International Paper Co (IP) 2008 Q1 法說會逐字稿

Good morning. My name is Cynthia, and I'll be your conference operator today. At this time, I would like to welcome everyone to the International Paper first quarter 2008 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 turn today's call over to Tom Cleves, Vice President of Investor Relations. Please go ahead, sir.

Thanks, Cynthia. Good morning, everyone, and thanks for joining International Paper's first quarter 2008 earnings conference call. This call is also being webcast.

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 earnings presentation and at the end of our earnings press release. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP financial measures is available on our website at internationalpaper.com, under the Investors tab. The website also contains copies of the first quarter earnings press release and today's presentation slides.

I'll now turn the call over to John.

Thanks Tom. Good morning, everybody.

As Tom said, we announced our first quarter earnings this morning. First quarter earnings from continuing operations before special items were $0.41 a share. These earnings reflect lower forest products earnings, which we expected; and escalating input costs, which we didn't expect, and they increased at a much greater than expected rate. Putting that $0.41 into context, it still was a second best first quarter we've had in 8 years, but relative to the fourth quarter our results reflect about $150 million, or $0.24 a share, in reduced forest products earnings. And relative to the fourth quarter, input costs also increased by $90 million, or $0.14 a share, which is three times the positive impact we in pricing we got in the first quarter relative to the fourth.

Paper and packaging volumes in North America declined slightly, but these declines were offset by increased volumes outside North America. Our first earnings reflected a 29% sales growth and 18% operating profit growth in our non-U.S. operations, and the EBITDA margins of those non-U.S. operations are about 600 basis points higher than our U.S. EBITDA margins. First quarter earnings also include the positive impact of Ilim's fourth quarter earnings, and we are putting those in for the first time. We'll talk a little more about Russia later on.

Now I'll ask Tim to comment on first quarter results in a little more detail, then I'll come back and wrap it up.

Thanks, John. Good morning, everybody.

Before I get into some of the slides, I just want to let everyone know that most of the material that I'm going to cover today is going to be on a year-over-year basis. We've included the fourth quarter comparison in the appendix of the presentation, but given the seasonal nature season of our business, we think a year-over-year comparison is more meaningful.

If you look at slide 4, it compares the first quarter results with the first quarter of 2007, and we achieved improvements in price and volume and cost mix, but the improvements were largely offset by the rapid rise, as John mentioned, in input cost, and Ilim did contribute $0.04 per share to our earnings. Over the next few slides, I'll give you some more details on the different factors that impacted earnings.

On slide 5, a look at volumes. Volumes for most of the businesses improved slightly on a global basis, although there were some differences between regions, and we'll cover some of that. Printing papers was flat year-over-year, with North America being down about the same amount as Brazil was up, and Europe was flat. Other businesses were up, but volume softened near the end of the quarter. We were stronger in January and February than we were in March, and we think there are several factors that led to the lower volumes at the end of the quarter, the economy being one of them, weakening throughout the quarter as we experienced it. But we also think there was some buying ahead of our price increase announcement, especially in uncoated free sheet, and we also think that earlier Easter holiday had an impact on shipments toward the end of the quarter.

On slide 6 we give you a breakdown of input cost, and this is on a global basis, and you can see that our cost increased year-over-year by $160 million, with the largest increases in energy and chemicals. And on slide 7 the chart that we've shown you before, but you can see the ground that we made up in 2006 and 7, and we fell a little bit behind in the first quarter, given the rapid increase in input cost.

On slide 9 - or I guess slide 8, we've given you a little bit more detail than we've given in the past, and so we've broken out the input cost increases by segment, and again this is on a global basis. You can see the printing papers absorbed about 55% of the total cost inflation due to increases in North America, but also we had a spike in energy price in Brazil, and we had higher wood cost in Europe.

Going on to corporate items, before I get into the segment results what I would like to do is set it up a little bit. Our first quarter expenses were down about 10% versus the first quarter of 2007. And the other point on this slide that I want to make, and I think most of you have already seen this, that we have restated our operating segment performance by allocating more of the corporate expense items out to the business, and we did this to facilitate better peer comparisons, and so all of the numbers that you are about to see will be on a restated basis for current and historical to reflect the new allocations.

So with that, let's turn over to printing papers. Overall earnings were up $18 million year-over-year, and if you look at the business by geography, North American printing papers was up 11 million, but we had an offset in a short fall in pulp earnings that was caused by issues in two mills, operational issues in two mills January and February, which have since been corrected. Brazil was up, reflecting the incremental increase in [tonio tons], but was offset by a spike energy costs and a heavier mix of our sales to the export markets.

On slide 11, you can see sales increasing by $175 million over the first quarter of 2007. Year-over-year volumes declined, with the exception of Brazil, as I mentioned a minute ago. And on slide 12, you can see that in the case of printing papers, price has kept pace with input cost, but the volume shortfall, which was about $9 million, was primarily due to the conversion of our Pensacola conversion to the lightweight linerboard production that we made during the course of last year.

