International Paper Co (IP) 2002 Q1 法說會逐字稿

Good afternoon, and welcome to the International Paper first quarter earnings release conference call. All lines will remain listen-only until the Q&A portion of the call begins. At the request of International Paper this call is being recorded. Now I would like to introduce Ms. Carol Tutundgy, Vice President of Investor Relations. Ma'am you may begin.

Thank you very much, and thank you all for joining us on this conference call today. Our speaker is John Faraci, the CFO and Executive Vice President of the company. Before we begin in just a moment I must read some of the forward-looking statement wordings that much of what, some of what we say today will contain forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially. These would include our efforts to balance internal supply with demands, whether or not anticipated merger or restructuring divestiture benefits can be achieved, and in general conditions affecting the demand for our products. And John would you like to take over the call?

Sure. Thanks, Carol, and good morning everyone. Or I guess it's now good afternoon. I presume all of you have the slides we put out on the Web site this morning, and I'm really going to follow those slides for the presentation.

But before I get into that, let me just sum up the quarter. The quarter was a good quarter for International Paper. We went into the year with a lot of momentum coming out of the fourth quarter of last year, and frankly we came out of the first quarter into the second quarter with even stronger momentum. And that really was all on the basis of what we've been able to do to our underlying cost structure. You see it if you look at our first quarter earnings versus last year.

On lower sales our earnings were double what they were last year. And you also see it when you look at our quarter-to-quarter change in costs. And I think we've got a slide later on that illustrates that. But in today's environment, we continue to say we've got to manage what we can control, we can't change the economy. Although it does seem like the economy's beginning to get a bit better. The tone of the Market's certainly better than it's been. We've been able to pull all the levers that we can pull, and it's making a difference.

You know, with that as an introduction, let me just move on to what is page three, and review the first quarter for you. You know, and aggregate volume continued to be flat. We'll take to some of the specifics in a minute. Our inventories are in good shape. They've declined from year-end levels. You know, pricing generally we characterize as mixed. Coated paper's prices remain under pressure, moreso in grounded than in free sheet. Both are under pressure. Lumber prices moved up during the quarter.

They plateaued a bit in March, but this month they've continued to notch up. Packaging prices continue to show the kind of pressure that frankly as I've shown for the last several quarters, slight modest erosion each quarter. We've got some price increases out in the marketplace in the uncoated business, both in North America and in Europe. They're going in. And market pulp prices have moved up this quarter, will move up in the second quarter. Did not move up in the first quarter.

Our operational performance is very solid. In Europe, both mills in Eastern Europe -- Russia and Poland - set three consecutive production records in the first quarter, January, February, and March. And in March, all four mills - the mill in France, the mill in the UK, and the two mills in Eastern Europe - all set production records. And just to give you a, you know, stateside here, in our consumer packaging business, in the bleached board division our costs of production in the first quarter of this year, compared to the first quarter of last year, were $95 a ton better. And only about half of that was energy, but the other half was all the other things we've been doing to improve our overall cost effectiveness. S&A reductions are taking place, and we're getting some improvement, you know, certainly, when you look at the year over year, we're getting some improvement on the raw material cost side.

This next chart - our next two charts are ones we've been showing you these each quarter so you get a snapshot of what's happening to us and what really is the - what we focus on is our non-price improvement. The first one shows our first quarter earnings of this year, compared to the fourth quarter of last year. Frankly, I think that's the most important comparison, because the first quarter of 2001 is a long time ago and it was a different world then.

We in 12 cents last year in the fourth quarter. We got 10 cents of non-price improvement. That's about $70 million. As you all know, goodwill accounting has changed this year. So that added 10 cents to our earnings. The combination of volume and price took away 12.

We also changed our assumptions in terms of rate of return on a pension fund, moving that down to 9.25 percent, which I think is detailed on our annual report. And that was four cents. We had a higher tax rate provision coming into the year, which cost us six cents. And everything else is positive two, that nets at 12 cents.

But as you can see, we are continuing to - quarter on quarter to build on the non-price improvement momentum that really started in the third quarter of last year. So for three consecutive quarters we've been able to make the non-price improvement bar as big as the erosion on the price side.

Looking at year-over-year changes, obviously the numbers are bigger because of what's happened over the course of the last four quarters. We earned a nickel in the first quarter of last year. The non-price improvement we've gotten is 38 cents a share. That's close to $300 million quarter on quarter.

Now we didn't have a very good operating environment and a very good of raw material costs last year. So that's why the number is so big. But it's a big, big year-to-year change.

Goodwill is the same 10 cents. Our interest costs are down six because of the lowering of debt and the refinancing of some of our debt last year. We've lost about 40 cents between a combination of year over year. The pension was two cents and taxes and other were a nickel, which gives us a 12 cent quarter this year, compared to a five-cent quarter last year.

