International Paper Co (IP) 2007 Q4 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 fourth 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 would now like to turn the call over to Mr. Tom Cleves, Vice President of Investor Relations. Please go ahead.

Thanks, Amanda. Good morning and thanks for joining us for our fourth quarter and full year 2007 earnings conference call. We're also webcasting this call. Our key speakers this morning are Chairman and Chief Executive Officer John Faraci, and Senior Vice President and Chief Financial Officer Tim Nicholls. During this call, we will make forward-looking statements that are subject to risks and uncertainties which are outlined on Slide 2 of our presentation and at the end of our earnings press release. Please go to our website under the Investors tab to find copies of the fourth quarter 2007 earnings press release, our presentation slides, and a reconciliation of non-GAAP financial measures to generally accepted accounting principles. I will now turn the call over to John.

Thanks, Tom, and good morning to all of you. Today, Tim and I are going to review our fourth quarter and full year earnings results in the performance of our individual businesses. We'll also discuss how we see business right now, given that we're almost midway through the first quarter. Turning to the fourth quarter, once again we posted solid quarterly results, generating the highest quarterly earnings in more than seven years. Our fourth quarter earnings per share share from continuing operations before special items were $0.69, an increase of 21% versus the third quarter. For the full year, full year 2007 earnings were up 52% versus 2006 and earnings per share on a lower share count were up 67% versus 2006. We're very pleased with the continuing progress of our transformation plan and our ability to continue to expand our operating margins.

The good news is we're not finished yet. We see steady demand for North America paper and packaging. January global demand was stable. Outside North America was pretty good. Inside North America, we did not see a recession right around the corner in terms of our volumes, and that just reinforces our confidence that we can continue to increase our earnings. We think we have some earnings runway ahead of us.

Turning to Slide 5, it shows we continued to increase our earnings in all of our operating businesses. The increased earnings in printing papers by 44% to $1.1 billion. We generated $500 million in industrial packaging earnings, a 30% increase versus 2006. We grew our consumer packaging earnings by 15% to nearly $200 million, and we achieved our second year in a row record performance at xpedx earnings, $146 million, a 14% increase over the prior year. So all in, we increased all operating profits, despite -- by 11%, despite a 30% year-over-year decrease in forest products earnings. These strong overall results demonstrate our ability to increase our earnings despite declining land sales. We're especially pleased with our quarterly earnings, given the continued high escalation we have in almost all of our input costs, specifically wood, chemical, energy, and transportation.

Slide 6 here shows our diluted earnings per share. As you see here, fourth quarter earnings of $0.69 a share were up 21% from the third quarter, and significantly higher than any fourth quarter and prior years. And as I said at the outset, while we've made a lot of process in proving our earnings, we believe there is more work to be done and more runway to continue to improve our earnings. If you turn to the next slide, what you see here is our efforts to not chase volumes, but really to manage price, have enabled us -- combined with good cost reduction activities and some volume growth where the markets are growing, have enabled us to increase our operating margins by about 470 basis points since 2005. And currently our EBIT margins remain several hundred basis points below historical peaks, so when we look at our businesses right now, we don't see margins at peak levels. Prices may be high, but so are costs. We expect to realize the announced uncoated free sheet, pulp, containerboard, and coated paperboard prices which we've already announced earlier this year -- we expect to see those price increases go into effect toward the end of the quarter and into the second quarter. We anticipate 2008 to 2009 prices are remaining above 2007 levels, due to strong operating rates and strong global demand. So now I'll ask Tim to comment more on our fourth quarter results in some more detail and then we'll come back, talk about business conditions right now and take your questions.

Thanks, John. And good morning, everyone. The chart on Slide 8 compares our fourth quarter results with third quarter and I'll move left to right and touch on some of the highlights of the quarterly changes. We realized $0.11 from higher average selling prices and printing papers and containerboard in both the U.S. and Europe, and volume improved by $0.04 driven by pulp, European container, and the ramp-up of the Pensacola production. Cost mix was unfavorable to the third quarter, primarily due to unfavorable operations at several North American paper and containerboard mills, and we also experienced a significant increase in input and distribution costs that John mentioned, which reduced earnings by $0.07 per share. Unallocated expenses decreased earnings by $0.04 per share driven by increased medical costs and the timing of incentive compensation accruals, and we signed a new labor agreement that reduced fourth quarter earnings by $0.03 per share. The agreement, or the agreements are with all of our labor unions, which represents about 8,000 employees at our 14 domestic mills, and these agreements extended the expiration dates of all existing labor contracts by four years from their original expiration dates. So now we have individual contracts expiring between 2011 and 2014.

On Slide 9, you see full year 2007 earnings per share compared to 2006, and again, paper and packaging prices were significantly higher, adding $0.66 per share. Volumes were slightly higher and actually we had higher volumes in overseas markets that were partially offset by lower volumes in North America, as we continue to trade volume for price by balancing our production with our customers' demand. Our mills ran very well in 2007, adding $0.37 per share. Pensacola machine conversion expenses reduced earnings by $0.08 per share, and input and distribution costs again were unfavorable by $0.30 per share. The combination of our capital restructuring and earnings from selective reinvestments increased earnings per share by $0.69, and then lost earnings from divested businesses, which include Arizona Chemical, coated papers, and also the loss of harvest income from divested forest lands, reduced earnings by $0.35 per share. And finally, unallocated corporate and other expenses favorably impacted results by $0.05. This was driven by lower pension expenses and partially offset by higher medical, LIFO inventory charges, and the one-time cost of the new labor agreements.

