International Paper Co (IP) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the International Paper third quarter 2003 earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If anyone should need assistance at any time during today's presentation, please press the star followed by the 0 for operator assistant. As a reminder this conference is being recorded today, Monday, October 27, 2003. At this time, I'd like to introduce Miss Darial Sneed, Vice President of Investor Relations. Please go ahead.

Thank you, Gentry. Welcome to International Paper's third quarter 2003 earnings conference call. With me is Chairman and Chief Executive Officer John Dillon. As John will be retiring at the end of this month after 38 years at International Paper and after having served the last seven years as CEO. So I'm very pleased that John is with us today. Following John Dillon's remarks, President and CEO-elect John Faraci and Chief Financial Officer Chris Liddell will review the quarter and the outlook. Then John Faraci and Chris Liddell will answer your questions. Before turning the call over to them, let me go through the required formalities.

On slide three of the presentation is our forward-looking statement. During the presentation, we're likely to make forward-looking statements, which is subject to the risk and uncertainties that are outlined on that chart. Risk and uncertainties are also outlined at the very end of our third quarter 2003 earnings press release. We'll also be discussing some nonGAAP financial measures. A reconciliation of these measures to generally accepted accounting principles can be found along with the presentation, along with the third quarter 2003 earnings press release at www.internationalpaper.com under investor information. Now I'll turn the call over to John Dillon. John?

Thanks, Darial. Before I begin, let me apologize. It took longer for people to get through the queue and I apologize for holding this conference up for a few minutes but wanted to be sure everybody got in. As Darial said, John and Chris are going to take you through a summary of the quarter and talk about earnings, but I just wanted to take a couple minutes and say thanks to all of you for following the company and report to you that it's been a privilege for me to work with you over the last six or seven years directly. And it's been fantastic, the period of time that I've had at International Paper.

And to see the kind of things the company has done to change and grow and continue to focus on what's important and try to drive this equation that we've been so dedicated to here in the last few years. Obviously, there's been a lot of changes at IP. I'm not going to take time here to repeat them all. We talked to you about them a lot of times. But fundamentally the company is far more focused than it has been. Each of these three core businesses that we're in today is very, very well positioned. There's been a lot of moving parts associated with making that happen, and in addition to the portfolio moves, all of the initiatives, the divestitures and rationalizations, importantly, the whole organization is far more accountable for results than perhaps we were in some of the years gone by.

We've established return on objective as our major overall metric because of the belief that if we drive this return calculation, it, indeed, is going to translate to share owner value, improved earnings, and that's what we're all about. One of the things that I'm particularly excited about is the intense customer focus and the change that we've been able to bring to the customer side of the equation. At the end of the day, there is just no successful business unless somebody is doing a great job with customers. And I'm pleased the way our employees have stepped up to something that was quite frankly different for us than where it had been in the past, in addition to work of the 80,000 employees in a company is showing great results. We accomplished what we wanted to do at last planning period.

And we've got an aggressive objective ahead of us, but as I travel around the company and talk to operating employees as well as leaders, there's no question in my mind that everybody in the organization understands what we're up to. They understand why it's important to improve the earnings and return of the company. And also recognizing that a large number of our employees are share owners and we send an awful lot of time talking about the share owner equation and what's happening to International Paper's share prices as a result of that. So thanks to all of the employees. The company's just a lot stronger. At the same time we all understand that there's an awful lot more to do. The external world remains challenging.

Frankly, as you've heard me say, I'm disappointed that we haven't seen a little better demand growth here in 2003. We saw demand weaken a bit during the war and it's coming back slowly but more slowly than I had anticipated it would. At the same time I am an optimist that we're going to see increments of demand coming back in a slow growth way, but with everything else that's happening across this economy and we're beginning to see in other economies. I'm just convinced that we're going to see improved demand and given where this company is positioned, relatively low inventories around the world, very little new capacity.

There's just huge upside as a result of this. Obviously global competition is tough and we see competitors coming from every corner of the world and in some instances we wonder how it's done and International Paper takes a hard position in terms of looking at subsidy and we ensure that the trade laws are watched carefully. John and Chris will talk to you about some of the cost pressures that we've seen here. Our natural gas has just been stubborn. And of course, we've had some wood cost increases. Having said that, I'm very, very confident in the leadership of the company. As Darial said, John will be taking over this chair here in a few days.

