International Paper Co (IP) 2007 Q1 法說會逐字稿

Good morning, my name is Lorie and I will your conference operator. At this time I would like to welcome to the EDS International Paper First Quarter 2007 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 will now turp the call over to Brian McDonald Vice President of Investor Relations. Please go ahead, sir.

Thank you, Lorie. Good morning, and thank you for joining International Paper's first quarter 2007 conference call. This call is being webcast. Our two key speakers this morning are Chairman and Chief Executive Officer, John Faraci and Chief Financial Officer, Marianne Parrs.

During this call, we're going to make some forward-looking statements that are subject to risks and uncertainties. These risks and uncertainties are outlined on Slide 2 of the first quarter 2007 earnings slide presentation and at the end of our earnings press release. Please go to our website at www.internationalpaper.com under investors to find copies of the first quarter 2007 earnings press release, our presentation slides, and a reconciliation of non-GAAP financial measures to Generally Accepted Accounting Principles.

Now here's John.

Thanks Brian and good morning, everybody. Today is we customarily do, Marianne and I are going to review the quarterly earnings results and the performances of the individual businesses. Then we'll discuss second quarter outlook and update you on our 2007 priorities and take your questions.

Let me start by summarizing the first quarter against the fourth quarter. The first quarter was our best first quarter since 2000. I would say it's a good solid start to the year. Our pricing momentum remains strong. We continue to make good progress on product prices. They improved in our European and Brazilian businesses and global pulp, and IP announced a number of price increases which were partially or fully implemented.

First quarter volumes were flat principally in North America. We took some lack of water down time in our North American paper and container board businesses again, to match supply with our customers' demand and we're going to continue to do that.

Global manufacturing operations performed very, very well. Led by our European operations which had a record manufacturing performance during the quarter. I think this just goes to underscore the kind of global balance IP has got to our earnings.

Raw material and distribution costs were somewhat higher, again driven by increased wood costs, but partially offset by more favorable energy costs. We did have lower land sales in this quarter when compared with the fourth quarter and a higher tax rate. And we reported lower interest expense, and we also have a lower share count as you would expect with our share buyback program, which Marianne will update you on.

And importantly, we started to contribute in the first quarter earnings from selected reinvestments, particularly the Brazilian reinvestment in the uncoated free sheet business from BCP, and the joint venture of bleach board in China.

On Side 6 for those who are following the slides you can see the diluted share from continuing operations. We reported first quarter of $0.45, slightly lower then the fourth quarter of $0.47 but well above any previous first quarters, again since 2000. Our 2006 earnings have been revised to reflect changes in the new accounting guidelines for planned maintenance outages which Marianne will talk about.

Overall I'll come back and wrap this up. We're pleased with the progress we've made on delivering earnings and the strength of our global paper and packaging business.

So Marianne, I'll turn it over to you to comment in more detail about the individual businesses.

Thanks John and good morning, to everybody. I'm going to start with Side 7 and that compares first quarter results with those of the fourth quarter. We're pleased that we were able to maintain our price momentum quarter to quarter, as John mentioned. Volumes were flat quarter to quarter as increases in North American paper were offset by modest declines in North American packaging, European paper, and our distribution business. We continue to make progress in reducing manufacturing costs and improving our sales mix during the first quarter. And these increased earnings by $0.09 per share.

Planned outages in paper and packaging had a $0.03 per share unfavorable impact in the the quarter. This $0.03 is a reflection of the new accounting treatment for planned maintenance shutdowns. Higher wood and chemical costs, partially offset by lower energy costs, negatively impacted earnings by $0.03 per share in the first quarter. Lower land sales in the first quarter reduced earnings by $0.11 per share in the fourth quarter.

Corporate items are essentially flat. We have lower pension expense offsetting higher benefit related to cost and the lack of a favorable LIFO inventory adjustment that was in the fourth quarter. Other increased earnings by $0.04 per share and primarily includes the absence of a fourth quarter one time charge related to shore repackaging. Lower net interest expense increased earnings by $0.04 per share as we reduced our total debt level and had some favorable, one time interest items in the quarter. Earnings from our IP/Sun joint venture and two months of Luiz Antonio's added $0.02 per share in the quarter.

The tax rate in the quarter was 32% versus the 28% tax rate in the fourth quarter and this lowered earnings by $0.03 per share. This higher tax rate reflects the higher percentage of total company earnings from our U.S. operation.

Slide 8 compares diluted earnings per share from continuing operations and before special items for the first quarter 2007, versus the first quarter of 2006. Moving from left to right, paper and packaging prices were higher on average in the the first quarter 2007 versus first quarter 2006 adding $0.28 per share. Year-over-year we improved our prices substantially, more then our costs. Slightly lower volumes reduced earnings by $0.01 per share in the first quarter as increases in European paper and Brazilian shipments were offset by decreases in North American paper packaging and our distribution business. Our mills ran very well in the first quarter 2007 with manufacturing costs and mix $0.11 per share favorable versus first quarter 2006.

