International Paper Co (IP) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the International Paper first quarter earnings conference call. At this time all participants are in a listen-only mode. Following the formal presentation, instructioning will be given for the question-and-answer session. If anyone needs assistance at any time during the conference, please press the star, followed by the zero for operator assistance. As a reminder, this conference is being recorded today, April 24th, 2003. I would now like to turn the conference over to Darial Sneed, Vice President of Investor Relations. Please go ahead, ma'am.

Good morning and thank you for joining International Paper's first quarter 2003 earnings conference call.

Before turning the call over to our president, John Faraci, and our Chief Financial Officer, Chris Liddell, I want to mention that we may make forward-looking statements.

Forward-looking statements are subject to risks and uncertainties which are outlined in International Paper's first quarter 2003 earnings press release which was issued this morning, April the 24th. These risks are also outlined on Page 2 of our presentation slide. Also this presentation includes certain non-GAAP financial information that management believes may be useful in comparing operating results from period to period. Reconciliation of these non-GAAP measures to the corresponding measures under U.S. generally accepted accounting principles, along with copies of the presentation slides, may be found at www.internationalpaper.com under investor information.

And with that, here's John Faraci.

Thanks, Darial.

Good morning, everyone.

I'm going to assume that most of you or all of you have the slides that are on our website this morning. So we will go through those slides as we typically do, then come back and try to leave enough time to answer all your questions. Let me start off with a summary of the first quarter. We thought it was a pretty solid quarter. Demand and volume as we expected. It was winter. We're seasonally slow but, you know, in line with our expectations. No negative surprises. Pricing was slightly positive relative to last year, and there are some plusses and minuses, but about flat with the fourth quarter.

You know, energy, wood and weather all had a big negative influence and as a result, our costs were higher than expected but as we look at, you know, energy and wood, you know, that's -- don't expect that to reoccur again. It may take a while for the energy prices to come back but we're aggressively managing our wood costs back to where they want them to be but they were high in the first quarter, both compared to last year and in the fourth quarter. We didn't run very well in the first quarter. Some of that we can attribute to the weather but not all of it, but importantly as we look at our operating results in the month of March, we were ahead of our budget and we look across our mill system in terms of cross-performance in March.

So that means we got those issues behind us and got them behind us quickly.

Turning to the next page here, you've seen this. This is kind of the last, you know, four years of quarterly earnings. We earned 14 cents a share in the first quarter before special items compared to, you know, 12 cents in the first quarter, and 33 in the fourth. And Chris will take you through that comparison, fourth quarter to first quarter in a minute. We left the 2000 in here just to, kind of as a reminder. You know, we talked about the earnings potential of International Paper going forward and I think when you look at the, you know, first and second quarter of 2000 and see what our earnings were and this is all before Champion was put into International Paper.

So it's Champion and IP aspirate companies what our earnings would have been, you can see that as we talked about $4 a share as being our mid cycle potential, we really believe, you know, that's the case with the cost structure we have and a result of the Union Camp and Champion acquisitions.

So let me turn it over to Chris and we'll come back and talk about each of the businesses and take your questions.

Thanks, John.

I'll talk about the major trends this quarter and also the special charges and then I'll end up back to John who will go into more detail at the (inaudible) level.

Looking at the trend to the fourth quarter last year, what we've done here is shown you slightly more detail in the past, mainly to give you a sense of how the winter quarter -- impacted operations. But if I start with select board and downtime volume, overall it was a positive 1 cent up but there were two offsetting trends. The volume was down slightly, two cents in the quarter, mainly seasonal, in particular in (inaudible) and Shorewood, and that was offset by a bit of lack of order downtime situation, 3 cents positive. So overall one cent up.

We haven't [INAUDIBLE] price and mix essentially because it was zero for the quarter, pulp coated bleached board lumber, and as John mentioned, he will come back and talk a little bit more about pricing in the business reviews. On nonprice improvement, we continued to take cost out across the company but in this quarter it wasn't enough to offset the negative impact of weather and the increased energy in raw material costs.

Until the winter disruptions, we estimate that we had a negative impact of about that same 5 cents a quarter. So it offset virtually all of our cost improvement. And there were a number of examples across the company of how that manifest itself, higher energy and usage, plus all of our mills, several freezes and breakages causing some downtime in some of them, weather-related wood shortages and some poor starts after downtime. So a relatively number of small, but adding up in total to around a 5 cent a share effect in the quarter. Now clearly with the winter essentially behind us now going out of the quarter, the run rate is zero. So we won't see that same effect in the second quarter.

