International Paper Co (IP) 2006 Q1 法說會逐字稿

Good morning, my name is Holly, and I will be your conference operator today. At this time, I would like to welcome everyone to the International Paper first quarter 2005 earnings conference call. All lines have been placed on mute, to prevent any background noise. After the speakers' remarks, there will be a question and answer session. [OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to Ms. Darial Sneed, Vice President of Investor Relations, please go ahead, ma'am.

Thanks, Holly. Good morning. And welcome to International Paper's fourth quarter 2006 earnings conference call. With me this morning, are Chairman and Chief Executive Officer, John Faraci, and Chief Financial Officer, Marianne Parrs. This conference call is being webcast.

During this call, we will be making forward-looking statements, that are subject to the risk and uncertainties that is shown on slide 2 of the presentation, and are listed at the end of our quarterly earnings press release.

Copies of the earnings press release, the slide presentation accompanying this presentation, a reconciliation of nonGAAP financial measures to Generally Accepted Accounting Principals, can be found on our website, at www.Internationalpaper.com under the tab marked Investors.

I'll now turn the call over to John Faraci. John?

Thanks Darial, and good morning, everybody. Today Marianne and I will do a couple of things. We will review the first quarter results with you and the performances the individual businesses, discuss the second quarter outlook, update you on the transformation plan we announced in July of last year, and as most of you know, we've been pretty busy for the last couple of months. And then we'll also leave time to take your questions.

We had a solid first quarter with broad-based improvement over the fourth quarter of 2005, but also recognizing we came off a very low earnings base in the fourth quarter. first quarter volumes were stronger across many of our key grades, including uncoated papers and coated paperboard. Low inventories constrained volume in Containerboard and market pulp, and actually cost us some money in our Containerboard system during the quarter, and in printing papers.

Product pricing improved versus the fourth quarter across all grades. Paper and packaging as number of IP announced price increases were partially or fully implemented. And we've got more price realization ahead of us in the second quarter. Raw material costs were lower, driven principally by declining natural gas prices, remember they were close to $15 in the fourth quarter, and wood costs which is very, very important to us. Fuel oil and coal prices, however, were higher in the first quarter than they were in the fourth quarter.

Global manufacturing operations again perform well in the first quarter. Our U.S. distribution business, xpedx, continued to improve its performance reporting record first quarter earnings. And we reported lower land sales and a higher tax rate in the first quarter versus the fourth quarter of last year.

As you can see, if you're following along, I'm on slide 6 now, our diluted earnings per share from continuing operations and before special items, were restated to reflect coated papers and Kraft papers reported as discontinued operations, Marianne will talk more about that, the why, and the impact later on.

We reported earnings of $0.19 a share in the first quarter versus $0.09 a share in the fourth quarter of 2005. First quarter earnings would have been even stronger at $0.21 had we not reported said coated and Kraft papers as discontinued operations, which we did in the first quarter.

While we're not satisfied with the absolute level of earnings at all, I am encouraged by the improving supply demand balance in uncoated papers and industrial packaging, and we expect to see continued improvement in our key platform businesses for the remainder of 2006, both in North America and globally.

And now I'll ask Marianne to comment in a little more detail about the businesses.

Thanks John, and good morning, everyone. If you'll turn to slide 7. That slide compares first quarter results with those of the fourth quarter. Moving left to right, higher price realizations for our paper and packaging grades improved earnings by $0.08 per share. As John mentioned, volumes were stronger across many key grades, but the total quarter-to-quarter earnings impact was neutral, as higher shipments of uncoated paper, coated board, and corrugated boxes, were offset by lower shipments of pulp and Containerboard.

We continue to make progress in reducing manufacturing costs, and in improving our sales mix. That increased earnings by $0.05 per share. Lower natural gas and wood costs more than offset higher fuel oil, coal, and chemical costs and improved earnings by $0.02 per share in the first quarter. Lowers forest land sales in the first quarter reduced earnings $0.04 per share versus the fourth quarter. And I should note that these results do not include the conservation land sales that we announced in March as part of the transformation plan.