To give this a little color or flavor to what's happening, you know, underneath the segments to the businesses, and looking at the - on page six now, for those of you who are following along - looking at the March quarter compared to the December quarter, we had significant improvement in our products business. That was principally the result of improving lumber pricing. , which we reported in the segment, so you've seen those number there, was also a big improvement, close to $30 million. About 10 of that was better bad debt experience, but the balance was a result of a very aggressive cost reduction effort which is sizing that business so that its break even point is consistent with the revenue generation we'd expect going forward.

The other businesses noted here, our packaging businesses, printing papers, Europe, Brazil, wall wood, pulp and CHH all basically, from a financial perspective, were flat, so when I say that I mean their EBIT was flat, but in all these businesses, you know, prices were typically down a notch, and they were able to offset that with operational improvements.

Our earnings were down in coated papers quarter to quarter, that was principally price, and down in forest resources quarter to quarter, principally due to lower land sales activity. Our volume was mixed, as you can see, volume in Europe has been pretty good, frankly it's been better than we thought it would be.

The pulp business has gotten a little bit stronger, which it always does just before it hits bottom. Box business for us was a bit stronger as well quarter on quarter. Uncoated papers up just slightly, flat in coated and in containerboard. Down in lumber and in bleached board. From a pricing perspective, I've mentioned that lumber was up, and boxes were flat, bleached board, uncoated paper and North American pulp down $10. Containerboard down 15, that's in the domestic market, and coated papers down 45 with wood being more than 45 and free sheet being less than 45.

We continue to take a significant amount of down time, 215,000 tons in the first quarter, although less than we had taken, we took in the fourth quarter, we took 350, the biggest change there being, I believe that's the uncoated white business. The green, if you look at it in color, at the bottom bar there is containerboard, and we're continuing to take most of our down time in the containerboard segment of our pulp and paper system.

As I said, our inventories are in pretty good shape. The over the last month, last 12 months they're down 59,000 tons, and they're down from where they were at the end of the year, and they're down from where they were at this time last year.

You know, slide 11 here I think is really the key one that sums up the quarter. And it's all about managing what we can control. If we look at our first quarter costs, and that's all the costs that go into, you know, making paper, making packaging, making lumber, and the S&A that goes with it. Our costs were down $70 million, quarter-on-quarter. And again, for those of you who are looking at it in color, you'll see a very small slice of that is energy. You know, frankly our energy costs on a quarter-to-quarter basis didn't change all that much. They did change quite a bit, when you look at the first quarter of last year to the first quarter of this year, and that's the bar that says $290 million. Roughly a third of that would be energy-related, but the lion's share are the other cost items we've been managing very, very intensely.

A good portion of that, but not all of it, is what we've been doing on the overhead management side. About mid-year last year, we announced plans to take a couple thousand jobs out and reduce our overhead costs by close to $300 million. And you can see the progress we've made on that basis right here. In the first quarter of last year, our overhead was running at about $900 million, and in the fourth quarter it was down to 850, and in the first quarter, it was down to $820 million for the quarter. So the swing there is $80 million, quarter-on-quarter. If you annualize that, it's over $300 million. So good progress on that front.

You know, we're also continuing to do the things we've said we'd do strategically, in terms of changing International Paper, both in terms of with the portfolio, and how we manage the businesses that are our three core businesses. And this slide here shows you the progress we've made on the divestment program that we announced about 18 months ago. We said we'd have $3 billion in proceeds from divestments by the end of last year. We were a little late if you're counting days, but by the beginning of this quarter, we had reached the $3 billion target with not all the businesses we've identified sold yet. So we've got the potential to go beyond that. But good progress on the divestment program in a very difficult environment.

So before I go to the Q&A, let me just summarize the quarter. From our perspective, it's improving performance in a flat market, managing what we can control, delivering on the promises we made. As I said, we met the divestiture target. Ongoing financial discipline. We're reduced our debt by $1 billion from this time last year. Interest cost is down 18 percent from the first quarter of last year. We're out of the commercial paper market. We made a decision to do that before everybody else starting racing out of it. And continue to hold capital spending well below depreciation. Our capital spending in the first quarter actually was at a rate of less than $1 billion, but it typically starts off the year slow.

And we're realizing significant benefits from the facility rationalization that we announced in late 2000 and early 2001, and we spent most of last year implementing those rationalizations and frankly paying for the cost to rationalize. And now we're starting to reap the benefits. And that's a big portion of that $70 million is what you see going on from reloading the system, and in our converting businesses, getting the same revenues from fewer facilities. I always mention this, because I think it's underestimated how much of our cost structure is changing in our packaging and wood businesses from rationalizing facilities, but, you know, not losing all the revenues associated with doing that.

And, as I said, the tone of the market I think is better than it's been. Clearly, the economy is starting to improve.

We're encouraged by that, but today we have to say, as we sit here in the middle of April, this demand remains flat. You know any improvement that's out there, we could characterize I guess as I call it. But there's no question when we look at how we positioned International Paper to date, and there's more to come, that we think we're well positioned to outperform from a earnings and cash flow standpoint as the economy improves, and obviously as the business as our customers improve. Our business can only be as good as our customers business, and right now it's, you know, more or less going sideways, with the expectation that it's going to get better.

So let me open it up to questions at this point.

