well as mix and volume growth. Sequentially from the fourth quarter, as you can see on the bridge, we saw continued price and mix gains of $0.10 from both prior year and current increases. However, given seasonality, this was more than offset by softer volumes as expected.

On a seasonal basis, although demand remains quite strong. As Mark mentioned, operations were impacted by weather disruptions, primarily frigid conditions across the East and heavy rainfall in the South, as well as other unusual events, which ended up impacting the quarter by approximately $50 million or roughly $0.08, but will not repeat. A detailed reconciliation of these events is included on Page 24 in the Appendix. And while we are still evaluating potential insurance recovery, keep in mind, these were discrete events with discrete deductibles so any recovery is unlikely to be material. That said, our operations, on balance, performed well despite these upset conditions in an otherwise very heavy planned maintenance outage quarter.

Supply chain costs continue to trend higher due to very tight rail and truck availability as well as higher diesel fuel costs. And looking forward, it is hard to see much relief here, so we believe this headwind will linger. On fiber, lower OCC costs were largely offset by seasonally higher wood cost and energy and chemicals were higher sequentially.

Lastly, Ilim delivered sequentially higher equity earnings and we also reported equity earnings from Graphic Packaging of $8 million, which was offset by purchase accounting deductions of approximately $6 million in the quarter.

Moving now to our segment performance. I'll start with Industrial Packaging on Slide 11. The business delivered a record first quarter result of $464 million EBIT despite weather and unusual events and heavy planned outages. Both domestically and globally, we continue to see strong demand across our channels to market with export containerboard up approximately $40 per ton sequentially and continued flow-through in domestic box. As expected, volume was seasonally soft, but we were in a position to repatriate volume from export markets to meet U.S. demand as our system remains oversold.

Operations were $54 million lower versus the fourth quarter driven by weather events, which impacted results by approximately $31 million. The remainder was largely Pensacola insurance recovery in the fourth quarter of 2017 that did not repeat.

In terms of the heavy planned outages already referenced, we completed approximately 35% of our annual plan during the quarter, including pulling up some work opportunistically at the mills impacted by the upset conditions. Lastly, higher wood cost for energy, chemicals and transportation more than offset lower OCC cost in the quarter.

Taking a closer look at segment positioning in the North American corrugated packaging market on Slide 12, we outperformed the industry in the first quarter largely due to our strong overweight positions in the fastest-growing segments. And while our scale and footprint enables us to serve just about every corrugated segment in a material way across North America, our deliberate focus on the fastest-growing segments, those benefiting from secular growth trends, is paying dividends as we apply our best network of packaging design and innovation expertise to meet and exceed our customers' changing needs. Leading the way in both e-commerce and fresh produce and protein, our objective is to grow with these markets over time and to be well aligned with the market leaders in these segments.

So turning to the next slide, 13. Our approach to innovation begins by fully understanding the needs of our customers through the value chain to the end customer. Across the business, we have segment specific innovation teams that work with our customers to develop value creating solutions. Picture here, we have an award-winning retail beverage display with immediate brand recognition, combining functional design with a storage capability, while also very easy to move and reposition for maximum visibility. The club store box with a tear out window for frozen protein that improves retail efficiency by simplifying restocking. An e-commerce box with impactful print inside that allows for added branding and enhances the consumer unboxing experience and a printed point-of-purchase bin for watermelon season. So these are just a few examples of solutions we bring to our customers every day.

Moving to our Global Cellulose Fibers business on Slide 14. We continue to see robust global demand particularly in absorbents and specialties, which represents about 75% of our business. Price and mix improved $12 million versus the fourth quarter and volume was down partially on expected seasonality, but also unplanned lower shipments of NBSK from our Grand Prairie mill in Canada due to ongoing rail service issues, which have now been largely mitigated.

Our North America pulp mill operations took the brunt of the weather disruptions, which impacted results by approximately $12 million in the first quarter, and maintenance expenses were $50 million higher sequentially as we completed the heaviest maintenance outage quarter of the year. All in, we are very pleased with the strong performance and progress of the business, stepping up EBIT by $66 million versus the first quarter last year with record fluff shipments.