Together, volume, costs and mix improved earnings by $0.10 per share or $65 million year-over-year. This is a solid start to the year as first quarter 2006 improvement was only $0.03 per share.

Planned maintenance shutdowns had a $0.05 per share unfavorable impact year-over-year. Raw material costs were slightly favorable, however, higher distribution cost continue to be a significant factor in 2007, reducing earnings by $0.03 or $17 million. I'll review this in more detail in a moment.

Lower land sales in the first quarter reduced earnings $0.08 per share versus first quarter 2006. Corporate other items increased earnings by $0.05 per share primarily due to lower pension expense. Lower net interest expense increased earnings by $0.13 per share as we reduced our total debt level. The sale of Arizona Chemical and the loss of harvest income as the result of our forest lands, reduced earnings by $0.08. The Luiz Antonio mill and the IP/Sun acre joint venture added $0.02 per share to our first quarter, 2007 earnings.

The tax rate in the first quarter, 2007 is 32% versus the 26% tax rate in the first quarter 2006. And these higher taxes lowered earnings by $0.04 per share. Lower shares outstanding increased earnings by $0.03. If you turn to Slide 9 it does break out the $17 million or $0.03 per share of higher raw material and distribution costs for the first quarter 2007 versus the same period for 2006. Distribution costs represented the largest change period to period and that's primarily due to the second half, 2006 increase in rail and truck rates. For more information on input costs we have details in Sides 31 to 33 in the appendix.

Turning to how our businesses performed in the first quarter, slide 10 shows that earnings in printing papers improved from $191 million in the fourth quarter to $231 million in the first quarter. Now this was due to improved results in U.S. uncoated papers, Brazilian papers, and record first quarter performance in European papers. I do want to mention that the reclassification of European coated paper board from printing paper segment to consumer packaging slightly changed our fourth quarter financials and you can follow up with Brian for any details you want after the call.

U.S. uncoated papers earnings grew in the first quarter due to a number of factors, including higher shipments and lower raw material costs, partially offset by higher manufacturing costs related to planned maintenance outages. Pulp earnings improved in the first quarter, due to higher shipments and significantly improved operations at the Regal Wood Mill as well as higher prices. The Regal Wood Mill annualized improvement is actually running at about a $40 million rage.

European paper earnings improved and set a new quarterly record. That was due to higher prices and record manufacturing performance. We actually had seven out of ten paper machines set new records. Now this was partially offset by higher raw material costs and slightly lower volume.

And IP Brazil earnings were up due to the addition of the Luiz Antonio mill, higher prices, and improved manufacturing costs as Brazil did not have a planned outage in the first quarter.

Let me comment for a minute on the Luiz Antonio integration which got off to a very solid start. Both our Brazilian mills ran well and in fact Luiz Antonio mill set record for paper machine and cut size sheeting in February, and they made some significant improvements in chemical and wood costs. The commercial side of the business has been integrated smoothly. We've changed to go to market strategy for products that Luiz Antonio traditionally exported to the U.S. and Europe, and this will improve our returns. This change has pushed some earnings out of Q1 and if we have to fill the new channel inventory pipeline. We feel very good about the decision, about the business and about the outlook.

We're pleased that our prices remain strong. Slide 11 shows, starting in April, our uncoated pre-ship bookings have improved comparable to the 2007 booking levels. Now that's as we move past in early 2006 where some prebuys in anticipation of price increases.

Turning to slide 12, you can see that Industrial Packaging earnings declined from $130 million in the fourth quarter to $103 million in the first quarter. Lower reported due to the large planned mill maintenance outages in the first quarter and these impacted earnings by about $44 million quarter to quarter. So, if you disregard the accounting change for planned maintenance shutdowns, earnings were better then fourth quarter and that was primarily driven by improved results in our box business. Box volumes were slow in the U.S. in January and February, but picked up substantially in March and we achieved healthy improvements in box margins during the quarter.

Third party container board sales volume were slightly lower due to large maintenance outages in the quarter. Strong manufacturing performance offset most of our fiber cost pressure during the quarter. Our European container business had record first quarter earnings with better volumes, higher prices, and strong manufacturing operations.

On Slide 13, consumer packaging earnings improved from $27 million in the fourth quarter to $61 million in the first quarter, due to higher earnings in U.S. and European paper board, food service and the IP/Sun joint venture business. U.S. coated paper board benefited from favorable manufacturing performance as there were no maintenance outages during the first quarter. That's about a $20 million benefit. They also had improved performance from the Regal Wood Mill, higher price realization, and higher volume which were slightly off set by higher wood and energy cost.