Thank you, sir.

At this time, we will take questions from the audience. If you have a question, you can ask your question by pressing star, one on your touch-tone phone. Once again, that's star, one to ask a question. And if your question is answered and you'd like to withdraw, simply press star, two.

Our first question is from of Salomon Smith Barney.

Yes, good afternoon.

Hi .

I had a couple of questions, . First of all, when you look at your timber strategy, you still have over 10 million acres. Do you have plans to continue to divest timberlands? And maybe as you look out over two or three years, how different do you think your timber profile will look then versus the way it looks today?

Well you remember, I think it was who was talking about this shortly after - said, "We've ended up with more timberland than we want." You know selling timberland has been part of International Paper's business model for making money in resources business for decades. I mean it's not something that just started with .

Strategically, we've ended up with, you know, more than double the acreage that we had before , , . Most of that came with the acquisition. So we're going to continue to strategically sell some timberland associated with the acquisition. And some of that, you know - some of those transactions that we've gotten completed will close in the second quarter. But that process is going to continue to move that ten million in acres down, and we said a couple million acres and we'll keep on looking at, you know, where we need land to support our facilities, and where we think we can make, you know, our comp that we've got on our cost of capital on the land that we own.

And as a follow-up ...

You know, I think it's important to understand there are two pieces to that You know, there's some strategic selling of timberland and then we're in the business of selling timberland, you know, every day we're out there growing trees.

Right, and I was really referring to the more strategic side.

Yeah.

Yeah, when you look, speaking of strategy, it's been a couple of years since Champion almost, and you look at the, where the dollar is, it stays, it continues to stay quite strong and you also I believe have seen quite a bit of success in some of your more recent European operations, for example the mill in Kwidzyn in Poland and I think the one in Russia, last I heard was doing well. Do you think it makes sense for the company to make Europe more of a priority when you look at acquisitions in the future?

Well I wouldn't say that it hasn't been a priority. You know, you've just pointed out too, I mean, Kwidzyn was made some time ago, Russia more recently. The, you know that's a business that's performing well, performing better in Eastern Europe than Western Europe, and obviously with the strong dollar in the businesses where that has a direct impact on our ability to compete in our own market, you know, we used to think about where you make investments. But you know, we've said the places that we'll look to grow the company when, you know, when opportunities arise and when we're ready to do that, are not limited to North America or to South America. You know, Europe is a possibility as well.

OK, thank you.

Our next question comes from of Credit Suisse First Boston.

A couple of things. First, can you - we've heard a bunch of anecdotal notes about containerboard demand so far in April, most up but not across the board. Can you give us a sense of what April looks like so far?

I'd say, , April is flat.

Flat versus where you were, or flat year over year?

It would be probably up slightly year over year, because we were up about, oh through the first quarter, two percent I'm thinking, I'm thinking boxes now. Not containerboard in total. If I can get the containerboard number I'll give it to you, while we're still on, still on the call. But there is, there is no fundamental, I mean there's spotty pockets where demand is better in some segments, but overall, you know, we don't see any signs yet that our business is getting stronger.

OK.

In some segments, some geographies, yes and no, but overall I'd say it's flat. You know, at obviously levels that have been - are quite depressed from where they've been historically.

OK, and second question. I wonder, can you give us a sense of your current operating rates in uncoated free sheet container board? You've obviously had a lot of moving parts with it.

Yes, in uncoated free sheet we're in the 92 to 93 percent range.

OK.

In container board, I'd say we're in the high 80s, but ...

OK. And last question, with the goodwill adjustment affecting the segments, can you give us a sense of how that goodwill's spread out across the segments, so that we can get a better sense of how the numbers really compare?

, do you want to ...

Yes, this is . The bulk of the goodwill is actually at corporate. There's more than 70 percent of it is at corporate.

Seventy percent?

Yes.

OK, terrific. Thanks very much.

Hey, , I'd say - you know, I'll be close here, but container board operatings were probably in the 88 percent range in the fourth - in the first quarter.

OK, perfect. Thank you.

Thank you. Our next question is from of UBS Warburg.

John, I ...

Hey, Rich, how are you?

Good, how are you? I just wanted to see if you could talk a little bit about what's going on in distribution? Remarkable turn from the fourth quarter. How much of that was due to the lower level of bad debt expense, and the rest obviously due to costcutting?

I thought I had commented on that, , but if I didn't, of the roughly $30 million swing, about 10 million of it you can attribute to slower bad debt expense.

OK.

You know, the balance of it was basically all. When you look at the revenues, revenues were down quarter-on-quarter. All of it was various cost control measures, and cost reduction measures. Not just cost control measures. We're not deferring costs, we're figuring out how to do business at a much, much lower cost level, and are reducing the break-even point.

So the kinds of numbers that you posted, the 18 million in the first quarter, you look at that as a kind of a sustainable type level?

Oh, we're going to build on that.

OK.

When I think about - and as I said, I think the tone of the market's better. It's still very weak still in commercial printing, which is where the lion's of business is in. They're also in the packaging business, but when I think about the improvements in the cost structure we're continuing to make in , coupled with the prospects of some improving demand, things look better there.