Now let's turn to industrial packaging. Year-over-year industrial packaging increased by $24 million, with improvements both in North America and Europe, and you can see on slide 14 the pricing increase versus both periods, both fourth quarter of last year and first quarter of last year. Container volume was flat compared to last year and slowed during the quarter. European margins improved but we saw softness in the industrial markets, and we also saw some softness in some of the agricultural segments around the Mediterranean. On slide 15, you can see that we made improvement in price volume and cost mix, which totaled up to $69 million, but was offset by $45 million in increased input cost.

Turning to consumer packaging, sales increased by $55 million and earnings decreased by $26 million. Coated paperboard in the U.S. volume increased by 4%, and selling prices increased by $31. If you look at slide 17, you can see the waterfall chart there, price and volume increasing about $16 million but input cost of $27 million eroding all of that. And Shorewood's first quarter earnings declined significantly. We talked about this on the last call for the fourth quarter call, but we continue to see decline in demand for the home entertainment section - segment, and we a continuing shift of tobacco production away from North America.

Slide 18 shows the xpedx earnings decline, this is the year-over-year change due to incremental overhead allocation. If you exclude those allocations, xpedx earnings were up slightly from the first quarter of 2007, despite an increase in bad debt, and we think that bad debt issue was isolated, but despite the increase in bad debt and the start-up expense of our Canadian unit. As we exited the first quarter, xpedx [as] order volume reflected a slowdown in the commercial printing and the financial services segment.

Turning to forest products in the first quarter sold 13,000 acres of mostly small parcels of land at an average price of just under $1,900 per acre. The reduced price reflects a lower quality mix of land, and we continue to experience selling prices for the mix of land that we have at the original appraised values. So the difference in price from the fourth quarter to the first quarter is simply the change in mix of land that we we're selling. For 2008, we expect forest products earnings to still be in the range that we've given before, 185 to $275 million, and it will continue to be back half of the year weighted as we go through land transactions in 2008.

On page 20, first look at Ilim. We did report $0.04 in earnings - for our share of the joint venture earnings. That was $17 million. It included a $4 million unrealized foreign exchange gain on debt remeasurement, and also a $6 million one-time charge for fair market value adjustment to inventories at the IP acquisition date. Ilim experienced continuing strong demand in pricing for its pulp and paper products, and their EBITDA margins actually exceeded 20%. We've also - the Board of Directors of Ilim have recently approved a $350 million capital investment plan, and the capital investment plan includes roughly $200 million in projects related to improvements in forestry and mill productivity, and also $150 million in environmental, regulatory and cost reduction projects.

I'll finish up on the cash flow. You can see that cash flow improved by about 45% in the first quarter versus last year, and that's even with an increase in capital spending of $85 million, which is primarily the - directed at the coated board machine at our [Sun] joint venture, and the uncoated paper machine in Brazil. We also improvements in working capital, inventory and receivables management in the quarter.

So with that, I'll turn it back over to John to wrap up.

Okay. Thanks Tim.

Before I comment on current business conditions and talk about the second quarter, let me give you a brief update on our acquisition of Weyerhaeuser's industrial packaging business. The integration of these assets gives us a great opportunity to create the best container board and box business of scale in the world. We are pretty confident, very confident, that this will generate DCF returns in excess of 15%, very compelling financial returns for this. We've been working on the integration plans over the last month, and even more convinced as we get into it that there are great opportunities, and some will come fairly early, to realize the operating synergies. With these synergies, we will increase our EBITDA by more than $1 billion from our 2005 baseline, which is illustrated on slide 23. Another way to think about that, that's all the earnings that went away with divested businesses which we bought in $11 billion in proceeds.

So this left hand pipe chart on slide 23 shows the composition of our 2005 EBITDA, $2.8 billion. In 2005, forest products and the divested businesses generated nearly 50% of our total EBITDA. By the end of 2007, we'd replaced all the earnings of the divested businesses, even as far as products earnings declined by 35%. The rate pipe chart shows that with the addition of Weyerhaeuser, and the associative synergies, we are going to increase our EBITDA by 40%, and we'll generate nearly 90% of our earnings from these core paper packaging businesses.

So with that, go to slide 24 if you would. Where we are in terms of getting ready for the closing, we filed the regulatory approval papers in early April, and have been meeting with the regulatory agencies to respond to their questions. The integration teams have been working a lot with - both internally and with Weyerhaeuser, with a heavy emphasis on developing systems for providing integration services and getting off to a fast start. We continue to plan on finalizing the acquisition during the third quarter, and we are also very focused on running the existing businesses while we are doing that.

So let's turn our attention now to business conditions in the second quarter. What we tried to do here is frame this up with kind of a red/yellow/green slide, so you can see what is going on around the world in the businesses. Looking ahead to pricing in the second quarter, we expect paper prices to increase as we realize the announced increases that we've already announced. We expect containerboard pricing to be similar to first quarter levels. With respect to volume, we anticipate demand for printing papers to decline slightly and market pulp volume to increase. Containerboard volume will decline slightly, due to increased maintenance outages we have in North America. But we do expect our European box volume to improve.