Looking at the converting businesses, food service had its best quarter in eight years with across the board strength in volume, price and cost. Sure was seasonally slower in the first quarter, but posted better results due to the absence of a one time non-cash fourth quarter charge.

Our distribution business reported record first quarter operating profits of $29 million compared with operating profits in the fourth quarter of $31 million. Sales revenues were slightly down versus the fourth quarter 2006, due to lower volumes and packaging and facility supply volumes were seasonally lower in the first quarter than the fourth. Mix was slightly weaker, but cost control, importantly, remains very strong.

On Slide 15, forest product earnings decreased from $162 million in the fourth quarter to $100 million in the first quarter. While land sales are difficult to forecast within a quarter, we expect second quarter earnings to be down slightly compared with the first quarter. Our objectives remain the same, to maximize the net present value of our holdings.

First quarter special items and discontinued operations are detailed on Slide 16. Special items after tax in the first quarter of 2007 totalled a gain of $254 million or $0.57 per share and these included a gain from the IP, Brazil, VCP asset swap of $164 million, a gain of $96 million from the sale of Arizona Chemical, and $4 million adjustments of coated paper. We also had restructuring interest charge of $10 million.

Slide 17 shows you how you get from the $0.45 of diluted earnings from continuing operations before special items to $0.97 per share of net earnings we reported this morning.

This concludes my remarks and now I'll turn it back over to John.

Thanks, Marianne.

Let me just summarize what I think are the highlights of the first quarter. We've hit the ground running as I said at the outset it's our best quarter since 2000. Our agenda is all about improving our margins and our operating margins were up nearly 300 basis points versus the first quarter of last year.

We touched on this European paper. European container, Nexpedex had record first quarters. Our Regal Wood Mill which had been a problem in the last couple quarters of last year, made substantial improvement during the quarter. We completed the Brazilian asset swap and now have a contributing of new business down in Brazil, the Luiz Antonio mill. We essentially completed the divestiture program and at the end of the day got more proceeds faster then we expected.

We're benefiting from our global foot print. For paper we saw healthy markets in Brazil and Europe and got record first quarter earnings in Europe and for packaging we had a record first quarter in our European corrugated business.

Turning to the second quarter, we do expect seasonally stronger volumes as well as the first full quarter of operations from Luiz Antonio. Again that's our uncoated free sheet business in Brazil. We expect average price realizations to improve as we continue to implement previously announced price increases. In paper we expect prices to be moving up both in North America, Brazil, and Europe. And in packaging our container board and box price increases, which are we are currently implementing.

We expect continued progress in improving the performance of our global manufacturing operations, but they had a great quarter. We expect input costs to remain high. Looks like we're going to have a tough second/third quarter as far as energy prices go with what's happening to fuel oil and gasoline. Maintenance outages are going to be about $0.01 more in the second quarter then the first, and during the second quarter, I would expect our forest resources earnings to be slightly down from the first quarter due to the timings in land transactions.

So as a result of all of the above, we do expect earnings to be somewhat better in the second quarter then in the first quarter.

So, in closing and before we get to your questions, let me just reinforce that our priorities for 2007 are about significantly improving the profitability and the returns from our existing businesses and continue to return value to shareholders. We're off to a good start. We remain focused on matching International Paper's capacity with the demand of our customers. As you know the conversion of the Pensacola mill from uncoated free sheet to container board will start this month which will shrink our uncoated free sheet in North America by about 350,000 tons.

We're also committed to achieving the $400 million improvement in margins and our existing businesses and the levers we're pulling on our operating costa, volume where there is volume to be gained, mix, and overhead cost. This is tough but it's a doable target and we're on track. Together, cost, mix, and volume improved earnings by $0.10 per share or $65 million on a year-over-year basis. I think this is a real strong start to 2007.

We intend in 2007 to deliver about $165 million in operating earnings from the combination of our asset swap with DCP for Luiz Antonio and coated board JV in China with Sun paper. We also expect Brazil to deliver on the full year commitments and we expect operating earnings in the second quarter to be more then double first quarter levels. So all of those reinvestments are on track.

We remain committed to returning value to share owners. We repurchased about 40 million shares in the fourth quarter of last year to the Dutch tender, and since December we have repurchased about 23 million additional shares, over $800 million worth leaving about 430 million shares outstanding. In total we bought back over $2.2 billion of IP stock and we currently have in place an open market plan to buy back additional shares.

Our goal remains the same. We're going to be a more focused, better paper and packaging company on a global basis and that's where we're headed.

So finally, I think we're making good progress on our potential Russian joint venture, we're very positive about the business. Our existing business in Russia continues to be very healthy. It's a complicated transaction. It's taken more time then we thought and our partners thought, but its work that needs to be done to get us to a decision point.