OK. In terms of the - looking at your reduction in inventory in the quarter, it - you know, you indicated your volume was down in the quarter, that that downtime was less than the fourth quarter, and yet inventories came down. What am I missing, is it...

Some of that Rich, and I think what happened was probably came out of the capacity number in the first quarter.

OK.

So, in other words, we take the - we take these facilities down. We've also been rationalizing capacity to . We announced that we're shutting down, you know, a couple of machines there last year. And as those come out of the equation, we have less capacity.

OK. And in terms of the $70 million of incremental improvement due to cost reduction in the quarter, could you go through and indicate what segments where most of that - how that $70 million sort of broke out here? Was it mostly in distribution or were there - it looks like maybe packaging also was the beneficiary. Could you give us some idea?

You know, , that really is across the board. You know every business had a non-cost improvement target for the year, you know, mapped out by quarter, which we're tracking. So I'd say that, you know, there is no one big place where that's showing up. And that's every business around the world.

OK.

And just lastly, could you talk a little bit more about the tone of the European business? That it almost seems like you're doing better in Europe than you are in the U.S.

Our returns in Europe are much bigger than they are in the U.S. And the demand environment, frankly, has been better in Europe than it has been in the U.S. We've had - you know, we had - the pipeline was really low in Europe, although inventory levels weren't bad here. And, you know, frankly, we've gotten in a position where we got quite in Europe and you can see our shipments were up quarter to quarter.

And we had a good fourth quarter in Europe as well.

Have you announced a price increase like one producer has for June 1st in Europe?

? Well we're not...

Well the...

We've announced a price increase on uncoated printing papers for the second quarter of Europe, and you know that is the process of going in. In fact, the a little bit more slowly than they do in North America. But that's playing out just as we would expect it would in a market that shows pretty good demand right now.

OK, thanks.

Our next question comes from of Deutsche Bank.

Hi John.

Hi, . How are you?

Good.

Can you just, first of all, give us kind of a recap of what happened with regards to timberland in the first quarter? How much timber sale gains there would be in your earnings, and how that would compare with last year? And then I noticed that the timberlands on the balance sheet are down by about $183 million in the quarter?

Well, let me just come back to the question raised, I was a little optimistic on your there, on the operating rate it was, you know, closer to the 85 percent number than 88.

On timberland I think I mentioned the timberland earnings from our forest resources business were down about $15 million quarter to quarter, most of that would be attributable to lower land sales. And you know, the fact that assets are down in timberlands quarter to quarter reflects ...

Part of that was the sale of disposition type asset.

What was that? I didn't catch that.

The Champion assets, the timberland that sold associated with Champion, you know, those are, you know, add, you know, add market and so there's no gains associated with those, there just coming out of the asset base.

OK. All right. A second question John, can you just recap for us real quick, in addition to timber, what remains to be sold at some point? The list that I've got had Arizona Chemical, decorative products, that chocolate bayou water company.

Right.

I mean are those three things all still out there at some point?

Those three things are all still out there.

OK.

That's right, and there's additional timberland to sell as well.

OK, so those are really kind of the four categories then?

Yeah.

OK. And then the last question I had, just looking at your operating margin in printing papers, it's about four percent right now on a whole, but I would think that the Brazilian business and Kwidzyn over in Poland would actually be much higher margin business, which suggests you've got some other things which are much lower margin businesses. If you just step back and look at the printing paper business as a whole, can you talk with us about where you think you have to do, you know, rationalization, cost take out, yet where most of the activity will be centered?

Well we've got to stop losing money on the pulp business . You know the EBIT margin in that business isn't very good right now, the numbers are pretty big and they're red.

OK.

So that's, you know, that's clearly one where we've got, you know, more work there isn't probably the right thing, you know, pulp is not one of our strategic businesses, but it's kind of inside in some way, shape or form a lot of our strategic businesses and facilities. So, when you look at the printing papers margins. That's the one that's really not carrying its weight at all by a mile.

OK. And I'm just trying to get a sense. I mean, is that more of the coated paper business in the U.S., the uncoated business, or the European business?

Well, you know, coated papers is losing money as well. So you've got two businesses in that segment that are in the red.

OK, so that's U.S. coated papers, and that's also U.S. uncoated papers?

No, no, no. If you're looking at the average margin I think was what you're referring to.

Yes.

You're right, Brazil, and Eastern Europe would be above the average, and the two that are most below the average are the coated papers business and pulp.

OK, all right. And what about the uncoated free sheet business?

Well, that's going to vary by, you know, we've got a converting business, we've got a merchant business, or a printing papers business that sells cut size and printing papers to the merchant channel. And then, we have our retail cut size business, which is selling to Staples and Wal*Marts and those type of customers. And I'd generally say the converting business - and a lot of this depends on where you're running it - you run the business because we have a system.

So you can't make generalizations about one segment as sort of being more profitable than others. But the way we've got the business loaded in these mills, the converting business tends to have better margins than in the other businesses. But again, you've got to think of it as a system, because we can put any grade really on our lowest cost machine, and make that look good.

