International Paper Co (IP) 2003 Q4 法說會逐字稿

Ladies and gentlemen. Thank you for standing by. Welcome to the International Paper fourth quarter 2003 earnings conference call. At this time all participants are in a listen only mode. Later in today's presentation, we will conduct a question and answer session. If anyone should need assistance at anytime during today's conference call, please press the star followed by the 0 for operator assistance. As a reminder this conference is being recorded today, Monday, February 2, 2004. I now have the pleasure to introduce the moderator for today's conference, Darial Sneed, Vice President of Investor Relations. Please go ahead.

Good morning, joining me on International Paper's fourth quarter 2003 earnings conference call are Chairman and Chief Executive Officer John Faraci and Chief Financial Officer Chris Liddell. We will be making forward-looking statements that are subject to risks and uncertainties that are listed at the end of our fourth quarter 2003 earnings press release. And those risks and uncertainties are also listed on slide 2 of the presentation. A copy of the presentation, the earnings press release and a reconciliation of certain nonfinancial measures to Generally Accepted Accounting Principles can be found at www.InternationalPaper.com under investor information. Now, here is John.

Thanks, Darial. Good morning, everybody. Let me start the presentation with some key points and we will be providing more detail around these later on. 2003 was a tough year. It's one, frankly, we are glad to have behind us. The fourth quarter of 2003, however, wasn't too bad considering demand and pricing and what was going on with input costs.

But first quarter, particularly January and February of this year, are going to be tough due to high wood and energy costs and seasonally weak demand. But we do see signs in talking to many of our customers, that their businesses is getting better off a low base. Today Chris and I are going to cover our fourth quarter results, individual business performance, how we did in 2003, and then I will come back and talk about our outlook and we will both answer your questions. Let me start by summarizing the quarter. During the fourth quarter, International Paper continued to manage at things we can control. Up until now, that's primarily been our costs.

Our operational performance is good, although not quite as good as the very good third quarter we had. In the fourth quarter, volumes were seasonally slow, broadly in line with the third quarter, and mix versus the fourth quarter of 2002. We were still struggling with weak underlying demand, although we currently see signs of improvement in container board, uncoated free sheet and pulp. We continue to take down time in the fourth quarter in order to balance our production with our customer demand. You will find that down time chart in the appendix. Because of weak demand pricing was flat or under pressure in most of the paper and packaging segments.

The exceptions were wood products and pulp. Raw material costs remain high versus one year ago, and in the fourth quarter, energy costs were broadly flat with the third quarter, but fiber costs were at the highest level of the year. Capital projects, these are low cost capital projects to reduce energy consumption are on going and projects that will be starting up by June of this year will reduce natural gas consumption by about another 7%. We've got more projects teed up for the second half of this year. Turning to slide 7, this is EPS before special items. Although the external conditions were tough, earnings per share before special items in the fourth quarter were 23 cents.

About comparable to the third quarter, and lower than the fourth quarter of last year, mainly due to lower pricing and volumes, higher raw materials costs and pension expenses. And these items are partially offset by improved operations and Chris will show you a chart on that a little bit later. Chris will now review the key factors that impacted our earnings and cover each one of the businesses. Chris.

Thanks, John. I will talk initially to slide 8, which shows the key factors driving operating earnings per share in the fourth quarter, then I'll come back later on and also talk about the full year. As you can see earnings were essentially flat quarter or quarter, 23 cents compared to 24 cents in the third quarter. Starting with costs, the first of the bars on the variance, we had good further cost reduction and mix improvements, but we didn't run as well as the third quarter rate. For example, uncoated free sheet operations was still very good but not as outstanding as they were in the third quarter.

Also, coated paper operations were impacted by the paper machine rebuilt at (inaudible) Scoggin, a project that's overall well on track. As I'll show you later, overall quarter four costs and mix improvement were still significantly better than last year. Turning to volume and lack of order down time on balance that was a 0 effect with slightly lower seasonal volumes offset by less lack of order downtime taken in the fourth quarter. We will show you in more details of lack of order down time in the appendix. Forest land sales in the fourth quarter were at similar level to the third quarter.

On the price side, that was also a zero impact overall quarter on quarter with price declines in uncoated paper, liner board and corrugated boxes offset by higher lumber, plywood and pulp prices. Raw material costs cost us 2 cents for the quarter, 2 cents higher than in the third quarter primarily due to higher wood costs in the south and the northeast with supply short and demand strong, in particular, some of our mills tried to build inventories for the winter. Overall our energy costs were essentially flat with the third quarter. Interest expense was 2 cents favorable change quarter on quarter and finally tax was also a 2 cents favorable with a tax rate of 11% for the quarter creating a positive variance relative to the 19% tax rate we had in the third quarter.