Our second quarter earnings will reflect a $60 million increase - of $60 million in maintenance outages, so it's a big maintenance outage quarter for us, and a significant improvement in operations which will offset a big chunk of that increased outage expense. Our results will also reflect, unfortunately, continuing high input costs. We expect forest products earnings to improve slightly from first quarter levels.

So in summary, despite a very weak U.S. economy and some uncertainty about when it's going to get better, if input costs remain similar to the already high levels we've experienced in the first quarter, we would expect second quarter earnings to be higher than first quarter levels.

So now let me just turn it back to Tom and we'll open it up for your questions.

Thanks John. Cynthia, we are ready to entertain questions, please.

(OPERATOR INSTRUCTIONS)

Your first question comes from Chip Dillon with Citi.

Good morning. Let me make sure I got this right, because I think this perhaps demonstrates how the cost has really snuck up on you. I know you mentioned $161 million in costs year-over-year. Did you say $90 - 9-0 - million just from the fourth quarter to the first?

Yes. 99, [though].

I know you mentioned this, a lot of uncertainty, obviously we're just a month into the quarter, but if we sort of froze things where they were now, assume no increase or decrease, can you give us a guess as to how much further they would be up in the second versus the first?

I can't. I just don't have on my fingertip what our input costs were in March relative to what they were in January and February. But as I've said, if we froze input cost at the first quarter average - and we have some ups and downs in there, so I don't think you can generally say they are all going up from where they were in March, but some are, and gas is certainly up and oil is certainly up., but if input cost in the first quarter averaged what they - held level, we would expect our second earnings to improve.

Got you. Then can you talk a little bit about the consumer packaging segment? I'm assuming that the fluff pulp you're increasingly selling our of places like, I believe, Riegelwood, is actually flowing through printing and writing, so you might confirm that.

It is.

Can you talk a little bit about how you see that unfolding this year? Again, not really talking about pricing but maybe with the situation at Shorewood?

Well, Shorewood is a tough business. A lot of their consumers moved from North America to other places like Mexico. We closed two plants last year, and ate those costs in our operating earnings. We've got $5 million in our first quarter that, as Tim mentioned, is from closing a big plant in Canada. There is more to come, more costs associated with that, another $20 million that we'll have to take this year. Having said all that, keep in mind Shorewood is less than 2% of our capital and less than 3% of our sales. So it's not a needle-mover. And like we did with our food service business, which was struggling a couple of years ago and is now making record profits, we think we can significantly improve both the top line at Shorewood and the bottom line, which is the most important line.

On the bleachboard side, really what bleachboard is getting hit with is, they are in as input cost price. We have cup stock - cup stock prices have moved up, folding carton prices have moved up and up to offset input cost. So those are the three segments that are impacted. Food services is doing well. Shorewood's issue is right-sizing its cost structure and getting - replacing revenues lost, and bleachboard is recovering some of the input costs that we've had to experience.

Got you. And then this last question. Can you talk about what your guess is at this early stage towards directionally what CapEx would do on a consolidated basis for 2009? I would assume the Sun spending would be behind you. I don't know if there is any early look to what we might see for next year, whether it might be down?

I think we are going to be - our target is less than $1 billion with Weyerhaeuser.

So including Weyerhaeuser?

That's the target.

Got you. Thank you.

Chip, if you look in the appendix on slide 33, you will see the quarter-over-quarter input cost increases.

Got you. Thank you very much.

Your next question comes from Mark Wilde with Deutsche Bank.

Good morning, John. I wonder if you could just talk from a big picture standpoint on how you manage this situation we are in right now, where we've got weak volumes because of the economy, but we are in atypical situation where you have all this pressure on commodity prices?

There's the cost side of it and there's the price side of it. On the cost side, we are looking to take out transportation models where we can. We now have the ability to actually understand what transportation models are, with the supply chain improvements we've made, particularly to our containerboard business. So managing transportation now in our industrial packaging business is almost as significant as labor cost. That is one piece.

We redirected our capital budget significantly to energy consumption reduction projects. They make good sense economically and they obviously make good sense environmentally, using less energy. We are doing things like improving our wood yard productivity, so that we can process more round wood, which means would he don't have to go as far to replace wood that has gone away because the housing market is in such poor shape that ship supply has dried up. So that - and obviously we are managing our costs as tightly as we can, and we think we can do it even tighter.

That's the cost side. On the price side, we are aggressively moving on price wherever and whenever we can.

Okay. Is it possible to get any additional color from you on kind of where you see price in your two biggest businesses over the next kind of three to six months? It doesn't sound to me like you are assuming that this containerboard hike will do anything in the second quarter from the end of the discussion comments that you made.

We think in containerboard prices - our prices did not go up. All we can talk about is our prices. Our inventories are in good shape. Demand for containerboard is strong, and we don't chase box volumes. Box plant utilization is not what International Paper is about in our containerboard business. We'll go to any channel to sell containerboard, and right now there are lots of channels to sell containerboard into. Having said that, our prices are basically flat. In printing papers, our prices have done a better job of offsetting input cost, and we think we are going to realize the [announce] on [credit appreciating] price across the board.

