International Paper Co (IP) 2001 Q1 法說會逐字稿

1

Hello and welcome to today's first quarter 2001 earnings call. Today's moderator for the call will be Mrs. Carol Tutundgy, vice president of investor relations. At the request of International Paper, today's call is being recorded. I would now like to turn the conference over to Mrs. Tutundgy. Ma'am you may begin.

Thank you very much. Good morning everyone. Thank you for joining us here today on this conference call. Before we commence, I just have to issue the forward-looking statement. [_______________] namely we will be making a number of statements today, and they are risks and uncertainties that may cause eventual results to differ materially from the statements we are making. That would include interest rate changes, demands for our products, energy, foreign currencies, and our capacity rationalization program and obviously a variety of other things. With that, I would like to turn this call over to John Faraci, the company's chief financial officer. John?

Good morning everyone. Thanks Carol. As you know, we released our 2 first quarter earnings this morning. We reported sales of $6.9 billion, earnings of 24 million which was a nickel a share. For those of you who are following on on our website, I am going to go right to page 2, and I think you will be able to follow the material. A lot of this is stuff that we covered when we had a conference call several weeks ago, so I will try to get to the Q&A session, you know, quite quickly. There has obviously been a lot other news that has come out this morning, which is somewhat important to us and to the industry and the economy as well with the feds cutting interest rates, but looking back at the first quarter, I think we would have to say that it was a very tough quarter. You know, we continue to manage our capacity aggressively, we make good progress on our divestiture plan. We continue to exercise and even tightened our financial discipline, you will see that when I talk about our capital spending. I'll also, you know, try to put some context around, you know, how we see the second quarter. You know starting off with the macro environment, on page 3, you know, the reason in our view the fed aggressively cut interest rates again this morning is the economy is quite weak. You pick up a newspaper, 3 and you see some signs that automobile sales may be improving, but in our businesses the economy everywhere we turned, with the exception of the housing market, was weak. The dollar continues to be at very strong levels, and earlier in the quarter, we had energy prices that when they spiked in January were about 4 times what they were last January, if you just look at natural gas. Page 4 is just a chart that I think all of you have seen. This shows the US-Euro relationship over the last 6 years. You know we are at a 15-16 year high with the US dollar against our major trading partners. And this has had a huge impact on our businesses, particularly our packaging and paper businesses. In packaging, it has basically taken away our export competitiveness on some of the businesses where with a more normal dollar we're one of the one low cost producers. In our paper business, what it has made is US market, for those who are selling in the US market dollars, which is everyone, has made the US market one of the most attractive markets where they can sell into and especially when they are producing in a country where the currencies are low. You know, obviously, the margins are quite attractive. I think the results of some of the paper companies 4 based outside the United States support that. One of the things, this is page 5 now, we have been showing you each quarter, I think it is important to give some transparency to what is going on. And to show you how we are doing on non-price initiatives, but the impact of some of the other things that we are doing which we think are the right things for the International Paper to do on the longer term, the impact they have on short term. We start off on the left hand side with fourth quarter results which are 28 cents a share, just kind of walking through the chart. Our prices quarter to quarter, and I will come back and talk about prices in our major businesses, the prices over all were off by 4 cents a share. Energy costs which again moderated during the quarter, but for the quarter remained quite high. It had the quarter to quarter impact of 7 cents a share. Our operations, no other way to put this, we did not have a good quarter, you know, running our mills. That was not across the board, we got a handful of our, close to 30, facilities, paper mills around the world, and January and February were quite poor months. Those problems seem for the most part behind us going in the second quarter. 5 So as you said in the press release, you know, those problems are not going to be with us as we go into the second quarter, but on a quarter to quarter basis, our operating performance was well short of what has been our normal pattern. The economy continued to weaken, and it also continued to be winner. So we had a shortfall in volume, again across the board, and I will talk about that business by business a little bit later, of 8 cents a share. We took less downtime in the first quarter, that is principally because of the capacity closures that we announced and implemented in the 4th quarter, and recall that most of that, over a million tons of it, was in our uncoated free-sheet business and our pulp business, then another couple of hundred thousand tons in our containerboard business. We continue to get the benefit of incremental merger benefits of 5 cents a share, that is on top of the merger benefits that we had already realized, you know since we bought Champion which in December last year amounted to about $100 million. We got another 5 cents on top of that to be realized during the quarter and those come from both S&A savings and some of the operating savings we are starting to get as we move grades around from various facilities to optimize our printing 6 papers and coated paper business. As we have tried to group the vested businesses over in one area, so you can see the businesses that we intend to sell. You know, their performance has moved the same way the rest of our businesses have. Some for different reasons, but all effected by a slowing economy which leaves us with 5 cents a share for the quarter. We can come back to this if you like. The next couple of slides, you know, drill down on some of these areas that were the major causes for the quarter to