International Paper Co (IP) 2007 Q3 法說會逐字稿

Good morning. My name is Amanda, and I will be your conference operator today. At this time, I would like to welcome everyone to the International Paper third quarter 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Tom Cleves, Vice President, Investor Relations. Please go ahead, sir.

Thanks, Amanda. Good morning. Thank you for joining International Paper's third quarter 2007 earnings conference call. This call is also being webcast. Our key speakers this morning are Chairman and Chief Executive Officer John Faraci; and Chief Financial Officer Marianne Parrs. During this call, we will make forward-looking statements that are subject to risks and uncertainties. These risks and uncertainties are outlined on slide two of our earnings presentation and at the end of our earnings press release. Please go to our website under the "Investors" tab have to find copies of our third quarter 2007 earnings press release, the presentation slides, and a reconciliation of non-GAAP financial measures to Generally Accepted Accounting Principles. I will now turn it over to John.

Thanks, Tom. Good morning, everybody. This morning, as usual, Marianne and I will do a couple things. We will review our third quarter 2007 earnings results and the performance for individual businesses. We will discuss the fourth quarter outlook, we'll talk about where International Paper is in its transformation plan, and then we'll take your questions. We had a solid third quarter, in fact, our best absolute quarter since the second quarter of 2000. For the third consecutive quarter we posted the best absolute earnings in the last seven years. North American Printing Papers posted its best quarter since 1995, benefiting from higher average prices, reduced maintenance (inaudible) costs, and good cost performance all around the system. Brazil's EBIT improved significantly driven by higher average prices, improved volume and mix. Once again, xpedx reported solid quarterly earnings, benefiting from higher prices, increased volumes and market share, and the addition of some Central Lewmar earnings which we brought into the Company in the third quarter. Product pricing improved versus the second quarter in uncoated papers, pulp, and packaging grades, as realized some or all of the announced price increases. Overall operations were fair, but I think we can do better. We began producing lightweight linerboard in September at Pensacola. I was there on Monday and we are already ahead of our ramp plan. Raw material costs, particularly in North America, continue to be somewhat higher, driven by increasing chemical, wood and waste costs, a little bit offset by favorable energy costs.

I think it is very important, and we feel good about the fact that we were able to offset these cost increases with increase realizations. In volume, land sales and tax rate was flat quarter-to-quarter. Slide five shows our diluted earnings per share for continuing operations before special items. We reported third quarter earnings of $0.57, 10% higher than the second quarter of $0.52, and 26% above last year's third quarter of $0.45. We are pleased with our progress on increasing earnings, improving our global paper and packaging businesses. We said two years ago that a key element of our transformation plan was improving margins and improving earnings in our existing businesses. And over the last two years, as you can see from this slide, we have done just that. We want you to know we're not finished yet. We still have more earnings runway, even as our forest land sales tail off over the next few years. This next chart on slide six highlights how we performed in each global region in the third quarter versus the second quarter.

As I said earlier, we have strong performance in the U.S. and in Brazilian Printing Papers and that drove our earnings improvement over the second quarter. We did not expect a strong third quarter in Europe. Even having said that, we still expect very good earnings for Europe versus 2006 when all is said and done. I will now ask Marianne to comment on our third quarter results by business in a little more detail.

Thanks, John, and good morning, everyone. Slide seven compares diluted earnings per share from continuing operations and before special items for the nine months of 2007 versus the nine months of 2006. Moving from left to right, paper and packaging prices were significantly higher on average in 2007 and this added $0.51 per share to our earnings. Year-over-year we have improved our prices more than our input costs by $0.32 per share. Slightly lower volumes reduced earnings by $0.02 per share in 2007. Volume increases in Brazil, European papers, and U.S. pulp were offset by lower North American paper and packaging volume. We have intentionally passed on volume in favor of balancing our capacity with customers' demand. This enabled us to realize higher average selling prices. Our mills have run very well in 2007 with manufacturing costs and mix $0.22 per share favorable versus 2006. One-time Pensacola machine conversion expenses reduced earnings by $0.06 per share. Input and distribution costs were unfavorable, reducing earnings by $0.19 per share, or $129 million. I will review that in a little bit more detail in a moment. Lower land sales in 2007 reduced earnings $0.17 per share versus 2006.