Overall for the year, that brings us to a tax rate of 22% for the full year. In special items, turning to slide nine, we had special items totaling $59 million for the year in charges or negative 12 cents a share. Included in the special items were a pretax charge of $101 million for restructuring and other costs, and that included $91 million for facility closures along with organizational restructuring programs that we will be talking to you about through the year. Included in that $91 million is the separation costs for approximately 1300 workers. $29 million was also taken for increased legal reserves in the quarter, and, against that, was a credit of $19 million for gains on early distinguishment of debt.

In divestures, we took $21 million of net losses on sales and impairments of small businesses held for sale. We have written these down to our expected realizable value. Finally, we had a $23 million credit for the reversal of restructuring reserves previously taken, but no longer acquired, mainly because we had achieved either better realizations or lower costs associated with them. The sum of all of those, plus plus the tax and minority interest impact, brought us to a net loss of $59 million for the quarter.

I would now like to discuss how our individual businesses performed, and start with printing papers, with sales and earnings declined in the fourth quarter from $120 million to $66 million. Essentially uncoated paper volumes were down slightly and prices also remained under pressure in the quarter. The average realization shown here includes converting grades as well, such as envelope papers, which decreased in line with offset prices which had declined as well in the third quarter. Uncoated papers volumes declined also due to the normal seasonal down turn in catalog paper demand, while overall realization were essentially flat.

Inside of that coated ground wood prices were up slightly while coated free sheet prices were down. We're still seeing coated paper imports remaining a significant factor in the U.S, due mainly to the supply demand imbalance in Europe and also in Asia. In pulp volume and average realizations increased in the quarter. And also in Europe, the earnings declined slightly as lower prices more than offset higher volumes. Mill operations for the segment were clearly favorable versus last year. But as I mentioned before not as strong as in the previous outstanding quarter. And in all of our US businesses wood costs were up for the quarter.

Turning to packaging, earnings in the packaging segment held up better and were essentially flat quarter on quarter with higher volumes offsetting slightly lower prices. In container board prices reached their low point during the quarter and volumes, particularly export volumes, increased. Box volume decreased seasonally during the fourth quarter, however, demand was stronger than expected and box shipments were 6% higher than in the fourth quarter of 2002 due to both improved markets and also market share gains for us. Bleached wood volumes increased as a result of stronger domestic folding and cup stock shipments. And overall for the segment operations in both the mill and the converting side were good during the quarter and at comparable levels to the third quarter.

Turning lastly to forest products, which includes both forest resources and wood products. In forest products earnings improved quarter to quarter from $201 million to $236 million dollars due mainly to higher lumber and plywood prices which more than offset seasonally weaker volumes. Lumber and plywood markets were stronger than in 2002. For example, fourth quarter lumber shipments were 6% higher than in the fourth quarter of the 2002 year and plywood shipments were up 2% compared to the year ago quarter. Earnings from forest land sales were flat with the third quarter levels and harvest volumes were also about equal to the third quarter. From time to time we discussed more about our core businesses on these calls.

Today I would like to take a few minutes to talk about our forest resources business starting on slide 13. Forest resources, along with our wood products business comprises our forest products segment that I just talked about. Forest resources is headquartered in Savannah, Georgia and is responsible for managing all of our U.S. forest lands and supplying wood fiber to our U.S. facilities, either through harvesting our owned and managed lands or by procuring wood from outside sources. At the year end 2003, we owned or managed 8.3 million acres of forest lands in the U.S, making us the largest private landowner in the United States.

Now current pricing. The fair market value of our U.S. forest lands is at a minimum two to three times their book value. We manage our forest resources businesses and portfolio and the objective of the business is clearly to optimize economic value. We have a range of activities to achieve this, including planting seedlings, harvesting trees, recreational income, forest land sales, real estate or hiring better use sales and selling standing timber. These are the leaders that we have to optimize and maximize value from that 8.3 million acres of forest land. The mix of the activities varies based on our facilities fiber requirements, prevailing stumpage prices, supply and demand for land sales and market preference to standing timber, logs and forest lands.

How we actually pull those levers varies over a business cycle is clearly based on demand and supply and the overall economic and operating environment. As we show in chart 14, in both 2002 and 2003, we had gross earnings from selling forest lands and standing timber of about $460 million. Standing timber sales are where we sell the timber but retain ownership of the land. That was a relatively small factor. Most of the sales in 2002 and 2003 were from forest land sales where we sold both the timber and the land. As we have told you in the past, selling forest lands is a normal part of our forest resource business.

It is not a one-off activity. Reflecting that, in 2003 we did over 500 transaction and that's double the number of transactions we did in 2002, mainly because we are now selling smaller tracts of land at higher prices and all well above appraised value. Hence, we're improving our sales mix inside this business. More detail on the transaction at prices are show in the appendix. We also had gross earnings of between 250 and $350 million from harvest and recreational income over the last two-years. I would like to point out that the income from harvest was lower in 2003 because average stumpage realizations and volumes were both down. Sale of forest lands and harvest and recreational income is shown before expenses because we manage them as a portfolio by the same group.