Now I'll highlight a few details of some of the key factors impacting earnings. On Slide 10, the full year impact of input cost increases for our operations globally is shown and in the fourth quarter we experienced an acceleration of costs for energy, wood and freight. However, despite the $0.30 increase in input costs, we were able to increase year-over-year earnings per share by $0.89, and on the next couple of slides, I'll show you how reducing the impact of higher input costs and improving our manufacturing operations.

On Slide 11, you can see in the U.S., wood costs increased by $65 million in 2007, and while wood costs decreased in the eastern region and were up slightly in the central region, wood costs in the west spiked sharply due to adverse weather conditions, reduced supplies for residual saw mill chips and high transportation costs. We have management initiatives that offset wood cost inflation in the east and central regions, but we were unable to offset the inflationary impact of the reduction of the factors that I just mentioned in the west. And we're continuing to work to offset these increases by producing more wood chips in our own mill wood yards, optimizing our transportation, and working with our most productive loggers to expand their capacities. However, we do anticipate continuing pressure on wood costs until the supply of saw mill chips increases and diesel fuel prices moderate and the weather improves to more normal conditions.

Slide 12, we show the total amount of purchased energy consumed per ton of production in our U.S. mills for each year since 2001, and as you can see, we've reduced consumption systematically through this period, resulting in annual savings of $285 million. And most of this has been accomplished by investing in capital projects that drive reduced energy consumption and also by running our mills more efficiently.

So if you turn to Slide 13, it shows the improvement in what we call overall equipment efficiency. And that's a function of reliability, availability, and machine speed. Since 2001, we've improved the overall equipment efficiency by 900 basis points and each 100-basis point change reduces our annual manufacturing costs by $30 million. Cumulative improvements since 2001 were worth $270 million in cost savings, and this is all about running fewer, larger, lower cost mills, the results which you can see here, but also running fewer, better, converting and xpedx facilities.

Slide 14 shows that in 2007 non-price initiatives improved earnings by $270 million, and while that's -- the overall results are less than the plan that we had, keep in mind that we continue to trade volume for price in order to realize higher average selling prices, and also our volume reflects the fact that we took an early shutdown on the uncoated free sheet machine in Pensacola and we had a later than expected startup for the Svetogorsk BCTMP line. In 2008, we've budgeted $335 million in non-price improvement, so non-price continues to be important to our efforts to expand margins. However, it's also important to understand that we have improved our margins through price, even though we've been in a very challenging operating demand environment.

And on Slide 15, recaps our performance over the past five years of selling price versus input costs. You can see that for the second consecutive year, we've increased selling prices more than input costs increased, and through 2007, we've nearly recovered the cumulative input costs to increases since 2002.

So with that, I'll turn to summary now of the performances of each of our businesses. On Slide 16, you can see a summary business by business. Now let me go into a little more detail on each one.

Slide 17 you see printing papers improved earnings from $307 million in the third quarter to $314 million in the fourth quarter, due to improved results in pulp, European papers, and Brazilian papers. North American uncoated paper earnings declined principally due to an $12 million increase in maintenance outage expenses and a $7 million impact on unfavorable operating expenses, which are not expected to repeat. We had strong price realizations offset. Increased raw material costs and volumes were better than expected, and inventories were in good shape at the end of the quarter. In Brazil, 2007 earnings were at $246 million, EBITDA was $346 million, and we exited the quarter with an annualized run rate of about $390 million in Q4.

Slide 18 shows the, the improvements by category for printing papers and you can see the increase from $307 million to $314 million. Increased selling prices contributed $30 million to fourth quarter earnings. Volume and mix contributed an incremental $14 million and you see the impact of distribution costs and input costs at $21 million. And then also the impact of the labor agreements and the impact of currency at $6 million.

On Slide 19, industrial packaging earnings increased from $115 million in the third quarter to $144 million in the fourth quarter, which was a 25% increase. Earnings benefited significantly from both higher volumes and increased selling prices. Quarter over quarter, we averaged $27 per ton, a price improvement for all domestic containerboard shipments. And the exit rate at the end of the year reflected the full realization of the $40 increase. At the end of the quarter, mill operating rates were high. Inventory levels were low. And export containerboard markets remain solid and we continued to have strong backlog.

On Slide 20, industrial packaging earnings increased by $29 million. You can see the realization of the box and containerboard price increases. Volume was boosted by the ramp-up of Pensacola lightweight containerboard and we also had seasonally higher volumes in European container, and so volume added $10 million. Cost mix was unfavorable due to a small number of operational issues at several mills, and increased wood and energy costs reduced earnings by $15 million. Other items included reduced Pensacola conversion expenses and one-time third quarter restructuring charges that did not repeat in the fourth quarter.