The combination of lower interest expense, lower share count and earnings from selected reinvestment increased earnings by $0.59 per share. Unallocated and other expenses favorably impacted results by $0.15 per share year-over-year and this was driven primarily by lower pension expense. Plant closure costs in our packaging businesses reduced earnings by $0.03 per share. And lost earnings from the sales of Arizona Chemical and [Cody] Paper and the loss of harvest income from the sale of our forestlands reduced earnings by $0.33 per share. This chart on slide eight now compares third quarter results to second quarter results. Moving left to right, higher average price realization for our paper grades across all regions improved earnings by $0.04 per share. Third quarter volumes were flat. Strong paper volumes in Brazil were partially offset by weaker volume seasonally in European container. In the third quarter, our mills ran as well as in the second quarter. Cost mix improved by $0.04 per share due to lower maintenance outage expenses, partially offset by higher costs in our converting systems. Expenses related to the conversion of the Pensacola machine to lightweight linerboard reduced earnings by $0.02 per share quarter-to-quarter. Chemicals and wood costs were unfavorable reducing earnings by another $0.01. Sales were flat quarter-to-quarter, and as you know below our original guidance of $110 million to $140 million. Lower interest expense increased earnings by $0.01 per share and other items decreased earnings by $0.01.

Slide nine provides details on the $129 million increase in input and distribution costs for the nine months of 2007 versus the same period of 2006. We have actually increased our year-over-year EPS by $0.57 despite this $0.19 input cost headwind. Wood costs increased by $59 million due primarily to the South-central West weather conditions. As you know, it has been a very wet there, tight supplies and low inventory. I did want to note this slide does not include OCC or corrugated containers. Our OCC costs this year are up about $29 million on a net basis, increased cost to the mills, higher realizations on sales from our box plant. For more information on input costs, see slides 38 to 41 in the appendix. Now let me turn to how our businesses performed in the third quarter.

Slide ten shows that earnings in printing papers improved from $249 million in the second quarter to $307 million in the third quarter and that was due to improved results both in North America uncoated and in Brazilian paper. North America uncoated paper earnings were 45% higher in the third quarter versus the second quarter. Earnings improved primarily due to lower maintenance outage expenses and higher average uncoated free sheet prices. These savings were partially offset by higher raw material costs and slightly lower volume. Pulp earnings were flat during the third quarter at benefits from higher average prices and improved operations were offset by higher costs for planned maintenance outages. European paper's earnings declined by 19% and that was, again, due to higher maintenance outage expenses at our Saillat and Kwidzyn mills, partially offset by higher prices and favorable foreign exchange. Brazil earnings improved due to greater volume, higher prices, better mix and the $7 million booked timber sale. We currently estimate fourth quarter earnings in Brazil to be about flat with third quarter results, and a fourth quarter 2007 EBITDA run rate to be approximately $375 million.

Slide 11 shows our global paper earnings by region. As you can see, lower European paper earnings resulted from higher maintenance outage expenses that I mentioned, partially offset by higher prices and favorable foreign exchange. If you would like to see more detailed information on earnings by region, please turn to slide 35 in the appendix. Slide 12 shows that industrial packaging earnings declined from $139 million in the second quarter to $115 million in the third quarter. Let's turn to slide 14 for additional detail on our industrial packaging results. The lower industrial packaging earnings were driven primarily by seasonally lower European container volumes as expected. North American container volumes were down slightly versus the second quarter, but were better than the industry average. High other items including higher raw material costs were partially offset by lower maintenance average expenses. Pensacola conversion start-up costs also impacted earnings by $10 million versus last quarter and we incurred restructuring costs of $7 million for facility rationalization. Export containerboard markets remain strong, our inventory levels are low, our backlogs are strong and we are realizing our announced box price increases.

In fact in October, our average price for boxes increased by almost $30 a ton versus our September average. We expect Pensacola conversion costs to be about $5 million to $10 million less in the fourth quarter than the third quarter of 2007. Turning to slide 14, consumer packaging earnings were essentially flat. U.S. coated paperboard benefited from improved pricing and lower maintenance outage expenses, but this was offset somewhat by higher input costs, especially wood. Looking at the converting businesses, food service's earnings were slightly lower than the seasonally strong second quarter driven by slightly higher raw material and manufacturing costs, and Shorewood's results were about flat quarter-to-quarter. On slide 15, xpedx continues to build momentum posting another strong quarter. Third quarter operating profits were $40 million compared with $38 million in the second quarter. This marks eight consecutive quarters of record earnings for xpedx. Earnings included about $2 million from our Central Lewmar acquisition. Slide 16 shows that forest product earnings were relatively flat. As you know, land sales can be lumpy and hard to predict precisely because transactions can move from quarter to quarter. We do expect full year 2007 earnings from land sales to be approximately $450 million. Our objective continues to be to maximize values, not the timing of sales. At the end of the third quarter we had 390,000 acres remaining in our portfolio.