Expenses came primarily from overhead and silver-culture, both of which were down in 2003 compared to 2002. Finally land utilization is mainly real estate sales and was flat broadly year over year. The chart on slide 15 tracks pricing over the last 50 odd years and shows that timber stumpage prices, which is in the green line for those of you who've got color. Shows also trend line pricing in yellow in 2003 dollars. What the data indicates is that southern pine (inaudible) stumpage prices are currently 30%, or approximately $12 a ton below trend line pricing. Clearly when stumpage prices are depressed, especially relative to forest land values, forest land sales tend to represent a large part of our portfolio mix.

Conversely when stumpage prices are high harvesting trees may be the best decision for maximize the value of our forest land holdings. Turning to slide 16, since we try and balance our forest resources portfolio by harvesting and selling more trees when stumpage prices are high and selling more land and harvesting lists when stumpage prices are down, forest resources has provided a steady and constant stream of earnings to International Paper over the last 10 years. What we've shown you here is the percentage over that last 10 year period. As you can see forest resources EBIT, as a percentage of IP's total business EBIT, has been very consistent, especially over the last three years, just over 30%.

Going forward we think that forest resource business will continue to be important earnings generator for the company as we expect harvester volumes and prices to increase overtime. Intensive forest management efforts result in us producing more fiber on fewer acres in the future plus we have an additional 2 to 3 million acres of non-strategic forest land that we plan to sell over the next several years. The key is that we manage our forest lands in the portfolio and we're not depending on one activity to provide earnings for the business. Also we look at it as part of the overall international paper portfolio businesses and these various businesses contribute more or less based on economic conditions.

For example, as you can see, in 1995 when paper and packaging earnings were at a peak levels, forest resources was a corresponding low percentage of total company earnings. In the future, to summarize, we'll be growing more trees from less acres, and with our predicted harvest and trend line prices, EBIT from harvesting and recreational income will increase substantially overtime. I would now like to turn to the full year comparison and talk you through the wonderful chart that we show for that. As you can see, earnings per share were down from $1.12 in 2002 to 80 cents in 2003. The first bar on cost and mix reflects the fact that sustained efforts to reduce cost and improve mix in 2003 provided overall good results and I will provide more detail in the following slide.

But in summary, lower manufacturing costs, as well as lower S&A costs will significant contributors to the 40 cent improvement year over year. We had good improvement, good performance in virtually all of our major U.S. mills. On volume, lower harvest volumes that I've just talked about and U.S. uncoated paper sales volumes in 2003 negatively impacted earnings, as you can see, by 3 cents a share. Earnings from forest land sales were about flat in 2003. This is 2004, as I have just discussed. Price declines and uncoated papers in the U.S. and Europe and industrial packaging more than offset improved realizations from wood products and pulp.

We show more detail in year over year pricing in the appendix. Raw material costs were 36 cents per share higher than in 2003. Clearly one of the most significant negative impacts, virtually offsetting the improvements that we made in cost and mix. And those costs came primarily due to higher wood costs, 20 cents of the 36, and energy, 15 cents of it. Pension costs were also higher in 2003, as we went from income of $75 million in 2002 to a pension expense of $60 million in 2003. These charges are reported in corporate items. A detailed pension assumptions and cost expectations for 2004 are contained in the appendix.

We expect the pension accounting charge to be up in 2004 mainly because of a change in the assumed discount rate. In 2003, offsetting that, we had an outstanding pension performance with a 26% return. Beating our benchmarks by about 300 basis points. And the benefit of this will flow through in future periods. Other includes foreign exchange impacts and the absent of miscellaneous favorable items in 2002, such as the sale of our stake in the Prudential demutualizaton. And finally, our estimated tax rate of 22%, which I mentioned before, was favorable to the 29% tax rate that we had in 2002.

Next chart on slide 18 shows the detail that we started showing you in the last quarter of our non-price improvement on a quarter by quarter basis. It shows where we are delivering that non-price improvement on a quarter to quarter basis and also summarizing it for the full year. The good news is we continue to progress on the things that is we can control, in particular internal costs and the mix of our businesses. On cost and mix, which are the the green bars, again for those of you who've got color, our performance has been steadily improving quarter to quarter relative to the same period last year, as with delivered increased cost savings to the bottom line. In quarter 1, we had just 1 cent, because we didn't run well during the winter months, but we delivered 10 cents in the second quarter, 13 in the third, and 16 in the fourth for a total of 40 cents for the full year.