Do you have any visibility in terms of non-maintenance down time, as we look out over the next three months? Sounds to me like you are seeing some of the slowdown, say in the printing and writing business, that we saw in the industry data for March?

Our big change in printing papers is the absence of Pensacola. We had Pensacola, I think our shipments were down 8% in the first quarter compared to the first quarter of last year. Pensacola accounts for about 10% of that. So we were down more than the industry just because we have less capacity, and our inventories are in good shape. We run our mills to meet demand. We don't run to just because we can produce. And as you know, Mark, we don't comment on down time forecasts, other than maintain outages.

And Mark, it's Tim. If you look at printing papers ex-Pensacola, year-over-year the business was actually slightly ahead. So the volume shortfall is almost totally impacted by the Pensacola conversion.

I thought I had heard you, when you talked about xpedx, mentioning that late in the quarter you had seen some of the slowing from the economy?

Well, in printing papers we certainly saw - the end of March was slower than the - January and February. There's no question the economy has slowed, and it's having an impact on commercial printing. Think about direct mail. We are big on envelope, and the direct mail segment in financial services has already been severely impacted. You know, there are less solicitations for credit cards, less solicitations for home equity loans. Business with Cap One and Citigroup is way down, and we are seeing the impact of that in our converting the converting segment around our the [printing] business. [Cap] size is okay.

Very good. I'll pass it on. Thank you.

Your next question comes from Gail Glazerman with UBS.

Gail, how are you this morning?

Good, thanks. Just carrying on those questions on demand into your box business. If I remember reading correctly, your volumes were up on a same-day basis. I wonder if you can talk a little bit more about what you are seeing, specifically in North American box demand?

Box demand is reflecting, Gail, as you would expect ,what is going on in the economy. It's pretty weak. The durables segment has been and continues to be awful. It's housing and auto-related. The nondurables segment is better, but consumers are adjusting their spending habits because the economy is slow. I was worried before we were talking our way into a recession; now we've succeeded, we've been successful, we are in one, regardless what the GDP number is, if consumers believe we are, and I think we are seeing a pull back in spending which is impacting box demand.

Okay. And looking at the printing papers business, as you are raising prices in this type of environment, just carrying it forward, have you seen any signs of kind of price - I guess you are talking about the weakness in the financial services direct mailing, kind of price elasticity to demand as you are pushing through these increases? How dramatic could this be impacting volume, or do you think it could?

I don't think it is, Gail. It's hard to take a month. The shipment numbers in March were down were down pretty sharply. The shipment numbers in the first quarter were not down nearly as much as March. They were down like 3% year-over-year. That's about in line with where we've been. So there's been substitution going on in the paper segment on some of these grades for a long time, that is going to continue. So I don't see any real shift, and we've got a lot of input cost inflation flowing through a lot of commodity products, paper being one of them, and we just have to pass those through in the form of pricing.

Okay. And when you look at the stronger global growth relative to the U.S., are you finding - what type of issues would you have servicing some of that out of the U.S. In terms of shipping backlogs? Has it been an issue? Are they getting any better or worse?

Global demand for containerboard is up 3 to 4%. There are - export volumes in containerboard are up. We really don't have a whole lot of capacity to move around because we've shrunk our footprint. The whole strategy here is for International Paper not to have more capacity than we need, and then when we have low-cost capacity, to run it. So we have taken out the high cost stuff, and we continue to not build our inventories. So we've been selling product, I mean the pulp market has obviously been very strong. The containerboard market, partially but not solely because of the U.S. dollar has been strong, and we expect it will continue to be. So we have some options. In the box business - in containerboard, we are more than willing to go to different channels to sell linerboard but we recognize it is a highly competitive market at all ends.

Okay. But you haven't found yourself unable to service export demand because of shipping or less shipping?

There is no question that there is congestion at the ports. We are having a hard time - if product doesn't arrive at the port exactly when it's supposed to, and that is particularly true in pulp, we don't get the shipment out. Brazil, with the expansion of exports out of Brazil, is having a hard time. So there's port congestion kind of everywhere, a shortage of containers, you name it. So from that perspective, we have to manage that very carefully to make sure we can get what we want, going in the right direction at the right time.

Okay. Thank you.

Your next question comes from Claudia Hueston with JPMorgan.

Thanks very much. Good morning.

Good morning.

I just had a couple of questions on cost. I was hoping you would talk a little bit about the cost situation in printing papers in both Brazil and Europe. Have power costs in Brazil improved? And maybe just comment on wood fiber costs in Europe, if they've stabilized at all or they're still going up?

The energy situation in Brazil has improved dramatically. We were looking in January about a $60 million annualized cost increase just for electricity, just at one facility. We now think that is going to be probably 20 to $30 million year-over-year.

Okay.

Still high. Still up. But changed dramatically, which just shows you the volatility of the energy market there. Costs in Europe are up. as they are in the U.S., because they are affected by world energy prices, that have been moving up. So we have the same issues around transportation costs and chemical costs in Europe. A different set of dynamics around wood costs, but generally speaking wood costs in Europe and Russia are up, for a different set of reasons than they are up in North America.

Okay.

But as I've said, our profits are up sharply outside North America. Our margins are better, because the overall cost structures are good and demand is growing.