quarter change in earnings. Big increases in gas prices, although down from the January peak, what we have shown here is the $85 million is comparing the fourth quarter of last year to the first quarter of last year, and by the time December come around, gas prices were running at about $85 million, a quarter more than they were at the same time last year. Gas prices continue to go up, gas reached, went over $10 a unit in January, came down to below $6 by the time March came around, but all in our energy cost, and this is just about all gas, was up a $135 million on a quarter to quarter basis and $50 million in the last quarter, and that $50 million is what amounted to 7 cents a share. Our capacity 7 management, this is page 7, we continue to take significant amounts of downtime, but as they indicated, we took less downtime in the first quarter than we did in the fourth when we took, and this is all market downtime, over 800,000 tons because I think, this is shown in blue in your chart. Is that right? Yeah, the blue part of the bar is downtime we are taking in our uncoated papers business, and you can see that shrunk in the first quarter because we had taken out the capacity of Mobile, Lock Haven, and Courtland. We continue to take a lot of downtime in the containerboard business, that is the green portion of the bar, over 200,000 tons, and you we are taking a significant amount of downtime in our pulp business as well as some in bleached board. We will continue to do what is necessary going forward to maintain our inventory levels where we want them, and our inventories came down quarter to quarter and to match our capacity with demand in the marketplace. The next two slides, page 8 and 9, puts numbers around sale volumes quarter to quarter and then price changes. First on sales volumes, we have got two comparisons here. One against the third quarter of last year, so you can see before we really started to see business tail off, where we are at this 8 quarter relative to that point in time, and then on the right hand column, how the quarter to quarter sequential quarter is compared. In uncoated papers, volume was flat compared to the fourth quarter and down compared to where it was in the third quarter of last year, and that is shown by a red arrow. That business had a very tough quarter if you look at operating earnings, we got impacted principally by poor operations, that's where a lot of it occurred in our uncoated white papers business and with high energy costs. Coated papers, again volume was flat quarter to quarter, but down significantly off where it was in the third quarter, and as the economy slowed and advertising has slowed, you know, we have certainly seen that impact in our coated papers business. Pulp, a combination of both things here, volume was down compared to the fourth quarter and also compared to the third quarter. I think you will see when I get to pricing that, you know, significant erosion in pricing as well in pulp quarter to quarter. Containerboard: Containerboard was probably our best performing business during the quarter. That is part of our packaging business, and our containerboard operating earnings, you know, held up relatively 9 well. We ran our mills well. Despite the high downtime we took, our performance was relatively good. Volume was flat, quarter to quarter and down 8% compared to the 3rd quarter. I don't have the box numbers here on this chart, but I will just give them to you. Our box business was flat quarter to quarter and down about 2% compared to the third quarter. Bleached board: Bleached board struggled during the quarter. This is the other leg of our packaging business. It got hit by high energy costs, you know, the bleach board business is probably the biggest consumer of natural gas that we have in our paper and packaging businesses. We had some operating performance difficulties, and I think we eluded the fact earlier that our wood costs recently, particularly hard wood in the western part of the south, Arkansas, Louisiana, and Mississippi, those prices have spiked up as heavy rains basically flooded all 3 of those states, so that business experienced a tough quarter for those reasons, and as the chart indicates, volume was down both sequentially when compared with the third quarter. Our wood products business, that's lumber and panels, their operating earnings improved quarter to quarter, and that really came as a result of lower wood cost 10 because as you can see, volume was although housing starts remain relatively strong, you know volume was flat compared to the third quarter, flat on lumber, a little bit down on panels. Xpedex which is our merging side of uncoated papers business and coated papers, you know, basically reflecting the same things that we see in the paper businesses with volume basically down sequentially when compared to where it was in the quarter ending September. Let me turn out the prices, and we will try to array prices here in two different ways because there are a variety of things going on within the quarter. The first column, now I am on page 9, shows the price in March compared with the price in the quarter. So this will give you an indication of whether coming out of the quarter, prices were coming sideways, down, or up. In uncoated papers, we came out of the quarter flat, so basically March prices were about the same levels as January and February, and for the quarter, prices were up $9 a ton. In coated papers, we came out of the quarter with more price weakness, prices in March were down $19 a ton compared to what they were for the quarter, and we went down more significantly close to $40 a ton on a sequential 11 basis. Pulp, as I indicated is where we have seen the most price erosion, and clearly pulp prices came out of the quarter with more weakness than we had in coated papers business. In fact, you know, directionally, that is probably clearly where the most ground has been lost coming out of the quarter. Our containerboard prices were down just very slightly in March compared with the first quarter at about $15 quarter to quarter. Box prices have been flat. Bleached board was down in March compared to the quarter, but flat quarter on quarter. Lumber, this is one of the pieces of good news we have, you know, lumber prices came out of the quarter on an upward trend. You know there is some seasonal uptick in construction markets, you know, the housing numbers that just came out are still relatively good. There still are supply issues in the wood businesses which are the real reason for prices remaining