Unfortunately, again, as we talked to you consistently throughout the year, this has been offset by the increase in raw material costs, both energy and wood, and the lower volume which is shown on the blue bars on your chart. Finally, for me, I would like to talk about energy and give you a little bit more information on that. As you know, we have been actively working to reduce our consumption of high cost energy fuel and are making excellent progress. The bottom of chart 19 shows the actual dollar cost of our total energy purchases for our U.S. pulp and paper mills. What it shows is between 2002 and 2003, energy costs increased $135 million from $680 million to 815. Please note, those are before hedging costs, which we show in some of our other charts , so I' just going to, for the purpose of this discussion, ignore the benefits of hedging.

As you can see, from the red line, natural gas unit costs increased nearly 70% year on year from $3.45 to $5.80 in 2003. In a response to that rising natural gas cost price, we decreased our consumption with total natural gas consumption going down 25% in volume terms from 2002 to 2003. The good story here is that though our total energy spend increased, we are able to mitigate some of the higher natural gas costs by substituting lower cost sources of energy and reducing our total overall energy usage. That's shown on the next slide, slide 20, which illustrates the mix of our total energy consumption. On the right, you can see the average 2003 costs of those fuels on an equivalent BTU basis.

In 2002, therefore, natural gas represented about 32% of our total consumption for our U.S. pulp and paper mills with coal a distant second at around 23%. In 2003 natural gas dropped to 24% of the total mix, with the increased use of coal, fuel oil, wood waste and other fuel sources. As well as that we achieved another overall 2% reduction in energy used per ton of pulp and paper produced, so we had a different mix and also a different lower level of total consumption. We continue to see opportunities in this area. For example, the reduction was accomplished in advance of a lot of capital projects that we started to implement in 2003, and we will continue to implement in 2004.

So, with those overall comments, I would now like to turn back to John to sum up the year and also talk about the outlook going forward.

Thanks, Chris. Let me do just that, and then we will go to your questions. Summing up 2003, as I said, it was a tough year, and we are glad it is behind us. In our paper and packaging businesses, demand didn't match the pace of an improving economic climate in the U.S. Price remained weak. With the exception of Europe, year end improvements in pulp, some in bleached board and quite a bit in wood products, especially towards the end of the year.

Operating earnings were down from the previous year as the cost in mix improvements that Chris talked about didn't fully offset the negative external factors. None of us are satisfied with the results, despite the fact we didn't get a lot of help in the marketplace with demand in price. Nonetheless, I feel good that we stayed focus on our internal initiatives and those initiatives are on on track. While we continue to say that we're going to manage what we control. We started off last year poorly. Our operating performance was not good in the first quarter, but we quickly turned that around. Our supply chain project is rolling out on schedule.

We want want to retain some important business with customers in 2003 and we continue to improve our position with our target customers by helping them win in their markets? Before I go to the outlook I would just like to restate our target of achieving the 9% ROI at trim line pricing that we shared with you before. As you saw in an earlier chart, while higher wood costs, energy and pension costs put us behind where we expected to be at this point, we are still focused on reaching that target. We're going to get the internal part of this done, no doubt in my mind.

But there are certain things that we assumed in that 9% ROI that have to happen. We need to see the benefit of increased demand in mid cycle pricing, I think we are seeing signs for the first time in three years that the conditions are getting better for that to happen, and wood and energy costs need to moderate to more normal levels. Finally we have to continue to build on our capability to take costs out. As I mentioned before, I am pleased with the progress we are making on that front. Let me talk briefly about the outlook. Looking near term, the first quarter is, typically, a seasonally slower quarter than the fourth one. January and February, we are having a real winter, I guess for the second time.

Energy costs are going to be high during the winter months, especially when it is as cold as it has been. Our wood costs are expected to remain high given the tight supply and the need to rebuild our inventories. We did get our inventories into a better position than we had t this time last year but our wood costs are up and they will probably peak in the first quarter. Near term, the outlook for pricing is mixed. But on the positive side, we have announced first quarter price increases for soft wood pulp, container board and uncoated free sheet..

It won't have much impact in the first quarter but will have a significant impact on second quarter results. Operating rates remain at good levels, inventories remain low, the mill and customer levels for most grades and the weak dollars should continue to help make U.S. exports more attractive overseas and mitigate the impact from imports. I think we expected the dollar to have more immediate impact, but there is a lag effect there. The good news is that lag effect is out in front of us and we haven't seen the full impact of the dollar yet. Demand trends across most businesses are positive. Looking over the short-term to medium term, we are going to continue to focus on the fact that those are under IP's control.

Our priorities will remain the same, to improve shareholder value by concentrating on operational excellence, people development, and customers. To do this every business manager in the company know that they must stay focused on delivering the non-price improvements that we talked about to the bottom line and they all know what their piece of that commitment is. We continue to see evidence of improving demand for our paper package and forest products businesses, as the economic recovery get gets more broad based in the United States and we start to pick up more encouraging news about the economies around the world. With improvements in box demand and commercial printing we expect improving demand in price in most businesses during the year as volume and operating rates improved.