Turning to consumer packaging on Slide 21, you can see the earnings declined to $40 million, driven largely by $9 million in increased maintenance outage expenses and also increased wood costs. And consumer packaging earnings increased $13 million versus the fourth quarter of 2006 as a result of improved pricing and volumes. Our U.S. coated paperboard volumes increased by 2.4% over the 2006 levels, and results for food service and our Shorewood businesses were flat quarter to quarter, but food service reported record full-year earnings. We were disappointed with Shorewood's annual results. The business unit lost money in 2007, primarily as a result of $10 million in facility shutdown costs, but also continuing weak sales in the music and home entertainment segments.

Slide 22 summarizes what was another good year for xpedx, posting record fourth quarter and full year earnings. Xpedx fourth quarter operating profits were flat compared to the third quarter, but up 26% versus the fourth quarter of 2006, and 2007 full year earnings were up 14% over 2006.

On the next slide, we show two important productivity metrics that are helping us drive xpedx earnings. The first one, operating expenses as a percentage of gross profit, you can see that xpedx has reduced its operating expense to gross profit ratio by 400 basis points over the past five years, each 100 basis point representing an improvement of $13 million. A large contributor to the improvement has been a 21% reduction in head count since 2002. And in the second metric, revenue per square foot of warehouse space is also improved by 34%, as total warehouse square footage has declined by 12% since 2002. And just to give you a comparison, xpedx has reduced total warehouse square footage by 1.4 million square feet, which is roughly equivalent to the size of the University of Phoenix Stadium, which was the site of Super Bowl XLII.

Slide 24, forest products earnings increased by $75 million versus the third quarter, as we closed a few large transactions late in the period. At the end of 2007, we had 324,000 acres remaining in the portfolio and throughout 2007 and as we enter 2008, we continued to realize land sales at the appraised values. Right now we're expecting land sales this year to be at the low end of our previously announced range of $185 million to $275 million, as we're left with a different mix of land holdings in our real estate portfolio. We also expect that our land sales will be heavily weighted toward the second half of the year. And so we're continuing to focus on maximizing value for our remaining land. We'll sell it more quickly or more slowly, depending on value maximization.

On the next slide, a key component of our transformation plan was to replace earnings from divested businesses, especially the earnings from our land sales, and despite a 25% reduction in land sales earnings in 2007 versus the prior five-year average, we're actually able to increase our total operating profits by nearly $700 million. And despite 2008 land sales earnings that we expect to be significantly less than 2007 levels, we're confident in our ability to increase our total operating profits.

So now on the next few slides, I would like to turn to some of our strategic reinvestments. We're pleased so far with the progress on our strategic capital projects. The Pensacola machine started up in the fourth quarter and produced more than 100,000 tons of lightweight linerboard. We also completed the fluff pulp capital project at Riegelwood and are progressing along the ramp curve. We had experienced some construction delays at our Svetogorsk BCTMP mill, but it's now up and running and running well. We produced more than 11,000 tons of pulp in January. Construction for the Sun joint venture coated paperboard machine in China remains on schedule, as does the construction of our new uncoated free sheet paper machine in Tres Lagoas, Brazil.

Turning to Ilim, we'll report Ilim's -- IP share of Ilim's earnings on a one quarter lag basis and we'll report their fourth quarter and our first quarter 2008 numbers and we've determined that the proper accounting treatment is equity method. Right now we're very encouraged by the initial progress of our new joint venture with Ilim. On October 5 when the transaction closed, we had the new management team on the ground and focusing on the operations and the business plans. And right now economic conditions in Ilim's two major sales regions, both Russia and China, remain robust. So while we don't have numbers yet, initial indications are that we performed well in the fourth quarter.

On Slide 28, you can see the geographic operating profit mix and year-over-year earnings growth by business and geography. We increased our earnings in each of our business units. North American earnings grew by 20% and earnings outside North America increased by 80%.

So on Slide 29, you can see how that shook out on a percentage basis and in absolute terms. In 2007, 30% of our total operating profits were generated outside North America. We expect to continue to extend the percentage of profits outside of North America. We expect to continue to extend the percentage of profits outside North America because of the BCTMP line in Svetogorsk, the Ilim joint venture, and the coated paper board machine at our Sun joint venture and also the uncoated free sheet machine in Brazil. We also expect earnings in North America to increase as our businesses focus on margin enhancement through cost reduction, mix, and price as we balance our capacity with customer demand.

Turning to cash flow, we improved our free cash flow by $700 million in 2007 and we expect to improve it further in 2008. Our capital spending in 2008 will be approximately $200 million less than 2007, as we've completed most of our strategic reinvestment projects. 2008 will be the peak spending years for both the Sun coated paper board machine and the uncoated free sheet machine in Brazil. Those two projects combined represent just under $300 million in spending for 2008.

Then finally, just turning to working capital, we continue to make progress in our efforts to reduce working capital. In the fourth quarter, we reduced our trade operating working capital as a percentage of sales by 50 basis points, and you can see that since the first quarter of 2005 we've reduced our working capital by 200 basis points. So with that, I'll turn it back over to John and let him cover the outlook and wrap up the call.