Corporate items were $0.01 unfavorable first quarter due to higher pension expense, which offset some favorable overhead savings. The tax rate in the first quarter was 30%. Now that's versus 14% in the fourth quarter, and that lowered earnings by $0.02 per share. This higher tax rate reflects a higher percentage of total company earnings from our U.S. operations. Other was $0.02 per share favorable.

Slide 8 compares diluted earnings per share from continuing operations and before special items for first quarter 2006 versus first quarter 2005. Now, again, moving left to right, although industrial packaging prices improved throughout the first quarter, they were still lower on average than the first quarter of 2005, the $0.01 negative. Higher volumes increased earnings by $0.05 during the quarter, and that was due primarily to increased industrial packaging, printing papers, and coated paper board shipments. And also improved volume, as John mentioned from xpedx.

Our mills ran well in the first quarter, but manufacturing costs and mix together were $0.02 per share unfavorable, and that was due to a series of small issues, including higher maintenance costs in our converting businesses, the fire, and a tough comparison with a strong first quarter 2005. Higher raw material costs reduced earnings by $88 million, or $0.13 per share in the first quarter 2006, and that was due mainly to higher energy costs. Higher forest land sales, more than offset lower real estate sales and increased earnings by $0.04 per share versus first quarter 2005. Higher corporate expense, unfavorably impacted earnings by $0.02 per share, primarily due to higher pension and supply chain costs.

Interest expense was favorable $0.02 per share as a result of our ongoing debt repayment effort. The tax rate was $0.05 per share unfavorable, due to the higher tax rate of 30% in first quarter 2006 versus 19% in 2005. Other, which reduced earnings $0.03 per share includes higher transportation costs.

Now, slide 9 breaks out the $88 million, or $0.13 per share of higher materials cost by input category. And as you can see, energy represented almost 85% of the cost inflation. And that's natural gas, #6 fuel oil, and coal prices all rose year-over-year. For more information on natural gas, see slide 31 in the Appendix, which charts our index prices by month since 2003.

Turning now to how our businesses performed in the first quarter. Slide 10 shows the printing paper earnings doubled to $120 million from $60 million last quarter. And that was due to primarily improved results in U.S. uncoated papers and European coated paper board.

U.S. uncoated paper earnings grew in the first quarter due to a number of factors, and that included higher shipments, higher price realizations, improved manufacturing operations, and lower raw material costs. Pulp earnings were down slightly in the first quarter as improved pricing was more than offset by lower volumes, and that resulted from pulp inventories being reduced significantly, and that's 57,000 tons in the fourth quarter.

European paper's earnings were stronger in the first quarter as coated paper board volume increased at our Svetogorsk and Clinton mills, as production ramped up following the completion of the capital project to increase capacity at those mills. And IP's Brazil operations declined slightly in the first quarter versus the fourth quarter.

Slide 11 shows industrial packaging earnings increasing from $5 million in the fourth quarter, to $38 million in the first quarter 2006, driven by stronger results in the U.S. and Asia, more than offsetting slightly lower earnings in Europe. U.S. earnings were driven by higher Containerboard, and corrugated box prices. Resulting from the implementation of previously announced IP price increases.

Although our Containerboard mills ran well, and full on an enterprise level, lower inventory levels led to increased logistics costs, in order to meet customer commitments, and the Vicksburg mill lost 8 days of liner board production due to an electrical fire. Third party Containerboard sales volumes were lower in the first quarter as we converted more tons internally in our U.S. box system.

European Container earnings were lower versus the fourth quarter as a result of weaker seasonal volume and margin squeeze, resulting from box prices lagging rising Containerboard prices. Container results in Asia improved in the first quarter and that's due to a ramping up of operations in China.

On slide 12, consumer packaging earnings improved to $35 million in the first quarter, from $29 million in the fourth quarter, due to higher earnings in U.S. coated paperboard and beverage packaging. U.S. coated paperboard benefited from higher volume, slightly improved price realization, and favorable operations. Looking at the converting businesses, beverage packaging earnings improved due to higher prices, while Surewood and Food Service were seasonally soft.

On slide 13, our distribution segment's earnings were sequentially higher as xpedx reported record first quarter earnings. Sales revenues increased 8% versus the first quarter 2005. And actually the average first quarter Return on Investment for xpedx was 7%. In addition to the stronger volume, the improved performance can be attributed to a combination of lower expenses, improved margin, and revenue growth.