Turning to Slide 15. One of the most exciting aspects of the Global Cellulose Fibers business is our R&D capabilities. Our innovation engine is essential to how we create value for our customers at IP. It starts with our basic philosophy of global reach and local execution. Remember that we export approximately 85% of our North America production. Our business brings together a world-class technology center with leading industry experts and strong customer technical support networks. We create value by understanding and addressing customer needs through a robust product development process that currently has more than 1,000 patents.

A very recent example of how we're bringing innovation to our customers is our new absorbent fiber called Elegance, which we launched in Asia last week. This innovative fiber is especially desirable for adult incontinence consumers who value discretion, and there's more to come. We have a rich product development pipeline, underpinned by our unique capabilities and innovation engine that is well positioned to create value for our customers in IP, all of which fuels the path to our target mix improvements.

Moving now to Printing Papers on Slide 16. We are now clearly seeing improving global demand with the southern hemisphere and Eastern Europe more than offsetting slower secular declines in Western Europe and North America. And in the North America supply demand balance, we see a backdrop that has improved significantly from last year and we continue to realize announced price increases. On an enterprise basis, price improved sequentially by $22 million, and we see that as continued realization globally. Mix was a $9 million headwind on expected seasonally lower demand in Brazil, and volume was also seasonally lower in Latin America and Europe as expected. Operations were $8 million unfavorable driven by weather impact in North America and unplanned downtime at our Kwidzyn mill in Polland.

Distribution in North America continues to face headwinds, which we expect to continue as we explore improvement options. Also, like the other businesses, front-end loaded on outages, Printing Papers completed more than 35% of its scheduled maintenance outages in the first quarter and will complete nearly 85% by the end of the second quarter. Input costs were higher primarily due to seasonal wood cost in North America and Europe, and higher purchase pulp costs in Brazil and Europe. But overall, we feel really good about our outlook in Printing Papers this year with a stronger demand environment and better industry fundamentals, all of which allows us to focus on our commercial excellence.

Turning to Slide 17, our Ilim joint venture generated record EBITDA and equity earnings in the first quarter, with EBITDA margins of 43% and an annualized ROIC of more than 25% associated with our investments. During the quarter, we also received $116 million in dividends representing another year of solid cash distributions.

On Slide 18, before moving to the second quarter outlook, we show our strong trend of revenue performance across all 3 of our business platforms on a year-over-year basis by quarter, looking through to the next quarter. We see this strong growth as a reflection of improving industry fundamentals, an outcome of our customer product and geographical segmentation. We see this as sustainable and importantly, early in this current phase of margin expansion. While price underpins a portion of this trend, volume and mix improvements are meaningful components as we focus on bringing differentiated value to our customers.

Looking through to the end of this year, revenue growth will continue to accelerate in all 3 segments as we realize recent price increases, grow and improve our mix. In fact, we expect the year-over-year CAGR in Industrial Packaging, Cellulose Fibers and Printing Papers to be 6%, 9%, and 4% respectively from 2016 through the end of this year.

Now turning to our second quarter outlook on Slide 19. In our Industrial Packaging global segment, we expect to see a $25 million benefit from recent price increases in North America packaging and export containerboard. While mix is expected to be a $10 million headwind globally, volume is expected to increase seasonally with the benefit of $35 million. In operations, the non-repeated prior quarter's weather disruption is expected to be a benefit of $28 million, which will partially offset -- which will be partially offset by about $10 million, largely due to LIFO inventory revaluation charges on previously announced price increases.

Outages will be $11 million higher and input costs expected to decrease by about $20 million. In Global Cellulose Fibers, we expect to see a $15 million benefit due to recent price increases and mix improvements, volume will be sequentially flat with continued strong demand and a non-repeat of weather disruptions is expected to be a benefit of $12 million with a modest offset of $5 million due to higher distribution costs. Outage expenses will be $26 million lower, although still another heavy maintenance outage quarter.

In our global Printing Papers business, the benefit of recent increases and mix improvement is expected to be about $20 million and volume is expected to prove -- improve by $10 million on seasonally stronger demand globally. Operations will be flat quarter-over-quarter and maintenance outages will be higher by $11 million.

You can see, our outlook for Ilim JV and Graphic Packaging partnership on the equity role of the slide. And lastly, in terms of corporate and interest expense and as well, our estimated effective tax rate, they remain consistent with our previous disclosures.