Okay, thanks, Tim. Before we get to the wrap-up section, I would like to briefly review our progress relative to our original transformation plan objectives. We've got a little score card here on Page 32 that summarizes that. I think we've made great progress in improving our existing businesses. In fact, we're right where we said we would be at the end of 2007, back in 2005. But, and I said this at the outset, we still expect that we've got a lot more runway ahead of us in terms of improving our existing businesses and growing our earnings. We do remain challenged by the unprecedented input cost escalation, and we anticipate this is going to stay with us for some time. But we've exceeded the balance of our objectives, but we need to continue to improve and deliver greater share owner value to our share owners. And we're looking to do that through a combination of continuing improved earnings in our existing businesses, of selective reinvestment, and a combination of share buybacks and/or dividend increases.

This chart on Page 33 shows that our transformation plan is delivering the results. We've increased our annual earnings by $0.89 over 2006. $0.86 of this improvement came from our core businesses, which increased their earnings sufficiently to overcome $0.50 of lost earnings from lower land sales and divested businesses. We reduced our net debt, which lowered our interest expense and we repurchased 34 million shares, which increased our earnings by $0.22 a share. The net of all this is the 67% increase in earnings per share.

Looking at the current North American business conditions, we see characterized demand for paper and packaging, I would say, as steady. Our inventories are low and we expect to realize the announced price increases, our announced price increases in uncoated free sheet, pulp, containerboard, and coated paper board. We're going to continue to see increases in input costs. We're watching our inventories very carefully in Europe, particularly in the west, where they are building a bit. The Brazilian and Russian economies are strong, and we expect uncoated free sheet demand in those markets to at least match GDP growth.

So let's turn to Slide 35 to talk about the outlook for the business as we see it now. As I said, you know, we're seeing steady demand for North American papers and packaging. No big change from where we saw November and December. We expect increases in paper and packaging price realizations as we implement the announced price increases. Our first quarter earnings are going to reflect increased maintenance outage expenses, a continuing escalation of wood energy and distribution costs, and in Brazil, we've got a unique situation. It's not just we. It's really all of Brazil that buys power. Brazil's had a major shortfall in rain, particularly in the central and northern sections of the country, and spot power prices have gone up by 400 to 500% over the last 90 days. We're buying spot power at one of our facilities and that cost us $5 million in the month of January and this is really all going to be weather-dependent in terms of how long that goes. So excluding the impact of reduced land sales and with the addition of our portion of Ilim's fourth quarter earnings which will be in our first quarter numbers, we would expect first quarter 2008 earnings to be lower than the fourth quarter, but better than the first quarter of 2007.

Despite a lot of uncertainty about the economy, as we look at our demand, our costs, and our margins, we believe that 2008's going to be a better year than 2007 in terms of earnings. January, our xpedx revenues were up January 2008 versus January 2007. Our box shipments were up January 2008 compared to January 2007. Our paper shipments were solid, so no question the economy has slowed. 0.6% GDP growth in the fourth quarter really indicates that, but we don't see a recession in our January business activities. Might happen, and we're on a short cycle, we're in short cycle businesses with not lots of lead times, but as we look at business today, we think business is seasonally where we would expect it it to be. So with that, I'll turn it back to Tom for the question and answer session.

Thanks, John. Thanks, Tim. Amanda, we're ready to open up the line for questions, please.

(OPERATOR INSTRUCTIONS) Your first question comes from Claudia Hueston with JPMorgan.

Thanks very much. Good morning. Just a couple of things. One, just to clarify in the printing papers business, did you say there were $7 million for sort of these one-time mill issues and then $10 million for the labor and both of those, I guess, would be sort of one-time? Is that the right way to think about those?

That's right. And it was $7 million for operational issues, $10 million for the labor, and non-repeating, so you got it.

Okay, perfect. And then I'm just trying to understand a little bit the components of the corporate expense and just sort of how to think about it directionally over time. So I was wondering if you might be able to help explain how much is pension a component of that, how much is supply chain in terms of the sort of $650 million to $675 million I guess you've guided for, just how should we think about those. And how should we think about that on a longer-term basis if we look out to '09?

We should see an improvement again in 2008 for pension expense and supply chain's going to be probably about flat for 2007.

And what was your pension expense then in '07 all in?

I think it's in the appendix.

Slide 51. You can see pension expense 2006 $377 million, $210 million last year and then you can see the reduction we're planning this year.

Okay, thanks. And then on Slide 14, you show a pretty big improvement in mix as a component of your cost improvement, your non-price improvement program. What's sort of driven that?

Well, we look at mix, a number of ways, customer mix, product mix, but we also look at geographic mix. And where we're shipping product to. So as we look in eastern Europe, places like Poland or Brazil for Latin American shipments, as the markets grow closer to the mills and we pull that volume back to support what the strategic markets were, then we get a benefit on the mix of customer and the mix of transportation.

Claudia, there was a huge difference to say bleach board for example, there's a huge difference in the margin selling in the Middle East versus selling it in eastern Europe.

Okay.

And that's just another example of having a global footprint it, where we're out in some of these markets, where we're able to sell closer to the markets, we're able to get better margins.

Perfect, thanks.

Your next question comes from Mark Connelly with Credit Suisse.

Thanks. John, two questions. When we look at Page 8 and Page 15, we've got a reasonably good story in terms of the ability to keep prices moving up in line with input costs, maybe not quite in line with total costs. But I wonder, could you walk us through IP's major businesses and tell us where you think IP currently has the ability to maintain pricing power in the face of the input costs that you're dealing with?