IP is well positioned to take advantage of that research and some customer demand. We have been working on our cost structure now for over three-years and we've got a very competitive cost structure and solid position with our target customers and the ability to produce and meet their needs as their business grows. I'm also pleased with our geographic position in the developing areas, principally eastern Europe and Latin America, which give us good options for the future. So let me stop right there and we'll open it up for your questions.

Very good, thank you. Ladies and gentlemen, at this time we will begin our question and answer session. If you do have a question please press the star followed by the 1 on your touchtone telephone. You will hear a three tone prompt acknowledging your selection and your questions will be polled in the order they're received. If your question has been answered and you would like to withdraw from the polling process, please press the star followed by the 2. I would like to remind you that if you are using any kind of speaker equipment today, please lift the handset before pressing the numbers. Our first question will come from the from the line of Rich Schneider Please state your company followed by your question.

UBS. John, I was wondering if you can talk to about the variance that occurred in the printing papers area, the drop-off in profit was quite noticeable more than I would have expected and most people. I know pricing was down in uncoated free sheet, but is that the area where you had some of the operating difficulties and also where you had the biggest impact of wood costs going up?

Well, there are a couple of questions in there, Rich. The operating difficulty was more in our coated papers business than in uncoated, although as Chris said, the uncoated business it didn't run as well as it did in the third quarter. We had a terrific quarter. We had to bring our direct rates pricing envelope in forms into line with offset. The offset price moved down in the third quarter and envelope lagged it a bit. So that's why you saw somewhat of a sharper fall in pricing. You are right, the printing papers business did get hit by some of the high wood costs. We are bringing in some chips from Brazil into Pensacola. Those used to be expensive chips. Now they are not expensive given what was happening to hard wood prices. So, those mills got hit by a higher wood cost more significant then some of the other businesses.

From your comments, it sounds like you have officially gone out, which I had heard before, on an uncoated free sheet price increase. Could you give us some of details on that?

We think that the marketplace is improving. You look at all our backlogs, order rates are noticeably stronger this time than they were last year. We look at our system, we think it is pretty much full. So if you are talking to commercial printers, their prospects for their business is much better than it was at this time last year. So, I think what's happening is you are starting to see broader economic activity, you start to impact more segments of the economy, and advertising is solely -- slowly but surely coming back. We think the demand is improving.

And, what is the price increase you've announced and the time frame?

It is $40.

Rich, this is Darial, we've just announced $60 per ton. On envelope, forms, and offset,effective February 20th.

And the direct rate as well.

Yes.

Just the last question, on energy, could you give us some help with the outlook for the first quarter and how much are you hedged on the energy side?

We are hedged in the first quarter about 40 to 50%, mainly with options, Rich, and those options, are kicking it around $6. So they are effective but won't bring our average price down. So quarter on quarter, I would use 40 flat, possibly slightly up.

Thank you.

Let me come back to a point about wood costs. For the first time in a number of years, we experienced, because of the prolonged bad weather in the south, a significant increase in both hard wood and soft wood costs in our paper mills. That is not a structural type of change, and we would expect, we are already seeing signs that wood costs are moderating on the west side of the south, and there is no doubt in our mind that if the weather patterns do what they have been doing, that cost will start to come down. So, that is something that's hit us last year. We still have the after effects of it. But we know how to manage that side of the equation, given where our inventories are at this point.

Very good, thank you. Our next question will come from the line of Mark Wilde of Deutsche Banc. Please go ahead with your question.

Good morning. First of all, just let me just say that I am happy to see the improved level of disclosure that you guys are putting out with the quarterly release. I am very happy with that. Chris, I wondered if you could talk with us a little bit about the foreign exchange impact. In the quarter you have big operations over in Europe. But you also have operations in Canada and Brazil and then down under? Maybe individually and cumulatively?

Sure. I am not sure which particular period you are interested in, Mark. Foreign exchange was a net benefit year on year. Mainly because of hedging. Going forward, we don't have a significant hedging position for those operations that you have mentioned at the current exchange rates, and we have sort of a perverse situation where, because a lot of the sales that they make are in U.S. dollars but their costs are in local currency, the strength or the weakness in the U.S. dollar is impacting them negatively going forward. But the benefit you see going backwards is mainly because of hedging contracts not because of the underlying FX exchanges. But there will be a mixture of effects in Europe, obviously the European sales in local currency and local costs, that's a benefit with the stronger Euro. But to the extent that some of the sales are in U.S. dollars and the currency costs are in local, it will be a negative. Same impact in Canada, same impact in our New Zealand and Australian operations. Is there a particular period that you were interested in there?

I was mostly interested in the quarter to quarter move because we had a pretty big move in the fourth quarter, Chris, for both Canadian dollar against U.S. and Euro and Euro against U.S. dollar.

Sorry, and you were looking at a particular number or just interested in the general impact?

I am interested in just the general order of magnitude.

Let me try to get a number for you. May I come back to you with a number, Mark?