I couldn't be more excited about the ability of International Paper to have developed the next generation of leaders. John brings almost 30 years of experience. He understands this company, has been a key part of what we've been doing for the last few years and is committed to continuing to drive performance and drive value and work in terms of the returns that you our investors need. I'm also pleased of Rob Amen's new role as the president of the company. As you know Rob, as well as John, had long experience in these businesses, understands them well. And both Rob and John combined with the rest of the senior leadership team, the company's in great hands.

They're going to make what I've been able to accomplish look like hen speed. They obviously recognize that you as investors have choices. You know, that's clear to us. That's why we've been working so hard on improving our cash flow and working with all of the cash levers as well as the return criteria. And as I leave, I just want to say to you, this company is extremely well positioned. I understand our world of competition pretty darn well, and there's just no company in the world that has got a better position, has got a stronger will to win, has got a group of employees who understand what it is we have to do to make this happen. So as I bow out, let me again say thanks to you. I've enjoyed all of these conversations.

I've enjoyed the meetings that I've had with you to talk about the company. I've enjoyed the challenges that you put to us, and I hope you feel that as I do that International Paper has made a tremendous amount of progress and is going to be an investment of choice not only among those choices you have in the paper industry but across all of industry as well. So thanks a lot. And until our paths cross again, I appreciate being with you and learning from you. So with that, I'll turn it over to John.

John, thanks. Before I get started in with the earnings, I'd also just like to take a brief moment and recognize John Dillon. I've known John for the 28 of the 29 years I've worked here. I can honestly say that he's been a tremendous leader for our company and a close friend of all of us at IP. My perspective, John has done more than change the portfolio of the company, he's really changed the culture, and one of his legacies, there are a lot of them, will be that he fostered a belief and commitment that IP can control its destiny regardless of what's going on in the outside world.

John, you've heard this many times over the last several months, but thank you again and thanks for all you've given to International Paper. And on behalf of our employees and our shareowners, we want to wish you well in your retirement. Let me now turn to the third quarter. I'll start with slide six for those of you who are following and just summarize the quarter. I guess the top line is during the quarter we continued to manage the things that were within our control.

Our operating performance improved particularly at our U.S. mills as we continue to focus on improving, among other things, our costs, our reliability and our overall productivity. We announced plans to take out another 3,000 jobs. Chris will update you on where we are on that in a few minutes. It will be a further improvement in our cost structure and better position us to show the kind of margins we've been talking about as demand comes back. We've been struggling with high energy costs and rather than just sit there and take those, we've been working on plans to reduce energy consumption. We funded projects in excess of $20 million. Some of them starting up now.

All of them will be operational between now and next June. These projects will reduce our natural gas consumption by about $50 million a year, 78 cents per share. And we're going to continue our ongoing initiatives to improve efficiencies and customer focus that John talked about as well. In a minute, I'll show you some data that I think backs up the fact we're making some pretty good progress. In the near term, as the economy continues to be challenging. As we expected in the third quarter, our volumes were up in many of our business lines, more due to seasonal factors than cyclical ones.

But I had to say that the season began slower than normal and still in many of our grades, volumes were below 2002 levels on a year-on-year comparison. So we have to say we're still struggling with underlying weak or, as I would characterize it, flat demand. To balance our production with our customer demand, we took increased down time during the third quarter. And because of flat demand in several of our businesses in paper and packaging, prices were under pressure. The exception was obviously our wood business. That had a very strong quarter as prices rallied due to a combination of things, but short supply of logs, of product, some weather in Canada curtailed some capacity so that business had a very, very strong quarter.

Raw material costs continued to be high versus last year's. The energy costs were about flat quarter to quarter, although wood costs were up quarter to quarter. That's been something that we've struggled with really throughout the year, particularly in the south and in the Atlantic area. Overall, year on year, our wood costs are up $70 million. This next chart here if you are following, it's slide seven, is our EPS trend over the last four-plus years. Despite the external conditions, we talked about earnings per share before special items were 24 cents in the third quarter compared with 19 cents in the second quarter due to improved operations, lower overhead costs and lower tax rate.

Comparing to the third quarter of last year, our earnings were down, again, due to higher raw material costs. Some increases in pension costs which Chris will talk about and overall lower pricing. Chris will now kind of go over some more details and take you through the charts that kind of give you the year-over-year and quarter over quarter comparisons. Chris?