Well, I think the, at the end of the day, Mark, as you know, that's a function of operating rates, and keeping supply in balance with demand. So I don't think the pricing power is probably an artificial word in our industry, but it really is a function of operating rates in supply and demand. As we look around the world, we see supply and demand in pretty good balance. You've got strong global demand for paper and packaging. So in our containerboard business, even though box shipments are weak, the, or soft, however you want to characterize it, global demand for containerboard is strong. The same thing is true to a lesser extent in paper, but it's also true in bleach board. So with the dollar where it is, the -- we're export-competitive and the markets globally are showing very positive growth. And we're in those markets, so we know that.

Okay, that's, that's a helpful way of looking at it. Just one second question, you talk about overall equipment efficiency, and clearly you've shown some nice gains there. Can you give us a sense of how much more you think there is out there under your existing programs, or whether you're, you know, going to start to bump up against a practical maximum?

Well, if you look at our number of paper machines we have around the world, best in class is well above 84%. The -- we've gotten about close to $300 million of improvements since 2001 and there's another couple hundred million dollars out there. When we look at Luiz Antonio, which is the mill we just acquired, they are running OE's above 90%, one of the best mills in the world. We're going redefine what we expect if we can get those kinds of practices to all our paper machines that are running all over the globe. So there's hundreds of millions of dollars left, because we're finding that what we thought was best practice isn't necessarily the world's best practice.

Okay, very helpful, very good progress. Thank you.

Your next question comes from Chip Dillon with Citi Investment.

Yes, good morning.

Hi, Chip, how are you?

Good. As we get prepared to account for Ilim, and obviously in the quarter you in essence I guess had $500 million that you couldn't get interest income on because you had bought it, it would seem to me that just based on what you've revealed so far that kind of roughly -- let me ask you this. Will this be a pretax number on the equity line or an after-tax number?

It's going to be after-tax, Chip.

And would a ballpark per quarter again, be very broadly, $15 million to $20 million per quarter at this run rate recently?

Well, I would characterize it this way. Our original estimate is still where we were for last year, but we really haven't seen the numbers on a U.S. GAAP basis. And so we want to see how that shakes out before, before we start talking about--

But the EBITDA was in broad terms for the whole venture around $350 million I think you said?

EBITDA, we were over $200 million. I think $210 million through the first half of last year and we were expecting the business to keep performing at roughly that level.

Okay, and you have roughly half of that, and the debt on the enterprise is, like a couple hundred million?

Yes, it's probably a little bit higher than that. Last time we saw -- last time I saw numbers would have been third quarter of last year.

Okay, and then separately, you mentioned in Brazil that you had some tax benefit that helped printing papers. How much was that?

It was about $6 million.

Okay, $6 million. That's obviously not going to repeat, I would think?

No, that was one-time.

Okay, and then--

We think of the tax department in Brazil as a profit center.

Okay. Well, yes, we can use those when we can get them. Then lastly on the timberland, you mentioned, I think you said you gave an exact number, if I'm not mistaken, 327,000 acres were left, is that right?

324,000.

324,000, okay. And any reason to expect the per-acre realization to go up or down in '07, not because I'm asking you to predict the market, but because of mix?

Let me just jump in there, Chip. That's going to be highly variable and it really depends on what we'll sell out of inventory. We've got land that's good hunting property. We've got land that is seeing in titles that is probably developable in the next 5 to 10 years. We really don't have any land in our portfolio that is near-term what we would call higher, better use real estate. That's not the kind of timberland that we've got remaining. It's going to be very dependent upon what sells and we're going to be very particular about what we sell from a value perspective. As Tim said, if we could sell it all today at what we thought was a decent value, we would do it. If it's going take a couple years, we'll do it that way. Looking at the per acre numbers is probably less and less an indicator of valuation because we get all of it appraised. They are all options, so we know exactly how we're doing and we feel very good about the values we've got, even in the real estate market and the financing market that was getting more difficult as the year went on.

Okay, thank you.

Your next question comes from Gail Glazerman with UBS.

Hi.

Hi, Gail.

Hi, thank you. Can you remind us how much you have left, if anything, under the buyback authorization?

The share buyback, Gail?

Yes.

It was authorized for $3 billion. At this point, we've done about $2.65 billion, so we would have $350 million remaining in authorization.

Okay, so you did about $100 million in the fourth quarter?

Yes.

And can you talk -- you touched on it a little bit, but as your cash flow's rising, can you talk in a little more detail about how you consider the various options for free cash flow between further buybacks, dividends and acquisitions?

Well, it's all about increasing share owner value, so we'll look at all of those things that you just mentioned and evaluate them for the opportunities that exist. And if we do not have reinvestments that make sense to increase your owner value long-term, then we'll look at share buybacks and dividend.

Okay, and just going back to Ilim, I know it's early days, but in the first three months that you've owned it, have there been any kind of anecdotal instances that you can give about whether you're more or less confident on the value that you bring to that proposition based on your experiences in the region?

I think we're more and more confident that there's a value-creating business plan that we can execute. These probably always take a little bit longer than you think at the outset. But the markets are good. The -- both in China and in Russia. We've got lots of opportunities to improve those facilities, with and without capital. As Tim said, we've got some of our key people. We've got the CEO over there. We've got some of the key people running the businesses in manufacturing, and they have got loads of ideas already.