Yes, that would be fine. I had a couple of other questions. One, you had a legal reserve in the special item?

Yes.

Could you tell us what that relates to. Is that Masonite or what is that?

Could I just hand over to Maura Smith who's our general counsel, she can answer that one?

Hi, Mark. The $29 million edition to the legal reserve that you are referring to actually relates to a potential settlement of pending litigation that are not yet final or public and not related to our Masonite reserve.

And then, finally, this issue of the lawsuits down in the southeast, around kind of fiber pricing. Can you give us any update on that?

Are you talking about the "Wall Street Journal" article, Mark?

Yes, and there have been articles in all the trade press. I think this is what, South Carolina Attorney General is pushing this?

Right. Well, actually it's really the plaintiffs case right now. The South Carolina Attorney General really is really not pursuing it at this time. We really don't comment on pending litigation but generally we can say that we're going to vigorously defend our business practices in that part of the country with our quality supplier program that was developed as a wood procurement initiative.

Actually, I have one other question for John Faraci. Champion had a couple of mill sites that I think they had big forest plantations on down in Brazil and they had actually talked for over a decade about doing something in Brazil. With all of the pulp mill projects that we are now seeing in Brazil and in other parts of Latin America being announced, do you guys have any plans to either use those sites on your own, or joint venture those or can we just get your thoughts on them?

Can we talk about it in terms of decades?

Sure.

We've got a great business down in Brazil, Mark, which I think you know a little bit about. You are right, we do have two plantations, one in the south in Brazil, one in the north, EUCALYPTUS. Those are options. They are businesses, we're operating as business now, basically cash positive or cash breakeven as we build out the plantations and start to harvest some trees and sell them. They're options for us going forward. I can't tell you how those will play out. What I can tell you is we are very pleased with our business in Brazil and see the cost structure down there and business we run as one that gives us something we would like to grow and we will do that at the right time when we see the right kinds of opportunities to make money on.

Okay. You are open to either doing that on your own or is a joint venture something you would look at?

Yes. We wouldn't rule out any options. We are not committed to any one option at this point in time.

Very good. Thank you. Our next question will come from the line of Chip Dillon. However, before we do go to that question, I would like to remind everyone please limit your question to only one question per location. Our next question, once again, is from Chip Dillon from Smith Barney. Please go ahead with your question.

Yes, good morning. By the way, I applaud the disclosure, too, it is terrific on the timber and timberland, forest lands sales front. I noticed that on one of the slides you had mentioned the revenues from both timberland sales and standing timber. Then there is a slide in the appendix that just gives us the number of transactions and the price per acre of timberland sales. I was just wondering if you could help reconcile those two a little bit, in particular if you could just breakdown what proportion of the revenues are from timberland sales and what proportion are from standing timber, assuming that slide 29 only refers to the timberland sales.

Chip, Chris may may want to add to this, but Chris did mention that recently most of those sales have been timberland sales not standing timber. If you go back four or five-years it was the other way around, there was a high percentage of standing timber that was in the mix. I think that reflects what Chris was talking about. There are a number of ways to optimize the value of our timberland. They vary overtime, depending upon buyer preferences, the market. Four or five-years ago, there was a big market for standing timber and we were participating in that. So, that has and will continue to change overtime, I would expect. Chris, if you want to add any more detail to that?

Yes. I will have to get back to you on reconciling one versus the other, if that's all right, Chip. But as John says, the great bulk of the sales is from forest lands, the standing timber was relatively incidental in the 2003 year. But if I can just get back to you on the reconciling one number to the other. Sorry, while I am doing that, just to come back to one of Mark Wilde's earlier questions. Mark, the foreign exchange was $7 million quarter on quarter, negative impact. So a penny negative impact in the quarter mainly from Carter Holt Harvey because of the U.S. dollar sales and their local New Zealand dollar currency. There were some other pluses and minuses, Europe a slight plus, but on net $7 million, and Chip, if you don't mind I will come back to you on the forest sales.

Very good, thank you. Our next question will come from the line of Edings Thibau from Morgan Stanley. Please go ahead with your question. Mr Thibau if your line is muted?

Yes, actually, thank you. Just one question on the supply chain management cost, I think you cited it as one of the reasons some of the corporate expenses were higher. I was wondering if you could talk about the pluses and minuses of that. Clearly, you expect that to be a big driver, or I should say a driver of some positive gains in 2004. Can you talk about how you expect the costs of that program to play out, versus the benefits?

Well, we are funding. We are in the point in time where we are investing in building out the supply chain program across the company. That is in addition to our S&A spending. The benefits of those supply chain activities, and there are benefits, in fact, we are just about paying for that project as we go, will show up in the businesses. So you've got the costs falling in one bucket and the benefits in another one. This is a project that is companywide. We are pretty excited now that we've got a more clear picture of what it is going to do for us. It is not only going to help us with our customers but it's going to enable us to take a big chunk of costs that we haven't yet attacked out of the cost structure of all the IT businesses, both in North America and eventually around the world.