Turning to cash flow on slide 17, we were not pleased with our working capital performance in the second quarter, but in the third quarter, our working capital metrics improved and we generated more than $380 million in free cash flow. As sales increased and prices increased the value of our inventories and receivables increased as well, but our ending working capital, and that's excluding cash and current debt maturity, as a percent of sales declined from 11.2% in the second quarter to 10.3% in the third quarter. I should note, we now, expect full year CapEx to be about $1.3 billion, and that will include $210 million of spending on our new Tres Lagoas paper machine in Brazil, the third Sun joint venture paper machine and the (inaudible) mill. Looking ahead to 2008, we expect CapEx, including the Tres Lagoas and Sun joint venture spending, to be roughly equal to depreciation and amortization. There are no spending numbers for Ilim included in these numbers. I also want to mention that we have updated some other full year key financial statistics in the appendix on slide 30.

On slide 18, third quarter special items and discontinued operations are detailed. Special items after-tax in the third quarter of 2007 totaled a loss of $23 million, or $0.05 per share. Slide 19 shows you how to get from $0.57 of diluted earnings from continuing operations and before special items to the $0.51 per share of net earnings that we reported this morning. Before I turn this back to John, let me remind you we expect to report the Ilim joint venture results on a one-quarter lag, so the joint venture's fourth quarter 2007 results will be included in our first quarter 2008 results. There will be no impact from Ilim in our fourth quarter 2007 earnings. So now let me turn this back to John.

Thanks, Marianne. I'm on slide 20 for those of you who are following along. What I want to start with is just show the EBIT margin percentages over the last several years. As you can see, we've steadily increased margins in our core businesses, and when I say core businesses, I mean all of our businesses with the exception of forest products, forest resources, and our divested businesses. The improvements, as you see, are significant and consistent even in North America where market conditions and cost pressures have been challenging. We remain focused on our non-price improvement initiatives, but the most important thing we can do is continue to expand our margins. That is why we've been aggressively balancing our supply with our customers' demand resulting in significant price improvement here in North America and lower costs. Our earnings in Western Brazil and Eastern Europe are also contributing to this overall margin expansion. For example, our nine-month EBITDA margins in Brazil are in the 40% range. In Eastern Europe, in the 30% range, well above North America. Our increasing mix of global earnings is also helping to balance our earnings capacity. Slide 21 shows that we continue to increase our North American EBITDA, which we expect will account for 30% of our total EBITDA this year versus only 20% from 2002.

Where is it growing? Well, it's growing in Brazil with the addition of Luiz Antonio, it will further increase with the addition of Tres Lagoas paper machine in 2009. That capacity will primarily be dedicated to Latin America. EBITDA is growing in Asia but it is still growing from a small number. We expect the Sun joint venture's third coated paperboard machine to start up later in 2008. We are increasing our EBITDA in Eastern Europe and Russia. Our BCTMP line is expected to start up ion December of this year. That is being built and commissioned in Svetogorsk. And we closed on our Ilim joint venture, as Marianne said, we'll report the earnings from Ilim on a one quarter lag. Slide 22 shows how the transformation plan is making a difference for International Paper and our share owners. We are now nine months through the year and our year-to-date earnings have surpassed our full year 2006 earnings of $1.34 a share. We are not getting the volume we expected in North America, but we are growing margins and EBIT and we're trading volume for price by matching, again, our supply to our customers' demand. The largest component, as this slide shows, of our improvement has been the improvement in our core businesses, which has added $0.69 a share to earnings on a year-over-year basis. Lower interest costs, lower share count have also contributed significantly to the improvement. As you can see here, we have been able to offset the earnings that went away with the best of businesses.

Looking at the fourth quarter, we expect the fourth quarter will be better than the fourth quarter of last year and slightly better than the third quarter. North American containerboard volumes will benefit from the Pensacola capacity. As Marianne said, we have already gotten $30 of box price of increase into our October results. Europe volumes will be better because seasonally the fourth quarter is better than the third quarter. But all of the other segments we expect to slow down as we move into the quarter. Thanksgiving is right around the quarter and we know once we get past Thanksgiving it is pretty slow until we pull out of January. In addition to box pricing, we will be getting some improvement in pricing in pulp and paper. We expect wood and transportation costs to continue to increase. We think energy is going to stay high. With that all said, we do expect fourth quarter earnings to be slightly better than the third quarter, and we expect forest resources earnings will be higher than the third quarter levels, as well. Interest and taxes will also be higher. Interest will be higher because we've got less cash, so less interest income. As we look at our tax rate and the sources of our earnings our tax rate will probably be a little bit higher in the fourth quarter. Summing up, as I said, we expect earnings from continuing operations and before special items in the fourth quarter to be slightly better than they were this quarter. Looking beyond 2007, slide 24 shows how we are building the capacity to continue to increase our earnings.