Okay, great. And just looking at the consumer packaging business, do you think the price increases that have been announced will be more than enough to kind of offset the cost inflation you're seeing there?

Well, that remains to be seen, Gail. That's, you know, cup stock, we've gotten good price improvement in our cup stock business. Folding carton's been a little stickier, and one of our bleach board mills, Texarkana is on the west side, where we've had this huge spike in wood cost. Going back to the chart that Tim showed you, our wood costs are up $60 million on the west side and they are actually down on the east side and Texarkana sits right smack dab on the west side, so they have kind of gotten a bull's eye on wood costs year-over-year.

Okay, thank you.

That's unique to that mill. Okay, great. Thank you.

Your next question comes from Mark Wilde with Deutsche Bank.

Good morning, John, good morning, Tim.

Good morning.

John, I do want to say right at the start I think we all appreciate the tremendous increase in the amount of detail that you're providing us in both the release, but also in the presentation handout, so that's much appreciated. Couple of questions I had. Tim, can you give us any sense for both the quarter and the year about how much impact FX had, just from a translation standpoint?

Yes, sure. Let's see, for the quarter it was about $2 million, and just looking at the year, it's not a big factor. $4 million for the year overall.

I would say that FX probably has more of -- at least that much of an impact on our customers' business and therefore our business in North America. So in our packaging business, we're selling to customers that make things and put them in a package or a box and ship them somewhere, and their competitiveness I think has really been enhanced by the dollar being where it is. When you get to other countries like Poland, Brazil and Russia, then you start to see the currency fluctuation. But all in, the direct impact is pretty much a wash for the ups and downs.

Yes, okay. Another question about kind of FX and the weakness in the dollar, this has clearly made U.S. assets more competitive on a global basis. Are you seeing any signs, John, from kind of players around the world, of a greater interest in having U.S. manufacturing assets?

I don't think anybody's applied for a permit to build a new pulp mill in the U.S. yet, so I guess on that basis I would say no.

Okay. Hmm, all right. One other question, recently one of the big privately held containerboard producers was sold, Southern Container. And just looking at their numbers, their EBITDA margin was in the mid-20s. Now, you and most of the other public companies in the industry are more in the mid teens range. Do you have any thoughts on kind of what accounts for about 1000 basis points of spread between what they are able to generate and what you and other peers are generating?

Yes, I don't -- I'm not an expert on Southern Container, but I would say you would want to look at that recycled mill they have in Syracuse, New York. It's a very, very good mill with a great energy system on pricing and I think it's -- I think, I don't know this, I think it's got pretty good OCC pricing as well. That's what you want to look at.

Do you think that's sort of a spread you can do more things to narrow that over time?

Oh, yes, but I think it's -- we've got some great energy situations at International Paper, too, where energy costs are less than 50% what they are in the IP average. And so the -- if we picked our best mill, it was -- it would have margins that would be a couple hundred basis points, just operating margins, looking at manufacturing costs, couple hundred basis points better than the IP average. So no question about it.

Okay. Last question--

Container's a one-mill business, though.

Yeah. Last question I had, can you talk a little bit about Southern -- or about Shorewood? Seems like the performance at Shorewood has been kind of disappointing since you acquired it back in 2000. I don't know whether that's all kind of media and entertainment issues, or if there are other things as well.

There are some other things. We're eating all the restructuring costs in Shorewood, as in the business that's, oh, $10 million this year. Home entertainment has been weak, but you also had an exodus of consumer products companies moving their business to other parts of the world and we've had to make a choice whether we follow them to Mexico or China or not. So that's cost us -- that's not free to do. You have to invest to do that. Shorewood is positive cash. We're not satisfied with the earnings. We think we can prove it. Our food service business was kind of in in the same spot three or four years ago and it just came off a record year, just gained $100 million contract with Starbucks to start supplying them. So Shorewood faces a lot of challenges, externally and internally and we just have to deal with them.

All right, very good. Thanks, John.

(OPERATOR INSTRUCTIONS) Your next question comes from George Staphos with Bank of America.

Thanks. Hi, everyone. Congratulations on the year, too, very good progress. I guess first question I want to drill into is on the first quarter guidance. You gave us a lot of color. We appreciate that. Would it be fair to assume, John, that if not for the potentially lower land sales that in fact first quarter earnings would be up sequentially from the fourth quarter as you see it? I realize there are macro concerns--

I think it's fair to say we don't give guidance. That's a fair way to think about it. We're no smarter than the any the rest of you are at figuring out all this stuff ahead of time. Pardon me?

But it would seem again that it's the real estate land sale that's the biggest sequential negative. That's what I'm trying to get at.

Yes, our land sales for the year are going to -- Tim indicated will be down substantially. They are going to be weighted heavily to the back end of the year, and we really don't know, we don't try to forecast land sales. We can't forecast them, because that's not the way that business works. We're only going to sell land if we think we're getting decent value for it, and when we do, we may sell more of it and when we don't, we'll sell less of it.

Understand. I'm just trying to get at what appears to be quite good progress in the underlying businesses in terms of earnings.

Oh, no question about that, and as Tim pointed out, we've replaced a lot of land sales already with, we think, sustainable, sustainable earnings from businesses in North America and businesses outside North America.