On energy and raw materials, a 7 cent negative relative to the fourth quarter. That was made up of energy, 4 cents negative, 5 at cost, 2 cents and other raw materials, for example, poly ethylene and resin, 1 cent. The energy number of 4 cents, that's hedging and as most of you know, we hedge around 40% of our energy usage. So the 4 cent number is net of those hedges. Going forward on energy, it will continue to still be a negative with the pricing structure that we have at the moment, but quarter on quarter in the second quarter, it will be better than the the first quarter, probably in the order of 2 to 3 cents where pricing currently is.

On forests and in terms of the next four variances, the variances are more due to the absence of favorable items we had in the fourth quarter. For example, forests, we had a high level of land sales in the fourth quarter. We're back now to what I would describe as more normal levels and similar to where we were on the first quarter of last year.

Pension income as we previously told you, last year we had pension income for the year of around $75 million. This year we expect to have an expense of $25 million. So the swing of $100 million between those two figures equate to around 3 to 4 cents a quarter.

On tasks in the fourth quarter last year, we had a 24 -- tax, that was in line to get us in line with 29% for the year and the absence of that adjustment is around 4 cents in the first quarter of this year. And finally on other, that's primarily the absence of the gain on the sale of our Prudential demutualized shares in the fourth quarter. So net of all of those changes, we came in at 14 cents of operating earnings and that was up 2 cents from the same quarter of last year.

In terms of special charges, they were 3 cents a share for the company. They were associated mainly with the closure of our chemical cellulose facility in Mississippi with associated head count reductions of 170 there and also 250 in other divisions across the company. Natchez will finally close around the middle of this year and to the extent that it's been losing money, the benefits of that closure will start to come through from the third quarter on wards.

Finally, we had a $10m architect charge associated with the adoption of FASB 143 and that equates to 2 cents a share. So with all of those total special charges, that takes our operating earnings of 14 cents down to the net reported earnings of 9 cents a share. I'll now hand back to John who will go through the business on a sector-by-sector basis.

Thanks, Chris. Let me start with the paper business and remind you, you know, that includes our big North American uncoated white business, our coated papers business, pulp, European papers, and Brazil. Sales revenues were down slightly within the four main businesses, you know, volume was up a tad in the uncoated business in the U.S. and pretty healthy in Europe. We were down in coated and in pulp. Pricing was firm in the U.S. paper business. It was up in pulp for the quarter. We're going to see more of that as we move into the second quarter because most of that price impact really didn't get into the quarter until late, in late March.

In Europe it shows here -- and we're looking at realizations, not bellwethers. Prices were actually off in Euro terms about 5% in Europe. What you see is the impact principally of X -- FX but also mix improvement. From our operating perspective these businesses got hit hard by wood and energy in the first quarter, about $30m compared to the fourth quarter. We had some operating problems at these mills, the U.S. mills, not in Europe, on January and February but as I said, we were favorable to our budget and obviously our budget has year-over-year improvement built into it in March. So we think we got the corner turned there.

Moving on to Packaging, again sales revenues are relatively flat. Importantly in the brown business, volume was up. That was mostly export containerboard. You know, that's the flowthrough benefit, starting to see an improvement in currency for us.

Box demand was not great but it was up 4% off of a weak first quarter of last year. And we lost a little price on those fronts. You know, we've had a steady drift down in industrial Packaging pricing, reflecting the fact that we've more or less been in a recession here in the United States as far as the manufacturing sector goes for now on three years. And input costs again, wood and energy had an impact on these businesses to the tune of about $10m during the quarter.

In our bleached board business, bleached board is seasonally slow in the first quarter. You know, probably more than the brown business. You know, we picked up activity as we, you know, came through the end of the quarter and as you probably know, have recently announced a price increase in bleached board as bag logs have stretched out a bit. We had a big project at one of our bleached board mills that got ramped up. We started that up late in the third quarter of last year and so we had the start-up costs associated with that, as well as, you know, the initial product that came off that machine was not on great. It was start-up volume. We've now got that facility ramped up. So it's running as planned and the start-up volume is gone. So what you see here is bleached board realizations up $15 with basically bleached board prices were flat during the quarter. And Consumer Packaging also got hit with input costs and that was about $12m, comparing fourth quarter to first quarter.

Moving on to the Forest Products segment, our U.S. wood products business, Canada, and forest resources, the, you know, wood products business in the U.S., you know, continues to be in the red, although our losses in the first quarter were less than they were in the fourth quarter of last year. Prices moved up, as you can see, but they moved up off five-year lows. So that's not -- it's good news but not enough news to make that business anywhere near healthy. And on the forest side we had, as Chris mentioned, we had lower land sales and lower real estate sales in the first quarter and also lower harvest volumes associated with all the weather problems we had in the south because we finally had a real winter.