In terms of just your overall energy exposure, are you hedged on natural gas at all going forward?

It's Tim. We are hedged for 2008. We are about 70% hedged on our buy.

Okay. And then just on corporate cost, the guidance I guess is 140 to 160 for the year, and then the first quarter was a little bit low at $21 million? So how do we think about the trajectory of those costs going forward? And then maybe if you could comment a little bit in terms of thinking about the allocation of the supply chain spending within the segments, and sort of how to think about that as we move into 2009, and I guess the spending sort of moves from containerboard or corrugated, wherever the spending is this year, to some of the other areas?

What we've done, as I've mentioned earlier, is we tried to push out so that we put the businesses on more comparable basis to some of the peers. The 140 to 160 will probably be weighted a little bit heavier to the back end of the year, because of the supply chain spending, but that is still playing out. And it's beginning to shift now. We've been largely completed in industrial packaging around the board mills. We are starting the implementation in the printing papers mills, and looking forward to 2009, we are going to have to assess how Weyerhaeuser impacts that. So we are trying to work through that analysis now, and probably will have more to say about it in the next quarter.

Okay, great. Thanks very much.

Your next question comes from Mark Connelly with Credit Suisse.

Following up on that question, can you give us, Tim, a little more of a sense of what the categories of expenses that were allocated were and what the basis of reallocation is? I guess I'm a little bit surprised, even though I do understand that the expenses were shifting, that printing and writing has seen so much of it relative to industrial papers - industrial packaging.

It's a combination of things, Mark, and Tom can walk you through more of the details, but generally what we are doing is we are looking at things that may have been more directly tied to certain types of businesses that had not been allocated in the past. We have LIFO inventory charges. Some of the stuff is cash, some of it is not cash. And I think if you are referencing the printing papers section, what we are doing is we are allocating in some cases, where it's not directly tied to the performance of the business, on a capital-employed basis. We looked at a lot of different methodologies and ran the numbers different ways, and it doesn't really make a whole lot of difference in terms of basis for allocation. So we are trying to keep it simple.

Okay. Thank you. I'll follow up with Tom. Just one question for John on what is going on with Russia. We are starting to see some of the Scandinavians announce more projects, particularly in pulp in Russia, not necessarily 100 percent voluntary on their part I suppose, and I am just wondering how you look out over the next five years? Is that going to meaningfully change the competitive dynamic that you guys are looking at?

Well, you have to remember, Mark, that most of these projects in Russia are projects that have been on the drawing board for years. So there are not a lot of brand new ones, and there's a huge amount of infrastructure that needs to go in to getting those projects off the ground. So the time frame, I suspect, is going to be very, very long. Not impossible, but long. And Russia is sitting on -- it's got a huge softwood surplus, so the fiber there is available, and eventually that fiber will get used, I think. But the time frame -- we look at greenfield options when we were looking at what to do, and it wasn't clear that Ilim was going to be what we did, and we said the risk, the time frame on the capital cost is huge, and the Scandinavians may actually do some of those. I think most of them are in the study phase.

So when you think about the resources you are going to need, the people and the equipment, you are not worried that any of these projects will come out in the same time frame and make that more difficult for you?

I know - there is - it's tough. Capital projects in Russia are tough now because of equipment and people. So there is no question about that. We started up our BTP&P project, which is doing great. We started up six months late, though, and most of that was around delivery of equipment and getting labor in to getting the project finished. Now we are selling all we can make at higher prices and producing more than we thought. But it came out six months late. So that's just a snapshot of capital projects in Russia, and it's the same across a lot of industries.

I would just add to that, Mark, that one region of Russia can be dramatically different than another region in terms of labor availability and how mobile that labor is.

The other thing, Mark, I'd say that gives us an advantage is having a Russian partner is a big help. That will feel very differently doing with someone who's been there and done that than someone who is trying to do it for the first time.

Thanks very much. I appreciate that.

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

Good morning.

How are you?

Pretty good, John. I wanted, if you could, to get a little bit more detail on the improvement, I think you mentioned, in operations you expect in the second quarter? Again, if you could give us a little bit more color in terms of the sequential increase and maintenance outages in 2Q, any larger projects behind that? A related question, I didn't see much of a benefit this quarter, if I read the slides right, from non-price improvement. If that is correct, what was going on there? What should we expect in 2Q? And then I have some follow-ons.

Do you want to take a couple of those?

Yes. In terms of the maintenance outages, George, it's simply - one way to think about it is in terms of timing, because we have to take the charge in the quarter now, and so it's just as the mill maintenance schedules play out. And I think we have a slide in the appendix, but if you look at our planned maintenance outages for the year, we are very much front half of the year weighted. So if I remember the numbers, we are going to be about 2/3 of the way through in the first half, with lighter schedules in the third and fourth quarter.

38 and 39.

Pages 38 and 39. In terms of non-price improvement, we made good progress in terms of volume and mix in the first quarter, and less so on the manufacturing side, given the inflation that we experienced. So it's really -- we think the volume and the mix initiatives will continue to play out in the second quarter. It's going to depend on what happens with input costs, and certainly a lot of the initiatives are based on how we run, and at this point we think we are running well now. We think we'll run better in the second quarter than we did in the first.

