International Paper Co (IP) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Q2 2002 International Paper earnings release conference call. All participants are in a listen only mode. Following the formal presentation, instructions will be given for the question and answer session. If anyone should need assistance at any time during today's conference, please press the star followed by the zero for operator assistance. As a reminder, this conference is being recorded today July 18, 2002. I'd now like to turn the conference over to Ms. Verio Snead, Vice President of investor relations. Please go ahead.

Good morning and welcome to International Paper's 2nd quarter 2002 earnings conference call. All of the statements we will make today will be forward-looking and are subject to risk and uncertainties that could cause actual results to differ materially. Among these risks are whether you are our cost reduction efforts will continue to positively impact earnings, climbing and strength of the economic recovery, changes in over all demand, changes in competition. The relative strength of the U.S. dollar compared with other foreign currencies, especially the Euro. Changes in the cost or availability of raw materials and the cost of compliance with environmental laws and regulations. I will now turn the call over to John Faraci, Executive Vice President and CFO.

Thanks, Verio, and good morning, everyone. I know this morning is a busy schedule for all of you. I'll try to go through our results fairly quickly, hitting on the important points of the quarter for your questions. I'm going to start, for those of you who have the slide presentation we put out last night or early this morning. I'm going to start with page three, which is our earnings per share graph over the last couple of years. As you can see, this morning we reported 2nd quarter earnings of 35 cents per share. That is before special charges with this quarter, were a positive -- more than double 2nd quarter earnings of last year and 1st quarter earning of this year. And this will be apparent, most of it comes on the strength of the internal success we've had on our cost improvement programs, and I'll talk more about those as we go through the presentation.

The slide four -- the profitability was non price initiatives that contributed 9 cents a share to our quarter-on-quarter earnings. Volumes did improve generally. I'd say most of the improvement was seasonal from what it was a low demand quarter in the 1st quarter of this year; as of yet we haven't seen anything widespread, kind of fundamental, economic, cycle-driven demand improvement. We did get some increased pricing during the quarter on our uncoated business container board boxes. We continue to look for ways to rationalize and realign capacity. We announce that we'd be shutting down, or possibly selling the Hudson River mill. We announced that in the second quarter, and we are continuing to do that not only in our paper businesses but in all of our converting businesses with the objective of taking out the capacity that we don't need, reducing costs, and getting more revenue. We completed the sale of our decorative product business and reduced net debt during the quarter by $340 million.

This next slide is an important one; it's one we've shown you each quarter. It's a waterfall chart that takes you through our first quarter earnings at 12 cents a share and shows you a bridge of how we get to the 35 cents a share, that's the bar on the right. As I've said, non price improvement was the biggest driver here, contributing 9 cents per share. For those of you who have been following our calls, I think you'll see if you look back over the past several quarters, we've been able to deliver quarter on quarter improvement of 5-10 cents a share a quarter, and those are no longer merger benefits. They are coming from the results of the rationalizations and realignments, SNA productions, raw material cost reductions, and, generally speaking, focusing on doing what we can control in a tough demand environment to improve our margins's and lower our cost. We did get some improvement in the quarter, that was 4 cents a share. We took less lack of order downtime, and the reason we too less is we took 120 thousands tons more maintenance downtown time in the quarter, which means we didn't have to take as much lack of order downtown. But basically, if you adjusted for that, we took about as much downtown in the 2nd quarter as we took in the 1st quarter. Just for different reasons.

We did have a reversal -- this is the lumber duty which we started accruing for earlier in the year, and as you know, that became effective in May, so there was 3 cents a share that went into earnings as a result of that. We've got a foreign exchange pickup of 4 cents a share here, and I ought to remind you that none of this is related to what's happening with the U.S. dollar and Euro; most of all of this is the way we're structured and our accounting for the Brazilian operations in Rio. We get a foreign exchange pick up and that number moves around quite a bit quarter to quarter. We've highlighted here so you can see it because it was 4 cents this quarter, and now there is an additional one cent which leads to the 35 cents reported for the quarter. There were special charges, and there are some pluses and minuses, all added up to a plus. A couple of significant items we sold our OSB business, which was a gain. We took a provision for the closeur or sale of the Hudson River mill which was a loss, obviously, and we took a reserve for the last installment of the head count reductions associated with our S & A improvement program, which we announced last July, and while we've got most of the cost out associated with that, there's still a bit more to come so we took remaining charge for that.