at close to 10 year lows, but price of lumber looks a bit better now then they did earlier in the quarter. Panel prices, however, went the opposite way, were down for the quarter and finally, stumpage which is an indicator of our lawn prices are the prices we sell trees for as they indicated lower wood cost, helped our wood products business, but would have hurt on 12 the revenue side, our timber selling business. In addition to the operating earnings, we had some special charges, [14:41____________] 14 cents for the quarter, they have followed a 3 [_______________] charges related to businesses that have either been divested or we are divesting and accounting change that amounted to $25 million related to an interest rate swap we did on some debt from 5 or 6 years ago, and merger cost associated with the Champion acquisition. The merger cost, the benefit is going forward like relocation, like systems work, we expense the merger costs like severance we take the purchase accounting. So this is the piece that goes to the P&L, and the after-tax impact has 14 cents a share. During the first quarter, we continue to rationalize capacity, to look for ways to take cost out, to reduce the number of facilities we operate with a view that we are going to do that and not sacrifice the revenues, and when we have capacity that we don't need, we are going to shut it down. That, all in eliminated about a thousand jobs, a thousand positions that included, in there would be the benefits realized through the Champion merger. A couple of specific actions we took, we shut down 13 sawmills during the forest products plants during the quarter, and we finished integration of 26 out of 29 distribution facilities that we acquired with the Champion acquisition, that would be the nationwide chain. We continue the implementation of the mill rationalizations. We got this mill shut down. It will take us several quarters to get all of the mixed improvement and operating improvements that we expect out of shutting down Mobile, downsizing Courtland, and what would be the eventual shutdown of Lock Haven [_______________] through. We made very good progress on divestitures, $900 million in proceeds in the first quarter and were over $2 billion when we combine businesses that have already been divested and those that are fairly close to reaching completion. Page 13, we continue to exercise aggressive financial discipline; inventory volumes were down. Our third quarter versus fourth quarter, I think, our inventories improved in just about every business. Debt was reduced by over $600 million, and to give you a sense of how we are approaching capital, in the first quarter of 2000, the combined International Paper and Champion Organization spent $280 million of capital. In the first quarter, we spent $200 million in 14 capital, so we are spending 25% less capital, with the company being 25% bigger, and you know that comes 2 ways, we have got less facilities to spend capital on, which has been one of our objectives, and continues to be, and we also have a sharper pencil out in terms of how we are spending our capital. On page 14, I have already talked to, as I said we made good progress on our divestiture program. You see here what we have closed, what's under contract, what's currently being marketed, and a combination of what has been closed and what is under contract amounts to $2.4 billion in asset sales. So let me summarize the first quarter. It clearly was a tough quarter it is the one, that is good to have behind us. There are a lot of things that we can't do about the economy, but as we said in the press release, we certainly can and, in fact, are changing the company. We had some operating hiccups in the first quarter; those will not be with us during the second quarter. Our volume was down in the quarter generally, in some cases flat, but overall it was down. Energy was significantly higher than the fourth quarter, but our energy costs moderated through the quarter, and in March, we got down to levels that were 15 close to where we were in December. We are still taking downtime, but the system is much better balanced now that we have gotten the 2 large mills that capacity out of the system, the downsizing at Courtland and shutdown of Mobile. Our inventories are in good shape, and I think we have to say that coming out of the first quarter, prices are under pressure. You know the only place where we saw some optimism on pricing, coming out of the quarter, was in our lumber business. Other than that, prices were either flat or showing some signs of erosion. That is a good lead into the second quarter outlook. We will continue to take downtime to align production with demand. We don't have a forecast right now because we are not sure what it's going to look like, but we are going to take the downtime we need to keep our inventories from building and to make sure we match our production with our customers' demand. We would expect some continued downward pricing pressure in some of our businesses. Energy prices are still high; they are moderating, and it's anybody's guess, I think you can pick up any scenario you want for energy prices going forward. How hot the summer is, how much rains, how many rigs people can get out in the field, and how much gas they can find. 16 So, we are not to certain where energy prices will be. We certainly expect and, in fact, are seeing our operating performance improve, but it's improving against the backdrop of an economy that slowed very appreciably, and I would say that's why the Fed moved again today. They're recognizing that the economy isn't out of the woods, and they have got to act which, from our perspective, is the right thing to do. So let me go to questions and just summarize on page 18. We were committed in changing the status quo of International Paper. We are focusing on our core businesses; we did that through the acquisition of Champion. We are doing it through the divestment program which is going to shed $3 billion in assets, $5 billion when you include timber. We are aggressively managing our capacity; we will continue to do that. We are going to keep our capital spending low all around the organization through a combination of facility rationalization and for looking for ways to lower costs and improve margins. We are finding ways to improve the company, and there is no doubt in our mind, this is going to lead to improved returns over the cycle. We have taken some short-term hits, but we think it's the right 17 thing to do. So with that let me get to your questions.