Taking out costs and improving mix, that's about $0.28 per share year-to-date before the outage impact. So that continues to be a big, big lever, plus we are selectively reinvesting in high margin, low-cost, and high growth areas with projects that produce good returns. Let me talk about a few of them. The Luiz Antonio mill will have a full year benefit next year. We'll be ramping up our production of lightweight linerboard at Pensacola. Riegelwood will be on fluff pulp and that's sold out already. And we will have the BCTMP mill at Svetogorsk running. And our share of Ilim earnings will contribute to our 2008 results. Beyond 2008, our earnings will continue to benefit from the addition of the third coated paperboard machine at our Sun joint venture in Shandong Province, and our new uncoated free sheet machine at Tres Lagoas in Brazil. In closing, before we go to your questions, our goal is what it has been for the past couple years, continue to be a more profitable cost-to-capital earning Company in our global paper and packaging businesses that has superior returns on an absolute and relative basis over the cycle. So, Tom, let's open it up tor questions.

Thanks, John. Amanda, we're now ready to take questions, please.

Thank you. (OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster. Your first question is from Gail Glazerman with UPS.

Good morning. I was wondering if you could talk in a little bit more detail about the decline in uncoated free sheet demand in North America over the last couple months, and, I think, you mentioned your box (inaudible) your order book is pretty strong, if you could maybe talk about that, as well?

Uncoated free sheet demand, Gail, has been weak all year so I don't think there is any pronounced trend here at all. We're seeing more of the same, it's not falling off a cliff but it is down.

I think the real numbers in terms of commercial print are not down quite that much because you have some other uncoated free sheet grades that are going into the low end of commercial print, but there is no question the year-over-year numbers are negative. They have been negative for a couple years. We're planning that the market is not going to grow in North America.

On the box side, our box volume is down about a little less than 2% year-to-date. On a quarter-to-quarter basis, our box volume was up about 1% but you have to adjust that for the number of days as well. The box volume is certainly in better shape, if you just look at the overall market than in uncoated free sheet.

Okay, and then just on the North American printing papers, can you quantify, Marianne, the benefit from less down time in the quarter? Was that a big contributor to the earnings improvement?

The benefit of less outages, is that what you are talking about, maintenance outages?

Yes.

Third quarter to second quarter was approximately $17 million. We got big price realizations in the quarter, prices were up about $22 million. That was the single strongest driver of improvement quarter-to-quarter.

Okay. Thank you.

Your next question is from Mark Wilde with Deutsche Bank.

Good morning.

Hi, Mark.

The numbers in Europe still seem kind of weak to me even with that seasonal stuff that you mentioned. In light of the FX --

Mark, are you talking about boxes or paper?

Talking more about the packaging side of the business, John.

Okay. All right.

I know that -- I think you exited the U.K. I don't know how much of that U.K. exit contributes to that year-over-year volume drop in the European container business?

It does contribute to it. Remember, we had a fire at a plant in Turkey. We lost a big chunk of Turkey, our capacity in Turkey. That plant has been rebuilt and it is starting up now.

We are on our way to having a record year in the box business in Europe, Northern Africa and the Middle East, Turkey. We are in pretty good shape there. I am not worried about the box volume in Europe

Okay, and, John, any sense with these ISM numbers out yesterday that continue to soften in North America? Are you seeing any reflection of that in any of your packaging related businesses?

It is a mixed bag, Mark. The jobs numbers this morning was very good.

You'd have to say that that is probably a sign that people feel optimistic about the holiday season, from a retail sales standpoint. The weak dollar is helping us in some segments because our customers in the box and packaging businesses are more export competitive. We have got an overweight, slightly, in our durables component of our box business. The market is about 80/20, and we're probably 25% durable. That segment is very weak. The purchasing index suggests that manufacturers -- it doesn't feel like 4% GDP growth, I guess, is where I'd be at.

Last thing, John, just as a follow-up, can you talk a little bit about the uncoated free sheet pricing because you're quarter-to-quarter gains seemed a little smaller than I would have expected, yet your earnings were up nicely?

We ran well and are continuing to take costs out, the uncoated free sheet, the roll side of the price increase is really a fourth quarter number. Let's see here. We got about $10 a ton on offset in October versus September, and about $30 on envelope. That price increase is flowing through. It is just flowing through in the fourth quarter.

Okay, very good. Thanks, John.

Your next question is from Claudia Shank with JPMorgan.

Hi. Thanks, very much. Good morning.

Hi, Claudia.

Could you just provide a little bit more color on the consumer packaging business and how we should think about that going into next quarter? List prices, [privilege board] keep moving up, your volumes were a little bit better than I thought and then there was less maintenance in the third quarter --

You said an important word there, Claudia. List prices. That is really important.

So what is going on?

Our transaction prices. There are a couple different segments. You have cup stock, you've got folding carton, and then you've got tobacco board and some of the other grades. Tobacco board tends to be priced on an annual basis. Cup stock has been moving up, but there are a lot of cost increases in cup stock. And folding carton prices have been moving up.