You'll notice that there is a large tax credit in the special charges, and that is simple to explain. It's all related to the decision not to sell Arizona Chemical, which, as you know, we intended to sell and have marketed it for some time and came to the conclusion that we weren't going to get the value, so we decided to hold that business, and last year we had taken a provision in anticipation of selling the stock in that company, which tax expense that we had to reverse when we decided to keep the business. So that's the $97 million tax credit, which means our special charges were 10 cents positive.

The results of 2nd quarter versus 1st quarter on page 7 of slide seven now. In our forest resource businesses earnings were flat. But across the other 12 businesses at International Paper, for reasons I've just spoken to, mostly because what's happened on the cost side, earnings improved.

I'll run through now the next three slides. A bit on each of the three main businesses, paper, packaging and forest products. These are new charts, and we hope to connect the sales earnings and what's going on with volume price by business as opposed to just talking about it to make it more clear for you. If this helps, we would like your feedback on it.

If you take our paper business and the big segments of that are the un-coated business in North America, the coated business, post, and Europe. In the uncoated business volume was up slightly. We started to get some of the price realization improvement as price increases were announced and implemented during the quarter. In coated papers, we got volume improvement. Most of that on the grounded side because we're into the catalog season, so as you can see prices fell sharply during the quarter for coated papers, both in free sheet and in granulated. Pulp, volume was down but prices have started to move the other way as price increases have been announced and gone into effect, and in Europe our volume was down but we had a very, very strong 1st quarter. Volume was off in Europe but it's coming off a strong period and pricing increases continued to go in there and prices were up about $30 a ton. We had a good operating performance in the coated paper business; we lost money in the 1st quarter. It was profitable in the 2nd quarter. In Europe, our profits are up despite the lower volume. We began to see price increases flow through.

Turning to packaging, that's slide 8. In container board volume, it was quite strong compared to a weak 1st quarter. A portion of that was the export business coming back. Our shipments in the export business were higher. They were up 14%. Our box shipments were also up by 7% over the quarter, and as you can see we continued to lose a little price in container board. Price increases have been announced and in the June prices were slightly higher than May prices. In bleach board, volume was up. Prices were off a bit. We had strong operate be performance in both of the packaging businesses. For example, unit costs and consumer packaging across that mill system were down $55 a ton, to give you an idea of the kind of improvements we're making in running the big portions of our manufacturing system.

In forest resources, forest lands were flat quart to quarter. That's the tree business. Lower harvest volumes were offset by better costs, so the earnings improvement was really two things. Stronger lumber shipments and lumber prices and the reversal of the duty at Weldwood, which is also part of the segment.

Other businesses, both [Expedex and Cardo Harvey] continue to improve. Expedex earnings were up in the quarter 30 %, a slight increase in sales revenue, and Cargo Harvey earned $14 million, $10 million in the first quarter. So that's how the business has performed quarter to quarter.

Next chart here on slide 11 just shows the company performance 1st half versus 2nd half. I think what's pretty obvious here is we have been able to offset the price erosion that has occurred, although it's occurred gradually. It's the accumulative impact is very significant. It's a 65 cent negative here on the slide. As you can see, our our non price improvement has offset all that and a little bit more. Goodwill is not being amortized this year, as you know, so that's a pickup of 19 cents. Our interests cost are lower because of lower interest rates and the debt we pay down. Downtime is about the same in terms of earnings impact.

Volume is a little off, and then we've got some pension tax and other stuff, but basically this shows you the change that we've been able to make to our cost structure on a year over year basis, and the next slide shows that in dollars. What's being shown here is on the left-hand side, our 2nd quarter cost -- and this is all costs. Manufacturing, S & A, and basically everything between sales and earnings before taxes. We are $65 million better this quarter than last quarter. I don't know what the color is on the slide, but the bottom light-shaded area is energy. As you can see, the energy didn't have much impact.

And in the second quarter versus -- this year versus second quarter of last year we're $220 million better, and in the first half for the full six months, $485 million better. So if you analyzed that, we're running at a rate of about $1 billion better on our cost structure this year than last year. Those of you you who remember our 1st quarter conference call last year, remember we got off to an awful start, but clearly we've made a major change in our cost structure that goes beyond just capturing merger benefits. Overhead cost performance we're continuing to manage what we can control. You can see the rate of overhead spending. This, S & A, and for us we call it S & A and overhead, all of our selling administrative expenses, and all of our manufacturing administration, so its more than just S & A cost. As you can see, that's steadily been coming down on a quarterly basis over the last several quarters.