Thank you. At this time we will begin the question and answer session. If you have a question, please press * 1 on your touch- tone phone. If you are using speaker equipment, you may need to lift your handset prior to pressing * 1. To withdraw your question, you may press *2. Once again, that's * 1 to ask a question and * 2 to withdraw your question. Our first question comes from Chip Dillon of Salomon Smith Barney. You may ask your question.

Yes, excuse me. Good morning John. I think your chart on the Euro tells the entire story. On that score, given the sort of unprecedented extreme we see, have you given any thought to actually maybe taking more downtime here and exporting from some of your, what you thought were higher cost facilities, but are now lower cost facilities that you have both in France and in eastern Europe paperback over here, is it that extreme yet?

I am not really sure whether France has become a low cost producer 18 yet. Eastern Europe looks pretty good. Well, we've got, you know, we don't have any virgin containerboard capacity other than what we got in New Zealand shipped. We are running the white papers business full right now, basically full in the US, and we think we've got the pulp system balanced around the world by running the low cost facilities and not running the higher cost facilities. So in an essence, we are doing some of that, but there are probably few opportunities. All in, I wouldn't say there is a material shift to move, to run our facilities offshore and not run as much as we have here, but as you can see we are continuing to take downtime where it's required.

If this situation continued, and perhaps it won't with the rate cut, but if it did, would you be increasingly likely to try to increase your capacity base in Europe again given the cost differential.

Sometimes, we feel like we are moving into the shoe business, and I think if we can pack up all these facilities and move them. They are competitive facilities, and we've got, our containerboard system is a world-class system. Add a more normal exchange rate. I am 19 not sure what that is, but yeah, you are right, looking at chart, it is pretty clear that where the dollar is now against the Euro, and we reached the 30 month high against the Yen last week or 10 days ago. This is not a normal situation especially when you look at what's going on with the stock market despite where it is this morning, the interest rate easing, the economy slowing, and our trade deficit, all those things would typically suggest a weaker dollar, and we got a stronger dollar.

Just shifting gears quickly, how do you feel about Masonite transaction, and maybe, it's premature to ask this, but if it ultimately doesn't get approval to go forward, are you confident that you will find an equally attractive buyer for the property.

I can't be specific on Masonite because we don't have anything tell you on Masonite today. We announced that we signed a contract on that. Justice Department, we don't have final approvals from the Justice Department to go ahead. There is still work to be done, but what I'd say is when you've got 14 businesses you 20 are going to sell, some are going to go very well and some are going to take a little longer. You know, we get prices that we are pretty pleased with on some of them and prices that always don't meet our expectations on some. All in, what we've said is we are going to focus on our core businesses, and we are pretty pleased with how that process has gone so far, but Masonite probably won't be the only one that has a couple of forks in the road. We've gotten out of the chute now and gotten quite a bit done in a period of 6 to 7 months.

Absolutely. Okay, thanks John.

Thank you. Our next question comes from Mark Wilde of Deutsche Bank. You may ask your question.

Good morning John.

Hi Mark, how are you?

I am good. I wondered if you could do a couple of things. I wondered if you could talk a little bit about, give a little more color on pricing in two of these markets, and I could appreciate that you were stable late 21 this quarter, but one of your competitors yesterday talked about being down about $40 late in the quarter. Then in the SBS market, you said you were flat for the quarter, but you were down almost $20 at the end of the quarter. I wondered if you could help us understand exactly what's going on in both of those businesses.

Sure. It sounds like you are about 100 miles away.

Must be a bad battery on this phone.

Pardon me?

No, go ahead.

Let me talk about the uncoated white business first. That, you know, if we look at, we are really in 3 business there, the cut size business, the commercial printing business, and our converting businesses. If you look at converting, you know prices were generally flat through the quarter. The merchant business used to be the kind of the roll businesses. Prices were generally up in March compared to where they were in the first quarter, and in the cut size business, we got some pricing 22 improvement during the quarter, and that's going to be, I am looking at our numbers in year market have mix in them, so there is little bit of mix that can be flowing through there, but generally speaking that's how the quarter played out. We did not end the quarter on a weak note on pricing in uncoated white.

In the SBS market, John?

In SBS and again it's a function of mix, and there is a lot more mix that's running through here because we are selling everything from folding carton boards to plate stock to liquid packaging board, but prices move around during the quarter, and at the end of March, you know, coming out of the quarter, they were lower than they were in January. I don't have the kind of plate stock, liquid packaging prices, and folding carton prices right here in front of me.

John, one other thing, when I looked at your balance sheet at the end of the quarter, I noticed that timberland was down by about $840 million, but the timber sale that you did out of Washington State was, I think, about just a little under 500 million. 23

Right.

Can you help us understand that difference?

Yeah, I think what's, if you look at, it is probably in goodwill. That's the Washington State timberlands, and when we closed on Champion, we still were trying to finalize all these asset values. What we did is we have assigned assets values to the assets, and what you have there is the asset value that was assigned to the West Coast timberlands were higher than what we sold it for, and the difference went into goodwill.

I see.

So you have, if we had, I don't know what the number was, but let's say if $700 to $800 million is assigned to that assets, you know, that was not it's market value, and since that all went through purchase accounting, the difference is in goodwill.

John, any contingency plans on your part if the dollar doesn't weaken. I mean it seems like most of us are sitting here with conventional wisdom that says the dollar has 24 to go down, but what if doesn't?

I guess it's a question of what time frame you think about contingency plans. I mean, we are to the extent we probably were at this point before because the dollar is just reinforcing what's going on in the economy. We don't need any capacity in our North American and US markets. You know, that's why we have been shedding capacity we don't think we are going to need over the long term and giving ourselves the ability to invest in the facilities we think are truly going to be competitive. You know, obviously if we are sitting here with a dollar that's stronger than it is right now a year from now, we will be thinking about, you know, how much money we are putting into facilities here versus facilities elsewhere. We haven't really thought about adding capacity in another part of the world to serve the US market because we have got all of our paper businesses and packaging businesses. We have got very competitive facilities here for the US market and in some cases on a global basis, but I guess, you know, that could get resawed, but you are not going to make that decision based on what's been a 12 month phenomenon, but the longer it goes, 25 obviously the more concerned we would get.