But they are a lot stickier, because there is a lot more competition, there are alternative materials, the list price is going up is the good thing. But what we need to get is transaction prices up the same as list prices. For us, we have more outages coming up, significantly more outages coming up in the fourth quarter. While we expect Shorewood to have a better fourth quarter than the third quarter.

Food service will tail off with a seasonal part of this. We're also incurring some restructuring costs at Shorewood which are substantial. We shut down two plants in North America in the third quarter, as we're transitioning more of that business to Mexico, and I believe the cost of doing that is about $7 million.

That's helpful. So you still should get a little bit of a seasonal pickup then in Shorewood you would think in the fourth quarter?

Yes, food service it is going to be weaker because we are going into the weak time of year and we've got big outages coming up in the bleach board system.

Okay. That is helpful. It is a little early, but can you provide any guidance on corporate expense for next year?

I think in the slides you said the supply chain expense is going to be about $200 million this year, which I think is a little bit lower than what you said before? So does that mean next year it goes -- I think you have been talking about a $225 million number for this year, so does that mean you'l get a little bit more next year on that supply chain initiative?

Claudia, we are just in the process of finalizing the budgets for next year. Directionally, you are right. Supply chain spending was a little bit lower this year than we had expected at the beginning of the year. Directionally it is probably going to be roughly the same but we haven't finalized the budgets yet. We will be able to share more information with you on the next quarterly call on what we think corporate will be.

Okay. Thanks a lot.

Your next question is from Chip Dillon with Citigroup.

Yes, good morning. You mentioned your land portfolio. What do you think that acreage will be at at year end?

It is 300,000 plus acres now.

390,000 at the end of the third quarter.

How many more acres will be sold by year end?

I just don't know, Chip. Those sales on coming in now. They are pretty lumpy, not as much related to the market, just that it's a much smaller portfolio and sales are a lot more targeted. I wouldn't want to make a forecast about the acres we have. We're only doing deals if we think they're the right values.

Got you.

And values have kept up very well compared to what we expected and appraisals.

That is important point. We haven't seen any value leakage at all in what we have been selling.

Could you give us some ballpark as to what -- I know this is mainly real estate, higher, better use. Is this something that is several times what straight timberland is worth on a per acre basis or is it twice as much?

It really depends, Chip. I wouldn't characterize it -- it is not really near-term real estate.

A lot of it is recreational land. A lot of it is land owners blocking up where we've got adjacent ownership. Some of it is longer-term development, when I say longer term development, five years plus. We are getting over $2,000 an acre on average for that land, but the range will be very high. It will be from $1,500 to over $4,000, and then you have different parcel sizes.

Got you. And then last, just to follow-up, you mentioned you would see 450 for this year. Does that not mean you will see somewhat of an increase in the fourth quarter? It looks like if you did 297 so far this year, you get 150 or so in the fourth, is that reasonable?

I think you can do the math. And you did it.

Just want to make sure my calculator works. Thank you.

Your next question is from Mark Connelly with Credit Suisse.

Thanks. Just one question, John. With respect to Brazil, you talked about all the good things that are going on there. Clearly, both the volume and the price realizations are stronger. Can you talk a little bit about where that paper is going and whether it is principally a domestic market issue, and can you talk a little bit about what you are seeing costwise there relative to North America?

About 50% of it is domestic, Mark. A big chunk of what is not domestic is in the region. The third largest piece would be -- after that would come Europe and after that North America.

Now remember BCP was were selling a lot of paper into Europe and into North America. We're selling less into North America now, maybe a little bit more into Europe. What is really important is the Latin American markets are growing. They are increasingly taking a bigger share of the total production into the region.

As you look at the bump in volumes you got, is most of that bump coming in the region? That's what I'm really trying to get at.

Yes. We also had a lot of pipeline filling so we weren't selling our production. Actually we oversold our production, I think, in the third quarter. We drew down inventories.

On the cost side, we are getting hit with higher energy costs. That really isn't a global phenomenon. It's just what is going on in Brazil. Currency is not going our way because, obviously, we've got a (inaudible) cost base and we've got some portion of our revenues that are dollar denominated.

Okay, okay. That is very helpful. Thank you.

Having said that, Mark, our EBITDA margin is still in the 40% range.

And also we are getting very good production out of Luiz Antonio, so the Luiz Antonio mill has been performing very well.

Perfect. Thanks for your help.

Your next question is from George Staphos with Banc of America Securities.

Hi, everyone. Good morning. My first question, to pay you back on Mark's question regarding Europe. You had said in your comments that the box business slowed seasonally, and that as far as the papers business went that maintenance spending was largely the factor for profits being lower.