We have completed the sale of $3 billion on encore assets which we promised we would do. About this time in 2000, two years ago, and this year shows you the list of businesses that have been sold. I guess the point I'd like the make here is we promised we would do six things. And all of those were aimed at improving the company's performance regardless of what's going in the external environment. We said we would focus the company on its core businesses and divest in the businesses that were not core or that were not making a cast cost to capital return, and we didn't think that they could. We completed that program. We said we would closed capacity we did didn't need; we have done that. We said we would pay down debt; we have paid down over three billion dollars since we acquired Champion. We said we would continue to exercise financial discipline and we've limited our Cap-X spending on the most important and highest return projects. We said we would keep our inventories in good shape, and they are basically where they were this time last year. And we would change our cost structure, which we've done. The result is a stronger, leaner, more focused International Paper that we're convinced is really going to show some great results as the economy improves, which I believe it's beginning to do. Although it's unfolding as a very slow recovery and at this point in time, patchy in terms of the industries that are being impacted. So with that let me devote the rest of the time to your questions. Because I'm sure you have some. I hope you do, and I've got some of my colleagues here who can also help out.

Operator, we're now ready to take questions.

Very good, thank you. Ladies and gentlemen, at this time we'll combine the question and answer session. If you have a question, please press the star followed by the one on your push bottom-button phone. If you would like to decline from the polling process, please press the star followed by the two. You'll hear a three tone prompt acknowledging your selection, and your questions will be polled in the order they are received. If you are using speaker equipment of any sort, please lift of the handset before pressing any numbers. One moment please for the first question. Our first question comes from the line of Rich Snyder of UBS Warburg. Please go ahead.

John, I was wondering if you can give a little more color as to why the volume was off in the 2nd quarter versus the 1st quarter in Europe, and also your pulp find was off -- it just seems counter to seasonal trends.

Well, pulp is probably a little bit of anticipatory buying, and that typically happens when pulp prices are starting to move. People will place more orders, and frankly the inventories -- I think in all the channels the pulp has steadily been coming down. In Europe, we had an extremely strong first quarter in Europe, Rich, which surprised us in terms of the volume strength in both the eastern Europe and western Europe, and it must have been that the inventories were -- the pipeline was low. We still have strong shipments on a relative basis, but not as strong as the 1st quarter so there are no fundamental shift there. No big loss in market share. There is nothing nothing behind that other than just what I said.

Okay. And going forward, are we supposed to be looking at roughly about $18 million a quarter of CVD since that's been reestablished?

Say that again.

Going forward, you know you're going to be impacted by the counter --

I think that's about $30 million.

It'll be about $30 million a quarter?

No $30 million for the year.

Okay, okay, $30 million for the year.

And we had the flip side benefit which is hard to quantify on the U.S. side. As you know, our position -- we've got an important and good position in Canada, but with much bigger players off of lumber in the US.

Okay, and just the last question. Corporate items, I know that there was positive, I think, benefit of foreign exchange in there, but, you know, you went from $94 million of corporate item expenses in the 1st quarter to $37 million in the 2nd quarter. Could you try and reconcile that for us and how to look at going forward.

There are two things to think about there. One, you put your finger on which is what is going on with F-X. And most of that is what's happening in Brazil with the weakening moral, and that swings around quite a bit quart to quarter. None of that is related to what's going on with the dollar weakening, that's ahead of us. And the other thing to run through there, and we do it because it's simple, but it probably should be cost of goods sold is the gains or losses on our assets, relative to the stock market -- you'll run through there and we do that so we don't have to try to figure out gas hedges back to 15 businesses, and that was a swing of about $30 million first quarter to second quarter. It was a negative number relative to spot in the first quarter, and a positive number relative to what it had been in the second quarter.

So on an ongoing basis excluding the hedges, we should be -- in foreign exchange we should be looking at more than $90 million type of numbers that you've been reporting previously.

I would ask Andy.

Yeah, it would run about that, plus or minus $10 or $15 million.

Okay. Thank you.

Next question from Chip Dillon of Solomon Smith Barney.