Turning to slide 14, our Forest product earnings were down from $257 million in the fourth quarter, to $226 million in the first quarter. This is due to reduced earnings in forest resources, as lower land sales more than offset higher timber harvest volumes, and favorable pricing and mix.

Wood Product's earnings were up slightly quarter to quarter, due to improved mix, lower wood and manufacturing costs, higher plywood volumes and stronger lumber pricing. First quarter special items in discontinued operations are detailed on slide 15. Special items after tax in the first quarter of 2006 included a credit of $12 million related to insurance recoveries, a charge of $11 million for legal reserves, a charge of $17 million for restructuring. A charge of $2 million for adjustment of estimated losses on businesses held for sale, and a charge of $6 million related to tax adjustments. The net after tax effect of these special items was an expense of $24 million or $0.05 per share.

During the first quarter of 2006, in connection with the evaluation of strategic options for certain businesses under the Company's previously announced transformation plan, the Company determined that selling the coated papers and Kraft papers businesses was in the best interest of the Company's shareowners. Accordingly, a pretax charge of $1.3 billion, or $2.68 per share was recorded. to reduce the carrying value of the net assets of these businesses, including goodwill, to their estimated fair values, based on estimated sales values less cost to sell. As a result, this first quarter charge and the operating results of these businesses are presented as discontinued operations.

If you turn to slide 16, it shows you how you get from the $0.19 of diluted earnings from continuing operation and before special items, to the $2.52 net loss per share that we reported this morning. Before passing it back to John to wrap up on our comments this morning, I'd like to note that if you exclude coated and Kraft papers which are now discontinued, other businesses under strategic evaluations will be included in the second quarter results.

Okay. Marianne, thanks. Let me talk for a minute about the second quarter outlook. At this point, we would expect earnings from continuing operations to be somewhat higher than the first quarter due to a number of factors. We see pretty solid global volume across all of our key platform businesses, paper and packaging. We've got improving price realizations that as we implement IP's announced price increases in paper and packaging.

There is some pricing improvement that we expect in Europe, most of it is here importantly in North America where we need it, to recover the sharp increase in input costs, we expect continuing improving performance on our global manufacturing operations. And in North America, movement in input costs is a mixed bag, we would expect natural gas and wood costs to be again lower in the second quarter than the first quarter with fuel and transportation costs higher, but the overall impact on earnings should be favorable. And the full-year tax rate should be at about 33% due to a higher proportion of domestic earnings in the earnings base.

Let me switch gears right now before we go to questions, and talk about the transformation plan and just where we are. As I said at the outset, it has been a pretty busy March and April, and I feel very good about what we've been able to accomplish, and also deliver what we've had to on the operating side of the equation.

The sales process from the remaining industrial businesses is on-track. We're presently evaluating the final bids on coated papers and Kraft papers as shown on slide 18, and should have more news on those late in the second quarter. In late March and early April, we announced 5 separate transactions to sell 5.7 million acres of our U.S. forest land for about $6.6 billion.

We are very pleased with the outcome of the Forest land sales process, and believe we maximized the value for our shareowners to the process we ran, and most importantly with the outcome. We anticipate closing on these deals in the third quarter and should monetize the installment notes, and have all of the cash proceeds in hand in the fourth quarter this year. And I want to emphasize that all of the sales will net as cash.

About 833,000 acres located in the south have been retained, and we anticipate selling about 700,000 acres of that to our realty business over the next few years, and the balance of the other land is stuff around industrial sites that is part of our ongoing operations.

Based on the results from the sales of Carter Holt Harvey late last year in our forest land sales, we believe that total after tax proceeds could now exceed $11 billion, as we mentioned the last time we talked. We also plan on communicating more details of our plans to return value to shareowners by the end of July, and by that time, proceeds will start to come in.

In addition, we continue to maintain our focus on improving our key platform businesses in North America. This is all about implying a fewer, bigger, better strategy around continued mill rationalizations, applying capital to realign our uncoated and packaging mill operations to further lower our costs, and we've got some exciting plans in place that we will start implement at the balance of the year. All these add up to an average savings, that we call nonprice improvement, over the next few years of $400 million a year, and we're on-track to realize the goal for 2006 in 2006.