Thanks, John. The chart on slide eight, for those of you that have it, shows the key factors driving the change and operating dealings this year from the second to third quarter and we've continued to give as much detail as we possibly can on those changes. As you can see, overall, the earnings this year and operating level rose from 19 cents to 24 cents. Cost reduction and mix improvement, the first of the bars, just working from left to right, contributed 6 cents to earnings per share and overall, we had a good operating quarter from our U.S. mill and converting system. Seasonally high volumes were offset by increased downtime which I I'll talk about in more detail shortly.

Inside those changes in volume, timberland sales were a single level to last quarter and included as well was about 2 cents positive benefit from the absence of the costs that we had associated with Carter Holt Harvey Kinleith mill strike which we incurred in the second quarter. Price declines, which John mentioned, in the uncoded pipe pulpline and corrugated boxes offset the price improvements we saw in lumber, plywood and bleached board. So the price variance compared to last quarter was on a net basis negative one cent. Raw material costs were also higher, 2 cents a share relative to the second quarter, primarily due to higher wood costs. Energy was broadly flat quarter on quarter.

Wood shortages, particularly hardwood, and increased competition for wood, has seen increased hardwood stumpage prices. And we also incurred higher transportation expenses, as we had to haul wood from more distant locations. That contributed around 2 cents per share. The other factor here includes silver elements, which nipped once in negative. On the side was foreign exchange and on the negative side were pension and benefit-related adjustments. These changes were reported in the corporate items that you see. Also lost interest expense was up.

That was due entirely to the adoption of FAS 153 classification of a preferred dividend expensed from minority interest into the interest line. On a comparable basis, we actually, on the FAS first number was slightly favorable as we continue to refinance expense of debt. Finally, on the tax rate, a little bit of complicated mess here but if I just talk it through, in essence, we continue to estimate our tax rate for the year as the quarters unfold and clearly, that depends to some extent on the mix of foreign and domestic income with the various different tax rates we have in those jurisdictions. In our most current estimation, we're looking at an average rate for the year of 25%. Last quarter we estimated at 26% so a combination of the rate for this quarter plus the catch up of the previous quarters means we had a tax rate for this third quarter of 19% on those earnings in the quarter.

That was a favorable 3 cents per share relative to the level of earnings we had in the second quarter. In terms of lack of order down time, we continued to match supply with out customers demand. That means we took more lack of order down time in our mills in the third quarter. In total, we took 240,000 tons mainly in the containerboard, uncoated paper and pulp. That lack of ordered down time compares to 90,000 tons in the second quarter, although we did have in the second quarter considerably more maintenance downtime. This is simply the lack of order down time statistic. On the next slide, slide ten, we tried to capture that in a slightly different form by showing you how our non-price improvement has progressed through the year, split by various parts.

And we're obviously pleased that we continue the progress on the things that we can control, in particularly internal costs and the mix of our businesses. That's in a green bar if you have the chart in color or the third of the three bars increasing from left to right. Our costs and mix of performances has been steadily improving quarter on quarter as we continue to deliver cost savings at the bottom line. In quarter one, we delivered only 1 cent, mainly because we didn't run well during the winter months. You'll recall we talked about that in the first quarter. In quarter 2 we delivered a better performance, 10 cents a share, and in this third quarter we've achieved cost and mix improvements of 13 cents. So the sum of all of those three quarters, 1-10-13, gives us 24 cents positive improvement in cost and mix.

Unfortunately again, we've talked about this on a quarterly basis, that's been offset by the sharp increase in raw material costs, in particular energy and wood. In the south, hardwoods type costs are up, in particular in the Atlantic region where they are up about $8 a ton compared to September last year. The total impact on the company year-to-date of wood cost as lined is around $70 million or 10 cents a share. So the sum of those negatives, energy, wood and others is increased through the year and about 26 cents a share. The third item is volume. And we had expected to see a bit of volumes and particularly as the year progressed. But as you can see from the chart, on balance in essence, we are broadly flat year on year from a volume perspective.

Looking overhead performance another, what we've shown here is the total overhead for the company, and this includes all of the manufacturing overhead right through the diversions to head office. Differs a little from obviously the number that we report which is merely the net at a corporate level. This is the total overhead for the company as a whole. As you can see, overhead costs have declined around 21% from the year 2000 to year-to-date 2003. A big portion of that decline was in the early years and resulted from divested operations, but we have continued to take out costs after those divestments and we continue to take out around $100 million a year net of inflationary costs.