Okay, thanks John.

Thank you. Our next question comes from Matt Berler of Morgan Stanley. You may ask your question.

Hi, good morning.

Good morning Matt.

Or afternoon. Three questions really John. First of all, in your slide show, you gave some guidance on a number of financial factors, and one surprised me a little bit, and that is your guidance for net interest expense for full year of $1 billion. So I wondered if you could, and that's basically a little bit above where your first quarter annualized, so I was assuming, and I assume most of you were, that proceeds from the asset sales would pull your debt down over the year. Clearly the refinancing environment you think would be improving now?

Yeah.

For a company like yours, so maybe you can touch on that guidance. Second 26 question, John, has to do with the coated paper side of your business, that would seem much bigger, more important for you now, but there is a whole lot of downtime seems to be taken in your system, or for that matter in the industry. Can you discuss your thoughts about that exposure in the second quarter, third quarter for you guys and then lastly, your pulp balance. Can you just refresh our memories about what your net pulp sales are today net of your purchases, so we can understand your exposure there, given the collapse that is underway.

On interest costs, I'll have to turn it over to my colleagues either Andy, Andy Lessin? Andy is in New Zealand, but he is part of this conference call. Do you have a sense on that, if not, maybe Jules [_______________] does.

I think the billion is probably a round number.

Interest in the first quarter ran at $250 million, and you are right, Matt, we are going to use proceeds from debt and cash from operations, proceeds from divestments and cash from operations to pay down debt, and if 27 you need a more precise number there, maybe we can help you out.

Okay, this seems to me that you could be $100 million or more higher.

$100 million or more lower.

That is what I meant.

Yeah, and that is going to be a function of timing too. Some of these sales like the hydro assets, and some others we are working on. You know, we will get the sale closed, and we won't get the cash for 3 or 4 months.

Right. Okay.

Thank you.

Your second question is about coated papers. We are taking, you know, there are two segments of our coated papers business. One is groundwood which is quite strong, and we have been running, you know, we haven't been building inventory in the coated papers in either coated or in groundwood and had a strong fourth quarter and businesses held up 28 reasonably well in the first quarter. The free sheet side is another story. That business has slowed significantly in the first quarter, principally as a result of decline in ad pages, and prices have slipped as well. So the downtime you're are looking there is, I don't have the exact number, maybe I will in a minute, downtime in the coated business, that was 30,000 tons in the first quarter this year, 45,000 tons in the fourth quarter of last year, and you know depending upon how things turn out, we will take as much downtime as necessary. On the groundwood side, there are two scenarios. One is, catalogers have basically already ordered their goods for the season. You know, some of our customers are telling us they're going to actually do more advertising, more catalog sales, more catalog mailings because they are worried about generating enough business activity to sell what they have ordered. There are other people that are saying there will be cutbacks in catalog sales. I don't think we really know yet, but our coated papers business, we are going to manage the same way that we are managing the containerboard, packaging business, and our uncoated papers business, and the amount of downtime will be a function of what customer 29 orders are.

You think that you have found a way to take downtime in your coated paper business in a way that is less onerous in terms of the impact on the P&L the way you have begun to do on the containerboard side?

Well in the, in all of these businesses, Matt, as we get better at understanding marginal economics, you know, the downtime numbers we talk about are downtime and slowbacks, and we are being increasingly capable of understanding how to run these machines and systems at less than what we call [_______________] capacity and without having cost go up. So that is happening around. It is not only happening in the coated business, but it is happening in containerboard and the printing papers business as well. Just to give you a sense here, coated papers inventories, you know, were flat February versus March, and so we did not really build anything. There was really no significant change in inventories during the quarter.

Okay. 30

[_______________] says we've got orders to, you know, for our customers, not at prices they were, but we've got orders.

And lastly pulp.

Pulp. I think our market pulp position overall is, maybe the thing to do is for Carol to get back with you on that, Matt.

Matt, I have a detailed schedule in my office. I just didn't bring into this call, but I'll, are you in San Francisco??

Yes.

I'll give you a call.

Thank you.

I think worldwide, we are about 3 million tons of market pulp, but I'm not sure how much against that, how much pulp we are buying.

Okay. Thank you.

Thank you. Our next question comes from Mark Connelly of Credit Suisse First Boston. You may ask your question. 31

Just a couple of quick things, John.

Hi Mark. Good afternoon.

First, on inventories. A couple of your competitors who have also espoused some belief in production discipline seem to have had trouble living up to it in this first quarter. In your key grades, are you, are your inventories where you want them? Are they low, are they high? And in addition to key grades, I wonder if you could add bleached board into that.

Well, you know, we've been [_______________] about controlling our inventories and, you know, taking downtime where it is necessary to do that. So I can't comment about what has happened to, you know, some of our competitors, but that's not the case for International Paper. In containerboard, our inventories in March were the lowest they have been since basically the September period, and were lower than they were in January and February. In the box plants, our inventories were down. I am just looking at box plant inventories right now are lower than they have been. This is roll stock, lower than they have 32 been in over an year. In the bleached board business, our inventories are flat versus, they are actually down in March compared to where they were in January, and they are the lowest they had been since September of last year. So, we are in pretty good shape inventory wise.