We firmly believe that the global growth in paper and packaging in emerging markets is also a key component of our strategy. We are, however, taking a very disciplined approach to any potential selective reinvestments. For example, we're evaluating a joint venture structure for the possible pulp and paper mill in Brazil that we've been talking about. That's part of our ongoing project review.

Why are we considering a joint venture? Well, if we did go forward with the project, and it involves a paper machine, we obviously want to have a very low cost, the lowest cost in the world if we can, pulp mill, but we don't necessarily need to own it. Bringing a partner in would allow us to have the benefits of scale in the pulp mill, balance the need for pulp to an uncoated paper machine, and maximize the value of our forest lands, and also minimize the cash outlay.

Just ending up, the leadership and employees of International Paper remain intently focused on executing the transformation plan. And this about execution and delivering improved profitability and higher returns for shareowners, and we look forward to updating you on our progress in the coming months.

With that, Darial, we'll open it up for questions.

Thanks, John. Holly, we're ready to take questions.

Thank you, [OPERATOR INSTRUCTIONS] Your first question comes from the line of Peter Ruschmeier, Lehman Brothers.

Thanks, good morning.

Hey, Pete.

Hey, Marianne, I was hoping you could help us out with the cash flow statement. I know you don't have all the figures. Is it possible to share with us the cash flow from operations, and the capital spending in the quarter?

Yes, I think a way you can think about cash flow from operations is our ongoing operations are $0.19 in earnings per share, you know we pay a dividend of $0.25 a share for earnings, depreciation is roughly a quarter of the approximately $1.2 billion we expect to be recording for the year, and capital expenditures I believe were $171 million.

Okay. Any update on capital spending for the full year?

At this point we would expect capital spending for the full year to still be about the $1.2 billion we've been saying. If you think about it from a cash flow point of view, some of the capital spending associated, with the example of coated which is pretty low, will continue to be a cash need as long as we own the business.

Okay. On the asset sales, and I think, John you mentioned we may hear more news by the end of the second quarter. Can you comment on any potential tax leakage, I guess your timber sales were a little bit higher than expected. So perhaps you depleted more of your NOL balance, can you comment on the degree to which you expect tax leakage or not?

Sure, let me just update you. We don't expect very much tax leakage. Some of the gain on timber sales will be covered by capital losses that we previously incurred, in part with the sale of Weldwood. However, we do expect to pay Alternative Minimum Tax on the timber sales, order of magnitude, $400 million. We expect that the industrial sales gains will be primarily covered by existing net operating losses that we have.

Okay. Great. And just lastly, if I could, on the 700,000 acres of land that you're keeping, that you plan to sell through your real estate business, John, I was curious if you could elaborate on, maybe a bit of profile, those lands, is there much of those lands that are really offered development opportunities, which would be much higher price points, or are these a more nonstrategic lands, that would have lower values?

Probably somewhere in between, Pete. This is not downtown Atlanta that we're talking about. But we are going to take our time looking at this. And you know, get some views and some alternatives on what the best way to maximize the value is. It's not commercial forest land, in the sense that the 5 million acres plus, was basically commercial forest land that we got very high values on. We think this falls somewhere in between higher better use land and forest land over time.

Very good. Congratulations on the quarter and good luck with the 2Q.

Your next question comes from the line of Edings Thibault, Morgan Stanley.

Thanks very much. And just following up a little bit of Pete's question regarding the timberland profile. Can you talk about perhaps the harvest profile of the lands you're keeping versus the lands you're selling? In other words, how should we expect that harvest to income to fluctuate through the year? As you execute the land sales?

The harvest profile, I mean in aggregate, I don't have the harvest profile of the 700,000 acres and the 5.6 million acres right in front of me, but our harvest has been coming down steadily over the last 4 or 5 years, beginning at about 2008, it starts to increase pretty substantially over the next 4 or 5 years and levels out.

So we'll continue to have some harvest income off of that land, but you have to think of that as land that we're going to monetize over the next several years, we want to make sure we think it through all of the options. And we think there's more options and more creative ways to get value than what we did with the 3 traunches that we just sold, for quite a bit of money.