So clearly the cost-based increases is a result of merit and other increases but we've managed to decrease the total costs so to take out those inflationary costs and more. Lastly, from me, special items for the third quarter on the negative side. We had $33 million for shutting down our Natchez pulp mill which ceased operating in mid July. Of that 33, $20 million was environmental clean up costs and $13 million from asset write-offs and contract termination costs. We also had $38 million for severance costs mainly associated with the overhead reduction program which John mentioned before and 720 employees are reflected in the costs shown here in the quarter. The remainder is mainly for debt extinguishment costs, as I referred before to the refinancing of more expensive bid.

So this is approximately the charges associated with that and additions to the legal reserves. The tax and minority interest impact of that was $31 million positive. These charges are offset by $60 million tax benefits. It's different from our operating tax rate and reflects a favorable revision to our tax reserves on the [INAUDIBLE] in our third quarter of our 2002 year and also an increase in research and development credits. These type of adjustments happen each year so their not unusually in that respect, but because of their size we've highlighted them here. So the sum of the negatives and positives was $5 million net income after tax or around 1 cent a share on a positive basis. I'll now turn back to John to review the results of our three primary businesses in more detail.

Thanks, Chris. I'll cover printing papers first then packaging, and wrap up with forest and wood and then we'll take your questions. First on printing papers, and I'm on slide 13, again for those following. Printing papers earnings declined in the second quarter due to principally lower prices which more than offset the benefits of improved operations and lower overhead costs. We saw a seasonal improvement in slightly and uncoated volumes, however, prices remained under pressure, particularly in offset roles and that will flow on impact to the other uncoated grades.

Albeit closer to breakeven in the coated papers business, obviously we are not satisfied with the breakeven result. But despite the fact that that business is still very tough, we got closer to break-even there. Volumes are up 18% quarter over quarter, stronger in ground wood than in free sheet. We're going to have a good catalog season but the commercial printing and advertising side of that is still pretty weak relative to where it should be. Imports continue to be a significant factor in the U.S. due to weak overseas demand. But when I come back and talk about the outlook, prices are moving up in the fourth quarter in ground wood. Despite lower pulp prices, our losses in our pulp business also narrowed in the third quarter, principally due to higher volumes.

Europe, which is also included in this segment, our earnings were down slightly but earnings in Europe and the returns remain pretty healthy. Not because of the Nan environment but we're offsetting lower prices with currency, our operations are doing very well, and we continue to make real strides in improving our mix in Europe both our product mix and our country mix , getting what our capability is in both east and the west. We can move product around, taking advantage of our markets, are stronger moving out of where markets are weaker. Turning to packaging businesses. In packaging, earnings were lower in the third quarter as we had some weakness in both volume and pricing and industrial packaging. And that more than offset earnings improvement in our consumer packaging business. In containerboard, markets remain soft, which caused both volumes and pricing to drop off slightly compared to the prior quarter.

Box prices held up better on the quarter and our box of shipments were up 3% in a flat market reflecting our segment straights in the agricultural segment. And also some share gains at specific accounts. On a consumer packaging side, average bleached board prices were up $10 a ton for the quarter, reflecting IP's announced price increase earlier in the year for cup and plate stock. Earnings for all the consumer packaging businesses improved on a quarter over quarter basis. And importantly, Sherwood, which is the biggest converting business in that segment, had its best sales month of the year. Music is still weak but home entertainment and general consumer packaging more than offset that weakness.

And forest products, earnings improved quarter to quarter due to sharply higher wood products prices and volumes and slightly higher timber harvest volumes. Earnings from land sales as Chris said were flat for the second quarter. Plywood markets increased dramatically in the third quarter following what I guess skyrocketing - I'm getting OSD prices and as I indicated earlier, this has been about strong housing starts, low interest rates coupled with some perceived and probably some real shortages at times in the channels as inventory's been low. Lumber markets also benefited from a late summer rally, although not as strong as what happened in panels but lumber prices peaked at levels not experienced since 1999 in the third quarter. As a result, both lumber and plywood pricing improved significantly from the previous quarter giving us the highest sales realizations for the year. Let me turn out to the outlook. Near term, as we all know, it's daylight savings time is over and it's almost winter.

October should be a healthy month but as we get into November and December this is a typical end of the year. We'll see a slowdown. To date, we've not seen signs of cyclical recovery. We would expect so, this pattern of flat demand is going to continue. However, I'd say that the macro signals and the data would suggest that the economy is starting to strengthen. When we look beyond the end of the year and the early part of next year, I think we're going to see improving demand in a number of our paper and packaging and uses. The near-term outlook for pricing is mixed. We are successfully implementing our announced price increases both in pulp and in ground wood.