So with that, now, let me turn it over to Mark. Mark?

Thanks, Glenn. We're very pleased with the performance in the first quarter and the momentum that we carry into 2018, which is underpinned by healthy demand and solid fundamentals globally. As Glenn mentioned earlier, we continue to see profitable revenue growth across our 3 businesses. We also have meaningful catalysts that will further improve our performance, including the startup of the Madrid mill later this quarter, which will produce 400,000 metric tons of high-performance lightweight recycled containerboard for our European packaging business. We also have more runway as we optimize our Global Cellulose Fibers business, which is already well ahead of our investment commitment. And in our papers business, we're seeing improved demand globally.

Looking forward, we have clear line of sight to 10-plus percent EBITDA growth and strong cash generation in 2018 with an improving trend of performance throughout the year.

Before we open the call for questions, I recognize there's a high level of interest in our proposal to acquire Smurfit Kappa. At this point, there is no new information to share. We have a compelling proposal on the table and we're disappointed we haven't been able to engage with Smurfit Kappa. Relative to the Q&A section of this call, we'd like to focus on the quarter and the strong year we have ahead of us.

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

(Operator Instructions) And your first question comes from the line of Chris Manuel with Wells Fargo.

Wanted to touch on -- as I look across the main business here, it looks like one of the things that is, isn't there any longer is kind of the volume and the price per ton outlook that you used to provide in the back. Perhaps could you give us some color as to where you are in realization, some of the price in the containerboard and then the cellulosic fiber business, what's -- and if perhaps you can remind us, what yet you have announced out there yet, particularly on the pulp side, there seemingly is a new announcement every day there, but what IP's announced and how we might see that flow through over the balance of the year.

Chris, this is Mark. Thanks for the question. I'll just make an overall statement about the pricing movement across the businesses you mentioned. As we've said, I think, on the last call, we expect and we're seeing what we would say is a normal realization pattern, both in the Industrial Packaging business and in the cellulose fibers business. But with some particulars, I'll ask Glen to try to cover a couple of the particulars that you asked.

Yes, Chris, Glen here. The way I would think about that is basically, what we shared back in January was 10% plus EBITDA growth and what we shared there, relative to pricing and volume, was primarily the carryover of price increases that were implemented in 2017. You're absolutely correct, and as Mark said, we have had further announcements and we are implementing current prices. What we see there is those increases change our view, make it more confident in the 10% plus and we will see them rollout as scheduled through the remainder of the year as upside to our views. For example, the March 1 containerboard increase on boxes is a tailwind to the previous stated 10% plus.

Just a reminder on what I said about normal realization, in that box price example that Glenn just referenced. It's normal for us across segments and the mix of customers that we have to see 2 to 3 quarters of implementation until we get the full realization, and we expect that to be what plays out in this particularly increase.

Okay, that's helpful. This is incremental. That's where I was going with this as to what you got there. Second question I had, Mark, and I appreciate you don't want a lot of questions about Smurfit on the call, but could you just perhaps give us a sense of the decision tree that you worked through with respect to timing? I mean, obviously, this isn't a bid that has a shelf life forever, but kind of decision tree as to when you have them, until you have to make a decision and then get back to run -- what you're doing on a regular day-to-day basis about the overhang.

I appreciate the question, and as I mentioned at the start of the Q&A, there really isn't anything new to report on that. There's a process that we're in right now and we will continue to look at our options, but I'm not really at liberty to say what the next process or as you said, decision tree is. Fundamentally though, if you look at the performance of the company, we're running the company very, very well and that's where our focus is right now.

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

I might have missed this, but I had a question probably more for Glenn on the equity income line. You mentioned or in the slides that basically, it looks like almost all of the equity income, that $95 million was from Ilim or it should, differently, only $3 million would have come from Graphic. And so could you just walk through why, apparently, it was only $3 million?

Yes, Chip, absolutely. Subsequent to Graphic making their earnings release, we saw a number of $12 million. We got an estimate, a pre-estimate about of $8 million and we had corporate accounting changes or corporate accounting adjustments that took $6 million off of that. So the net-net is essentially $3 million that showed up, we'll true up the difference in further quarters, but that's essentially how we get to the math. You're right, the 90 -- the large percent of the $95 million is Ilim.