OK. And the white paper business in Western Europe, how is that performing, now that we've got kind of out of the mix there?

They're both profitable. They're both solidly profitable, but they're not making the kind of returns that we're making in the Eastern European businesses.

OK. All right, thanks, John.

You know, overall, that business is earning its cost to capital with all the assets in there. So if you look at the performance of Europe with the performance improvements we've made, plus fixing up the portfolio, that's one of the IT businesses that's above the cost to capital.

OK.

Thank you, our next question is from of Lehman Brothers.

Thanks, good afternoon. Have a couple questions. John, you talked about asset sales and you've come toward the end of your asset sale program, and you've been cutting costs all along. Can you really help us to understand how you think comparing/contrasting, you know, focusing internally on costcutting plans, versus focusing externally on acquisition opportunities? Just broadly?

Well, I don't think they're mutually exclusive, but someone just passed me a note, and maybe I said this in a way that it came out not the way I wanted to say it. But in the first quarter, we did lose money in our papers business, but not in the fourth quarter of last year. So I don't want to leave you with the impression that we've got a current problem in our papers business. You know, what's happening there is pricing has collapsed principally on the side.

Back to the - I guess the question was about how we think about cost reduction versus acquisitions. And we don't really think of them as either/or. I think we've said and we continue to say, right now, we're focused on generating more profits out of the existing IP portfolio and not spending a whole lot of time thinking about the next acquisition.

You know acquisitions have played a part, and you know, we still think if it's done right, on the right way at the right price, they can be an important way to improve International Paper. But right now is improving the earnings and cash flow from our existing businesses.

OK.

So it's not an either/or strategy. We don't shift from one mode to the other. We're going to be looking. We've got on these margin improvement initiatives. Most of them are costs - not all of them. You know, some of them are in the marketplace even though we've got a tough set of market divisions.

But, you know, for example, in our printing papers business, you know, we've just signed a five-year global supply contract with HP for ink jet and laser papers. That contract can be worth more than $100 million a year, and that's good business for HP, it's good business for us, and it's growing at rates that are far greater than what the overall size market is growing at.

So we haven't ignored the top line opportunities, there are just few of them in a very difficult market.

OK.

How about in the printing paper business, you indicated, you know, you sell obviously to the merchant community and also to the retail channel. Can you touch on - you know, place sensitivity of selling into those various channels?

It's really not a price differential when you think about those businesses. The cost to serve differential. You know the end of the retail channel, the Staples and the Wal-Marts, you know you're really selling consumer goods through a consumer goods channel. When you're selling to the merchant, and you're putting paper , and the merchant is selling that to whoever their customer is.

And so the real difference in that business, assuming you're comparing like paper to like paper, because there are lots of different grades and , it's in the cost to serve.

OK.

And the cost to serve includes trade spend - you know, that's the merchandising cost - promotions, , what have you, plus the advertising and marketing.

OK - OK.

Last question, if I could, in terms of lowering your costs, how much might be attributable to lower wood costs, which I think have been trending down in the last couple of quarters?

We've got a target to - you know, this year, we expect our wood costs will be down year over year. There hasn't been a whole lot of, you know, movement, and when you look across all our regions, across both hard wood and soft wood, the first quarter of the year, we're slightly favorable, but it, you know, a couple million dollars, not tens of millions of dollars.

OK.

That cost number, that $70 million is, you know, really a big chunk of that is not, is non-raw material cost related.

OK. All right, great. Thanks very much.

Our next question comes from of JP Morgan.

Hi there.

Hi how are you?

Good thanks. Had a question on the free sheet markets. I don't think you've addressed yet, how successful the price increase that you got out there is at this stage. I don't know if you've got much visibility yet, but if you could address that, that would be helpful. And also, how much tonnage of your free sheet tonnage that's actually going to cover?

I was waiting for someone to ask that. You know, that price increase is in, where we put it in, it was on the sheet grades of offset, the full amount. Less than that on rolls and on merchant cut size. And, you know, that then is a, for us, you know out of our facilities as of the beginning of April, first week in April when it's effective, and it's also in at the merchant level, which is also a good sign.

So will we ...

So it's not on - we've got lot's of grades are converting business for example, which is about half of our printing papers business. You know that price increase doesn't relate to that segment.

So one would think tonnage if we were to put in something like $20 quarter on quarter. Would that be fair, or is that a little aggressive?

That's probably a little aggressive. On the overall volume?

Yeah, on the overall volume.

Well we've got half the volume we're - it didn't go in at all. And as I said, we've got on the roll side of the merchant business, the roll side of commercial printing, the price increase is less than the $40 on the sheet side, you know, we're getting, you know, what we put in, and we're getting it on cut sides, again, through the merchants.

OK.

Cut side through the retail segment, you know, will come a different way. That comes over time because we've got contracts.