Okay. And just on your one of the things I noted in some of your Appendix slides you have some of the down time you'd taken. Pretty consistently, it seems as if IP has been taking a rough order 20,000 to 25,000 tons of down time in it's European business. Can you talk about what your plans for, what your plans are in Europe to address sort of that kind of GAAP?

Well, we continue to manage our capacity around the world to meet demand. In fact, in Europe, we've got three projects that are ramping up, that increase volume, all in eastern Europe. Two in Russia, one in Poland. The downtime we've been taking is mostly in the west, and we'll manage that the same way we manage our capacity here in North America, if we come up with a way to have fewer bigger facilities in western Europe, we'd certainly look at that too, but right now as we think about demand, demand in Europe is pretty good. I mean, I was going to use the word healthy, it's better than we expected it to be, and European economies are starting to come back.

And when do those projects get fully ramped? What kind of timeline?

They're right in the ramp-up mode now, I would say they're all in the 50 to 75% of completion now. The only one that is--, there are four projects sexually. 3 I talked about that are all in the ramp-up phase, and then we've got a BT TMP mill that's under construction that we'll be starting up in the beginning of 2007.

Got it. Great. Thanks very much. Good luck with the quarter.

Thanks.

Your next question comes from the line of Rich Schneider.

Hi, good morning. I was just curious. When you look at your sales revenue, it was basically flat with the fourth quarter on the revised numbers, and yet, I know your volume was flat, but your pricing was up as you show in the [quarter flow chart] $0.08, why wasn't your sales volume up from the fourth quarter level?

Well, if you look at some of the numbers, you know, underneath that, Rich, like Containerboard. We sold a lot of Containerboard in the fourth quarter. We took our inventories down, they are down 100,000 tons from where they were this time last year. So you have got some business where revenue, where volume was up, in the fourth quarter, and then prices better in the first quarter, but volume was down. So I think if you go back to the slide that's attached to the press release, you'll see some of those pluses and minuses on the volume side.

I guess I was --

You see the same thing in Market Pulp, Rich.

Right.

Volume was 70,000 tons higher in the fourth quarter than it was in the first quarter.

Yes. But on the other hand, Uncoated Free Sheet was up strongly.

You see the same thing in Lumber. Volume was down 20 million feet, so Uncoated Free Sheet was stronger, but there are a lot of parts that were, that were not. And I think that's all good news, because we've got a combination I think of volume and price going our way as we move throughout the next 3 quarters.

Great. And when you look at your Uncoated Free Sheet realizations, you were up only $10 and you know, there was a 50 to $60 price increase in the January/February time period. Was some of that movement reflecting some changes in mix, or I'm just a little curious why the realization didn't move up more than $10?

Quarter to quarter, you're right, we were not up that much, but if you look at the exit rate and in December, in the fourth quarter our prices were going down through the quarter. So that first quarter 2005 which is on slide 28, the 797, that's a sliding number that's going down. So December would be lower than 797, and we exited March at 826, so you had kind of the exact opposite.

In the fourth quarter we had prices bottoming out in December, and in the first quarter we've got prices moving up in March. So it's a much bigger sling there than you see. We track that very, very carefully by grade, the price flow through, and we're seeing all the price flow through we expected.

Just another question on the outlook that Marianne gave in the last quarter for corporate expense and interest expense, I think you mentioned a corporate expense at 750 to $800 million. With the first quarter you are at a run rate below 700 million, are you going to revise that number?

Since Marianne gave it, I'll let her comment on it. [laughter]

I think the chances are now that we'll be toward the lower end of the range that we were talking about. We do expect some of the supply chain spending to ramp up during the course of the year.

I think the other thing we talked about is the hard work that we do to try and keep S&A costs other than that under control, and I think we've been, probably a little bit more successful than we might have expected in the first quarter. And that helped us. So that's an ongoing focus. And we'll keep working hard at it.

So you would expect corporate expense to actually move up a bit from the first quarter level?

Yes, I would. But to be definitely at the low end of the range that we talked about.

Okay. And just last question. Your comment on potential project at Brazil. You had laid out, you know, the full-blown project. And what's caused you to, you know, rethink that whole situation and come in with something that's much more manageable at this point? Maybe I've already answered my own question.