So I'll stop right there and turn it back to Brian and open it up to our your questions.

Thanks, John. Operator, we're now open for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Claudia Shank of JPMorgan.

Thanks very much, good morning,.

Hi, Claudia.

Hi.

Hi. I was hoping you could talk a little bit about the fiber situation in Europe and maybe provide some color on the impact of higher wood costs and pulp costs on your operations there. And as we look at the price increases that have been announced in Europe. If those are successful, should your margin there's expand or are they just really offsetting the higher input costs?

Well, wood costs are running higher throughout western and eastern Europe. No question about that. Wood costs are also up in Russia. The Russian piece is principally the result of quite warm weather in the first which kept everybody out of the woods. So there were shortfalls in supply driven, by weather. In eastern and western Europe it's just tighter fiber market. Our price increases are recovering that and more because we're expand our operating margins. I would say wood costs in Russia are headed back down, but they're at higher levels. Wood costs in western Europe and eastern Europe are going to stay high. North America, I think we seen the high water mark on wood costs and we would expect them to be coming down from high levels in the second quarter.

Thanks. And then, Marianne, could you just put a little more color on the interest expense and sort of what happened in the quarter and how sort of the guidance meshes for the year which still seems a little bit high.

I think what you have to recognize in addition to our interest expense in the first quarter, we did have some interest income items, which are not going to be repeated in the second quarter and going forward. We're currently looking at interest expense in the second quarter of about $80 million. As we use some of our cash in things like the share buyback, it will also reduce interest income a little bit, so we're looking at about $320 million in interest expense for the full year.

Okay. Thanks very much.

Your next question comes from the line of Rich Schneider of UBS.

Good morning. On that interest expense issue, how much was the interest income that won't be reported -- won't be replicated?

In the neighborhood of $15 million.

Okay. And that was related to some Canadian issues?

There was a little bit of that. We also had a note that ended up being paid off that we hadn't expected to be paid off and that generated some income in both the forest resources segment and some interest income.

Looking at Luiz Antonio and you looking -- I'm looking at your volume in Brazil in the quarter, it looked like your volume was up about 20,000 short tons from the fourth quarter in Brazil. I would have expected more. Is that related to this distribution change that you made down in Brazil?

We've got some pipeline filling to do. When we bought Luiz Antonio mill, we didn't buy it with a lot of inventory. So, we've had to fill those pipelines and outside of Brazil that takes a while to do because you've got product going to North America and Europe. We're going to see a substantial pick-up in sales volume, not production volumes but sales volumes in the second quarter.

You had mentioned I think, John, $165 million of operating earnings expected from the coated board and from Luiz Antonio for the year? How much did you achieve in the first quarter?

I can't answer that right off of the top, Rich, but we're on track. We said that we expected, I think EBITDA from Brazil to be --

150. We said for the year for earnings in Brazil and we're on target for that.

I think our cash flow from Brazilian operations is actually going to beat the target we've set or our expectation that's we set last year when we completed this transaction.

As we mentioned, Luiz Antonio and Sun added $0.02 per share in the first quarter compared to a year ago in the fourth quarter.

That's with the pipeline filling going on. This is going to be a bigger addition to EPS in the second quarter.

As John mentioned, we expect more then double earnings in second quarter from Brazil, compared with the first.

And just two last ones. Could you talk about comments that you made in your release that you shifted product among your global markets to match supply and just wondering how this global model is coming together, which looks like a great opportunity for you. And then second, could you give a little more detail on where you are on Illiam, you mentioned it briefly?

I think our capability to respond to get our production to the right markets is becoming stronger and stronger and we are -- we've got a global approach to uncoated free sheet, particularly cut size that let's us move products around the world. Luiz Antonio was shipping some product to Europe. We're continuing to do that, but we've upgraded the mix and improved the pricing, so that's been a help. With global markets being quite strong, we've had export opportunities out of the North America but paper and packaging we've taken advantage of, and I think our ability to be in all of those markets, both from a sales standpoint and a production standpoint is just giving us more capabilities to kind of see things ahead and respond to them as opposed to responding to them in a reactive way.

And then on Illiam.

Illiam, that's progressing well. We're just about completed on due diligence. There is -- Illiam is going through a reorganization themselves in their ownership structure, which is very complex, very time consuming, and frankly needs to be done if we make a go decision. So there's work that needs to be done on their side. Work that needs to be done on our side. All of that stuff is underway. Illiam's having a strong start to the year as well. Pulp markets are good, container board markets are good, and so their earnings are up as well.

Any time frame on possible conclusion on this?

Yes, there is. I'm not sure what it is, Rich, but there is a time frame. I think we're closer to the finish line then we were at the last call, how about that.

Okay, thank you.

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

Thanks very much.