Understood. And it seems like that would be sort of their GAAP number, and not their -- if I'm not missing, if I have this right, and not their adjusted number. They basically had twice as much adjusted income as they had GAAP income. So is it sort of fair to say that you didn't make that adjustment?

We made our internal adjustments from the estimate given, which was $8 million to get to the 3 answer. Ultimately, we will true up in the future from a purchase accounting standpoint.

Okay. So there was no adjustment for -- going from reported to adjusted earnings, okay. And then the next question is just want to make sure I have this right. I think you called out roughly, it looks like to me, a little over $100 million in net positives going from the first to the second quarter, not including pricing in industrial and fluff, but not to make you go through all those numbers. But does that sound right, a little over $100 million on a pretax basis of net improvements in the 3 segments? Not counting the price in those 2 segments?

Yes, when you look at the bridge, ultimately, the large portion of that is the revenue uptick across the businesses. So yes, directionally, you're in the ballpark.

(Operator Instructions) Your next question comes from the line of Mark Weintraub with Buckingham Research Group.

Just to clarify. So the numbers on the outlook, which you gave and they came fast and furiously, so I'm not sure I got all of them first time. So they did not include any potential from fluff or the box price increase or they did?

No, they absolutely did, did, Mark. So our quarter-over-quarter look into the second quarter was holistic to include all our recent increases.

Okay. And so on the Industrial Packaging side, what was the price mix number 2Q v 1Q?

Mark, this is Mark Sutton. So what Glenn outlined by business, I would encourage you to follow up with Guillermo and Michelle because they can walk you through all of that detail, but the number for Industrial Packaging that Glenn cited was $25 million due to recent price increases. There's also a number for cellulose fibers and for paper, but the IR team would be happy to go through that with you in detail.

Okay. And then just lastly, I wanted to also just clarify on that. From the first question, so the 10% plus in EBITDA, that did not include benefits from incremental pricing. I think on the question that was suggested that, that would all be additive, is that the right way to think about it? Or are there other offsets so that we really can't do that simple math of the 10% and then whatever pricing have that additive? I just wanted to clarify that.

Yes. So Mark, what we said on the 10% EBITDA plus outlook, 90 days ago, was that it included flow-through from previously announced 2017 pricing actions and our outlook on input cost and other elements at that point in time. Fast forward to now, we just discussed that there is a number of new price increases that are out there. There's also movement in some of the inputs. So that's why there's a plus sign there and you're right. Those latest price increases that had been announced for 2018 were not considered in that original outlook.

As well as any changes to inputs or volumes that you or we may see going forward.

Right, and I guess that's why I just wanted to focus on it. So would that -- today point in time, would that be anticipated to be a partial offset or not necessarily?

Well, I think there's a net upside.

(Operator Instructions) Your next question comes from the line of Brian Maguire with Goldman Sachs.

Just a question on the cellulose fiber business. I'm just a little confused by the price benefit there. It seems like maybe not getting as much leverage to some of the price increases that we've seen and I know discounting happens, but just wondering if there's just more of a delayed impact there, if we should expect the acceleration to come a little bit later in the year. And then just sort of related to the weather outages in the quarter, some of that volume, it sounds like it wasn't able to get out, but it was produced and it's just sitting there. So does that mean we should expect a little bit more volume than normal as you get those shipments out the door and recognize that revenue?

Good question. Two points there, this is Glenn, relative to cellulose fibers. One, on the first question, as we're implementing price increases and I think I heard earlier, there have been a lot of incremental price increases. We're realizing those as we expect to realize them. And yes, depending on which channel to market, they have varying degrees of lag so this -- a lot of this is still back-end loaded in this year to the extent that it was already announced and it's being implemented. From a standpoint of your next question, relative to...

So what he asked about was volume and if there's going to be a catch up.

So the point there is at Grand Prairie, as I said, we had flowbacks associated with supply chain interruptions. We lost volume there and we called that out in the summary section there. We are recovering from that, but that was a headwind and did cause us some loss volume in the first quarter.