I don't have a slide here on our next but just let me make a quick comment. You know, sales were down $100m in the first quarter compared to the fourth quarter, and I think that is probably one of the best characterizations of how we should think about what's going on in the advertising and commercial printing size of the economy. You know, very, very weak. The first three months are always weak for [INAUDIBLE] but we didn't expect them to be that week probably in that business and basically the gross profit that we didn't get in that $100m bridges the gap between what [INAUDIBLE] earned in the fourth quarter versus the first quarter.

Moving on to the second quarter outlook, you know, I think we would like to look at this and say the glass is half full, not half empty. We've had, you know, a whole bunch of things impacting our industry over the last couple of years, the continued weakness in the economy. Then all the uncertainty around, you know, whether we're going to get into the Middle East and if we got in, what it was going to look like. I think we can say there that the beginning of -- the end of the beginning kind of ended on a more positive note and we had the impact of high wood and energy costs, principally energy. As I said at the outset, those will mitigate in the second quarter, energy probably solely as we move into the warmer part of the year. You know, prices are improving in some grades but not all. Pulp prices have moved up. There are price increases out for the second quarter in both bleached board and in containerboard. We would expect those realizations to go in. They will probably go in slowly but we believe that they will go in.

And we would expect and are confident that our operating performance, you know, the problems we had in January and February are behind us, you know, based on the good result we had in operating performance in March and as we look at April, we're running pretty well. So I would think that, you know, the economy should, you know, should pick up but every time we open the newspaper, there is another event out there that creates some uncertainty and, you know, it's not Middle East now. It's coming out of Asia. So who knows, but, you know, we're cautiously optimistic that things will move up from here.

We're now ready to take questions.

Very good. Thank you, Ms. Sneed. Ladies and gentlemen, this time will begin the question and answer session. If you have a question, please press "star," "1" followed by. If you would like to decline from the polling process, please press the star followed by the 2. You will here 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 today that has a handset, you must lift the handset before pressing the numbers. One moment, please, for the first question. Our first question will come from the line of Mr. Chip Dillon with Salomon Smith Barney. Please go ahead.

Yes, good morning. I had a question about the uncoated free sheet business. You noted the price increases that are going -- been announced in many other grades and we've seen, you know, pulp move up quite strongly here and yet we're not seeing anything yet in uncoated, yet seasonally you would think we're getting close to the point where you would expect to see an attempt at least at a price increase, given what pulp has done. Could you explain why you don't think we've seen that move yet?

Well, Chip -- excuse me. Uncoated prices have basically moved -- been flat and, you know, through a period of, you know, the first quarter is always seasonally slow in that business. You know, commercial printing, the reason Expedx sales were up $100m is the paper segment of Expedx, not the Packaging facilities applies and we've got a very weak advertising market still.

You know, one of our customers pulled 60 ad pages out of one of their titles before the academy awards reflecting, you know, the fact that we had just gone to, you know, started the sequence of events in the Middle East. So I think that is, through a big way, predicated on what happens in advertising, both for our coated papers business and our uncoated business.

To say it differently, you know, pulp really needs the demand on the paper side to come back pretty quickly for it to continue to be sustained at the level it's at or go higher.

Yeah, these -- I mean, all these grades, Chip, as you know, are driven by supply and demand. People try to say they are connected but at the end of the day supply and demand for pulp and supply and demand for offset paper are going to determine where pricing is and, you know, the supply side of the equation is being, you know, managed differently in some of those businesses and, you know, that might make them -- make prices behave a little bit differently than historically we thought.

Gotcha. And then as a follow-up, you mentioned that in the paper segment you had some operating problems in January and February that have worked themselves out, and while you quantified the energy hit in that segment as $30m, how much do you think these operating problems cost you in the quarter, if you hadn't had them?

Chip, you know, I would have to go back and look, take energy out of the overall cost equation, but it's -- you know, it's not insignificant. We did get out of -- they didn't last through the whole quarter because in March we were in pretty good shape. So I wouldn't want to guess.

Okay. But clearly you feel better about where the mills are -- how the mills are running now than you did a month ago?

Absolutely.

Gotcha. Thank you very much.

Thank you, sir. Our next question will come from the line of Mr. Mark Wilde of Deutsche Bank. Please go ahead.

Mark, how are you?

Good morning. I'm good. John, can you talk a little bit about the offshore markets that you are involved in, particularly Europe and then kind of Australia, New Zealand and Asia and I wondered if you could talk about both demand in those markets but also sort of currency in those markets, currency impacts.

Well, you know, Chris has been in New Zealand more frequently than I have.