Good morning. A couple of questions. One related to the potential for, I guess, volume increases, and maybe you're starting to see this because of the shift in the exchange rate with the Euro and the fact that you all have been take so much downtown. You mentioned you took almost as much in the second as you did in the first quarter. I didn't know if we could look forward to seeing at least what the market would bear -- what would bear -- volume increases that could matter 5% or more sequentially in the third or the fourth quarter, or are conditions not strong enough to warrant that yet?

This thing is unfolding slower than I think we all thought it would for a variety of reasons, so it's hard to put your finger on a percentage that we would expect. But if the economy continues to show signs of rebounding, which it did on first quarter GDP numbers, eventually we'll see that. We're also going to see ahead of us the impact of a modestly weaker dollar. We haven't seen that. That will be in quarters to come, which again is good news. But I will be hesitant to try to predict and quarter to quarter change in demand at this point in time. Because it's premised on what's going on with our customers. Right now in commercial turning and some of the packaging businesses, it's very spotty. And in some it's still flat.

Now we saw in one grade, and for example a container board yesterday that the U.S. operating rates really shot up in June, and in the case of your system, would you say that your system ran, I guess, fully in June or would you say there is still a lot of potential for you to get more volume from whatever you were getting June?

On the container board side.

Yes.

We still got more volume potential but we ran the container board system fuller in the second quarter than we did in the 1st quarter.

Okay, and then the last question. You are mentioned a $55 ton reduction, I think, in cost and bleach board. Was that versus the 1st quarter and mostly the [Moss] point closeur.

No. It's both the impact of rebalancing and realigning what we make at Augusta, Texarkana, and Pine Bluff, but then there are a bunch of focus programs at each one of those facilities to take the lower boat variable and indirect cost, and we're pulling all of those numbers so it's hard to see the impact of facility rationalization and it shows up in improved profitability and a better cost structure at our other facilities which are fundamentally better facilities. So both of those things are having an impact.

And then lastly, obviously the cost savings that you've shown us are quite impressive in light of not having a merger to sort of get synergies from recently. Do you see opportunities to continue at roughly the rate or even close to the rate that you have in recent quarters?

I think 5 to 10 cents is -- that's what we're shooting for. We're already planning for what are the elements of how we are going to move this beyond 2002, into 2003,'04, and '05. That's part of this declining process, it turns into the budgeting process of the companies. So we're very enthusiastic about our prospects. We are not satisfied with 35 cents a share, but in today's environment, we're pretty pleased we've been able to produce those kind of results. And if you look at the last couple of quarters, it's pretty evident that we've been able to quarter on quarter put another five to 10 cents in earnings from a variety of opportunities, and that goes well beyond merger benefits.

And then that's 5 to 10 cents sequentially?

Yeah.

Okay. Thank you.

Our next questions from Matt Berler from Morgan Stanley.

Thanks and good morning.

Is this early for you? Or is this the east coast?

I'm used to this; I'm always on the east coast. Can you tell us where your average pricing is today for your key commodities versus the 2nd quarter? It is no secret that there has been some noise about the [INAUDIBLE] situation, and then I think we got a July first liner board increase. Can you update us on where we are today for some of your key commodities versus 2Q?

I prefer to talk about it in terms of averages rather than dollars. Matt, because we released the change in quarter to quarter prices, but that is going through all of the bell weathers and that will take a lot of time. Our uncoated paper's price, which has got converting in there, has got roll offset and cut size. It was in 755 for in June. In container board, we were at 380 and that's an average. And in coated papers a little over 721. And in lumber, it's 318.

John --.

I don't have it all in front of me.

It's more the change that I'm focused on.

If you take -- go back to page seven, I believe it is. Yeah, seven, the uncoated was up $5 a ton quarter on quarter.

Right, I'm sorry. I meant to say the 3rd quarter where we are today. Versus the 2nd quarter. So I'm rolling forward and trying to look at 3rd quarter.

I can't help you there.

Okay.

I don't know where prices are today. I don't have have a month to date composite price in front of me. I would say that prices generally speaking, price increases are going in. They are going in slowly. It's summer, so they will not go in quickly. It's July and August, obviously because they never do. And uncoated papers, we're aware of some discounting but it's only around the edges. We are getting the last $10 of pulp, and there is another pulp price increase out there for July. Which will probably come in slowly given it's summer.