OK, it sounds more like $10 maybe quarter on quarter. Can you also address the Canadian number issue. Just wondering kind of what your expecting to see there, is there anything on the horizon, and also how you accrued for that issue during the first quarter, and how that compared to the fourth quarter?

We accrued about $9 million in the first quarter, excuse me, $4 million in the first quarter. And the way that feathers in, it, you know the full impacts of it won't be with us in the second quarter. But if as we go from - we were accruing it roughly at a 10 percent range -- at a little more than 10 -- it goes up to 29 percent. So ...

OK. And then, in terms of the tax rate, I think that was about 31 percent for the quarter. Is that a good guide for the full year?

Well, we're always looking for ways, , to manage that tax rate. You know, manage that tax rate down. And the first part of the year, the is usually a little light, so we start off at 31. I'd say at this point in time that you ought to use that.

OK, that's great. And just one final one. The corporate expense line at 94 million, is that a good guide going forward, as well?

I'll let answer that.

It probably is. There's a normal variation in that of five to $10 million either way. But I think the 94 would be a good place to have a baseline.

OK, thanks very much.

But, , when you - if you're thinking about Canadian lumber, assuming it's 29 percent and we get the full implementation, it'll be about $9 million a quarter.

schoenfeld OK, thanks very much.

Because Delta's about five.

Our next question, sir, comes from of CIBC World Market.

John, ...

Hi, .

Hi. You had mentioned expressly making good progress in the bad debts. I wonder if you could sort of stand back and look at the range of products as well as jurisdictions, and are you seeing over sort of the last two, three quarters any deterioration in I guess receivables quality? Just trying to get a sense of the ability of these customers to pay.

Well, what happens is, from a bad debt perspective, I mean, this is generically this isn't just attributable to , but when people get into trouble they tend not to get into trouble at the beginning of a downturn, they get in trouble sort of at the end of a downturn, because they've been handing on for a number of quarters. And either their customers don't pay them, or the banks get - whoever's lending the money -- decides not to lend them any more money. So you typically see these things start to show up at the end of what's been a downturn. And that was our experience, as we came through the fourth quarter of last year. And we took some reserves to reflect a more conservative view of how or what our bad debt write-off experience might be.

Have you seen any difference though across the pipelines, or geographic regions?

Well, commercial printing's has been tough, because there's so many commercial printers, and so many of them are small commercial printers. But K-mart certainly was out there and got themselves in trouble. Formica's been out there and recently got themselves in trouble. So I don't think size these days - or a huge company could have got - for a variety of reasons, they've ended up without the ability to fund themselves. And you know who that list is. So there are all different reasons.

And it's something we watch very carefully, you know, from our perspective. Bad debt management doesn't begin when you have a bad debt problem. It's all about customer selection and how much credit we extend to people. We don't want to be a bank.

I was just curious, when , the distributor, just went under I guess earlier in the month, there were some comments that you may have had some loss. Any observation on that or...

Well I don't want to get into specific accounts, but, you know, anything that's in , you know, I've gone into - I'm not sure exactly, I think it's Chapter VII.

Yeah.

But I don't want to comment on specific accounts. But, you know, we've - you know, our bad debt reserves are adequate for, you know, things that have happened.

OK - thank you.

Our next question comes from of Morgan Stanley.

Good morning, .

Hi, good morning.

Oh I guess it is good morning.

Yeah, it's still morning out here.

John, I'm trying to reconcile the slide where you a show a seven cent hit in the quarter, 1Q versus 4Q with lower volumes, with the fact that you had less downtime 1Q versus 4Q. And with slide seven, which seems to show that your biggest businesses, with the exception of , have flat to up shipments.

I was waiting for someone to ask that question. Yeah, there's about three cents of timberland sales in there.

In the lower volume?

Yeah.

OK.

So one - you know, about almost half of that seven cents relates to lower sales.

Oh, OK.

We just dumped it in there so we didn't have another bar.

OK.

And then I wanted to ask about the slide nine, where you show the downtime. And you're reporting that exclusive of maintenance. But what was your maintenance, and what in the quarter versus 4Q and what should we look for 2Q versus 1Q?

If you have another question while we look up the maintenance downtime, no one ever asked the question . The maintenance downtime, you have a picture of, you know, what we're taking that's not maintenance related. And I frankly - we'll have that in a second.

Well, because it can be lumpy and it can be significant, right?

Oh yeah. I mean we obviously have tried to manage our maintenance downtime and move it around so we don't take downtime twice. Maintenance-related downtime in the first quarter was 110,000 tons.

And do you know how that compares to 4Q, or what the plan is for 2Q?

Yeah the plan for 2Q is like everything else, we'll work that out as we, you know, go through the quarter and see how, you know, how markets, how markets looking. But we're going to continue to match our production to our demand. What I was saying is, you know we obviously don't want to take down time twice, so if we think we need to take down time to match up capacity with demand, and we can move around an outage, those take some planning. So that we take it once, that's what we, that's what we'll do.

OK, and then just coming back to the 215,000 tons of down time you did take, which was market related, you know, clearly it's down because you've shut down a lot of capacity in the last 12 to 18 months. but ...