Why don't I let him talk about Australia and New Zealand and then I'll come back and talk about Europe.

Australia and New Zealand have been actually extremely strong through last year as you have probably seen in particular in the building cycle. That's come back a little in the first quarter but was actually still relatively strong, and the D -- G.D.P. at those describes has continue to perform really well.

The impact of [INAUDIBLE] and the has been the currency impact where we've seen the appreciation of the Australian and New Zealand daughter by the order of around 13% over the last year. So that's had an impact in particular into the export markets into Asia where once we are seeing some pricing increases, that's been offset to a large extent by FX changes.

Now, in the case of Carter Holt Harvey, fortunately they have a foreign exchange hedging policy which has allowed them to continue to have exchange rates which were effectively a year ago now.

So they have had exchange rates in the mid 40 cents to the U.S. dollar compared to spot rates in the mid-50s. So they have offset. But to a large extent those foreign exchange impacts will start to come through as year proceeds.

Mark, before I turn to Europe, Chip, back to your question about operating cost. It was about 5 cents a share. So that's $35-$40m kind of across the plate in terms of port performance in January and February.

In Europe, Mark, we're pretty fortunate because we play in both sides of Europe, eastern Europe and Western Europe, and Western Europe is not feeling very good. You know, Germany is as slow as we are or slower. You know, our volumes actually quarter to quarter were up slightly in Europe.

You know, prices have come off, reflecting the fact that, you know, Western Europe is very slow, but we can -- we've got a great sales position in both markets and so we can move, you know, product around, and, you know, are running full over there and have, you know, two very low-cost facilities. So we're doing pretty well, but you can't get excited about the European economy for sure.

John, I wondered just one other question. Could you talk a little bit sort of about what the strategy may be for expansion into both Latin American, Asia going forward? You know, I know that Champion has a big and actually a very profitable Brazilian operation. They talked about expanding down there. And then seems like a lot of your big European competitors have been expanding pretty quickly in Asia.

Well, as we said, we don't think the world needs a lot more capacity in just about anything, including paper. Probably across every industry. So, you know, we've gone back in our capital budget and we're not doing, maybe with one or two minor exceptions, any volume-related projects across the company. You know, our capital is being aimed at, you know, taking costs out, improving product quality.

You know, there are some pretty attractive places at some point in time, you know, paper demand is going to grow. It's going to grow with G.D.P. growth around the world and G.D.P. growth right now ex-China is pretty weak. And we've got some good positions. You know, there's always the buy versus build equation and for the last number of years, it's been cheaper to buy than to build.

So, you know, we would look to building our business -- you know, our main businesses stronger when the time is right and that, not only through volume but through continuing to improve our product mix and our cost structure and our customer position.

Okay. And finally, you mentioned the capital budget. It seems like you had raised it over the last couple of quarters and I think we were at about 1.3, 1.2, 1.3 for this year. Are you kind of pulling that back down now? As it looks like 2003 will be a little tougher than many of us had expected f.

We are, but just let me frame that up. I think when we talked about 1.3, we talked about that level of capital spending over a planning cycle and we've gotten away from thinking about capital spending as an annual event. We think bit as part of our strategy and then we adjust that up or down depending upon, you know, how we feel about things and, you know, what projects are in the pipeline. You know, this year is probably going to be in the, you know, 1.1 range. Last year was 1 billion. So we're spending below what we would be our normal spin rate over a cycle which is, you know, roughly 70-75% of depreciation. And, you know, we continue to reprioritize projects.

Energy projects are moving up to the top as you would expect because energy prices having hanging around in the $5 level for some time and we've got some great energy reduction projects that we're going to go do but that just means we're going to reprioritize something out.

Our next question will come from the line of Lise Shonfield from J.P. Morgan. Please go ahead.

Good morning. I just had a couple of questions. The first one is related to your cash balance which looks like it increased by over $1 billion during the quarter and I just wondered what plans you have for that cash over the next couple of quarters.

Well, Lisa, Chris speaking. In essence we took the opportunity a month or so ago to take advantage of some very good rates and issue $1b worth of debt and that was really just in our view what we considered to be a good conservative approach, given the world as it was then, in particular with things like the Iraqi war, but there's no particular significance in that. That was , as it turned out, the rates that we raised were the best five- and 12-year coupon rates ever raised in the forestry products energy.

So that will allow us to repay the little bit of commercial paper that we have outstanding and also the fixed debt commitments that we have over the next six months.

Great. And then I've got a question on the pulp market as well. Obviously pulp prices have moved up. You are obviously going to benefit from that in the U.S. but I think in Europe you are a net buyer of pulp. I just really wanted to understand. Do you think net-net you are actually going to get a benefit from these higher pulp prices or is it ultimately going to be a wash as we move into the second quarter?