How are you?

Great, thank you. Just wanted to follow up on some of these questions as we crawl through some of the the disclosure, I would love to figure out what the recurring shipments are going to be in the consumer business. I think the note said something about including some beverage shipments in there?

Recurring -- Give me a call after the call.

I'll just walk through that or perhaps a better way to think of that is -- are all -- 100% of the Sun shipments included in that or 50 %? How are you approaching that?

100% consolidated.

You see a minority interest reflecting the other share, the partner share. 100% consolidated then with a minority interest.

Great and perhaps, Marianne, if you could perhaps talk through some of the detail on both of share buyback, just sort of taking us through the timing of that, what did you complete at the end of the first quarter? And also on some of the last of divestitures, how much more cash have you taken in in the last month versus what we're seeing on the balance sheet?

We've done about $800 million worth of open market share buybacks. At the end of the first quarter, we finished just under $500 million of that. We did another $300 million since the end of March. Through yesterday. At the end of the first quarter, we had 439 million shares outstanding. As of yesterday, we had about 430 million shares outstanding. So obviously we report on weighted average number of shares outstanding during the quarter, so you'll see the share count on average for the second quarter significantly lower then it was in the first quarter.

And then your second question had to do with?

Just timing of those divestitures. I think you had a slide said they're now 100% complete.

Yes.

Were they all done in the quarter or were there --

Yes.

They were all done in the quarter.

Almost all were done in the first quarter. There were a few tag ends, very small tag end that's are outstanding around beverage packaging, but the lion's share of the proceeds are in and you can see it reflected in our balance sheet as March 31st.

You do have to assume the divestment program is over. We tied a bell around that and it's completed and we've got transition service agreements to work through.

Congratulations on that. John, perhaps you could talk, I think you talked a little bit in your guidance but maybe give us a sense of what you're seeing across the company in the U.S. economy as we come out of the quarter. Are we seeing a rebound? Some of these industrial numbers real and what are we seeing perhaps on the consumer?

I think the thing that we have keep in mind is the housing market has had an impact on the economy. We saw that on our box business, especially in durables. Side 11, which Marianne talked on I think is an important one because is shows uncoated free sheet backlogs. The first quarter, shipments were down 6% versus last year. And the overall market down even more but imports were down, but I think importantly backlogs have improved and you see that looking at Slide 11. In the box business, the last part of March and April were a lot stronger then January and February. So I think those are good signs, but the U.S. economy has clearly slowed and we're ready for that with our business plans and I think importantly we've also got strong businesses outside of North America.

That's particularly true too, isn't it, in cut size, John? With the international strength in cut size, I think the whole cut size market.

I'm looking at the backlog trends, I'm not as worried about the second looking like the first quarter as far as uncoated free sheet business in North America, but it's a flattened down market for sure on the demand side in North America. Outside of North America we're seeing good growth.

Got it. Thank you very much.

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

Good morning, Mark.

Good morning, you're talking about the uncoated free sheet market and as you noted, the industry numbers suggested very weak shipments. You were up, actually, 3% versus the fourth quarter and I assume that's your domestic uncoated free sheet shipments? Do you know what you were year-over-year and do have a sense as to whether there's been a sense as to whether there's been significant destocking at customers that would explain much of the apparent decline in consumption or the shipment numbers?

Well, we don't see. We see inventory levels in our system being down. Tom Kadien is here and he might have a comment about what he says in the commercial printing industry. Tom, due have a sense of what your customers are seeing?

I think commercial printing is seasonally improving, but we wouldn't call it robust. I don't think there's a lot of channel inventory at commercial printing grades throughout the industry and certainly not at XPedx.

I guess the big concept that many of us are wrestling with are these very large year-over-year industry declines that's just surprising -- do you have any thoughts that?

Yeah, I think we would expect 2006 -- 2007 to look like 2006 in terms of year-over-year changes. We don't see, at this point in time, a big stepdown. Having said that, from a capacity standpoint, we're ready to adjust if we have to. So I don't think the 6% decline in shipments year-over-year is going to turn out to be an annualized number, but we expect shipments to be down year-over-year and our capacity plans are -- have been made accordingly. That's in North America, outside North America it's a very different story.

Fair enough.

Cut size segment is still pretty healthy though and we're on a reservation system on cut size. We're implementing price increase in that business and that segment is strong. But overall market isn't as strong as the cut size segment.

Have you communicated a decision on Bastrop yet? Or is that in the thought process?

That's still in the thought process and that will be all function of how much capacity we need to meet our customers demand in North America.

I guess lastly in the container board business, with Pensacola starting up, you had talked about potentially some offsetting rationalization. Do you have an update on your thought process there? I guess you've been particularly been doing pretty well in that business?