So your inventories were down in March. We are going into the seasonally stronger period for bleached board demand. Do you expect those inventories to stay at this level, or are you going to have to bring them up in anticipation of the seasonal improvement?

I wouldn't say we would have to bring our inventories up. What we do is we move our inventories around as we plan for maintenance averages, you know, when we wouldn't be taking market downtime for capital projects.

Okay and just one last question. Are there any significant events in terms of your energy costs over the next couple of quarters? You know, big contract roll off or anything else like that or any other adjustments that we should be able to anticipate?

No, our energy basically, 33 we were just above at the stock market for energy through the first quarter, so I mean you always learn in hindsight, that would have been a good quarter to have bought some energy.

Okay.

We saw what the market was.

Fair enough. Thank you very much.

Thank you. Our next question comes from Mark [_______________] from Goldman. You may ask you question.

Thank you. Good morning John.

Hi Mark.

On the divestiture program, on page 14, you listed a number of business which are being marketed, and you said in the past that you are expecting to get about 5 billion plus, and I think that the closed and under contract add to just under 2.5 billion. 34

Right.

Is it fair to assume then that the being marketed is kind of 2.5 billion plus in expectations or might there be other businesses not included there?

When we said, Mark, that we were upping the divestiture target to $5 billion, we also said most of that, in fact, if not all that increment was going to come from timberland sales, and we indicated I think when we acquired Champion that we anticipated we'd be selling over time a couple of million acres of timberland. In fact, we are going to do that. We put the East Texas timberlands up for sale, but there is more timberland to sell. We don't intend on selling that all in one year.

Okay.

That's not the right way to monetize timber.

Okay.

No, you can't, don't assume that there's anything close to $2.5 billion in the being marketed category. We expected to get 35 $3 billion plus of proceeds done by the end of 2001, and that's still our objective.

Okay. Second question on Europe. Have you seen any change in market conditions there. It's held up pretty well in the early part of this year. Do they continue to hold up reasonably well all things considered, or are you starting to see that slow at this conjuncture?

Pulp prices obviously are coming down, and without Zanders, we are a net pulp seller in Europe. Operating wise, we are running very well in Europe. Businesses in eastern Europe and western Europe are having good operating performance. Volume was up in the fourth quarter versus first quarter. Prices were down a little bit, and you know we are taking some downtime by slowing back [_______________] because we are not running the system full again, thinking about how to manage our capacity around the world. So relatively speaking, performance in Europe is better than in North America, but Europe can't be isolated from what happens here forever. The pulp markets obviously are moving down around the world. 36

Just last, if you just remind me what was the impact of the operating issues on first quarter ballpark.

Versus the fourth quarter?

Yeah.

$40 or $50 million. If you go back to the waterfall chart there, it cost us 6 cents a share on 480 million shares.

Okay great. Thank you.

Thank you. Our next question comes from Peter [_______________] of Lehman Brothers. You may ask your question.

Yes, thanks and good afternoon. John, I just had a question coming back to energy. You know, if you assume that energy prices remain high for an extended period, I was curious if there are any machines or mills in your system going forward that might be candidates for some type of change as a result of the energy. Maybe as follow on to that, I know you sold some cogen. I am curious if you have any other plans in your system on a cogen 37 front.

One of the things we have done, Pete, is move very quickly to convert from gas to fuel where we could, and think about what happened to gas prices. Our energy bill in the first quarter compared to the first quarter of last year, if you go back, take January. We would have annualized January of this year and compare it to the first quarter of last year, our energy bill doubled. Gas prices went up by about 4x, and the reason we did not have that kind of increase on our energy bill is number one, we don't use exclusively gas. Number two, we switched a lot of our facilities from gas to oil. Now, we've got coal capability at some facilities like Eastover, and you can't make those kinds of conversions without spending capital. If we were to say that we are going to have gas prices that are in the 6 plus range going forward for the foreseeable future, economics of some of these conversions, which are expensive, we look at those.

Okay.

We generate over, I think, it's just over 55% of our own energy, so you know 38 we've got cogen capability in a lot of places around the world. The cogen operation that we sold earlier in the year was a water project, and the economics were attractive to do that.

Okay. But is it fair that that was an opportunistic situation.

Yeah, that was an opportunistic situation. You would look at that differently at every facility or every situation.

Okay. But I guess the question really is whether you are contemplating investments in cogen going forward.

You know, those types of projects, Pete, are always on the radar screen. They've got to compete for capital, we may have less capital go around now, so we will make those if they make the return cut off, and you know the return cut off is a function of what you can do at the facility now we have been able to make these conversions from gas to oil at a lot of our facilities without spending much capital at all. You know, converting something to a coal capability where it doesn't have it is a bigger 39 ticket item.

Okay good. The other question I had [_______________] comment on the containerboard markets. When your competitors commented on some of the export pricing coming down, I was curious on what you're seeing out of Savannah or some of your other export mills, export price versus domestic price.