I think we're a net pulp seller around the world. When you add in, you know, what we've got in New Zealand. So I think that's right, Lisa.

Okay. Thanks very much.

Thank you. Our next question will come from Mark Connolly of Credit Suisse First Boston. Please go ahead, sir.

Just a couple of things.

Hi, Mark.

Can you talk about your inventory and downtime, your inventory situation and your downtime expectations for uncoated free sheet and containerboard?

Well, I can tell you what we've been doing. As you know, we don't try to -- I don't think we're smart enough to forecast downtime because we're not smart enough to forecast orders. So we don't try to do it. You know, we've been running our uncoated white system fairly full. We did take less downtime in the first quarter than we did in the fourth quarter. The fourth quarter was over 200,000.

In the first quarter it was, you know, closer to 60, but we also moved some maintenance downtime into the first quarter to make sure that our inventories were in good shape, and, you know, our strategy has not changed. We'll continue to run, match our production to our customers' orders and not build inventory and we thought our inventories had gotten a tad high in the fourth quarter and as a result, you know, took a good shrug of downtime and if we have to do that again, we will.

But your inventories now are okay?

Our inventories are in great shape.

And containerboard?

Containerboard? Our inventories are containerboard are just fine.

And what level of downtime did you take there?

In the first quarter, we didn't take that much. You know, 60,000 tons, Mark, was not a lot of downtime. You know, probably 30ish or so.

Okay.

But we moved a lot of maintenance downtime into the first quarter.

Right.

And most of that was in the containerboard business.

And just one more question. With respect to Carter hold Harvey, has SARS affected any of your shipment patterns yet?

Not a big impact there that we've seen at this stage, no.

Okay.

Probably more significant down there, Mark, is we've got one of our facilities where we got a strike in Kinley. So that's having a bigger impact, it continues to have a big he -- bigger impact than SARS at this point.

Okay. Thanks very much.

Thank you, sir. Once again, ladies and gentlemen, we do look forward to any questions or comments that you have. So if you would please press "star," "1" on your touch-tone telephone and if you would like to decline from the polling process, please press the star followed by the 2. Our next question will come from the line of Rich Schneider, UBS Warburg. Please go ahead with your question.

John, I was wondering if you could talk about how you performed in your box business year over year. You indicated your volume was up 4% from the fourth quarter levels. Do you have that figure for what it was versus the first quarter of last year?

I'll have it in a minute. But our box business continues to -- you know, we've got some improvement to make in terms of getting the cost performance in that box business's same level we've got our paper mills. We think we've got a world class system on the containerboard side, and, you know, we don't have 50 box plants that are performing at their potential. So there is more work to be done there. We've -- you know, we had a bit of a hole last year.

We lost some business. We've gained that back and we've done that by, you know, being very targeted and, you know, going after business where we thought we had a value proposition. So our volume has come back.

You know, we had the impact of that, of lost business was really in the second and third quarter, and we're up about 4%, you know, kind of year over year. But we've got more work to do in the box business. You know, we would like to be more integrated and that's -- you know, sell more of the liner board we make through our own box business as, you know, U.S. moving comes back, that's an important part of our customer base.

We think box demand will improve and, you know, the strategy there, as we've said, is to, you know, be more integrated.

So you were up 4% both versus the fourth quarter and year over year. That means, you know, at this point you are picking up share in the market and, you know, you mentioned your targeted approach.

How does that sort of work? Does it involve having to be very competitive on price or are there other means which avoid having to get into that?

I mean, there is business won and lost. We had a review with the industrial Packaging people last week, and there is business won and lost in that business all the time and, you know, we lost some business and we won some, and, you know, net-net is we're a little bit ahead. You know, obviously what we want to do is -- and a lot of that depends on which customers you are hooked up with.

You know, if you are selling product to Wal-Mart these days, your volume's probably up even though everybody else's may be down. And picking up share with customers where we already got the business is an important part of that equation.

Okay. Just done on the comment about Natchez and the losses will be gone obviously with the shutdown in the third quarter. Could you give us an idea what the losses are attached in Natchez?

They are, in the context the overall picture, Rich, they are not significant but they are negative numbers. We don't break out Natchez as a segment.

Okay. And in terms of Forest Products, your profits were up despite the fact that your Timberland sails were down. Are we supposed to view that as your converting operations had much more of an improvement, still losing money but much more of an improvement than what you lost in reduced harvest and timberland sales?

Yeah, there are two pieces. There's wood products in Canada and wood products in the U.S. and in both cases, you know, our earnings improved. You know, we're still losing money but they improved quarter over quarter.