Publication prices for containerboard have dropped off by about $10 a ton, which will be reflected in some of our box business where box prices are influenced by what's going on in the board market. Energy costs are going to continue to be relatively high. I don't see much relief there near term, and wood costs are going to remain high given the tight supply, particularly of hardwood. Again, most of that's on the Atlantic side and the need to rebuild inventory for what is always a difficult logging season during the winter months.

Looking forward, beyond that short-term seasonal issue, we feel optimistic about where we're at. As Chris pointed out, we've made quarter on quarter improvements in changing our cost structure. A lot more to go, and we continue to find ways to improve our competitiveness and our cost structure despite what's going on in the outside environment. Our priority's going to remain the same. We've got to deliver and improve shareowner value by concentrating on what we can control and what's important.

That's being great with customers and having a world class cost structure in every single one of these businesses. We talked about improving our returns over a three-year period to earn the cost of capital over kind of mid cycle prices and mid cycle demand. At some point in time, we will see mid cycle prices and mid cycle demand, but we're not there now. There's a big piece of that improvement that comes from the internal side of the equation. We're a little bit behind this year, frankly given what's going on with energy and wood, but we feel confident we'll make that up going forward. So, let's take some time now and open it up for questions.

Very good, thank you, sir. Ladies and gentlemen, at this time, we'll begin the question and answer session. If you have a question, please press the star followed by the one on your touchtone telephone. You will hear a three-tone prompt acknowledging your selection and your questions will be polled in the order they are received. If you would like to pull yourself from the polling process, please press the star followed by the 2. We also ask if possible, please use your hand set when asking your question as opposed to using a speaker phone. Our first question will come from the line of Rich Schneider. Please go ahead with your question.

Chris, I was wondering if you can walk us through the increase in corporate items going from the second to third quarter going from 96 million up to 138 million and talk about the pension expense issue.

Sure, Rich. The increase comes from the number of factors. Pension costs are up and there's two underlying factors there. One is this time of year, actuaries redo the demographics of our population, look at the average age and average pensionable income. Also, we had a labor settlement at the beginning of the quarter for the new rates going forward.

So the combination of those two things increased the pension costs. We had lower gas hedges. So we're coming off more favorable hedge rates from the second quarter, so the income that we had associated with that was lower in the quarter. There were some very small one-off items and benefit-related accruals were up as well. So a combination of all of those factors is the $40-odd million increase quarter on quarter.

How would you suggest we look at the fourth quarter? Have you changed your pension expense estimates for the year or should we be looking at something closer to 100 million in corporate items in the fourth quarter?

I think the trends just associated with pension costs, the two factors that I mentioned, on an ongoing basis, we're looking at about 15 to $20 million a quarter, Rich. Going into next year, obviously, we'll have to relook at the net pension costs as [INAUDIBLE] some big numbers which is the anticipated return on the asset to discount rate, which feeds into the interest costs and then the service costs. So we'll have to update all of those assumptions going forward at the end of the year.

In terms of interest rates, long-term interest rates are actually higher than where they were at the start of the year, which is feed into a higher discount rate which is better slightly. And year-to-date, we're actually reaching our targets in terms of our income on the pension. But clearly, a lot can change in the next three months. All of those factors we'll have to update.

Okay. So, you said higher discount rate could be the same or higher next year? I'm sorry?

Well, again, we'll have to look into that at the end of the year and do a maturity match across all of our profiles, but if you just look at ten and 30-year rates compared to where they were at the start of the year, they are slightly higher. Treasuries I'm talking about.

Okay. Just the issue of currency in the quarter, I guess, that helped you in the printing papers area to offset, helped your European recorded profitability. Could you give an idea of how much that was?

Currency overall was about a $10 million positive.

Quarter --

quarter over quarter.

Okay, thanks. And this last question. You still have under the 3,000 employee reduction program another, I guess, almost 2300 still to record. Is that going to be in the fourth quarter or were you planning on taking a charge for that?

The target is to have all of those projects implemented by no later than the fourth quarter of next year. Clearly, a large number of them will be over the next couple of quarters. That will be the bulk of them. But also we'll be looking at - some of them are positions rather than people if you'd like. So we won't be filling vacant positions so it will be a mix.

Yeah, Rich, we're getting a bunch of that through attrition, too. So there, if we can manage attrition, it doesn't cost us but it does when we are eliminating people from jobs.