Okay. And then can you tell us looking at the 3rd quarter, I think you said you had as much downtown in Q2 as Q1, but the mix was different because you took the maintenance downtime. Will that maintenance downtown go away in Q3, and as a result will you see a substantial improvement in production and less downtime?

Not unless we have orders. So we'll take as we've been doing for the last two years, we'll take downtown as necessary to keep our inventories in control and balance our capacity with the demand. So we won't take as much maintenance downtime in the third quarter because we've taken the maintenance downtown we needed to take for these annual outages, but what will happen is we'll take lack of order downtown if we don't have the orders.

So based on your order book today, do you think that you might have to increase your lack of order downtown in Q3 as you take less maintenance?

We haven't given a forecast for downtime in the quarter, and don't do that because we you really can't forecast it. It's going to be a function of our orders. But what I would tell you is expect us to take the downtime that's necessary to balance our supply with our demand.

Right and the key is that the demand hasn't picked up much or materially from the second quarter levels yet.

I'd say it's mostly seasonal. We're encouraged by the box numbers for June. That's a plus. But the commercial printing market is still is not strong. Advertising, all of us know what is going on with magazines and with advertising, it's still you can't call it robust.

And is it possible to quantify John, what the impact of the 120 thousand tons of maintenance downtime is versus if that 120 had been lack of order downtime? Don't you capitalize and spread it throughout the year, your maintenance downtime?

How do we do that, Andy?

Yeah. We spread the maintenance throughout the year.

What will be the -- what is the impact of taking that downtime as maintenance versus lack of order from a PNL standpoint?

I can't tell you right off the top; I'd be guessing.

Can it be material?

Andy is shaking his head no.

Okay. Very good. Thanks a lot.

Our next question comes from the line of Mark Connelly of Credit Suisse First Boston.

Thank you. Two questions: Looking at the foreign exchange issue are we seeing enough of a drop -- can you you hear me now?

Yeah.

When you look at foreign exchange I'm wondering if we've seen enough of a drop relative to the Euro for you to expect any different performance in your coated business competitively, and second, when we look back to your presentation on bleached board, you talk about a $10 drop in realizations. There was a June one price hike slated. What is your expectation in the bleach board now for the reality of that price hike?

I will expect that the going forward that we continue to the kind of exchange rate we're looking at today for sure. We will have both not only relative change in the performance of our coated papers business -- our competition. Where our competition is not U.S. competition. But also an absolute change, so I think they are again that's in front of us. We had very little -- no impact of that that in the 2nd quarter because the movement to dollars has been recent. In bleach board, you've got -- as you look at the page that shows packaging mark. You have got mix running through there, and we would expect -- this comes slower because we have quite a few contracts in our bleach board business, and whether it's in cup or liquid packaging and certain times when prices get reopened with customers, so there has been a price move, we have to wait for the reopener, but we would expect that the price increases that has been announced for bleach board will gradually go in as we get through the summer and move into the fall.

Okay. Thanks very much.

Very good, our next question comes from the line of Peter Wishmeyer of Lehman brothers.

Good morning. And congratulations on a nice improvement despite some tough market conditions. I wanted to ask a question about FAS 142, if you've completed the test and if you could share any of the thoughts or any of the findings related to that.

We haven't completed the work Pete, so there is nothing we can share with you now. We have got good will $6.5 billion, which is about 15 percent have our assets, but we're going to be completing the first phase of that work in August, and at that at that point we'll know and we'll disclose if we'll take a goodwill charge and the range, and then after you make that disclosure, we will be making in our 10 Q. -- we'll be toning that down and we'll get that down before the end of the year.

Okay. Great. And another question has to do with working capital. It looks like you reduced working capital -- squeezed out a little over $150 million sequentially. Curious on where you think the opportunities are there. Do you have a budget? Do you have a plan on how much more you might be able to squeeze out, going forward.

I think that's one of the areas we've done pretty good job with working capital. I think it's one of the areas that's a big opportunity for us going forward because we haven't had, frankly, the -- not lack of focus, but we haven't had the very disciplined approach to trying to figure out how we can get working capital down on the cost side, and I think you've heard John talk about some of the work that we're doing on the project. That's going give us a good game plan going forward as to how to take a big chunk of working capital permenantly out of the supply chain. And I see that as an area for a lot of improving going forward. Our distribution business is obviously the most working capital intensive business, and they's done a great job at taking working capital out, but it's an opportunity for us going forward in the rest of our businesses.