Okay. And that offset the reduced timberland sales?

Well, it offset the lower earnings at Forest Tree services, yeah.

And then just lastly. On corporate expense, the pension hit of about 25 million, that shows up in the $88m of corporate items and you also, I think in the release, said that there was some lower benefit costs. Could you go through what's going on in corporate expense and maybe the comment about lower benefit costs?

What are you referring to, Rich?

I think it was -- now I probably can't find it. I thought there was a --

Good. Because we can't, either. [ LAUGHTER ]

All right. Anyway, I thought it was in the release -- yeah, it says corporate items were $88 million but higher than the fourth quarter of 2002 due to an increase in pension expense, higher supply chain initiatives, somewhat offset by lower benefit costs.

Well, one of the offsets is right. Pension expense is up. As you know, we've been gearing up on our supply chain initiative.

In the fourth quarter as we paid out, our incentive plans paid out above target for last year based on their formulas and this year we're accruing at target. So there is going to be a Delta there as well.

Okay. So that was the key thing. Okay. Great. Thanks.

Thank you, sir. Our next question will come from the line of Mr. Peter Ruschmeier of Lehman Brothers. Please go ahead with your question, sir.

Thanks, and good morning. I wanted to ask a question about maintenance expense. You mentioned, John, that you've moved some of the maintenance into the first quarter for both containerboard and unclear free sheet. Can you help us to understand as a company what your maintenance expense might be as a budget for the whole year and how lumpy is it? And should we expect that to decline? Any way to quantify how much that may decline in the second quarter?

Well, we typically accrue for maintenance shutdowns across the year so we spread the costs there, Pete. Obviously the downtime cost, though, is -- flows through the bottom line. So you are not going to see big lumpy, big, lumpy maintenance expenses due to annual shuts.

And, you know, the objective there was to come match our production to our orders and if we're going to take -- if we have downtime scheduled for outages in the second quarter and we thought we didn't have the orders, the smart thing was to do was to plan to move that shutdown around so we didn't end up taking two.

Okay. All right.

But typically by and large across the company, the cost of annual outages in every mill has -- and every mill has one or two -- are spread throughout the year.

Okay.

And maintenance cost is a big item in our paper mills and it's one we manage very aggressively. It's, you know, part of -- it's one of the levers we're pulling to make this company's cost structure much, much better and there's a lot of opportunity there.

Okay. So it's not different by the quarters because you amortize and I assume it's not that different for the full year, either.

No. These are regular outages that are planned and every mill has them, you know, one or two during the year.

Okay. I wanted to come back, John, to your comments about, you know, buy versus build strategy and, you know, curious if you could comment, you know, over a multiyear period as we eventually get into much, hopefully much stronger environment, you know, is it safe to say that we should not expect IP to be making a case even over a multiyear period to be building machines when there's so much opportunity, you know, to look at the buy methodology?

Well, I think it depends on the business and the strategy and the issue. You know, if it's one of growth, if that's what you're aim at, you know, then buy versus build is, you know, the way to do that without adding capacity to industry.

If it's, you know, a cost problem that needs to -- or cost opportunity that needs to be improved, you know, having a high-cost facility and buying the Lowe cost one doesn't change the fact that -- low-cost one doesn't change the fact that facility is high cost. There could be a situation where, you know, one puts some money into these facilities to improve the cost structure and the objective is not a lot more volume but a better cost structure and as a result you shut down some other high-cost stuff.

Okay.

I think you need to be, you know, very specific and not just generalize this.

All right. So with a system as large as yours, it's not inconceivable over time you could look at a particular site, build a machine and offset that likely with rationalization.

Sure. We've got lots of paper mills around the world and lots of paper machines.

Okay. Just lastly if I could ask about your coated free sheet and uncoated free sheet businesses industry data suggests that, you know, coated free sheet has been much more of a growth market than uncoated free sheet. I'm curious if you could comment on anything that you are seeing to help explain that.

You know, is there somehow a substitution going on, is there -- you know, is the demand growth skewed positively for coated or negatively for uncoated for any particular reason? Any thoughts there would be helpful.

Well I think, you know, the coated papers business, you are right, Pete, it's been one that has been managed to grow and grow strongly enough that it's absorbed a lot of capacity that's been moved into that grade, both, you know, a lot of it in Europe over time.

And it's had pretty attractive growth rates and all you need to do is go down and look at the magazine rack and look to see what that looks like now versus the new titles that are there now that weren't there five and six years ago. And it continued a use of print as a way to advertise.