Okay.

Seasonally the first quarter is always a tough quarter. So I would, I wouldn't be surprised if -- we're feeling pretty good about 2008 but it's always a seasonally sluggish quarter.

Fair enough. Could you give us a little bit more color on trends in Europe? You had, from what I recall from the appendix, very good performance in European paper's profitability. You also mentioned during the comments that you have seen inventories build a little bit in the west of Europe. What are you seeing right now and how are you going to match against that?

Our January volumes in Europe were good. I haven't seen the pricing numbers yet, so I can't -- we're just closing the books now for January. Volumes in Europe were good. We're heavily weighted in the east and Russia. That all comes under IP Europe, so we're not Western Europe-oriented, but volumes were okay. The inventories in Europe, kind of relative to inventories in North America are at higher levels.

Right. So you need more buffer stock there is what you're getting at.

I think we probably got too much inventory in Europe. I think that's -- to watch. We're not a big player in the Western European paper market, so we're -- we can manage our inventories, but doesn't have much of an impact on overall inventories.

Okay. On non-price improvement, you gave us your target for the year. We appreciate that. What do you think the range might be, plus or minus, on non-price, depending on the macroeconomic conditions, i.e., does that assume very low GDP growth in North America, does it assume continuation of growth outside North America? And if you see more of a global slowdown, how might that number pull in 10%, or 15%, just order magnitude?

Well, we put our plan together around a little less than 2% GDP growth in North America. First half of the year may not feel like that, because I think we're doing a fairly good job trying to talk ourselves into a recession. We didn't -- we see a slowdown. I wouldn't characterize January activity, certainly wouldn't characterize January activity as recession level activity. Where it's going to show up is in volume, and the -- that's where it showed up this year. We didn't get, in our non-price improvement, we've got volume in there. And we didn't get near the volume improvement in North America that we thought we would get, and we decided not to chase volume, but to chase profitability. And I think we made a meaningful improvement in our profitability as a result of making sure we matched our capacity to our demand. Of all the pieces, mix, the cost, and the volume pieces that go into the non price improvement -- probably the one that's got the most variation around it is volume. Now, we'll get volume out of the BCTMP mill in Russia that's starting up. We'll get volume out of Pensacola, which is starting up, but then there's the other piece of that. We didn't build growth into our plans in North American markets.

Okay, fair enough, John. Last question, housekeeping, bleachboard price realizations, I didn't see those in the appendix. Do you happen to have it off the top of your head?

I don't.

We'll follow up.

Yes. We'll follow up on that.

All right, thanks, guys.

Your next question comes from Richard Skidmore with Goldman Sachs.

Good morning, John. Just wanted to touch on really one question. As you think about the improvement in your uncoated free sheet business in North America, really profits have gone up, your margins have expanded. As you think about managing to price as opposed to volume, how should we think about going forward if the volume assumptions come in worse than expected. Would we anticipate IP to be as equally aggressive as you have been in the last year or so, taking out capacity?

We've taken out all our high cost capacity. We've -- the last facility that was relatively high cost was our mill in Bastrop, Louisiana, which we're converting to fluff and market pulp. That conversion will be complete I think the second half of the year. So we could curtail capacity there faster, but everything else International Paper has is in the first and second quartile and we intend to run it.

Okay. So as you talk about sacrificing volume to maintain price, at this current level of productivity in your mills and the mill set that you have, unlikely to be taking volume out. So if volumes did go down, we would just see temporary downtime. Is that how we should think about it?

You could see temporary downtime. You could see us make more pulp at some of the facilities and less paper. You could see us -- we're shipping some product into North America from Brazil. You could see less of that. I mean we've got options, but shutting down facilities, which we have done, and we've taken out all of our high cost capacity.

Great, thank you, John.

Your next question comes from Mark Weintraub with Buckingham Research. Hi, John.

I think you'd mentioned that cap spending would be about $1.1 billion this year and also that about $300 million of that was related to some of the expansion projects. First of all, I did hear you right on that?

That's right, $1.1 billion.

Okay. So basically do we have anymore of that type of spending beyond '08, or are we largely done with it so that kind of the run rate moves to $800 million?

Well, the run rate should move down. I'm not sure it will be $800 million, but once Sun and Topaz and Tres Lagoas are finished, those are couple hundred million dollars between them. The whole notion, we are trying to run fewer facilities so we have less maintenance capital to spend and we're trying to and we're getting better at solving problems at spending capital. The Russia capital will be financed out of the Russian cash flow and you don't see the Russian cash flow in our numbers, so I think you're pointed in the right direction.

Okay, and then also I assume that you also have no pension contributions this year. So the pension expense you have, that's another source of cash effectively if we're looking at earnings versus cash generation, is that correct?

Yes, just about the only noncash number, significant noncash number in IP and P&L is pension, whether it's income or expense.

Okay, and so coming back to the earlier question on what to do with all this free cash, maybe coming at it a little bit differently, how do you conceptually frame the question of sizing, just the dividend portion? You obviously are in a position where you are generating a lot of free cash. Do you use some sort of percentage of cash that you can generate, or how do you conceptualize that question?