That's right, a whole lot.

But isn't it, but how should we look at that number, because your capacity to produce, I would think, or your ability to produce more is more than four times that number, right? Annualizing 215.

Right. berler: Our ability to produce is more than four times that number?

Yeah, in other words, the 215,000 tons.

Right. That is actually the capacity that we're not running right now, to slow backs or down time.

Right, so you're basically telling us that you would, if you increased your capacity on an annualized run rate of 860,000 tons, you're at capacity?

That's right. I think we've got more, well I don't think, I know we've got more capacity there, than that 215,000 tons reflects because the way we reloaded these machines, these facilities.

Right.

As a result of Union Camp and Champion has given us more capacity. But you know, we're doing this against main play capacity just to make it simple for you, so we're not changing the numbers all the time.

OK.

So you can look at those, you can look at those numbers over the past ten quarters, and you know, the differences are either what's happening to our orders, or the capacity we've taken out. We haven't tried to fool around with how much more capacity we've got as a result of, you know, all the machine rationalization that we've done.

OK, switching gears. When you ...

, let me just kind of finish off on that.

OK, sure.

We've taken, we take out over two million tons of capacity, but we haven't lost all that ability to produce. You know I'd say, I think we've talked about this before, we've taken out Carol, 2.1 million tons, so it's been over two, and we've probably effectively lost about a million and a half. And I mean, that's the real, the real upside for us, you know, when demand comes back, and the maintenance down time in the fourth quarter, I think you asked that question, was about the same amount.

OK.

About 100,000, 110,000 tons.

And otherwise you ran pretty well would it be fair to say?

Oh we ran very well, but we can, we've got plans to run better. Like I said to you we had excellent quarters in business in north American, an excellent quarter). And a terrific quarter in Europe. But there' no reason why we can't have another good quarter in Europe, and run as well as well as we did in those two locations, everywhere around the world. But good operating quarter. A whole different story than the quarter last year, where it wasn't a very good picture.

Right. I wonder if I could just switch gears and go back to the bad debt reserve that was much lower in Q-1 for . Do you set that on an annual basis, and kind of do a - set a reserve amount that you take each quarter? And then you true it up at the end of the year?

No, what we have is they set a criteria about aging the receivables. And when a receivable gets to a certain point, we start to accrue for it. So there's not a lot of - they're trigger points, so it's pretty mechanical about what the bad debt accruals need to be. And in fact it's a lower reflects a better credit situation. Not just a wish that it's going to better.

So it's dynamic moving through the year, or it's adjusted real time?

Adjusted real time. Yes.

OK. And then lastly, when you look at the economics that they've laid out publicly for their purchase of the potlatch coated paper business, I think it's probably the most vivid example of example of what you also have been trying to do, which is make acquisitions that transform your existing base of business and improve profitability?

Right.

If you had to look at your existing operations today, what area do you think could receive the largest boost from that kind of acquisition?

Well, when you say that kind of acquisition, you're saying similar to the acquisition in the potlatch coated business by ?

Right, right. Where you buy a business and you can reload your existing machines.

Oh, well, that's what we've been doing through and Champion. And like I say, we're not working overtime on the acquisition front right now, so I can't tell you. And I guess if we were, which we're not, I wouldn't or couldn't, because we don't speculate on stuff like that. But they're clearly - you know, the way you get merger benefits, one way is by looking for those machine rationalization opportunities.

And frankly, to get in the coated papers business. And we'll get some of those. It's been difficult with demand being so weak. On mergers that are somewhat across-border mergers, that's harder, because you can't move grades from Eastern Europe to Alabama. So it really, really depends on - hypothetically if there was an acquisition - where it was. To see whether there are opportunities to get a lot of that. Those can be very significant.

I'm not sure what analysis you're referring to, , but it can't be too specific. But if you could help me out here, maybe it could be.

Yeah, I think the basic idea is making an acquisition where you shut down capacity and you transfer that base of business to the remaining assets.

Oh, that's got huge leverage. I mean we've been doing that acquisitions. I mean think what's been going on in our packaging businesses. And if you read through our , we see them rationalizing facilities. We haven't lost hardly any revenue there. What we've been doing is figuring out ways to move around, move business around, speed up things and, you know, get the same amount of capacity and sales potential with a lot less assets and whole lot less indirect and overhead costs.

Big, big opportunities there. And we frankly learned a lot over the last two years about how to do that.

OK.

And then - this is truly the last question - you mentioned how difficult conditions are for your business today. How do you look at that business with - now that you have the big Brazilian base of operations and you really know what the cost structures are down there, how do you look at the viability of your business here in North America long term in light of the new capacity that is coming on later this year? And, quite frankly, I think probably a stream of new mills that will come on over the next five to 10 years down there.

Well business in North America is a tough one, it's not where you want to be. Right now, as I said, you know, where we've got , it's principally in facilities where we've got others - you know, very strategic product lines as well.

You know, Brazil - if your strategy is to be a significant player or to grow your business and commit your capital to the business, Brazil is probably one of the places you want to be. That isn't our strategy. Growing our market business around the world is not something that we've set as priority.