Very good. Thank you. Our next question will come from the line of John Tumazos from Prudential. Please go ahead with your question.

Last week a competitor sold a couple soft pulp facilities. And investment in pulp conversion in North America has waned with other paper investment in the last few years and soft pulp for personal hygiene, infant care, etc, is a premium, more demanding grade. Is that a market that IP targets, focuses on, wants to grow in? Are debt reduction goals stringent enough that even if a competitor sells a good business cheaply, you will pass on larger size deals? Please update us on your guidelines?

There are a couple of questions in there, John. One is we are in soft pulp business and that's a good segment for us at some of our facilities which are positioned to make a soft pulp product. We have not viewed market pulp as a strategic business to International Paper. We are a large player in it, with our operations in Canada. We've got a market pulp positions at many of our paper mills here in the U.S. and then are in the business in New Zealand. It is not companywide, it is not a strategic business for us. We make lots of choices about where to put our capital and our people, and market pulp at this point is not one of those.

Very good. Thank you. Our next question will come from the line of Lise Shonfield with JP Morgan. Please go ahead with your question.

Good morning, I just had a question building on Edings' question on the corporate line. Obviously it was a little higher than I had anticipated in the fourth quarter. I was just wondering, aside from supply side initiative spending, was there anything else unusually impacting it in the fourth quarter and could you give us a little bit of guidance on what sort of number or kind of range of numbers we should be using for 2004 for that line?

Yes, Lise, Chris here. There were some pluses and minuses, as there always are in that particular category for the end of the year, but nothing particularly unusual. I mean, going forward, we would say that the run rate that we currently have is broadly going to be the run rate that we have through next year at around $140 million a quarter. The composition will change because going through next year, as I mentioned, we will have higher pension costs, and we will also have the additional costs associated with the age of supply chain projects. So those will be up, but some of our S&A savings will be down. So, net, net it will be about the same as the run rate in the third and fourth quarter for the next year.

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

Thanks and good morning. I wanted to ask a question, if I could, on the timberland side of the business. I do appreciate the slides, I thought were very helpful. Really just a three-part quick question on timber. First, any update on your timber harvest plans for the full year '04 and how they compare to '03. Secondly, can you give us a sense as to the harvest volumes that might be sold internally versus externally, and then, lastly, more broadly, if you define fiber to mean really timber and pulp combined, you are very heavily integrated as a company. I am curious if you could comment on whether you are inclined to be more or less integrated going forward.

There are a lot of questions in there, Pete.. Let me try to take them in sequence. First on the harvest. The harvest every year, just like timberland sales or land sales, is a function of supply and demand and how we see the pricing and market environment. Overtime, as one of the slides shows in the appendix, our merchantable inventory grows in the south quite substantially. So the potential harvest certainly grows overtime. Internal versus external, most of our saw timber, on a net basis because we're not always matched with facilities, most of our saw timber sales are going to our own facilities, but we are a large net buyer of fiber across the whole International Paper system. So we are, on balance, buying more fiber than we are cutting off, harvesting off our own land. I heard your last part of that question, Pete, I am not quite sure where you are headed. Could you help me out?

Degree of integration.

Are you talking about degree of integration.

I'm sorry, sir, I already cleared his line from queue. Would you like me to open his line back up for you?

Sure.

Perhaps the answer might be in that we indicated in the text that we are still looking to sell 2 to 3 million acres, so we are looking to be, I guess, less integrated on that business, that would get us down to the level of integration that we're comfortable with.

Mr. Ruschmeier, your line is open now.

Okay. So on the timber side, perhaps a little bit less integration and on the pulp side the answer would be no change in your pulp self-sufficiency?

Mean fiber self-sufficiency or pulp self-sufficiency? We're selling market pulp.

Yes. The question is really more broadly, I view you as a very integrated company, and, granted you indicated you are buying some timber, but your long pulp. Just was a broad question as to whether, on the integration question, whether you feel that you need to move that needle more to a more integrated stature, regardless of whether that's timber or whether it's pulp, being long even more pulp or whether you feel that a fiber integration is something that you can go the other direction in?

We feel owning trees is an important part of making International Paper successful. We like the tree business and we also think it helps us in our downstream facilities both wood products business and the paper business. In our market pulp business, as I said, we've got two market pulp mills in Canada and the rest of the market pulp in North America really comes out of facilities where we are making paper and we've got excess pulp, so we're selling it in the marketplace. If we could make all that into paper, right now that would be a good thing, but the world doesn't need more paper, either. We are in the businesses we're in. We are running those facilities as they are. As I said to an earlier question, strategically the market pulp business is not high on our priority list.

Thanks very much.