Were there any other factors, John and Marianne, in terms of profits being, specifically within papers, lower than last year? Were there any businesses or trends that were a little bit below where you would have expected them three months ago and seasonally, as we look out to the fourth quarter, you're looking for better performance, but does it look like Europe will be up on a year-on-year basis?

George, Europe is going to be way up on a year-on-year basis. Year-to-date, Europe -- we are running almost double last year's earnings in Europe through the first nine months. And in container, even though we sold, as someone mentioned, we sold our U.K. box plants our packaging earnings in Europe are up about 20% year-to-date versus last year. So in both businesses we're on our way to having a record year. It's not gangbusters growth in Western Europe. What it is is growth in Russia, we're selling more of the board that we're producing in Poland, and we had a capital project to produce more folding box board. We're selling more of that in Eastern Europe, as opposed to exporting it. It's improving our realizations. We're getting some pricing, we got some pricing improvement in Europe, as well. But it's not a Western Europe volume driven thing at all.

John, the best that you can analyze this if you could on a same-store or same business basis, will the markets be up on a demand basis. Again, I realize that Europe is not gangbusters, as you mentioned.

In the fourth quarter?

Yes.

Yes.

Okay. Now just on non-price improvement you've done a remarkable job there over the last several years. You've had a very good year this year. But when I compare the slides on the nine month versus the 3Q basis it looks like the performance there slowed a little bit in the quarter. Was that largely driven by the volumes being sluggish in a couple of businesses, or were there some other factors there? Thanks.

Well, one of the things is we had a fantastic second quarter. I mean we way out performed our budget in the second quarter. We kind of came in on budget in the third quarter, which meant the third quarter wasn't that much better than the second quarter.

Okay, thanks. I'll be back, guys.

Your next question is from Richard Skidmore with Goldman Sachs.

Good morning, John and Marianne. John, can you just talk about your strategy of International Paper within container board in North America, and somewhat specifically with regards to the volume that's coming up in Pensacola and where that volume is going?

Well, the volume coming out of Pensacola, Rich, is going to be lightweight linerboard so it's very targeted to specific customers that want lightweight linerboard. The export markets are quite good for linerboard now. So not specifically to Pensacola, although we think we will export some out of Pensacola to selected markets, but we'll rebalance the system and we took care of [Hoedown] so that came out, and as Pensacola ramps up there will be some addition to our containerware production capacity.

But as we look out in the marketplace where our inventories are, where orders are domestically and globally we feel very good about being able to sell what we're making.

And following up on that as you look to the recent weakness of the U.S. dollar versus the euro are you seeing a lot more opportunities for exports, both in container board and in paper to Europe from North America?

Well, we've seen that for the last couple quarters where the dollar has been relative to other global currencies has been good for exporting to the U.S. But that's all a function of demand. And we're matching our supply to our demand on a global basis and there's no question the dollar where it is is helping U.S. producers to be more export competitive.

And is that having much of an impact on your European business, particularly in the packaging business, is that part of the reason that packaging in Europe was a bit weaker, or not?

No, I think it is probably putting more pressure on the paper side in terms of the capacity in Europe and some of that was exported, has been exported. With the strong euro, the margins on exporting paper from Europe to other parts of the world aren't as good, so that paper is tending to stay in Western Europe, which is, we've got to watch the operating rates and the inventories in Western Europe.

Thank you very much.

Your next question is from Peter Ruschmeier with Lehman Brothers.

Hi, Pete.

Thanks, good morning. John, I wanted to ask, if I could, about Ilim if you could give us a little more color update on Ilim, both in terms of how you plan to report results in terms of consolidating, where we might find the income statement, and importantly, I guess, remind us about the spending plans going forward and what kind of growth trajectory we should expect from Ilim?

Let me comment on the first part of that, Pete, then Brian McDonald happens to be here today who is heading up one of the big pieces of Ilim so I'll let him talk about how he sees business there right now. As Marianne Parrs said, we'tre going report Ilim on a one quarter lag. We haven't decided yet how we're going to account for Ilim.

We're working that through. We will be back to you on our next quarterly call when we get that resolved. But it will be on a one quarter lag, so the fourth quarter results for Ilim you will see in our first quarter results. Brian, why don't you talk about what you see? You just got back from Russia.

I just got back, Pete, from a couple weeks in Russia and a week in China visiting with our customers. And I would say business over there is very robust and our customers and our employees in Group Ilim are very excited about the partnership of International Paper and Ilim Group.

Our partners in China, where we do almost a million tons a year from Ilim, understand the value that International Paper can bring to the partnership and the ability to produce more products, to produce better products and to improve service levels. It is a very different dynamic. I think you get a flavor for that in International Paper when John went through how good Brazil was in the quarter. We see the same things kin Russia and we see the same things in China. It is very strong right now.