I would say overall, some of these products were qualified and we are the primary supplier. So the idea that we will have catch-up ability is definitely in our commitment to our customers. There is strong demand for the fluff and specialty segment of the product mix, and also good demand for the special market pulp like what we make in Canada. So good operations will allow us to get more of that product out to market. So we expect strong demand and some of that will be able to catch up, there's no doubt.

Okay, and just as a follow-on, some of the industry box shipment data that's come out showed maybe a little bit of a deceleration from the trend we were on, coming out of last year. Just wondered if you're seeing that as well? Maybe can you kind of comment on your April volumes, how they have been shaping up so far? And then just sort of in general, do you think there's any deceleration? Is it weather-driven, economically-driven or just tougher comps? Any kind of color you can give there would be helpful.

I think seasonally, there are some changes in box demand. I guess it depends on an individual customer's mix. I can only speak for IP. We see continued strong fundamentals and it's broad-based across many segments. And recently, we've seen box demand, the traditional offset we've seen with GDP, that gap has closed and we say -- we see, for the foreseeable future, that, that's going to be a sustainable trend. So it's pretty strong across the segments we're in.

Glenn had shared a chart in the presentation around some of the segments and where we are underweight and overweight. You dig into the subsegments there and the customers that participate there, you can see what drove our slight overperformance to the market. And so far, this quarter, box demand remains very healthy and strong.

And your next question comes from the line of Gail Glazerman with Roe Equity Research.

Could you talk a little bit about where your inventory stand both on the containerboard side, both in terms of all the outage issues in the quarter. There were press reports that you had lost, they were talking about the customers, 100,000 tons, and relative to the tightness and the logistics side of things?

Sure, Gail, this is Glenn. Overall, as I indicated in the core presentation, our businesses in North America, but across the globe are sold out. We're not running with any lack of order downtime, and we're hand-to-mouth, so to speak, to meet our customer needs, and that's been exacerbated by some of the upset conditions, weather-related and otherwise in the first quarter and some of the supply chain constraints like we talked about at Grand Prairie. So again, we're -- our supply chain is working incredibly hard to put what we need and what customers need in inventory to support their growth, but we're tight.

Okay. And going back to box demand a little bit. In the past, you've been willing to share kind of what your long-term modeling looks like. And I'm just wondering if you could, I know you mentioned it was tracking closer to GDP, but can you put some specific numbers to that and how that might have compared to this time last year?

Yes. We are seeing, I guess from public information that trends right now look closer to GDP, and that's a great outcome, if that's sustainable. Clearly, some of these secular movements, whether it's fresh food and e-commerce has closed that gap in the medium term to the extent you believe the runway on those secular trends, that could be more the norm, but we're just going to have to see that play out.

And Gail, I would just add to Glenn's answer. On the long-term planning, we never live in the moment of current demand. We look at a number of different things so that we can plan appropriately our capability in the box plants, our capacity for containerboard. And so that long-term planning still has a very rigorous look, and it almost always is a lower number than the moment that we're in unless the moment we're in is really low.

So we don't confuse in the near term. We are happy to have the near term where we have it, but our long-term and our investment plan is based on a much more sober look at the overall market and the -- but right now, we are lucky to be able to have the capability and the footprint to serve the demand while it's there.

And your next question comes from the line of George Staphos with Bank of America Merrill Lynch.

I have 2 questions. The first is really on the subject of your non-North American operations. We look at the paper business in -- I mean, let me rephrase it. On the one hand, North American paper, we look at the business and recognizing there's fair amount of freight and maintenance outage burden this quarter. Nonetheless, generating $1 million or so of EBIT on the revenue that, that segment does, does that suggest perhaps you need to take another look at this business strategically longer term? And then the related question, just getting ahead of myself, when we look at the non-North American packaging businesses, again, we see very modest EBIT on relatively large revenue gains. At some point, do we need to think about the strategy, the structure, whether it's within Brazil or Europe in terms of your containerboard and box business there?

Thanks, George. This is Glenn and those are both good questions. Relative to North America papers, we feel great about where we are, probably we feel as good as we have in the last decade in terms of the dynamic. Again, we acknowledge we're in secular decline and we don't think that rate of decline has changed materially, but what we do see is are good industry fundamentals. We are shipping less exports to meet U.S. demand. And quite frankly, there are less imports coming in. So those are good signs. We have price traction. We do have headwinds, supply chain is a headwind, but that's something somewhat in our control that we're going to manage and optimize.