Can I come back on Chip's question from before in terms of the split of forest lands and the standing timber. In the last couple of years only $10 to $20 million has come from the standing timber sale. So of the $460 odd million, 10 to 20 of that in both years has been on the standing timber side.

Thank you.

Thank you, sir. Our next question comes from the line of Rick Skidmore of Goldman Sachs. Please go ahead with your question.

Thank you, good morning. Just quickly on the coated groundwood business, it seems to be missing from your comments with regards to pricing and demand getting better, i.e. uncoated free sheet container board pulp. Can you just elaborate on what you're seeing in the coated groundwood business and your outlook in that business?

There are a couple segments in that business, as you know, Rich. The catalog season was pretty good for coated ground wood. Publishing is still quite weak. Ad pages in a lot of the titles out there have not come back and we would expect that would happen as the economy improves. In the overall general commercial printing market, which more coated free sheet goes into, also has been weak. We haven't seen any meaningful improvement in that business. Would expect to see some going forward, but the signs aren't as clear yet as they are in uncoated free sheet and in packaging.

Thank you.

Thank you. Our next question will come from the line of Mark Conley of Credit Suisse First Boston. Please go ahead with your question.

John, you talked about improvement in operating rates. The one place that really hasn't seen seen much improvement is uncoated free sheet. Do you think we are going to need to get to a 94% operating rate to have sustainably better prices or has something changed that makes you more optimistic?

Well, there is certainly the tighter the supply demand situation, the better the pricing environment. As we look out going forward, Mark, we see and talk to ur customers and look at our own bookings, and look at some of the industry data that is out there, we see a better situation than certainly this time last year, and one that is better than what we saw at the end of 2003. So, my guess is as good as yours as what the magic operating rate is. But certainly the higher the better, supply and demand works in this business like it does in most of our other ones.

Can you tell us what your operating rate is now?

I can't, Mark, we are still taking some down time in the uncoated free sheet business. The chart and the appendix shows you how much.

Okay. Our next question will come from the line of Steve Chercover with DA Davidson. Please go ahead with your question.

Thanks. Perhaps I should know this answer, but I was wondering what was the impetus for separating the Carter Holt Harvey volumes from the remainder of the IP volumes?

Mainly because it's a 51% owned entity, so you need to either treat it on 100% basis or 51% basis, depending on the way you looking at it.

But nothing has changed? You hadn't done that before this quarter, as far as I am aware?

Steve, this is Darial. Nothing has changed. We had a lot of requests to split it out because Carter Holt is reported as its own separate segment so people had a hard time matching up our, say, paper segment with the volumes that we were reporting. So now you have a much easier way if doing that.

Thank you.

Okay. Our next question will come from the line of Akiba Cohen with Morgan Stanley. Please go ahead with your question.

On the balance sheet side you had a large build in cash this past quarter, about 800 million, at the same time debt was up by nearly 400 million. Just wondering, it's probably just particular to this quarter but why aren't you using the cash to reduce the debt and what should we expect going forward into '04?

That is just a timing anomaly. We raised $1 billion in bonds in December and used that money, in particular, to call some expensive debt. The call period is 30 days. We are just carrying the cash over the balance date in order to repay that debt during the course of January. So you will see all of that reverse by the end of the first quarter.

Okay, great. Thank you.

Thank you. Our next question comes a followup question from Chip Dillon of Smith Barney. Please go ahead with your question.

Yes. Thank you. You have a slide that shows the timberland, I guess is just the U.S, slide 30, going from 9.4 million to 6.3 million from 2003. My guess would be that about 300,000 of that must be that Champion land in Washington you sold. But is the rest of it sort of falling through on a quarter by quarter basis and then if I understood you correctly, there was a point made that you wanted to reduce your timberland ownership down another 2 or 3 million acres, which I guess would take you to 3 to 4 million acres?

The point there, Chip, was just illustrative. Almost regardless of the ownership position you pick, in terms of acreage. We are going to be growing more trees in our merchantable inventory, which reflects our potential harvest, is gong to be growing overtime.

Sorry, Chip, that is the southern forest land too, entitled for the U.S. our total holdings at the end of the year was 8.3 million acres. So the 2 to 3 that I talked about would get us down to around 6 for the total U.S. You are just looking at southern, then.

Very good. Thank you. Then we have a followup question from Edings Thibault from Morgan Stanley. Please go ahead with your question. Mr. Thibault, if you are muted or on a speaker phone, lift your handset.

Yes. Chris, just wondering if you would comment on the tax rate going forward for '04 . What should we be modeling at?

We put it on the appendix, or I believe we have.

533, 31%.

Great. Thank you.

And I believe there are no further questions in the queue. So, with that, I am going to end the call and thank you very much. If you have follow-up questions, Brian Turcotte and I are certainly available. Thank you .

Thank you, ladies and gentlemen. This does conclude the International Paper fourth quarter, 2003, earnings conference call. Thank you for for your participation. You may now disconnect