Mainly over the next six months.

Thank you. Our next question will come from the line of Edings Stebou. Please remind everyone if you can limit your questions. Also if you can possibly keep them brief due to the overwhelming response to the conference call today. Please go ahead, Mr. Stebou from Morgan Stanley

Just a quick question on the head count reduction area. Could you identify some of the business segments that might benefit the most from the reductions to come?

Really it's across all areas. There's no one particular business. What we did is a comprehensive business-wide program. It's not only at the business level, it's also at the corporate level as well, so it's broadly spread.

Okay. Great. Thanks.

Thank you. Our next question will come from the line of Peter Ruschmeier. Please go ahead with your question.

Thanks, good morning. You mentioned 240,000 tons of lack of order downtime in the quarter. I know that you're running to demand, so you don't have a good idea for fourth quarter. But is it reasonable to assume similar to higher levels of downtime just due to seasonality?

Pete, we're not going to try to forecast downtime. I think you can draw your own conclusions from how you see the fourth quarter. We're going to match our production to customers' demand and it's October, November, December now, not July, August, September.

Okay. Could you comment at all on Weld Wood in terms of whether it's operating where you want it to be in terms of utilization rates?

Well, Weld Wood's got two businesses, Pete. Pulp, which is a business that is around about break-even and wood products business had a very good third quarter. Weld Wood's got a great cost structure and is really well positioned from a customer standpoint. So the wood side of their business is doing quite well.

Okay. Lastly, if I could, I know it's early, but for 2004, do you have a preliminary CapEx figure in mind? And then do you have any guidance on a tax rate for '04 both a book tax rate and cash tax rate? That's all I have. Thanks very much.

We'll continue just philosophically to look at 70% to 80% over the cycle. We're looking at a figure of around $1.1 billion for this year. We'd expect to be more than that next year, probably in the range of $1.1 to $1.3 but we are just finalizing those numbers now.

Our next question comes from the line of Chip Dillon. Please go ahead with your question.

Yes. Good morning. I had two questions. Quickly if you could verify that the $70 million wood cost change of the third quarter '03 versus the third quarter '02. My next question is it looks like when you reclassified your Trust preferreds that you put $1.3 million into debt and I believe the balance that's not there was the 1995 convert and you put that in equity. But I thought that was a bond. If you could just tell me where that 1995 convert is and is it really equity no matter what or could it possibly become debt again?

Yeah, Chip. Chris speaking. The figure for wood costs was year-to-date not third quarter to third quarter last year. So $70 million is a year-to-date figure. On the Trust preferred, you are correct that they have been reclassified under the new accounting standard. Not entirely sure of the second half of you questions, but if I understood is correctly, those are the preferreds that we refinanced earlier this year. So they have been refinanced.

Okay, the convert that you did in 1995. Because I think you do have a 144-A convert you did. Maybe we can talk offline, that I remember you did one when it was at 45. And I think it converts in the 50s.

Let's talk offline.

We'll get back to you on that.

It's either been refinanced or put into equity.

Thank you.

Thank you. Our next question will come from the line of Rick Skidmore. Please go ahead with your question.

Good morning. Just a quick question, can you just talk about where your inventories are versus the second quarter on a per-ton basis throughout the paper and containerboard segments?

The inventories are in pretty good shape. We've been drawing down our inventories throughout the year. They got a little high in the summer so we've taken some more down time where we needed to. But industrial packaging's been flat. Consumer packaging flat. We've reduced our inventories in both printing papers, coded and in Europe. So we're in good shape there.

Okay. One follow-up question in terms of the printing and writing paper markets, can you just talk about what you are seeing currently in the uncoated white business?

Well, as I said, we've had some price slippage and in the roll offset market, which has had kind of a flow-on effect into some of the other grades. I'd say the market is moving sideways. And you hear different things. When I travel around, and talk to customers in different geographies, a lot of these markets are stronger on the east coast and the south than they are in the midwest and west coast, if you're look at commercial printing activity.

Thank you.

Thank you. Our next question will come from the line of Don Roberts. Please go ahead with your question, sir.

Yes. John, sometimes I pick up some rumblings of IP revisiting the notion of a Timberland REIT. I wonder if you could just sort of review any status of any initiatives there and whether there have been any changes on capital gains treatment of Timberland.