So again, does this make us rethink the business? No. I think this is a reinforcement that this is a cash generating business. It has the potential to -- with our asset quality to throw up a lot of cash and we have assets that are very material to our other businesses. So I think it's right in line with our strategy, but when you look at it holistically, given our geographic footprint of printing papers around the world, it's a growth business when we're in mid-cycle environment, and we're certainly seeing that right now by the revenue growth over the last couple of years and into the future with Brazil and otherwise.

Fair point on packaging outside of North America, we have positions obviously in Europe and South America. In Europe, we're augmenting that position with catalysts, which we believe is going to make a big difference in integration, our Madrid mill, and we're quite committed to our market access in Europe. But we have some squeeze now as a nonintegrated player, and that's why we're addressing that with some organic moves to this conversion. Relative to Latin America, structurally, we're somewhat impaired there, but we're growing our market access. We're building customer relationships, and I'm not going to open up a can of worms here relative to our aspirations globally, but clearly, we see fit to improve our market access in those very profitable pools around the world through acquisitions, if we can do it at the right price.

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

I just wanted to follow up on George's second question there and talk about the international containerboard operations. Can you, a, give us some sense of kind of the sequencing on the Madrid ramp-up? And sort of how you think about that in the context of what looks like an awful lot of new supply coming in Europe over the next few years?

And then secondly, down in Brazil. The business is EBITDA negative. It's been 5 years since you bought that business. What's a reasonable time line to be generating reasonable returns in Brazil?

Two good questions, Mark. Appreciate them. Relative to Madrid, we have line of sight. Clearly, there were some obstacles largely due to labor and management of that labor in Spain, but Madrid is now looking to be ramping up by the end of this quarter and we feel great about that. That addresses a primary concern. Understand the backdrop of new capacity, but we also like the growth quotient in Europe, so a lot of that new capacity we think will be absorbed by growth.

The good news for International Paper is our mill is 100% integrated day 1. So we get to keep that margin, which is meaningful now given where OCC is at in Europe and around the world. So again, we feel it's a big step forward for our business in Europe.

Orsa continues to struggle, but improve. There's a year-over-year improvement, 2 years in a row here. We're focused on our customers. We're cautious on capital allocation, so it's really about understanding market access and understanding how to navigate Brazil in a non-recessionary environment.

Line of sight, we think we have line of sight to an EBITDA positive business. That certainly isn't a return that's accessible to us and we'll make decisions and keep our options open on how we operate across Latin America, but clearly, we see Latin America as a profit pool we want to be a part of.

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

So you had some extraordinary items in Q1 that were more extraordinary than normal, and you said it hit the quarter by about $0.08 and you also moved some maintenance forward. Can you quantify that on the maintenance front either in dollar terms or in percentage terms?

Yes, we can and what we talked about was the cost headwinds. There were some volume headwinds as well on that $50 million. We talked about Grand Prairie maybe as another issue. But yes, Of the $0.08 hit, that's going to be a non-repeat, the pull forward predominantly in Industrial Packaging. Let's say that's about $15 million of outages out in the second quarter that will come in -- that have already been taken care of.

Okay, that's great. And then also, question on the Riverdale conversion. How is that going? And when does the free sheet machine there get turned off, so to speak?

So Riverdale is on track. We have not disclosed specifically our point at which we pull the plug. We are ultimately going to time that with the engineering and time that with market demand, but as we outlined and disclosed from a macro standpoint, we're right on track with the project and we'll keep updating you as we go along.

And Steve, what we did, I think when we announced projects, we talked about it being online, which would obviously mean the conversion would take the uncoated free sheet somewhere in the middle to second half of 2019. Right now, that's still our current thinking.

And your next question comes from the line of Adam Josephson with KeyBanc.

Glenn, you talked earlier about OCC being low around the world. I just want to follow up on that. What are your longer term views along those lines? I know some of them have the view that OCC has to go up over time because of some eventual global fiber shortage, but we obviously have not seen evidence of that as of late. So can you just talk about what your view is to the extent you have a strong view along those lines?