Pete, on the capital spending side we are still finalizing our plans, but the good news here is Ilim is earning good money. The more money it earns, it just gives us more debt capacity and more cash flow to finance the capital program, and I suspect at the end of the day the speed of the capital program is going to be making sure we have the projects really well-defined, not financing. We will have to see.

How about on a trailing basis, John, can you remind us the LTM EBITDA for the business and what the CapEx the run rate has been, and --

Well, Ilim's EBITDA is running at over $400 million. So think of our share of that as $200 million, and we invested slightly over $600 million for a 50% stake in company that's earning over $400 million EBITDA.

That still has to be adjusted for U.S. GAAP.

What was the CapEx spending at, kind of base load at Ilim?

It's pretty low. It would be less than $100 million.

The Company's been spending less than $100 million and we want to make sure we are well organized to step that up. We anticipate it will step up quite a bit on specific projects. The race isn't here to spend it as fast as we can. It's to spend it well and spend it on the right things.

Okay, and just last question, if I could, on that, John, at a high level -- I know you haven't committed to all this, but I believe you have indicated in the past that over a multi-year period is it roughly $1.5 billion type of spending at the JV level? I understand that's non-recourse to IP, but is that the ball park, the number? The million tons goes to what kind of number over roughly what time frame?

Well, the $1.5 billion is still the number, roughly a five-year time frame. The projects, some of them will be capacity expansion.

They'll probably be aimed at paper in Russia, pulp for China, there will be product quality upgrades around paper for Russia. There may be some container board expansion. Most of these will be de-bottlenecks, not big new paper machines. They're going to be upgrading what we have. And there will be a lot of cost reduction.

John, thanks very much.

Your next question is from Mark Weintraub with Buckingham Research.

Good morning, Mark.

Good morning. Just real quick, Marianne, I want to make sure when you said the EBITDA on Ilim is not adjusted for U.S. GAAP, et cetera. I assume when you do make those adjustments you are not having big changes, not more than 10% or something like that? Is that fair?

It would be things like depreciation.

Which doesn't affect EBITDA?

Yes, it doesn't affect cash. It's the key way to think about it, it is just a switch in how the numbers on a non-cash basis might look.

Okay, okay. Just pursuing the impact of the weak dollar a little more, do you have a sense, John, of where [mill nets] selling liner or for that matter the uncoated free sheet products that might get exported, where they compare now for your European exports versus your domestic business?

I think that where prices are right now, in Europe and in North America, it still doesn't make sense for most Europeans to ship from Europe to the U.S. There's more profitability in Europe than there is -- and maybe with one or two exceptions mills that have great logistics going to the U.S. That is why understanding global pricing, we are in a great position to do that since we're selling in all markets, Asia, Brazil, Russia, Eastern Europe, Western Europe, and North America. I'd say right now pricing is at a point where it makes sense for the regional producers to be focusing on their local markets.

Okay, so does it make sense quite yet for U.S. mills in linerboard to be shipping it to Europe?

I was talking about paper, Mark. On linerboard, the U.S. dollar for virgin linerboard the U.S. dollar puts U.S. linerboard producers in very good shape because on the virgin side you've got a competitive cost structure. We are mostly virgin. We don't have a high recycle component.

Right, and so mill nets to Europe might be fairly comparable now to keeping it in the U.S.?

Yes, our mill nets, we are not shipping much to Asia at all. The only place where mill nets are a little bit lower than they are in North America is Latin America.

Okay, and then just lastly, I don't know if you have a perspective on this, but the spread between testliner and kraftliner in Europe is unusually narrow, actually testliner is maybe even a little higher than kraftliner? What implications, what relevance might that have as we are thinking about this business from your perspective?

I'm just looking around the room, Mark, to see if anybody knows more about that than I do, maybe Tim Nichols. We will have to get back to you on that.

Okay. Thank you.

Your next question is from Steve Chercover with D.A. Davidson.

Good morning. Looks like your profits are ramping towards $3 hopefully on a unsustainable basis and you've got a great balance sheet. Is there a point at which you're going start to reconsider the dividend?

Yes. There is. I don't think we are right there, right now, but that is something we have been and will continue to talk to our board about.

Thank you.

Your next question is from John Tumazos with John Tumazos Independent Research.

Could you just walk us through the capital to be employed and the seven important growth projects on your slide 24, and in the aggregate, would a 20% return for EBIT return be a reasonable goal on the aggregate capital employed in these projects?

Let me go through the numbers with you, John, on the projects. The Pensacola conversion is about $350 million. The Reiglewood Fluff Pulp project was about $80 million. Svetogorsk BCTMP about $150 million. The Sun joint venture machine, the last piece of that was $70 million or $80 million is in my head, $70 million or $80 million for that machine. Then Tres Lagoas is about $290 million.