Yes. [laughter] Well, I mean, part of it Rich, it's more manageable, but we could manage that financially and managerially, but the important thing is thinking strategically about about what do we really need, and what do we really want? And our objective is not to be the world's leader in Market Pulp. But if we're in paper, we certainly want to be connected with low-cost pulp.

It's pushing ourselves to think about a different model, to do what we want to do strategically that makes financial sense, as well. So these are some of the things that we've been working on while we've been continuing to evaluate this project, of looking at all ways to try to execute the strategy and maximize the returns.

That sounds pretty good. Thanks.

Your next question comes from the line of Mark Wilde, Deutsche Bank.

Good morning, John. Good morning, Marianne. Couple of questions. One a little follow-up on Brazil. I wondered if you could give us a sense of what the land base is there at Três Lagoas, because that's obviously something you'd be contributing to any joint venture.

It's about 100,000 hectors, close to 80,000 are planted. And then we've got some, that's what we own, and we've got some, I'm not sure if leaf land is the right now, but we've got additional sources of fiber that we've put together over and above of what we own.

Great. The other question I had about Brazil, was just your thoughts on all of that Amapá land up in the north near the mouth of the Amazon. Is that something you want to hold on to or might you sell that?

That's something like everything else, is we're looking at it. Right now we're in the export chip business up there. And strategically we've got to decide whether that's the right long-term business for us to be in, and are there other viable options for Amapá. We're also bringing in a lot of chips out of Amapá into Pensacola, but as we convert Pensacola from a hardwood base Uncoated Free Sheet mill, to a softwood base Liner board mill, we don't need those chips in our U.S. operations either.

Okay. John, the other question I had was on the redeployment of capital over the next year or two. You've talked in the past about wanting to grow in places like eastern Europe, Latin America, and Asia. I'm curious along side that, what type of issues might lead you to redeploy more capital into existing North American businesses?

Well, you know, look at the last capital redeployment we made, or reinvestment. We bought Box USA. And, you know, that met all of our criteria. It helped us improve an existing business. It was earnings accretive within the first year, and it had that good stand alone return on the purchase price. So you know, it was a good financial value and a good strategic move. And that's the criteria we're using around the world.

And would you want to give us any thoughts on your willingness to get bigger in something like, you know, either Uncoated Free Sheet or Containerboard on the mill side in North America right now?

It's not a bigger and better strategy, Mark, it's again, going back to can we improve and strengthen our existing businesses, and meet the financial criteria we set out for reinvestment, and whether that's reinvestment from cash and proceeds of divestments or just capital spending, that all goes through the same financial filter.

Okay. Thanks, John.

Your next question comes from the line of Mark Weintraub, Buckingham Research.

Hey, Mark, how are you this morning?

Thank you. Doing well, John. First a little clarification on the reclassification. Is Inpacel discontinued now, or is it still part of the regular operations?

It's part of the regular operations.

Okay. And I just wanted to make sure the math I was doing, looking at the numbers you restated made sense. If I looked at what the printing papers was previously reported to, and now what the restated numbers were, looks like there's about $130 million. So is that the EBIT that Coated and the Supercalendars business has generated in 2005?

It's a piece of it, there are some other reclassifications. We moved also Coated Bristols because of the change in the way we're managing that business. What I'd strongly suggest is that you give Darrell and Brian a call after the call, and they can run you through in as much detail as you'd like, to what we moved from one place to another.

Terrific. Thank you. And then also, you know, we've been getting the nonrecurring charges run through, but there's obviously also going to be a very large one-time gain when you finalize the land sales. Can you give us a sense as to the magnitude of what that gain would be?

The magnitude of the gain is going to depend in part of how we end up accounting for it, which in part is related to how we end up accounting for the fact that we do have some ongoing timber supply agreements. We're in the process of working through that right now. Obviously the price we're selling it for is substantially above of what we're carrying it on our books for. We won't be able to give you those numbers though until we finalize the accounting for the transaction. The difference between book and sale price is quite large.

A way to think about that, Mark, is regardless of how the accounting works, we get the cash.

Fair enough. And then, lastly, John, you in talking about Pensacola, you said if you go from Uncoated Free Sheet to Liner board, is that still an open-ended question, or are you going to be doing that project?