Yes, I think we do have a fairly firm view long-term, and I appreciate you framing it long-term because short-term is a lot more complicated answer. But long-term, it comes down to, if you believe in global growth and the fact that boxes ultimately will facilitate that global growth, that there will be strong demand for recovered fiber and there will be pressure on that important substrate over time. We suggest in any medium term period, it could be quite volatile. There's different -- definitely impacts to trade today, forcing even different fiber streams to meet some of the needs. We'll watch it closely. We still remain very confident in North America that our low-cost version position is a winner, but we see OCC as strategic, not only in the U.S. but around the world.

And the good news, Adam, is we're located, both in Europe and in North America and Brazil, for that matter, where it's produced. So ultimately, we have the first access. So we have the right to first supply. The rest of the world's growth has to come from our region. So again, in any medium-term situation, we'll have access. And over the long-term, to your original question, we see incremental pressure.

Adam, let me just add, just a high-level statement around what you would have to believe to arrive at the view Glenn just described. If you believe in global growth of fiber-based packaging, then you understand that OCC is going to become more and more valuable if you look at where a lot of the growth is occurring. And the source of OCC , of course, is the box that starts with virgin tree fiber.

So we believe in global growth of fiber-based packaging and hence, the value that OCC is going to play long term in that value chain. It's going to be pretty important. That should lead to a commodity that's worth a lot more, but there's always going to be dislocations like what's happening in China. But cleaning it up is the right thing to do, but it's going to cost money to do it. But it's still the best solution for that type of packaging.

Aside from OCC, obviously, just about everything has been inflationary at least in the states in recent months, just along with an improving economy, to the extent the economy continues to improve, freight, labor, chemicals, other stuff, do you expect those buckets to remain quite inflationary as we've seen them in recent months?

Yes, it's a great question. And when we look at our year-over-year view, we do see inflationary pressure, for sure. We see it in energy and chemicals. I think what we're experiencing more than not right now in terms of wood is more seasonal. But OCC is the big variable, and whether that neutralizes it or not, I guess will just play out during the year. But certainly transportation is structural, and energy and chemicals is material. Wood, we think stays very competitive.

And your next question comes from the line of Scott Gaffner with Barclays Capital.

Mark or Glenn, when I look at Slide 20 on the EBITDA guidance and then you've got the comment around strong and sustainable free cash flow on that slide as well, I'm just trying to triangulate down the free cash flow. So if 10% -- if you have 10% plus EBITDA growth in 2018, do you think you'll be able to get to a 10% plus growth in free cash flow as well? Are there some things that hold it back in 2018 relative to 2017?

Good question and we talked 10% plus. So we framed the 10% plus relative to what we said last quarter and what we believe now. We don't forecast cash flow, but I can say that it should be within the same conditions materially, somewhat equal. So yes, to the extent we have upside in EBITDA, most of that will translate into free cash flow.

All right, fair enough. And then just as my follow-up question. If I look at the proxy that you filed back on April 5, in regards to compensation, there was a little bit of a change to the long-term management compensation, especially around return on invested capital. I think you moved to an absolute ROIC versus a relative ROIC prior, which would seemingly give you a little bit more leeway to change your ROIC targets on a long-term basis. Can you talk about that? And am I reading that correctly?

So what you're seeing there is a change. It was a change under consultation with multiple external advisors, including our Board adviser. We had an issue with relative ROIC in that plan meeting versus competition, just because of the variability associated with that. What we have built in the ROIC piece of the long-term incentive plan is a structural imperative to have a meaningful spread to our cost of capital balanced by TSR. So again, we think a very robust view of growing the size of our intrinsic value with TSR and maintaining over time, a ROIC with the spread to the cost of capital.

So again, we believe a much more clear and clean way for our organization to see value creation and also to report back out on it. Clearly, the baseline for any payment is our cost of capital. The target is a meaningful spread of 200, and again, today, we would do any capital allocation with that factor in mind.

And your next question comes from the line of Mark Connelly with Stephens.

So you've described a couple of your businesses as representing attractive profit pools in this call. Can you expand on what sort of criteria you focus on in determining what constitutes an attractive profit pool?

And the second question is fairly simple. Can you tell us more about commercial excellence? My guess is that, that's mostly a customer-focused program, but I'm wondering if there are specific financial targets on it as well.