We left $25 million on the table in operations in the first quarter. Did not have a good running quarter. February was better than January, March is better than February, and April will be better than March, but we didn't run well in the first quarter at all.

A lot of that was related to those two issues, you said - I thought you said in pulp, John, in the first quarter.

We ran poorly at [Augusta] and Riegelwood. Augusta didn't impact pulp; Riegelwood did. Was less production on the table at Georgetown and Pensacola. So - and we had a couple of issues in Europe. So by and large - we typically run very well all the time. This was the quarter when we didn't and we are on it.

As far as early April trends, John, could you give us any sense for what you are seeing in uncoated free sheet in particular, realizing month to month demand can swing fairly - fair volatility?

Looks like the end of March, and the end of March is not as good as the beginning of March.

Okay. I guess you would attribute it then to the macro more than anything else? Stepping back, you said your year-to-date isn't running much below what the normal trend has been in uncoated free sheet the last several years. But I also remember in the past that you had been expecting maybe a little bit more of a boost this year because of the election and because of the easier comparison. So is there any shift that you are seeing or is this entirely due to the macroeconomic environment, as you see it right now?

Some of it is the macroeconomic environment for sure. Think about what's going on, just what I was saying about direct mail. Typically, when there's a postal increase, which was there was, there is an impact on paper consumption, and then that bleeds off after a couple of quarters. But now we have had a couple of end-use segments and user segments like direct mail and the financial services area really pull back sharply, as those end users like financial institutions adjust what they are doing to reflect the problems that the financial services sector is having.

The election, no question, will help, but there's a bunch of pluses and minuses. I don't think we ever said we thought the year-over-year comps were easy. We think that structurally this business is one that is not showing growth. It doesn't look like newsprint, but we are managing it for what it is, which is a big, important business that is showing growth negative patterns to it.

Okay. I appreciate that. We'll come back at a later point. I guess last question, in terms of what you are seeing out of Europe, I think you made some comments that the box business may be a little bit weak because of agriculture in the Mediterranean, and that'll be seasonal I guess, but some color there would be helpful. And you also mentioned, I thought, that some of the industrial end markets were a little bit weaker, if I heard you right? If you could give us some color there? Thanks. Good luck in the quarter.

Sure. The economy is pretty much overall - we are in primarily Western Europe on the industrial side, so you have France, Italy and Spain. It just hasn't been as robust. It's not as bad as North America, but it hasn't been as robust as we would like it to be. On the agricultural side, the crops kind of come through quarter by quarter, so what's grown in one quarter shifts to a different crop. Citrus has been weak, but we picked up volume in other areas. Tomatoes have been strong. It's just going -- as we shift from first quarter to second quarter, there will be a rotation of crops that we'll be [factoring]. We'll have to see how those play out in the quarter.

All right. Thanks guys.

Your next question comes from Rick Skidmore with Goldman Sachs.

Good morning. John, I just wanted to ask quickly on the land side, how much land is remaining in the fourth segment and is the mix that we saw in first quarter representative of what is remaining, or is it more like what you've been selling in the fourth quarter?

We've got about 300,000 acres left, Rick, and the mix will be all over the place. As Tim said, we have appraisals on all the land. We have some high value land, some low value land left in the portfolio. Think of it this way, we have less than 5% of our land left. So fundamentally I'd say we are out of the land business. Obviously, we will try to maximize the value of that 300,000 acres, and whether we do it with a long tail or do it all at once, it will be a function of -- we are indifferent about that, but we will maximize the value on it and this happened to be a late quarter and we'll have other quarters like this as well. So it will be very choppy when those land sales come in over the next couple of years. Maybe choppy up or choppy down.

Just following up on one of the earlier questions on the inflation, as I look at your slide - the slide deck on slides 45 through 48, they go through the respective costs of starch and energy and wood fiber and whatnot. The trend clearly is up in the first quarter through March. I'm just wondering, John you mentioned that if you froze the average in the first quarter of inflation, that you would expect second quarter to be better, but it looks like the trend is clearly higher in March versus the average. Have you seen inflation costs level off, come down, continue up into April?

You know, I can't tell you Rich because I haven't looked. The price of oil has been bouncing around, and that affects through fuel surcharges a lot of what we do. Natural gas prices, as Tim said, were hedged a big chunk of our natural gas, and some of these commodities like wax, like cost of soda, like starch, we are not pricing them for order, we are pricing them on a quarterly basis. I don't much of it is on a monthly basis. So the answer is a little bit of yes and a little bit of no.

And then, John, just a bigger picture --

But I'd say Rich - Rick, we are not expecting big increases. We've already had an explosion of input cost, $90 million quarter-over-quarter, so I don't want to predict we've hit the ceiling, but the best guess we can make is they stay where we are in the first quarter.

I think that's the way we've approached it as we look at the performance of our business. We are not expecting them to fall back to the levels they were at the end of the fourth quarter.