There is nothing new to tell you about. Timberland REITs, I think we've kind of covered that ground before. We never stopped kind of looking at ways to figure out what the best way to make money off our Timberland business is. Also what strategically we seem to be doing with our land base and it's the right land in the right spot is what it's all about. So we've kind of been down every avenue and but always keep our eyes open looking for better approaches.

Okay. Thank you.

Thank you. Our next question will come from the line of Karen Gilsenon. Please go ahead with your question.

Thanks and good morning. On page 10, the chart you gave on costs and mix improvement, I wonder if you can give us some sense on how that 13 cent number might look in the fourth quarter? And at the same time, as you are managing your costs down, can you talk a little bit about what you are doing to better manage your raw materials and your energy costs, which seem to be offsetting a lot of the benefits you are getting on the cost side. I know you are doing some energy conservation programs and also any hedging you might be doing, thank you.

Let's start on the cost side, that's probably slightly easier to talk to. For the fourth quarter, as John mentioned, we'll continue to experience the same sort of phenomena that we've had through most of the year, higher energy and wood costs. Spot energy prices this morning, I think we are about 480. That's broadly the average we've been experiencing through the year. We're hedged around 40% to 50% through the winter so through this fourth quarter and through the first quarter of next year, we'll have the hedge rates on as fire wall to some of the ones that we had earlier in the year. You'll recall, I mentioned that lower hedge income was a part of the reason why we had a higher expense in the third quarter relative to the second.

So continued high energy costs offset to some extent by hedging and continued wood costs. So we expect in the fourth quarter those to continue. On the positive side, really, again, the focus is very much the same on looking at all the factors that we can improve, cost mix and our operational performance. So we expect to continue to add value there.

What we're doing is at some of our facilities, on the energy side, obviously we're doing as much switching to coal and wood wastes as we can to reduce the consumption of gas and fuel oil. And on the wood side, removing as much of the pines, in mills where we use both pine and hardwood, moving away from hardwood and trying to maximize pine. So we've also had, looking at our system on the east side, where are the machines where we have the lowest profitability. And when we need to, and we've done this in the third quarter, we slowed back a bit to make sure that we have adequate wood at the facilities that are the most profitability. So we're just not sitting around waiting for energy and wood to solve themselves. We were taking what actions we can to minimize the impacts.

Thank you. Our next question will come from the line of Mark Wilde. Please go ahead with your questions, please.

Thank you. John, I wondered first can you just confirm that this legal reserve is related to the containerboard settlement.

The one that was in the special charges?

Yes, exactly.

Yes.

Okay. And then secondly, just in terms of this downtime, and I am very happy to see remaining discipline here. If the economy or if demand for paper were to remain weak, could you foresee some more capacity rationalization moves rather than continuing to run at 250,000 tons a quarter?

That's something, we're not visiting that subject every day, Mark, but that's something obviously we'll look at. I believe we've taken the capacity that we didn't need that we thought was too expensive to carry, we bit the bullet on that and took it out. We want to make sure we can adequately supply our customers as their business improves. So, speculating on what scenario would lead to what action probably isn't - none of us will be right, but we're going to continue to run the capacity we have at the level we need to meet our customers' demands. I'd expect frankly that as signs of recovery become more broad based and people start feeling more confident about things that lead to higher levels of advertising that we'll see some demand come back and the upside for us is we're not running full.

John, finally, I wondered if you could talk a little bit about what you are seeing in trade flows in your main businesses and I'm particularly interested in the coated paper business. It sounds like you are making money in Europe and you are at about break-even in North America. Can we extrapolate that kind of across the industry to assume that we're going to continue to see a lot of pressure from European coated paper here in North America?

It's interesting, Mark. The data we look at would suggest that the imports have dropped off a couple points in terms of share. Now, that may be because the market's gotten seasonally stronger. So I can't speak for what people will or won't do, but as we look at it, the share of imports and the code of market is still significant. Remember that's mostly free sheet, where the big shares are. It's mostly sheets not rolls, which is a segment we're not in. But it's also a factor in ground wood and I think in some cases what's happened is as capacity's been rationalized in North America, the substitute product or the product that's come in for the capacity rationalizations come in from Europe. So if you think about that it shows up as more import product but it's not net incremental product into the marketplace.

And John, how does trade look in the other businesses, just containerboard and bleached board

When you say trade?

Particularly exports in those two businesses.

Well, exports, I read something over the weekend that industrial production has picked up. That is a positive sign. What we've had is this dichotomy of consumption looking good and production looking poor, if you look at durables and nondurables. There are clearly some lag effects here. A lot of this, we lost 2.8 million jobs in manufacturing.