But, you're right. If you wanted to do that, that's where you do it. Where we've got , if they were just mills, we would think about them differently than what they are, which is facilities that produce other things.

It's a different situation - not entirely, it's not 180 degrees different, but wood is a little bit different. Our North American producers in the of, say, can be better positioned than living in the business. And in Canada, where we're in the softwood business, it's also a little bit different. It's clearly better for us in New Zealand, where we're in the softwood business, with very low cost structure because of currency.

So at this point you don't feel like you have any obvious closure candidates?

Well we don't have any market pulp mills in the United States. All the pulp capacity we have is, you know, wrapped up at, you know, places like for instance Eastover. Eastover is a very big facility, with a quite a good return even in today's market, it's got some market pulp associated with it. And that's not something that's helping it right now.

Right.

Our next question is from of Franklin Advisory Services.

Yes, thank you very much. Can you give us some idea of, you know, how far along you are in your internal improvement program, and would it be possible to give some estimate of how many, excuse me, how much cost can still be taken out of the company?

Well, let me answer this question this way, I mean, I don't know if you were at the, necessarily at the meeting, but two and a half, almost three years ago, after we acquired Union Camp, we set a target, this is 1999, of improving International Paper's margins without price, by 400 basis points, by the end of this year. That was the run rate. So by the end of the fourth quarter we're on to be at a run rate of having improved the, our return potential by 400 basis points. And we think if we hit our targets this year, we'll be at that run rate.

So we've got a lot of work to do between now and the end of the year to get there, but as I said, we came into the year with very good momentum from our internal initiatives, came out of the first quarter with even stronger momentum, and feel good about being able to deliver on that commitment we made to ourselves. And I've every reason to believe it will be, we'll be in good shape. And, you know, once we get to that point, we'll figure out, you know, what's the next target we want to set.

OK, thank you.

One more call. Or one more question.

Our final question comes from of Goldman Sachs.

Thanks. John can you give us a sense of what your target this year might be for the non-price improvements?

The - in overall we're trying to improve our returns by about 150 basis points, on a non-price basis, and that's got, and I'm just pausing for a minute, that's in aggregate that's got most of that in, is in terms of earnings improvement, but some of it is coming from lower capital spending and working capital management. We were about halfway towards our goal in the, our 400 basis point goal as we came into this year. And you know, as we put together our plans, we said if we can do another 150 basis points for this year, we'll be at a run rate of 400 basis points by the end of the year.

And so we can just, when you say 150 basis points, we can just take your sales and do 150 basis points ...

No, that's on our capital.

On your capital, OK. All right.

Some of that is coming though from improved capital turnover, but obviously the biggest chunk of it, and the one that's got the most leverage for it in terms of improving earnings and cash flow, is getting earnings up.

Right. And now, how should one think about where you are in your rationalization programs, which as you pointed out, can play a big role in improving cost structure?

Sure. Well, we're always looking for new opportunities. It's like peeling back an onion, or just climbing higher in a tree. Grabbing apples above you with out dropping the ones you got. And I think the really terrific thing about how we've approached this, , is when we started off on this -- I'll call it journey, because that's what it is -- in 1999, we didn't have all the answers to how we were going to get that 400 basis points. We figured it out along the way. Merger benefits played a big piece in early on. They're not going to play a big piece this year, other than hold on to the ones we've gotten from Champion and , and I'm sure we'll do that. But it's interesting.

We've come up with more and more ways to figure out how to produce the same amount of widgets, and with fewer facilities, and we make tough calls on capacity we don't think we're going to need going forward, because we're running our other facilities better. Or, make choices about investing in those and not investing in others that are either at the margin, or we don't think that they've got a plan that we really want to fund with people and capital to get there.

So the levers that we're pulling have changed over time, and we're coming up with, as people get into this, more ideas. It's a very powerful thing when it starts to build momentum in the company. And when you get lots of people involved in it, and we've got 100,000 employees all thinking about how they can contribute to doing this, there are lots of things that we've yet to do. Supply chain is one for us, is out there, that's a big opportunity, and that's an enterprise-wide initiative that we're coming to grips with. And that's going to be one of the sources of our non-priced improvement going forward. I'm sure about that. Don't know what it is yet, but I'm sure it will be.

And I noted when you were talking about businesses yet to be sold, you didn't included Natchez on that list. Is there an update on the status of that mill?

Yes, we took Natchez off the market. I mean, Natchez is one that we were out there trying to sell it, couldn't find an acceptable transaction, and said well, that one we couldn't sell.

Great, thanks, John.

This is Carol. and I will be available for any other questions you have, so please call us in our offices. And...

Let me just wrap up by saying, and just to emphasize, I think it's, you know, as Chairman Greenspan said yesterday, the next two to four months are going to be important ones, and there's no question in our mind that we're very well positioned if that happens to generate strong earnings and improving cash flow going forward.

So, thanks.

That concludes this afternoon's conference call. Thank you for your participation and have a good afternoon. You may disconnect at this time.