So, Mark, on the profit pool comment, what we look at and it's part of this framework we described around building attractive positions, building competitive positions and serving attractive markets. One of the attractiveness criteria of the market is that there's profit to be made and that you can actually see that flow back through the value chain so that the producer, in our case, of packaging, has a chance to capture some of that profit. There are other markets that have high growth rates, so that's the attractiveness criteria. But based on structure and where they are in the world, there's not much money to be made. And I think, if you look at International Paper, you might conclude that our on-the-ground operations in Asia didn't meet our test for being able to capture a profit pool, even though the market has some of the highest growth rates in the world. Instead, what we did is we shifted our manufacturing focus and made products that they need in that market and produced them where they should be produced. And hence, we've captured the profit pool. For packaging, when we look at the world, there's more value appreciated by customers and hence, more ability to create compelling value proposition and capture profit in the Americas and in Europe. So that's how we think about that. It's one of several attractiveness criteria.

Great. And on commercial excellence, are there financial targets there? Or is that really just making customers happy?

So I think at a high-level, it's more than just making customers happy. It's really integrating what we do operationally with what we do commercially. We talk a lot about some of the programs you use to run a good operation in supply chain and manufacturing, lean manufacturing tools, processes that evaluate data and do predictive analytics on our factories. There's a whole world of similar initiatives around helping customers find solutions to their issues and it might be that our package helps the throughput in a certain customer's filling plant. Things we've been working on significantly, but when you think about International Paper's journey, over the last several years, building the company we have today, a lot of our focus has rightfully been on successfully bringing new people into the company, integrating acquisitions, building on really competitive set of offerings and focusing on getting our best possible position from a cost and product quality standpoint and blending the human side of all of that. We've done a very good job of that, and I think it shows in our results with our returns, with our cash flow, with our dividend capability and we want to reenergize our efforts now on taking the company we built and taking the next step in integrating commercial excellence and operational excellence.

So the targets in there are really reflected in our normal financial targets. We want to produce best-in-class margins and in some cases, we already do. We want to increase our distance and our lead. It's also about profitably finding ways to grow the company. We're not a high-growth company, but we should not shy away from the ability to grow our company hence, why we talk about profitable revenue growth. So if you've got returns like International Paper has, well above our cost of capital, and you can profitably grow, you're going to create higher intrinsic value and that should be exciting for investors.

And your next question comes from the line of Marcio Farid with UBS Global Research.

I have just one follow-up question on the JV Ilim. I'm not sure how much you can comment on it, but the company has clearly been performing pretty well. So I just wanted to understand what are the long-term plans there? Do you see room for more investment on capacity growth? Or just to pay dividends from here?

Thanks for the question. Ilim is a fantastic business. It's one of the best examples we have of our competitive position, serving a really attractive market. A lot of Ilim's products end up going to Asia. There is optimization underway right now in Ilim, across the business that gets exported out of the country and across the businesses that serve the Russian market.

And as Ilim has already, in the past disclosed, there's opportunity for growing that business through further investment and that plan is underway in various stages. But business has a tremendous amount of potential. It's performing very, very well. We've got great people in that business and great assets, and we have very attractive markets, especially the adjacent market in Asia.

And our final question does come from the line of Chip Dillon with Vertical Research.

Yes. Just want to make sure I have my numbers right. It looks like you've cut about $11 million out of the maintenance expense from the year, at least versus the first quarter. And with the -- it looks like the $14 million extra you spent in the first quarter versus the plan, means that we kind of are looking at a nickel of benefit in the back 9 months in terms of the maintenance being less than what we would have thought before, based on the numbers in the first -- fourth quarter call back in February.

Chip, this is Glenn. I mean, you caught it. Your numbers are directionally correct.

And now I'd like to turn it back over to Guillermo.

And Guillermo is going to turn it back over to me. Thanks, operator. Thank you for all being on the call, and for your interest in International Paper. As I said earlier in my remarks, we have a lot of momentum coming out of the first quarter, and it's driven by solid fundamentals and significant success with our customers and really all of our businesses.

We look forward to delivering a very strong year of performance in 2018. We also look forward to talking to you again next quarter. Thank you.

And this does conclude today's conference call. You may now disconnect.