Those jobs are not going to come back so what we need to see is some growth in the U.S. economy so the people are investing in hiring and then we'll see some more export activity. I feel pretty good about where currency is. There's still, these things don't happen in a quarter. There's some real lags here as people adjust their spending and investment plans. So I think the trends in currency are very favorable for us both in packaging and in paper.

Thanks, John.

Thank you. Our next question comes from the line of Mark Connelly. Please go ahead with your question.

Just a couple of quick things. First, you've got a multiyear cost reduction program. Should we then realistically expect that you will probably have sort of a steady stream of charges associated with that?

Well, Mark, you said, or as we said earlier, the taking costs out is, and this big wave of 3,000 jobs we announced, the charges will be taken when the individual jobs are identified in the people poll. Yeah, that's the way the accounting works.

Well, that works that way if you choose to take them as charges, I guess. I guess that's what I'm trying to get to. IP has had charges almost every quarter for a long time now and we're just trying to calibrate our own expectations. Should we be assuming that this is sort of going to be an ongoing thing?

No, you shouldn't. We're not going to be taking out 3,000 jobs every 12 months. And you remember, we're not shutting down capacity here. This is the same revenues. Just doing it with a better cost structure.

All right. Okay. And second question. Relating to the former questions about the coated business. When you look at your position in the coated market, imports and all that stuff, I mean, is returning that business to profitability just a volume issue at this point or is there further restructuring in the portfolio of your coated business necessary in your mind to bring that thing back to a more healthy operating level?

I think we've got work to do on both fronts, Mark. There's obviously a volume piece to it. That's not all within our control. But if we've got the right customers and we're in the right channels, we can influence that. Even in the weak market, if we're lined up with the right customers, we can improve our position, but we've also got some other work to do to improve the returns in that business. We're certainly not satisfied with where it is.

Thanks very much.

Thank you. Our next question will come from the line of Jared Muroff. Please go ahead with your question.

First I was wondering if you could give us a sense of maintenance downtime, and how that changed second quarter to third quarter and then some guidance as to how that might change moving into the fourth quarter.

We don't forecast downtime whether it's maintenance or our marketplace.

Okay. How about third quarter versus second quarter?

There was a little less maintenance downtime in the third quarter.

Okay, but the big jump and lack of ordered downtime isn't because you had much more maintenance downtime in the second quarter?

We had more maintenance overall downtime in the second quarter, but we took more overall downtime in the third quarter.

Okay. And then I was just wondering if you could give us some color on what you are seeing in the containerboard market, whether you are seeing any kind of encouraging signs there outside the seasonal dropoff?

It varies by segment and by customer. We're in a variety of segments in the box business. We're in agriculture, we're in poultry, we're in bulk, we're in general industrial. And you've really got to get down to account specific. We've got some accounts where we're way up because our customers' business is stronger. The agricultural part of it is very seasonal, but in aggregate, I mean, just look at the overall statistics. You'd have to say that the market is flat to down a tad. We picked a couple share points. Our volume is up but it's very account and very segment specific. That's what this business is all about is lining up your assets with specific customers and specific segments where you think you can do your customers a very good job.

Very good, thank you. Ladies and gentlemen, we have time for one more question and that will come from the line of Mark Weintraub. Please go ahead with your question.

Thank you. First on that maintenance expense. Just curious, do you amortize that over the course of the year or do you effectively -- did you have a bigger maintenance-related expense in the second quarter than the third quarter?

Yes, we do amortize. What was the second half of the question, I'm sorry?

Okay so then the maintenance expense would have been similar in the third quarter then the second quarter even though you actually were taking a lot more maintenance downtime in the second quarter?

Correct.

Okay. On the pension expense, Chris, I just want to check my math. Does that mean that this year the pension expense is going to be roughly 60 million? Because you had originally talked about it being 25. Then you said it's going to be 15 to 20 million more on a go-forward basis. So taking the third quarter and the fourth quarter, that got me to about 60 million for this year.

That's approximately correct, yes.

Thank you.

All right, Ms. Sneed, there are no further questions, if you would please continue with any closing remarks that you may have.

Thank you very much for joining our conference call. If you have followup questions, Brian Turcotte and I will be available. Thanks.

Ladies and gentlemen this does conclude the International Paper third quarter 2003 earnings release conference call. Thank you for your participation and have a great day.