Is it possible to quantify what might be possible? I mean, is it possible to see as much as a half a billion or a billion dollars of reduction in working capital over an extended period or any rough guidance you can provide?

I say it's the supply chain work. There is easily two points of sales for opportunity out there.

Okay. Okay. Great.

That's going to come. That's not going to come in the next six months, and we'll go beyond that because we'll find there are huge opportunities for us as we take costs out of supply change and working on the project -- we're scoping out that effort right now.

Very good. Any quick update on Cap X for the year?

It's going to come in about where we told you it would. About $1 billion to $1.1 billion.

And just lastly if you care to comment, I think you've indicated pretty consistently in the past that strategic actions along the lines of acquisitions of like would be on hold until you have delivered on some of your objectives, and you've started to do that with asset sales and you've been getting some non-price improvement, but does that still hold? Can you help to clarify what the company's position is as related to strategic opportunities going forward?

Two years ago we told you our priority was integrating Champion and completing the divestment and paying down debt. We've done all of that. We've also said that we have no major acquisitions that we're right in the middle of looking at. We also told you that that doesn't mean that we are not looking at smaller acquisitions and we've looked at some and decided to pass, and we'll continue to do that. Maybe we'll do one, but paying down debt and getting Champion integrated has been completed, and I think our results are starting to demonstrate -- they're starting to demonstrate to us that we're delivering on the ability to deliver earnings in a weak demand environment and prove that building a stronger International Paper through Union Camp and Champion is going to create some shareholder value.

Just lastly, can you comment on your willingness to take on debt in this kind of environment if you found the right opportunity, or should we assume that based on your capital structure should we assume that I. P. would look at the lines of using equity?

That would depend on the situation. We're paying off debt and starting to generate cash flow that is in excess of what we need to make interest payments and pay taxes and dividend ends, and I feel terrific that we are doing that in today's environment. There is a huge mount of upside when you start to think about mid-cycle prices and mid-cycle demands. So we're going to be in great shape from a cash flow standpoint.

Thank you.

Next question from Stewart Beaumont of Axiom Capital; please go ahead with your question.

I know you've answered a lot of questions today, but maybe you could just --

Could you speak up a bit?

Oh yeah, sure. Could you maybe talk a little bit about -- I know you took a little bit of a hit on pension, but not very much. So are we to take from that that you're very conservatively positioned there, and the if you can give us an update on the funding position.

Sure. Well, the year to date through June our pension plan was down about 3%. We've been a pop performer among a large peer group and our pension fund has done well. We've had some very good people who look after that. Our returns over the last five years have been about 9%, and about 9.6% over the last 10 years. We're not making contributions now. In the future, it's going to be a function of how the returns are. We lowered our expect rate of return for pension plan this year from 10% to 9.25. And there is roughly -- that's a change of about $60 million of lower pension income, so pension income this year -- in our first half results, pension income is about $50 million. If we lowered it to 8%, I saw somebody I think it was Lisa Shawnfield did an analysis which was close -- if you lowered to 8%, that would costs us about 10 to 15 cents a share, and if you think about the mid cycle earnings in the $4 range, that's insignificant. From a cash flow standpoint, if we have to make contributions our plan, which we're not now, and we certainly are not required to by the IRS this year, we will be able to do that.

Okay. That's pretty thorough answer. Thanks.

Very good. Next question comes from the line of Matt Berler of Morgan Stanley.

Thanks. I don't think you gave us the slide that you've given us in the past that quantifies the amount of down time in terms by grade, or at least my package didn't include it. Can you tell us what that was?

It was about 65,000 tons of lack of order downtime, and then another 120 thousand tons -- 120 to 140 thousand tons that we didn't take in lack of order because we took it in maintenance. So I don't have it by lack of order downtime by grade was 11,000 tons in container board. 20,000 tons in coated papers. 10,000 tons in Europe and in pulp. Remember we've got maintenance downtime on top of that.

Right and you said you took that in basically in lieu of lack of order.

Yeah, we just moved our maintenance down time. Most of the maintenance work is done in the spring either during the second or 3rd quarter, so we said we don't have the orders so let's do it in the second quarter.

But you've got about 200,000 tons per quarter now at a second quarter rate of down time.