And then John just bigger picture, as you look at what is happening with inflation, is there any view or any ability to start thinking about pricing, such that you could build in the inflation pressures that you are seeing, or be more firm on pricing -- there's a trade off between being much more aggressive on price and the lost volume, such that lost volume is a bigger impact?

The way we think about it is lost volume is not the biggest impact. We manage our pricing looking at what makes us more money, not what ships us the most volume. Like I said about the box business, we don't run the fully utilized box plants, we think it's impossible to do that. If you look at pricing and printing papers, we've been fairly successful at getting through - pricing to offset input cost in a business which is a tough business. They are all very competitive. Our printing papers business, bleachboard, containerboard. So competition is always out there, which is -- we are cognizant of that but we don't chase volume, we chase profitability.

Thanks, John.

Your next question comes from Mark Weintraub with Buckingham Research.

Thank you. On the corporate expense allocation, at one time I think you had anticipated that the corporate expense would be coming down 150 to $200 million, once the supply chain spending was all done, et cetera. So is that improvement now going to show up in the segments, and when might we expect that to occur? And I recognize that having Weyerhaeuser might change this a little bit, but if we treat Weyerhaeuser separately for now.

Hey Mark, it's Tim. We had said that peak cash spending on the supply chain project was going to be this year and peak expense next year, and then winding down 2010, 2011, and that hasn't changed if you look at IP, ex-Weyerhaeuser. And you would see some of that -- most of that decrease in the business segments as it happens, and you will see a smaller piece of it at corporate remaining. And we'll have to see how Weyerhaeuser plays out.

And are the types of numbers that we've been thinking about, the possibility that spending or at least what gets expensed would go down about $150 million or so, is that still -

That is still a good number to use.

Okay, great. Thank you.

Your next question comes from Peter Ruschmeier with Lehman Brothers.

Good morning.

How are you?

Hi, John. Good thanks. Maybe a question for Tim, if I could, on working capital. I'm curious on your expectation as you go through the year on how much of an opportunity or not you see in working capital?

Well, we budgeted improvement. There's a lot of factors going on. We still think that we will show year-over-year improvements, and the good news here is the cash flow increased even with higher capital spending in the quarter. So last year we had a number of issues on the working capital side, as it related to growing the business outside the U.S. I think we are doing a better job of that now. The trick about working capital is making sure it is sustainable, and we are trying to put programs in place business by business so that we capture working capital improvements and sustain them. And we've shown a tremendous progress in working capital management since mid-2005, and we had another increment improvement, about 70 to 100 basis points improvement, budgeted for this year.

We feel pretty good about our cash flow generation in the first quarter, both from the businesses and then managing our working capital.

Okay. And 70 to 100 basis points improvement, that's on revenues?

Yes.

That's helpful. Thanks. I wanted to ask, if I could, on Ilim, John I'm curious about your views on the Russian log export tariffs, and A, how you think it's going to play out, and B, how it will impact International Paper?

Well, I can't predict how it will play out, other than to say there's a lot of negotiation going on. But at the end of the day there will be a tariff. How much, when it goes in, what's grandfathered or what is not, there's a whole bunch of discussions around Russia getting into the WTO that are tied up in that, but everything I've heard, the Russian government has said that there will be a tariff. So I think there will be one. In fact, in some cases I think the tariff has already gone in, but it's hard to figure out all the - exactly what is happening. But the bottom line is it can't hurt us. It can only help us. We are sitting in Russia. All the wood we use in western Russian goes right by our [gate] to Finland. We process all our wood in Russia, sell our products in Russia, which is what the Russian government wants, and in our joint venture we do the same thing. It's not uniquely, we are one of just a small handful of companies that is doing just what the Russian government puts this duty in or tax in to encourage, which is processing in Russia.

Okay. That's helpful. My last question was on slide 49, back on the cost inputs. Just to clarify that the non-U.S. cost that you list, I presume, is Europe and Brazil, but excludes Asia. as the footnote says. So that's both Russia and China would be excluded from these numbers?

Well, it excludes the joint ventures that we equity account.

Wouldn't have Ilim in there. Would have our European eastern and western operations, and would have Brazil.

Okay. And John, I don't want to split hairs on this, but if many of these cost inputs are bought on a quarterly basis, and if a spot price is up sharply today, to suggest that your cost might be flat for the first quarter, does that imply you expect the spot to roll over?

That's not splitting hairs. I didn't say that at all, Pete. I didn't say I was forecasting flat input costs. Nothing - I'm not. I just said that if, in terms of the second quarter, if input costs were flat, we would expect our second quarter earnings to be higher than our first quarter.

I understood. Would you say that the average lag on these -- I know they vary, but would it be about a quarter - on these various contracts, about a one quarter lag on what is going on in the actual market? I think some things might even be longer than that. Maybe coal might even be 12 months?

It's all over the map. And we have some contracted customers that allow for pass throughs, some that don't, some that have reopeners. So you get the pass through but you don't get it immediately, because there might be two reopeners a year. So it's all over the map on that. But you are absolutely right. That is not splitting hairs. Input costs are high and may go higher.

Okay. Good luck with the quarter. Thanks John.