Of course buying into Brazil and buying into Russia were big commitments.

We sent Tony, the thing about that is that it was a big swap, where we swapped trees, we swapped the project, trued up VCP, or Votorantim, with $1.1 billion in capital, and got Luiz Antonio mill plus all of the timberland around the area. And then we talked about the Ilim joint venture. So the returns on those projects are all well above the cost of capital. They do vary, but they are all very healthy returns, well into high double-digits or better.

The good news is the Fluff Pulp project's already sold out. The BCTMP markets in Eastern Europe are very strong. The Sun joint venture machine, we're ready to sell that. Pensacola, we've got more orders right now in containerboard than we can ship. Tres Lagoas starts up in 2009.

They're really not North American driven projects, with the exception of Fluff Pulp I would say. Like I say, we've already got all that volume sold under contract. Does that answer your question, John?

Yes. Thank you very much.

You have a follow-up question from Mark Wilde with Deutsche Bank.

Yes. I wondered, Marianne, if it's possible for you to estimate the FX translation effect that you have had in the third quarter and then through nine months?

It is not a very big number. There are pluses and minuses, it's pretty much a wash. There are pluses and minuses as you go around the world.

It would seem like the dollar is weaker against almost every currency around the world. It seems like on a translation of offshore earnings it should be a net positive this year?

One of the things that makes it a little bit more complex than that is if you take a country like Brazil, for example, when Brazil exports, Brazil exports in dollars. You don't get all of the benefit you might be thinking of the weak U.S. dollar for the translation effect of earnings.

It does benefit Europe. And then in Europe we have cross-country translation, as well. We will have the translation effect of shipping from Eastern Europe or Poland into Western Europe or into Russia. So the plays of currency are a little bit more complicated than they might seem on the surface.

When you net everything out it is maybe a small plus, $5 million to $10 million.

Okay. All right. And, John, you have talked about bringing down the overhead at IP as you shrink the domestic footprint. Can you just give us some sense of where you are at in that process right now?

Our total overhead is running flat year-on-year, that's total overhead dollars as a percent of sales. We are a little bit lower than we were last year. And I'd say over time we still have about a percent of sales of overhead that we are going to get out over a period of time. We are going to do that through attrition, through fewer facilities, and we're in the midst of doing that right now in Shorewood and in the container division and in xpedx. Mark, I'd also come back to your question on currency, there's a big flow on effect of currency in our packaging business, despite the fact that the box business is down, the market is down 1.9%, one plus, close to 2% year-to-date. I think with the dollar where it was, we would be looking at different numbers. That doesn't show up in our financial statements as a FX line, but it is really there.

I think it also helps pulp pricing. The weak dollar.

Yes, I think it is going to help pulp and a lot of other things next year if we stay where we are at right now.

I agree with you.

All right. Thanks, John. Thanks, Marianne.

We have time for one final question. Your last question is a follow-up from George Staphos with Banc of America Securities.

Just a quick one. I realize this isn't the outlook right now, but if you are in a weaker environment next year, would we expect distribution earnings, xpedx to be following pretty much on pace with what you would be seeing in paper or board? Do you think that given what you've done to restructure (inaudible) the business, improve it through NPI as well, it should be a fairly trend line steady business against the other businesses?

George, Tom Kadien, who runs that business is sitting right here, so I'm going to let him answer that.

Hey, Tom.

Hi, George. I think we can do better than the trend line that you would be watching for uncoated or coated paper. We have many restructuring activities going on throughout xpedx. John mentioned the S&A. We're down year-over-year significantly in head count, and yet we are growing the business relative to the markets we're competing in. We're gaining some share. So I think we can do better than the markets that you would be looking at for uncoated free sheet or coated paper.

So perhaps [stamp-in] growth, but not a whole heck of a lot of volatility on the down side, if, in fact, that is what we have next year?

Yes, I would agree with that.

Okay. Thanks very much, guys. Good luck in the quarter.

Let me, before we hang up here, just say that IR is available to answer any additional questions. But I also just want to take this opportunity to tell you this will be Marianne's last earnings call.

As I think all of you know, Marianne is retiring after 33 years with International Paper Co. I don't have to tell you she has been an influential leader in our organization throughout her career and from my perspective she's been a valued colleague and an adviser and a personal friend and been very valuable to our transformation plans.

I know all of you will join me in wishing her well in the next chapter of whatever is coming next. Marianne, I don't know if you want to add anything to that you can?

All right, well, what I would add to that is that Tim Nichols is going to be taking over as CFO the first of December. I have been working with him for several months now here back in the United States, and I think you all are going to find that he is extremely good for you to work with and you will enjoy it.

Okay, thank you, everybody. That is it.

This concludes today's conference call. You may now, disconnect.

Thank you, Amanda.