Yeah we're going to watch the market and make a decision when we're closer to starting up Pensacola on container board. Right now, if you look at the first quarter, box shipments are pretty disappointing. However, in April, our box business was up 3% over March. So that slow first quarter was really a very slow January and February and first two weeks of March, a stronger second two weeks of March and a much better April.

Also, exports are better from North America then they have been and we're benefiting from the weakness in the U.S. dollar there and strong demand globally.

I'm sorry, did you say your April was up 3% year-over-year or versus --

From the prior month, Mark.

Okay do you happen to have the year-over-year or not?

I think it was about flat with '06.

Okay. Great, appreciate it.

Again, with a much weaker economy from a box demand standpoint given what's happened with housing.

Thank you.

Your next question comes from the line of Richard Skidmore of Goldman Sachs.

Good morning, John and Marianne.

Hey, Rich, how are you.

Good, thanks you've done well on the cost cutting side and looking at the corporate expense line, looks like it's running 165-ish on average, but the guidance on Slide 24 doesn't appear to have changed. How should we think about that corporate expense line going forward?

We expect it to be about running where it is in the second quarter. There are items that move around from quarter to quarter though, so I could say probably order magnitude 700 for the full year.

Great. Just shifting -- sticking with the paper segment, uncoated free sheet. How much did foreign exchange translation help the quarter out of Europe and Brazil?

Well there's no question that weaker dollar is improving our competitiveness and what you've had is you've had prices moving up in Europe, which, for paper now, prices moving newspaper Europe, which is kind of changed of relative profitable of where product gets shipped and you find more European paper staying in Europe. There's been some capacity taken out in Europe, and you've got growth in the marketplace. So currency has certainly helped us as far as that goes. Currency has hit us pretty hard in Brazil. Where we've almost got the Real continues to get stronger and we've got a Real cost base and portion of our business in dollar sales. So, net-net it probably isn't a huge plus for International Paper, but in Europe it has been.

Yeah, it's basically a wash in terms of economic impact in the quarter.

Just lastly on pulp. There's been commentary on pulp versus uncoated free sheet and some speculation that if pulp prices decline uncoated free sheet prices would follow. What do you see is the connection currently between market pulp pricing and uncoated free sheet and what do expect the real driver of uncoated free sheet pricing to be going forward?

I think that linkage is becoming less and less connected on a global basis because the demand driver for pulp is what is going on in Asia, and that's where the incremental pulp is going, and the growth in Asia continues to be robust and China will be a net fiber importer of practically all of their incremental fiber needs, whether it's wood chips, whether it's logs or whether it's pulp or white paper. I think that is more of the driver on the pulp side now then what's going on with the non-integrated paper producers around the world. So I don't see that -- I don't see that linkage being tight as it used to be.

Great, thanks, John, appreciate it.

Your question about what is going to drive paper prices going forward it's going to be supply and demand. If supply and demand is in balance, the paper margins can expand and if it is not, they won't.

Thank you.

Your next question comes from the line of George Staphos of Banc of America Securities.

Good morning,. Great operation his quarter, congratulations.

John, I want to come back a bit to Bastrop. At this juncture, is it more of a function of the way demand evolved this year or is it just necessary time and the analysis and planning that is preventing you from having a decision at this juncture?

We've done all of the planning we need to do. We're just going to see how much capacity we need and where we need it. We've got more leverage to pull now. We've got product coming out of Brazil that some of is going into Europe. Some of it's coming into North America. We'll make our adjustments based on what the best set of economics are and we've got more options then we had before to adjust to supply and demand in the uncoated free sheet business.

Would there will be any critical mile posts over the course of the year? Any date that's we should keep in mind or anything else?

Nope, I don't think it's date driven. It's really how we see the marketplace. Frankly one of the reasons we were excited about prospects for our printing papers business in North America, even though we knew that it was going to be a tough market from what's happening in the overall market demand is we've got the best channels. We've got some of the best customers and in a $13 million-ton market there's still customers and segments that are growing and we've got those positions. So I think we're even in a market that's declining in aggregate, we're very well positioned with the channels we've got, the products we've got and the customers we have to outperform that market overall.

Well, it definitely showed up in the quarter in terms of cost and operations. Again, congratulations.

On fiber in Europe I just want to come back to that. Is there anything you can do at this juncture as you look out at the rest of the year either in adjusting recipes, or fiber such that you could offset some of the aggregate fiber cost or very little.

If you have any ideas let us know what those might be. We are looking at options and obviously anything we can do to improve our fiber yields and switch, make adjustments between soft wood and hardwood, we're doing. But I think fiber costs have moved up in Europe and that's -- right now we're assuming that's not going to change.