Yes, that's the direction we're headed in, we haven't started the project yet. We've got permitting to do, and final engineering to do. But that's the direction we're headed.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Steve Chercover, D.A. Davidson.

Good morning. Mine's been partially asked, but you really stressed that you wanted to grow primarily in Latin America and Asia or eastern Europe, and yet there are opportunities in North America in one of your core businesses. So how closely will you evaluate that? And what's the criteria that would make you pull the trigger or decline to participate?

Well, it's the same criteria around the world, we obviously have different hurdle rates. It's not the same hurdle rate around the world, investing in some places around the world is a higher hurdle rate than here in North America.

But again, we're going to be very selective about reinvestment, and those reinvestments need to be more than just financially attractive, they need to strategically help us move our existing businesses to a stronger position, and be financially attractive. So that's the same criteria we're using, everywhere in the world.

And if you want to think about how that would apply in North America, think about Box USA.

Got you. And so, I guess 9 months now into the strategic initiatives, have you given any thought to maybe, you know, reallocating the cash proceeds? Is it still the same you know, magnitude of dollars that goes first towards debt repayment then towards shareholders, or has that changed in any way?

Well, what we've said is on the assumption the proceeds are $9 billion, we said you can expect these weren't exactly hard numbers, but about 50% to go to debt repayment that was the priority for us, and the balance to looking to return value to shareowners, and selective reinvestment. That was about 25/25. You know, we now expect the proceeds could be in the $11 billion range, and that increment, we'll obviously look at that increment and say what's the best way to maximize shareowner value going forward with that increment.

And make those choices, as that cash comes in, so that we can be making choices in the current environment, not prospectively. I think we'll be ready to talk to you in more detail about that with all of you and our shareowners later in July.

Good, well, hopefully the debt component remains static. Thanks.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Jennifer [Paransky], Barclays.

Hi, this is actually Chuck Peterson in for Jenn. I had a question about the March 16th announcement that you elected John Townsend to the Board of Directors. I was just curious, what's the rationale for having someone with a leveraged finance private equity background on the Board of Directors of an investment-grade company?

Well, we went out, actually the way we go about looking for Directors, one of the things we do. We talk to our Board about what the search criteria should be. What skills are we looking for our on Board. And we've made a lot of progress reshaping our Board over the last 3 years, and we are looking for to bring on an individual that had a capital markets financial background.

And we looked at a number of candidates and selected the individual we thought would be the best fit, the best. And it turns out that he happened to have a leverage finance background. I wouldn't read anything into that, but I would read in to we're looking for someone with a proven track record and experience in capital markets, who could bring that perspective to our Board.

Okay. Fair enough. Thank you.

Your next question comes from the line of Mark Wilde, Deutsche Bank.

Hi, John, I wondered --

You're back.

I am back. I wondered if you could just update us on backlogs in businesses like White Paper and Bleach board. I'm hearing from other players that Bleach board backlogs are quite strong, and also any thoughts on further price moves in the White Paper business?

Well, on backlogs. Just kind of go through North America for a minute. In Containerboard, we're very low on inventory, and I think Containerboard probably cost us $0.02 a share in the quarter, the combinations of the Vicksburg fire, which further put a hole in our inventories, and then just the very low inventory situation we've got, we're making boxes out of plastic rubber bands and rope, and a little fiber in there to go with it. We're very tight in Containerboard.

Printing papers we're sold out, I can't tell you exactly what the backlogs are, and we're managing those, we're actually not trying to extend the backlogs out, we have open cycles. And we're being very careful, only to open cycles with a short time frame ahead, because we don't want to get our backlogs out, you know, if we try to maximize backlogs we could probably impress you with a big backlog number, that's not a good thing for us to do, because we can't service our customers then.

But I would say in all three of those businesses, if we wanted to, we could be pushing out backlogs, and we're holding back, because we don't want to get extended, we want to be able to sure our service levels stay where they need to be. We're having a hard time holding service levels where they are in Printing papers and Containerboard, because of our low inventories.