First we like to capture it before we spend it. That's one thing, and -- but there's no question. International Paper's moving from having done a huge amount of restructuring, having a lot of moving parts to having, now we're operating. And we'll look at our free cash flow and our earnings. We've been paying out $1 dividend and we haven't -- if you look at our earnings, we haven't made average making $1 over the last five years. We're now coming out of this year at over $2, and if we are confident in those kinds of earnings levels going forward or better, we should be looking at returning more cash to share owners, either through more share buybacks or an increased dividend.

Okay.

And there's a lot of uncertainty in, obviously in the economy right now that I think much of it we created ourselves, but there's no question there's a slowdown and a collapse of the housing market. We want to get the cash in hand and realize it and then we'll, I think we'll make the -- a balanced decision with what to do with it. Just like the transformation plan that generated, including operating cash flow, over, well over [$11 billion]. It was a balanced approach to it. It wasn't all one way or the other. If we don't find reinvestment options we feel attractive, we'll have more cash to think about giving back to share owners than if we see good reinvestment options like we saw in Russia, like we saw in Brazil.

Do you expect to move it direct -- I'm speaking specifically of the dividend -- directionally as you get more comfortable about what your longer term sustainable cash generating power is? Or do you want to have more time under your belt to feel that yes, you've shifted to a new plateau and now you're ready to move that dividend more significantly?

We're confident we've shifted to a new plateau. I think we've got to be honest with ourselves and say the world as we see it now looks a little bit more uncertain than it looked last June. So we want to be careful in what we do, and we're confident in the progress we've made and confident that we can make more progress, and we'll be talking to our board about this as we move through the year.

Okay, very helpful. Thank you.

Your final question comes from Peter Ruschmeier with Lehman Brothers.

Thanks. Good morning. Had a couple questions. You mention the P&L impact for printing papers was positive, I think sequentially, 3Q to 4Q from reduced maintenance outages. I was curious if you could quantify that P&L benefit. And related to that, I think you also say that the maintenance outages will increase sequentially into 1Q. Is it possible to quantify that?

Actually, the maintenance outages were unfavorable in the quarter by about $12 million, and from fourth quarter to first quarter it's essentially flat.

So the maintenance was $12 million higher in 4Q than 3Q.

Yes.

Okay.

In North America, Peter.

Got it. Tim, do you have an underfunded pension balance figure for us and also the OPEB for year end '07?

At the moment, the last time I saw -- I mean, we're fully funded, so we can get pension numbers for you. But we made the contribution over a year ago, of about $1 billion.

Okay. So we should think of that as fully funded at this point.

Yes.

Okay. And maybe a question for John, if I could. I guess it gets back to the question of the increased competitive position in the U.S. I'm curious as how you think about currency and whether you view this competitive advantage that some of your U.S. mills have as more permanent, and if so, how does that impact how you think about an export strategy, and are you doing anything in particular to develop more of an export strategy from some of your mills?

Well, we are in containerboard. We've had an export position there for some time. It's shrunk obviously as we've shrunk our North American footprint. The global demand for containerboard is 3 to 4%. That's not the rate of growth here in North America. We tend to focus just on North America and get all caught up in that. Global demand for containerboard is quite healthy and the good U.S. mills -- we've got a bunch of them -- have a very favorable cost position in virgin linerboard. And virgin linerboard demand is part of that 3 to 4%. Now a lot of the world is going recycled, but they all need some virgin linerboard -- virgin fiber to go into that. So the answer to your question is yes, in our bleachboard business and in our containerboard business. In our paper business strategically we see the markets from a North American standpoint capacitywise is being regional. I guess there's a scenario where we'd say if things got to a point where you could ship products into Europe. But there's plenty of capacity in Europe. So I'm not sure that would prove out to be a worthwhile thing to do. But no question, in containerboard, bleachboard, and obviously in market pulp. We're not trying to be in the market pulp business in North America. If we're going to be in the pulp business, it's going to be in the Southern Hemisphere or Russia.

Okay. And I guess on a related point, can you comment on your ability to gain access to ships and containers, and as you go to market, as you go to the export market, how are you doing that in light of the constraints? Are you using more container [eyeships]?

Well, we've got some delays, especially in our pulp business. But we don't seem to ship all the containers that we had, and getting stuff in and out of Brazil is always a problem because Porto Santos is so clogged. And transportation is becoming not any -- transportation, land transportation, but ocean transportation is becoming increasingly a big factor in the delivered cost structure of getting product to market. So what that does is it just puts an additional emphasis on staying in low cost areas for manufacturing and being good at manufacturing excellence. So wherever you are, you run it very well.

And I guess lastly, if I could, John, do you care to share your thoughts on those types of shipping rates for full year '08 versus '07. What's your general expectation as to the kind of escalation you might see?

I really don't have that off the top of my head. Most of what we're seeing are surcharges right now, but that would kind of be rail and truck. We'd have to get back to you on that. That's not something I follow on a daily basis.

Thanks very much. Good luck with the quarter.

Thanks, Pete.

I would now like to turn the call over to Mr. Tom Cleves for closing remarks.

Amanda, thank you very much. Thank you to everyone who participated in today's call. If you have additional questions, we'll be available by telephone. Thank you.

This concludes today's International Paper fourth quarter 2007 earnings conference call. You may now disconnect.