In Russia, they are moving down because it was driven a lot by what was going on seasonally there. Longer term in Russia, I'm optimistic for those of us in Russia from a fiber cost standpoint because those surcharges go in on exported logs. What that's going to do is that's going to force those in Europe and Scandinavia, who have been relying on taking wood out of the Russia, they're either going to have pay higher cost and some will find more cost effective options back in Scandinavia, which will keep more wood in Russia, which is good for us. Because we're sitting right on the border, and all of that goes out of Russia and into Scandinavia goes right by our mill. Longer term, and that hasn't even kicked in yet. Those surcharges get pretty significant as we get into 2008.

We're waiting on the Russian's --

You're waiting on what?

The Russian field trip, whenever that comes down.

All right.

Two last questions --

Bring your fellow (INDISCERNIBLE), we'll put you to work.

Fair enough. The ERP rollout in the box business, how is that going right now? Are you getting the benefit from it? And in terms of 2Q guidance and the somewhat increasing earnings sequentially, what could make earnings grow better then 10%? What's the wild card or what's the impediment? It sounds like it's energy at this juncture.

On earnings forecast, George, we're not going to give you any more guidance than we have. We don't do that because it's impossible for us to be right.

What's the biggest concern at this juncture, is it energy, John?

I think it's the U.S. economy. And then, when I said, not from a concern standpoint,t but the first quarter was slow, the economy did slow down. Some of the signs are coming out now, some of the data are encouraging. We have to see how that plays out.

We take Pensacola down that's going to cost us some money and we've got some more maintenance outages, but on the things we can control we're making very good progress. The pricing environment, net-net is positive. In the -- we've got lower land sales in the second quarter relative to the first quarter and a timing issue. I think as far as the overall land sales program we hit the market at the exact right time by selling most of what we had in 2006, and the rest of what we guided is not commercial timberland but it's also not near term real estate properties that will be how that unfolds over the next few years remains to be seen.

On the ERP side of the box business, we have just rolled out that go live in three of our box plants and we're wrestling through what all that means, and right now I would say we're not in the benefit reaping stage we're in the learning curve. That's expected so that's going as we expect it.

All right, thanks a lot guys, good luck in the quarter.

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

Good morning, John, good morning, Marianne.

Hi, there.

John, just a big picture question first. There looks like there's going to be some more change that takes place, particularly in the container board industry in North America over the next year or so. Could you just give us your thoughts on making further acquisitions in that business in North America versus putting more capital to work outside of the U.S.?

I'm not sure those things are mutually exclusive, Mark, they may be but I'm not sure you should assume it's a mutually excusive decision. It's either this or that. Our criteria for looking at reinvestment is the same as it has been and just to restate it. We're going to make strategic reinvestment that's -- or reinvestments that aid to our current strategy of building a stronger better global paper and packaging business. They've got to have cost of capital returns on their own investment and need to be near term earnings accretive for International Paper. And the opportunities to meet those criteria like Luiz Antonio did, like the Sun joint venture like Box USA did here in North America, we'll be serious about. Those that don't, we'll have to discipline to pass on them. So we'll have to see how that all plays out, but I wouldn't be surprised if what you say is correct.

Marianne, next question is just on the corporate expense, the issue that Rick Skidmore raised. I just wonder, given the smaller footprint of the Company now, where should we expect that corporate expense to go on an annual basis if we look out a couple of years.

I would anticipate that corporate expense will start to come down. There's a couple of items in it that are pretty large. One is pension expense that runs through that. That's beginning to come down this year. We also put a lot of supply chain cost through that. Those expenses should peak this year and start coming down. I see the direction as downward for corporate expense.

One of the things I would add to that and not to be -- kind of a different view then Marianne on this, the overall -- what we're trying to do is standardize, simplify, and consolidate as much as we can. Some that ends up pulling into corporate expense. Take our supply chain project, almost all of the benefits out of that is going to show up in cost of goods sold, not in S&A, but the cost to put that in are going to show up in corporate expense. What we're after is improving IP margins, not managing line items.

Okay. The last question I had is just around the container board business and there were a couple of issues. One, I noticed your European box volume is down about 4, 4.5% year-on-year and most of the reports out of Europe suggest that box volumes have been up, so I was a little surprised by that. And I was trying to reconcile that with what you said about record earnings in that business and with the fact that container board prices are rising in Europe faster in than box.

What we did was sold our UK box business, and so we had two box plants in --

Ireland --

Three plants that we sold and we can get you what the volume associated with those three plants were I just don't have it at my fingertips. That's the reason. The remaining business had a very strong quarter, Morocco, Italy especially.

Are you getting squeezed between box prices and board prices?

Actually, I think we call delta P. I think we got margin improvement in the quarter.

Your container board volumes, it sounds like you're taking some down time and you actually sold less in the open market. It's a little surprising given the strength of export pricing and the currency that you mentioned.