Well, you know the export market has been the weakest part of the market now for 6 to 9 months, and I'd say prices in the export market are $50 dollars below what they are in the domestic markets.

Okay, just last if you could? Do you have a depreciation figure for the quarter yet or working capital or long-term debt?

I'd have to ask one of my colleagues here. Pete, maybe we can get back to you with that.

Okay, that would be great. Thanks John.

Thank you. 40 Our next question comes from Richard Schneider of UBS Warburg. You may ask your question.

Hi John. I was wondering if you can clarify on restatements that you have done in terms of segment numbers. Obviously, chemicals has been eliminated because it's not big enough, I guess, anymore with the sale of [_______________] a number of other segments were restated like forest products.

Let me just take a look at the page, Rich, and see, it's not obvious to me at all to me at all. We'll have to get back to you. What page you are looking at?

You know I am just looking at.

Yeah, the other businesses, what we have in there is those are the businesses that had been earmarked for sale, so if you go back and look at the divestment page, page 14, the businesses that are being marketed will include those divestment businesses. So some of those businesses like Arizona Chemical which used to be in the chemical segment, like decorative products would have been in our forest products 41 segment, fine papers would have been in the printing paper segment. So the businesses come out all the segments and are going into businesses being marketed.

So that's involved in all these like last year, you know, printing papers was reported at 178 million and now you are showing a 166 million for the last year, so those are related to all the businesses being sold and how you are reconverting the segments at this point, right?

Correct, and then hopefully, that makes it easier for you because we have gotten our base of paper, packaging, and forest and wood segments that have the businesses in there that are not on the part of the divestiture program.

Okay, are you going to be able to provide us with restatements for all the quarters of the last year at anytime soon.

I have no idea. I haven't given any thought for that.

Okay. 42

John, we can do that.

Hey great. Just looking at forest products on this new segment orientation, you are up marginally from a year ago, and I'm not sure how that looks versus the fourth quarter because that was you know, fourth quarter obviously had some restatements. Could you go through what went on in forest products? Lumbar prices have moved, but they are down significantly from last year and what were the things that had forest products up this year versus last year.

Our forest products earnings were up quarter to quarter both not only compared to last year, but sequentially.

Okay.

Not only compared to last year but sequentially. We are not pleased with the performance in that business because, you know, with the wood prices still at 10 year lows, but the performance in both our lumber business and our panels business during the quarter, when you put those two together, it was better than it was in the fourth quarter. 43

Okay. Then year over year, it was up because you then had Champion.

Yeah, the first quarter numbers gone up with Champion.

So that is not on an accountable basis.

The first quarter numbers for us until we get to the third quarter, you are really not going to have good quarter to quarter comparisons, but frankly, that's probably not worth a lot of effort to go restate.

Then just looking at the issue that was brought up on interest expense. You sold $600 million worth of businesses in the first quarter. Was it more the timing issue as to why interest expense did not drop from the fourth quarter?

Yeah , it was timing and some other things, you know, that we were funding. We had a shutdown at Mobile, we had the downsizing at Courtland, we had lot of cost associated with realizing the Champion merger benefits as we got people out during the quarter. 44 You all know that we are going to get $500 million merger benefits from Champion, but it is going to cost us some cash to get that done. We have got all that factored into our thinking.

Okay, and just on the problems that you talked about, the operating problems, you specifically talked about uncoated free sheet and bleached board, and it seemed like those are the two areas that you also indicated were hit the hardest by the rise in natural gas prices. Were some of these operating problems related to your attempts to switch to other cheaper oils.

Yes, some were related to switching, Rich, some were related to the fact that we set some ceilings on what we would pay for wood, and some of these of these facilities were over in the near hardwood when everything flooded, and we were running, taking facilities up and down because we did not have wood. We had some boiler problems, we had some long-term problems. Nothing systemic, but we had a handful facilities in printing papers and a couple of bleached board mills that did not have a good quarter. 45

Okay.

So all of those things contributed, but what it wasn't, it wasn't because there were any key distraction on merger benefits or not getting our priorities right, in fact we have got those facilities running better now.

So as we look at the second quarter, we may see some moderation of energy costs, lack of these problems that had surfaced on some lower interest expense and maybe well and clearly looks like higher wood or lumber prices. Are those some of the positives that you see going?

Well, I guess I wouldn't think they are positives, I would think they are negatives. You know, volume is still very weak, you know, we don't see strong volumes. We were expecting some seasonal pickup in March. March is a little bit better [_______________] in a few days, but not meaningfully so. March is typically one of our strongest months of the year. Prices are not headed up, they are headed for the most part, they have got a direction, some have gone sideways, but they have a 46 direction, and they are down. Energy costs, I am not going to try to forecast energy cost, so I don't know whether they are going to be down for the quarter or, you know, back above where they were in March. I'd be real surprised if they got back to January levels. You know, interest costs will come down as we get the proceeds in, but a lot of the sales, we don't get immediate proceeds. You know, we've got some where we've got to get some other regulatory approvals, and it takes some 4-5 months from the time of closing to get the cash. So, you know interest generally, thinking through the year, the trend of interest cost is going to be down. I don't know about the trend of prices. Volume is going to be a function of the economy. Our mills will run better. That is the one you can take to the bank.