So it's pretty healthy on Bleach board there was a folding carton increase. Cup, that we just announced. That was last week I think, or early this week, I can't remember. This week so that's a pretty significant grade for us, which is a sign that the overall Bleach board market has firmed up. Firmed up further. And Bleach board prices have been steadily marching up, kind of, more than creeping up, but they haven't moved in kind of the step-wise function that Containerboard and Printing Paper have been, they've been just moving up 5 to $6 across, kind of quarter to quarter.

Any thoughts on anything else in Uncoated White Paper? I mean pulp costs continue to go upward.

We're not going to try to forecast pricing here over the telephone. That wouldn't be a good thing to do. But it's all a function of supply and demand, and what we see the industry operating rate being.

And as I've talked to customers, and I've talked to and been with a lot of customers recently. They understand what's going on in the marketplace, and it really doesn't matter whether costs are going up or down, as you know Mark, this is a operating rate supply demand driven business. So if supply and demand are in balance, pricing can be moving up, and if they're not balanced, it can do the opposite.

Okay, very good, thanks John.

Your next question comes from the line of Claudia Shank, JP Morgan.

Hi, thank you.

Hi Claudia.

Just two questions. One if you could remind us on the hedging policy that you have going forward.

Sure, Claudia. Actually we've implemented a new hedging strategy within the last several months, and right now we're in the mode where we're hedging up to 50% --, and I assume you're talking natural gas.

Yes.

We're hedging based upon a trailing weighted average price to try to make sure we're not hedging at peak prices, we're about 50% hedged today for the second quarter,and maybe between 25 and 50% hedged for the third quarter. We watch it pretty carefully.

Okay, and then you gave some information in the Appendix for your usage has that been adjusted for the discontinued operations?

The gas usage numbers? I don't believe so. One of the things to watch in gas usage, by the way, we're actually in the situation today, where it's more economic for us to se gas at some of our facilities than #6 fuel oil, so you may see some slight increase in our gas usage, that's because we watch and literally can trade off almost daily between oil and gas. And, you know, the quick rule of thumb is if you take the price of #6 fuel oil, divide it by 6.3, that will give you the trade price against natural gas.

Okay, that's helpful, thank you. Shifting gears, I wondered if you might be able to give us a little bit of color on trends you might be seeing in the converting businesses on the consumer packaging side?

Well, on the box side, I think we've kind of covered that. We're in a lot of segments that box demand is, you know, pretty healthy. And we're struggling to get board to all of our box plant to meet orders. That's a good sign.

In Beverage Packaging, we had a very good quarter, most of that driven by operations of Food Service, our other business, food service is a relatively small, a big earnings turn around first quarter of last year where it lost money, to making a solid profit this quarter. And, you know, that's a result of both operational improvement and we've gotten some new business.

Surewood, the fourth quarter is always huge, that's when they do, I don't know, probably 50% of their sales, and 60% of their earnings. So the first quarter is always slower, our Tobacco business, though is quite strong. And so I'd say that those are, did I cover all of the converting businesses there?

In the U.S. Yes.

Okay. Thanks a lot.

Your next question comes from the line of George [Petty], SAC.

Hi, good morning. I was wondering if you could tell us about the difference in energy intensity, quarter by quarter, whether it's natural gas and oil combined. And if there's a big change in second quarter versus the first quarter?

There's not a big change, there'd be slightly less usage in the second quarter on average than the first quarter, just because of the weather.

and --

it's not a real big phenomenon. The change in price is probably more significant than the change in usage.

Okay. And of the businesses placed in discontinued operations, are they more or less energy intensive than the corporate average?

Let's see. They would have higher exposure to gas, as opposed to wood waste or coal.

Okay, thank you. Thank you.

At this time, there are no further questions, I'd like to turn the conference over to management for closing remarks.

John, would you like to close?

Sure. As I said at the outset, I would say we're pleased but not satisfied with the quarter, it was a pretty good improvement of the fourth quarter last year. Not looking backwards now, looking forwards, you know, we're pretty positive on how we see the rest of the year unfolding, the macro environment looks okay, and we think we're on-track to do what we said we're going to do in 2006. So look forward to talking to you about that at the end of the second quarter.

Thanks everyone, the IR team is available to answer follow-up questions. Thank you.

Thank you for joining today's International Paper conference call, we appreciate your participation, you may now disconnect.