I mean, we just finished a survey of a lot of people who spent advertising dollars and, you know, print on paper -- or ink on paper isn't going away and as people look for, you know, more targeted, more valuable ways to, you know, reach consumers, you know, many times they vote to go with a coated paper product. You know, the electronic substitution that we're seeing, and it is occurring, is probably having more of an impact on the uncoated market than on the coated market.

Okay. That's helpful. I'm sorry. Lastly, if I could. On the bulk land sales, I think you indicated it was down sequentially but flattish year over year. Is it possible to quantify what the delta was and what your inspection is going forward, if you have one for 2Q?

No, we're not going to -- we don't make forecasts going out, Pete, but I think when Chris went through the earnings waterfall chart that we call it, you know, we highlighted it's 3 cents a share.

In terms of differential between 4Q and 1Q?

Yeah.

Okay. Great. Thanks very much.

Thank you, sir. Our next question comes from the line of Mr. Josh Cap of Citigroup Asset Management. Please go ahead, sir.

Good morning. I haven't heard too much discussion about the profit and improvement plan supply chain initiative. So I was wondering if you could cover that briefly, you know, particularly, you know, what benefits or, you know, costs you are going to be incurring over the next several quarters. And, Chris, I don't know how involved you were in terms of formulating the initial plans there. So particularly enjoy hearing your perspective.

Well, that's as you've heard is talk, Josh. That's an important initiative, one that we think is going to do a couple of things for us. You know, improve our capability to serve our customers very, very well and also, you know, enable us to talk more costs out of International Paper. You know, we're going to spend more money on that this year as we scale up but what we've done is we've made choices we're not going to spend money in other places. So, you know, net-net, the company will not spend more money in S&A but we've re- located what we've got our people working on.

As we've looked at our $24b cost bucket, about half of that, $12b is what we call the cost to make things and that's typically where we spent a lot of our effort in the last years and been very successful at improving that big slice of the cost pie. There's about another $3b that is the cost to buy and resell things and most of that is what Expedx buys and resells and then the cost to serve is roughly around $3b and that cost to serve is one that we see a lot of opportunities to make some real step changes, both in our cost structure and our service levels.

So it's pretty darn important.

It's not going to -- it's not a this year impact, in a way. What we've done is challenge that organization, that group to pay for themselves. We call them quick hits. If we're going to spend $1 million, we want to save $1 million. So we are seeing some of the benefits. We call them quick hits this year, but, you know, the big benefits from repiping and rewiring International Paper's ability to take an order and get it to a customer, cost-effectively are a couple of years out.

Okay. Any thoughts you want to add there, Chris?

I came into the process relatively late. So I certainly can't take credit for the initial thought. But in terms of the general approach, it's extremely similar to what we've been doing, I guess for a number of years and similar to what was done down in Carter Holt Harvey, for example in the full suite complementation of S A P, that's a platform we're looking at in terms of International Paper.

In terms of market perspective on the things I'll be focusing on are very much obviously in the financial area and particular things like discipline around capital expenditure and how we prioritize working projects, working capital and cash flow, corporate costs and effectiveness and the use of technology obviously to take costs out of the system. So looking very much at the supportive projects and the enabling projects that will help deliver what John's been talking about about the businesses.

You know, Josh, just another part of that. While there are some systems that are going in to support this effort, you know, this is really not a systems investment. It's an investment in business processes and one that is really driven by our business people and supported by our technology and systems people but led by our business people.

Okay. Great. Thank you very much.

Thank you, sir. Ladies and gentlemen, our final question, a follow-up question from the line of Mr. Mark Wilde of Deutsche Bank. Please go ahead, sir.

Hey, John, could we just come back briefly to the downtime issue? Because it wasn't real clear to -- real clear to me when you, I think, answered one of the earlier questions, Mark Connolly's about downtime and uncoated free sheet and containerboard about exactly how much you took in each of those businesses and how much you might have taken in your other paper businesses as well?

In the fourth quarter?

Fourth quarter and first quarter.

Excuse me. In the first quarter we took -- let's see. About 60,000 tons of overall downtime. About 25,000 of that in industrial Packaging. The uncoated system took very little downtime in the U.S. We took about 10,000 tons in coated and in Europe.

10,000 each in coated and in Europe?

Yeah.

Is that right?

And as, you know, Chris pointed out, we took less downtime. We took about 270,000 tons of downtime, market-related downtime in the fourth quarter. So the impact of running more full just on that basis, about 3 cents.

Okay. So I'm just, I'm trying to think. This would suggest 60,000 tons, if you annualize that, that's about a quarter million tons. You have about, I think 14 million or 15 million tons of total capacity. So you, you know, you ran at an operating rate in the upper 90s.

Yeah.

Would that be correct?