Our 1st quarter lack of order downtown was 200,000 tons. And the demand picked up a bit in container board, and we got some seasonal improvement in coated papers which the catalog season is starting. But fundamentally as I look at this, I would say if we hadn't taken the downtime the maintenance downtime in the second quarter, which we took, we would have been backed up to 200 thousand tons down time. Because it might have shown up in different businesses, but there hasn't been a fundamental shift in demand that is anything but some moving from the first to the second quarter. We're optimistic that, you know, as the economy continues to improve that the third and fourth quarters will unfold differently. But it's clear that it's going to be a slow recovery not a quick snap back.

And what I'm really kind of leading up to is your comment about $4 mid cycle earnings and all that up side. And basically where you are right now from all other aspects, excluding price. If you annualize the second quarter results excluding unusual items which maybe was what 24-26 cents a share; is that right?

Right in there.

So say you're running at about $1 a share. Annualized. You said mid cycle is $4, so you've got $3 of -- to get to mid cycle. How much of that do you think from here is price versus non price?

There is --.

Because 200 thousand tons per quarter, 800 thousand tons a year in volume gets you part of the way, right?

But you've got to remember all of the volume in the non paper business -- it's not only the paper businesses that are running at 80-95% of capacity, it's 200 converting plants around the world. So there is a -- we have closed more than 40 facilities over the last 18 months. We haven't lost really any revenue capacity on that side. We've lost some tonnage -- you know, some volume capabilities, and we've shut done 2 million tons, but we've probably lost maybe one billion and a half tons of capacity. There is that -- I'm trying to recall from memory, Matt. I think it's about a billion and a half of price that gets us back to mid cycle. About somewhere between half a billion to $1 billion of demand and then non price improvement of $600 million.

So non price improvement --.

What I think about is EBITDA today is running about 3.4 to $3.5 million. And we think mid cycle EBITDA for us can be in the $5.5 billion range.

Okay. And then just one -- thank you for that. And one other little bit. The other businesses contributed, I think it was -- I'm sorry, where is that? The number here in the 2nd quarter? Was it $16 million specialty businesses and other?

Yeah.

Now that you have a pull Arizona chemicals back in, what do you think that number looks like going forward? Is that $16 million number a decent number plus or minus to go forward with?

I'm not -- I can't give you a forecast for for that segment, Matt, or we will be giving forecast for all of the segments. You're right, Arizona chemicals is in -- anything else in there? Industrial Papers. We would expect over time I mean the reason we didn't sell Arizona chemicals we think we can improve that business. We didn't get a value that we thought was a fair value. So that business will benefit from an improving -- we have got a profit improvement plan that is pretty credible and doable and we're going to start in on it.

Can you give us an update on the timber sales are going and what is left to sell there in timing?

We got most of east Texas sold in the first and second quarters, which we said that was roughly 600,000 acres in east Texas. And so that went very well. We pulled that timber and got the cash in the first and 2nd quarter of the year. We still have a couple of million acres of timberland to sell, and our income from land sales in the quarter didn't change from the 1st quarter, and I think the 1st quarter was down a little bit from the fourth quarter. We'll tell you if that changes significantly quarter to quarter. Harvest volumes were off, and there is nothing structural about that quarter to quarter, and we offset that with cost improvement initiatives in the forest business, so we've still got some timberland to sell and we'll be doing that over the next several years as opportunities arise.

Thanks.

Our next question comes from the line of Jared Merop of Prudential Securities.

Thank you. You mentioned earlier in the call that the impact the duties was $7 million. Can you go into that a little bit? $7 million a quarter. Excuse me. About $30 million a year. Can you go into where that comes through on the Canadian side, and then what would you see as the improvement on your U.S. operations? Would that fully be offset?

More than offset. We produce more than twice as much lumber in the U.S. as we do in Canada. Plus you've got the ripple effect impact on stump prices. Canadian lumber being more fairly costly, including both the duty and the other component which add up to, I think it's roughly 27%.

Okay. Thank you.

We're far better. Every time we've quantified it, we're guessing, but it's easily 2-1.

Great. Thanks.

Mr. Merop, does that answer your question? All right. Ladies and gentlemen, there are no further questions at this time. Please continue with your presentation.

I think if there are no further questions, --.

I want to thank you for joining us. And we will be available to answer follow up questions. Bye-bye.

Ladies and gentlemen, this concludes the Q2 2002 International Paper conference today. You may disconnect and thank you for participating.