I am assuming you are not implying though that volume is, you know, looking like it is going to be weaker in the second quarter than the first quarter though. You are just not getting the seasonal pickup, is that the way to interpret?

I saw the containerboard numbers came out yesterday, you know, they looked 47 pretty. Inventories were in good shape, better shape, but the numbers in terms of shipments, I think, were an indication of what is going on with the slowing economy and extremely strong dollar. You know, the shipment figures, I believe are down year over year. So I frankly, Rich, near term, winter's over. So I was talking about winter for the last 2 quarters. Winter's over, so sun is out, it is warmer. We ought to get some seasonal pickup, but you know, this economy is certainly not out of the woods, and I am not sure whether it is going deeper into the woods or not. If consumer confidence takes a turn for the worse, yeah there is more downside to the economy. The housing market is very strong. It may be sustained by, helped by lower interest rates, but if consumer confidence takes a hit, I think there is more downside than upside risk to the housing market right now and we've still got wood prices at 10 year lows.

Thanks. Just a last question, you know, what is your views on what is happening in the pulp market? Are we, you know, seeing spot prices hitting the bottom or is this thing just continuing to collapse. 48

My crystal ball is no better than yours, Rich. I think, if I kind of had to say, looking at pulp, are we closer to the bottom than we were two quarters ago, for sure, to the extent that these markets are functions of supply and demands. So, if the markets are oversupplied, there is price weakness. If they are not oversupplied, there is less price weakness.

Thanks.

Thank you. Our last question comes from Josh [_______________] of ABN Amro. You may ask your question.

Thank you, I had two questions. The first one needs a clarification on a statistic. You guys have said that the uncoated free sheet tonnage that is being closed is 820,000 of tons.

Right.

The AFPA in their monthly PW sheet has the number at 700,000 tons, 740,000 if you include carton and bristols. What do you think the difference is since 49 [_______________] given those numbers?

I have no idea.

Okay, so we should use the 820,000 number as the correct number. Okay so now my question is this, what is the offset to that closure in terms of tonnage from rationalization that you are doing and over what kind of time frame?

You mean what do we get from being able to run our facilities better?

Absolutely. There has to be some offset to that number, and that is what I am asking.

So there is. You know we are going to manage how that comes back in because again this is all about, you know, not building inventories and matching our production to customers' demand, but this is a high class problem. Being able to produce the same amount or close to same amount of volume at fewer facilities is the right thing to do. It makes us more profitable. It means we have to spend less capital going forward. We are not going to get all 820,000 tons back in a real hurry. We have 50 got a 4 million ton system, and that will come back over time as we manage it, and we may have to spend a little money at some facilities to de-bottleneck them, but you know, today that 800,000 tons is out of the system. We are not running our system as full as we could. We've got machines slowed back, and we have got machines that are down. In the uncoated system though, right now we are taking very little downtime which means with a smaller system that is better matched to what our customers need, and we are upgrading our mix. That is a very important part of making this, something that makes us more money. In addition, we'll have less capital tied up in the business, we will make more money because will improve our mix.

Okay, so you don't have an overall number which you have targeted or you know you feel you can pullout from rationalization.

We know that one of the big merger benefits that we got with Union Camp and that we'll get with Champion is we will get the ability to rationalize grades, our machines get longer runs, and that all shows up in increased productivity which we don't have to spend capital 51 on to get, but we manage that according to what demand for our product is.

Okay, now the second question.

I just got [_______________] a note on the first question you asked about the discrepancy with AFPA. The 700,000 [_______________] 60,000 tons of [_______________] that we still have operating at Lock Haven. That is being staged down probably over the next 6 months to 1 year. That may be the answer to your question.

Okay, Lock Haven, just to come back, Lock Haven may show [_______________], and I'll look into that and see if that's what it is. Okay the second question, you may not like the fact that I am back as a certified analyst, but I am going to ask you because I can't help it, but one of John Georges', or let's say one of the major themes under John Georges about 7 years ago was that the earnings power at IP, at the bottom of the cycle would be relatively substantial. He was talking around a 4-5 dollar number. Clearly you are not going to earn 4-5 dollars this year. So, I guess 52 this is a serious question. My question is do you think you'll ever stand up in front of us again and say that there is some kind of earnings power at the bottom of the cycle.

I think so, I mean, you know, I believe that every move we made, Josh, since we did Union Camp was all about creating a stronger company with stronger businesses. Though it is costing us a lot of money to take downtime, you know, we think that is the right thing to do for International Paper [_______________] short term and long term, and we will continue to do that. That is not what we did 5-7 years ago. We ran our systems full, built inventories, and result was the result. So in that front, we are managing our system very differently today in a weak market than we typically did, and that is costing us money, but we think at the end of the day, it is making money for our shareholders. We weren't sitting here talking about energy prices that we had a couple of years ago. We also weren't talking about dollar that we have got today which is at a 16 year high against trading partners, I mean, that changed the competitiveness of not only our system, but everybody else's system who produces 53 in North America.

Okay thank you.

Thank you. At this time, I am showing no further questions.

Thanks a lot.

Thanks very much. Talk to you next quarter.

Thank you for joining today's teleconference call and have a great day.