We're playing that. Where there are opportunities to sell board and we'll take advantage of those. Most of the impact of volume were our mill outages. We had a very full mill outage schedule in our container board system. In the second quarter it will be mostly our printing paper system.

Mark, 50% of our system mill outages and container board are in the first quarter this year. So it's really a function of that.

That's very helpful, thank you.

Your next question comes from the line of Mark Connelly of Credit Suisse.

Thank you,.

Mark, how are you?

I'm pretty well and your numbers are pretty good too.

All right, I'm glad we both feel good then.

Can you talk a little bit more about this pricing momentum situation, John? Clearly prices are up in a number of your businesses. Not in uncoated free sheets, I hope you're not maintaining pricing momentum there. It strikes me as sort of unusual that we're in a period where volumes are not all that great. You're taking some downtime and yet we're talking about pricing momentum. I guess what I'm trying to get at is how fragile is that momentum? Is this all contingent on seeing a relatively robust Q2?

Well, I think if you go back one of the comments you made, our pricing is improving on cut size and uncoated free sheet, so I would say the second quarter to first quarter, we see some pricing momentum in uncoated free sheet in North America, which is cut size driven. In Europe, we've had quite healthy improvement two price increases that have flown through or continue to flow through into realizations. At the end of the what this is all about is supply and demand. So it's not just demand driven and it's not just supply driven. It's matching supply and demand and when those get out of balance then the market gets fragile. When those are in balance, the markets are much firmer.

So, would it be fair to say that we might -- we might see -- continue to enjoy pricing momentum here and you may very well continue to be taking down during that?

That's entirely possible.

Okay. And just --

-- Down time in the first quarter, not a lot but we took some downtime in the first quarter even though we had outages where we thought that was the right thing to do so we could build inventory. Or chase volume that wasn't worth chasing.

Sure. And just one question, Marianne, you commented on Europe as having seven machine set records and yet the overall volumes were down. I'm curious what the overall offset was there if you have so many machines running so well.

You may remember we had a mill in France called Maroscale, that we shut down during the course of the year last year. That's accounts for it, and Brian can get you the details those numbers.

Last question, back to this container board export question, can you give us a sense of how much your container board export activity changed? This quarter? With the outage maybe it's not as helpful a number, but I'm still curious how much of your board is being exported.

Give me a call afterwards, Mark, one thing we can tell you basically, if you look at the mill nets around the world and I listened to some of the other calls. We're seeing very healthy and attractive mill net globally. And that's a change for us right now.

Okay.

Comparable for U.S. numbers.

Very helpful, thank you very much.

We have time for one more question.

Your next question comes from the line of Chip Dillon of Citi.

Chip, you have the last word.

I'll leave that to you, I'll just ask the question.

I'll take it.

A lot of good questions have been asked. I just have one clarification and that is on two things, one, if you could just tell us what now is in minority interest in the main income statement and sort how that should flow quarter to quarter? And secondly, Marianne you mentioned about Regal Wood being at a $40 million run rate. Is that sort of the annualized EBIT or EBITDA or what did you mean by that?

First, if you go back to what our minority interests are, minority interests are of course, primarily where we have joint ventures. So it would be the Sun joint venture, the Moroccan joint venture, we have a joint venture in Turkey. Those are the major ones that are in minority interest. So they tend to be small, but certainly we expect to see earnings growing in the Sun joint venture, and so as the earnings grow the minority interest will move up with that.

And the comment about Regal Wood is really year-over-year EBIT contribution. We're looking at the run rate we were at the the end of the first quarter compared to where we are on average last year. It's a combination of both improved operations and more volume to sell because we're making more pulp.

So basically you're expecting this year to be on an EBIT basis $40million better at that mill alone then it was in '06?

That's correct. Assuming we continue where we are and we're optimistic about that.

And lastly, you mentioned that you and I think this is from the December meeting that you saw about $150 million in Brazil EBITDA from Luiz Antonio. How much of that -- what's the depreciation. How would you break that up between EBIT and depreciation.

That's EBIT, Chip.

Oh, EBIT. Got you. You're expecting China to be somewhere in the neighborhood of $15 million then.

You got it.

Thank you very much.

Okay, well let me summarize. I think it was a strong start to the year. Our view is global markets are healthy, probably a little healthier then markets here in North America. We got some high cost pressures that will remain with us, but overall when you look at Year Two of the transformation plan for International Paper, I think it's pretty clear it's working. Our non price improvement, our margin expansion is coming, our share count is down through share buybacks. Our interest expense is down through paying down debt, and our divestment program is completed with more proceeds faster then we thought. So good start to the year we've still got three quarters to go. So thanks for tuning in and we'll talk to you in July.

Thanks, everybody.

Thank you, that does conclude today's EDS International Paper first quarter 2007 earnings conference call. You may now disconnect.