We're not pushing the system. What you see there is market-related downtime. We had maintenance downtime as well in the first quarter of about 150,000 tons.

Okay.

And we're not running -- we're not pushing the system to run full. You know, we don't capture all that. We look at the downtime times.

Okay.

But we've got well more -- we've got plenty of capacity to take care of our customer demand as it comes back.

Okay. Thanks, John.

We certainly got the system more in balance. I mean, I think the important thing, Mark, is we're not carrying a lot of high-cost downtime in the system and as a result of all these facility rationalizations

So that's lowered our cost quite a bit but what it's also done is enabled us to really get the mix better and improve the profitability like we said we would. You know, all these shutdowns that cost us a ton of money two years ago now are starting to pay dividends as we get -- you know, put more of the same grades on facilities and run them on dedicated grades.

John, if we turn that around then, if in a good market, is there more than, you know, 210,000 tons a quarter of incremental volume that you would pick up if you weren't doing any maintenance and you didn't have any market downtime?

Well, we've got to do some maintenance and when you look at the International Paper and say what's the upside on volume, you know, it's easy to look at the paper mills and say that's all there is. I mean, there is a huge amount of revenue potential in the rest of the company that's, you know, ready, able, and willing to serve our customers as their business improves.

So it's far more than just the downtime tons you see in the paper businesses.

Okay. If I can ask one other question. Chris talked a lot about the things that he was going to focus on, and a lot of this seems to be focused on taking out cost. I just wondered if you could talk about the other side of the equation which might be kind of incentives to push people to sell better margin business, or to really focus on revenue opportunities within International Paper.

It seems like, you know, some of the privately held companies in the packaging business are much more profitable than most of the big integrateds in the industry and it's because, you know, they have a lot of skin in the game.

Well, I don't know who you're referring to, Mark, but all you need to do is -- and I've done this in the last couple of weeks -- is travel around with some of our salespeople, go visit some of our Packaging plants, go talk to our customers, and you find an intense focus on doing better with key customers, and those are our target customers where we think we've got a value proposition that wins for them and for us. You know, gaining share with those customers, you know, listen to go what their needs are.

On some of our businesses, where we've got sales incentives structures, they are aimed at gross profit, not just volume. You know, it's hard to do that in a marketplace where your customers have less business.

But we're always looking to improve the mix, and we made enormous strides in our uncoated white papers business. In Europe, I mean, the business in Europe is doing better. I mean, it had a record year last year not because we sold more commodity paper but because we sold more value-added grades, and it's a great example of how to get the facilities right and then steadily improve the mix.

The products business has done the same thing. They basically sold a much higher mix than they sold a couple of years ago to a different set of customers that weren't as important to International Paper's wood business four or five years ago.

So there are examples of that going on all around the company, but they show up in little pieces, not big chunks.

I guess I'm just curious, John, whether you've made changes in your incentive structure as kind of a -- kind of across IP to drive that kind of change. I think you did some of this down at Carter Holt.

Our effort, Mark, has been to get more marketing and more customer focus. We talked about these three drivers that are going to make International Paper a more successful company. You know, customers, people, and operational excellence, and kind of bending our DNA to think about operational excellence.

You know, sometimes we have a January and February, but we've invested a lot of money and a lot of time and a lot of effort in people and in teaching our organization, including the leadership of the organization, you know, what it means to be customer focused and how to do it, and that's different for every customer. You need to listen to what -- you know, their issues and their problems and their opportunities are. I think that's the start point.

And if you go out and talk to our customers which, you know, I've been doing for the last couple of months, they will talk about a different International Paper than the one they did business with four or five years ago, and a lot of that is also the result of building a stronger company on the basis of the Union Camp and Champion acquisition.

So we've got some very good people who have helped us accelerate the pace of that customer focus in the company.

And it's going to make a huge difference. And the belief that we have is that does make a difference I think is reflected in the investment we're making in this supply chain project which is basically a big chunk of that is to make us, you know, better serve our customers more effectively.

Okay. Thanks, John.

All right, gentlemen. There are no further questions at this time. Please continue with any closing comments that you might have.

No closing comments. I think we've covered it all. You know, thanks. Looks like spring is finally here, at least last week it was. This week it's winter but, you know, we're pretty positive that there's some better times ahead. Thank you.

Thank you. Ladies and gentlemen, in order to listen to a replay of today's conference, please call U.S. toll-free 1-800-406-7325. Internationally call +1-303-590-3030. Once again, U.S. toll-free is 1-800-406-7325. Internationally +1-303-, using the access code 3040734. Ladies and gentlemen, this concludes the International Paper first quarter earnings conference call for today.

Thank you for participation