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

Many of my questions have been touched on, so I guess these will be elaborations. Starting with the wood situation in Russia, why is it up? Is it being used for heating or pellets? Because I thought that the tariffs would have already decreased exports and therefore provided better supply within -

What is happening in Russia is it's mostly weather related. And weather related in the west, for us in [Sudergorst], that's a big chunk of it. And then in the east in the joint venture, we are spending capital, as Tim mentioned, on forestry, infrastructure and productivity, so that we can reduce our wood costs. So when you have warm weather -- the logging roads in Russia aren't made to be year around. They are made on the expectation they are going to freeze, so you can get it in in the winter. So if you don't have a normal winter, which we haven't had for a couple of winters in western Russia, you can't get on the logging road, which means you have to go further to get wood, which drives the cost up.

Okay. So presumably they are still on some sort of spring break now? Are your wood supplies adequate for second quarter or is that going to be an ongoing issue?

Supplies are adequate, it's just the price we have to pay for it.

Okay. And then going back to the situation in free sheet, where we saw a substantially higher drop in March than the quarter average, can you comment on what that might have been? Was the economy, just substitution all of a sudden increased, and I guess is 10% the new 5%?

I think some of that is where Easter fell during the quarter, and there was probably some pre-buying ahead of the [inaudible] free sheet price increase. Thomas Kadien is sitting here, who runs xpedx, and maybe he can talk about how he sees it?

The calendar and the way it laid out with shipments and customers throughout the distribution channels really didn't -- wasn't our friend in the month of March. We had a 21-day March, which is short of a typical 22 or 23-day month and March is really when we get our biggest shipments. So losing the days and then having Easter fall where it did in the calendar impacted the March shipment numbers, I'd say by a couple percent.

Thanks. Final question. I understand how the election cycle can theoretically or used to theoretically benefit newsprint consumption, but I've heard today in a previous presentation from you how the election cycle might impact uncoated free sheet, and I'm not sure I get i,t so maybe you could explain that?

Used to, theoretically. It's a good way to think about it. Typically there has been pretty strong correlation between the Olympics and paper consumption where the Olympics are being held, and election years and paper consumption, because of the barrage of direct mail that all of us get all the time. If we see paper consumption going down in an election year, which we never said we thought there would be strong growth just because it's election year, we just said the year-over-year decline might not be as sharp. What we are seeing now is we have a - basically a significant downturn on top of us that impacts advertising. It affects consumer behavior. It affects just what the banks are doing. So when Citigroup and Cap One and all these financial institutions decided to cut back on advertising, because they are going through a lot of financial difficulties, and feel like it doesn't make sense to solicit for home equity loans now, when housing prices are going down, or new credit card usage when their bad debts are going up, that impacts printing demand and impacts envelope demand. And uncoated free sheet also tracks white collar employment, and unemployment levels are still relatively low. They've been inching up a bit. So you have to factor - all of that stuff goes into the hopper.

Understood. Thanks very much.

Your final question for today comes from Don Roberts with CIBC World Markets.

Thank you. John, two quick questions. First of all, I guess with this secular concern with energy and chemical prices, especially if we see the pricing of carbon in the future, what is your view if you step back in the table and say over the next three to five years the opportunity to run your facilities increasingly as biorefiners that produce more energy and chemicals in addition to your pulp and paper products?

Remember, we are 60% energy self-sufficient on average across our businesses. We are pushing for - to use less BTUs, to make a ton of paper or packaging grade product, and we've taken a couple hundred million dollars out of our cost structure. Whether it makes more sense to turn some of these units into energy sellers as opposed to paper makers is -- there is a set of economics that could lead you down that path. It's already happening in aluminum industry. I know some aluminum companies in Brazil, when energy prices spiked, stopped making aluminum products and started just selling power to the grid. We might see ourselves in that position, but I think it will take a significant step change from where we are and - anything is possible. No one thought oil was going to go to $15 a barrel when it did, and no one thought it was going to go to $120 and it did. What I take away from that is, it a mistake to look at things and say they'll never change, whether they are high or low.

So when you look at it, is it just for the energy or are your sort of R&D folks saying there is an array of chemicals sides - or markets that you could at look at over time, as well?

I'm not sure I understood the question.

Energy is one opportunity here. I'm just thinking as we look at these in the [craft] pulp platform, energy is one output. There is a series of industrial chemicals as well. I'm just wondering - you know, if I look at this three to five years and say we've got this pretty - potentially strong headwind, especially if carbon pricing, they get serious on it, is there ways to take this existing asset base that you are looking at and, I guess, do that step function? Is that an area that you are focusing on to some extent?

I wouldn't say it's a big focus for us. We have looked at the impact of cellulosic ethanol, both on wood cost but also the technology of cellulosic ethanal, and think that is -- it may develop over time but I think there will be other non-fossil fuel sources of energy that have good economics ahead of cellulosic wood - cellulosic ethanol. Now, switch grass and other residues are another story. So we are not spending a lot of R&D time trying to figure out how we can make pulp mills and do power plants. They already are, and we use that energy to make our products, and I think we will be able to continue to do that, even if we have high energy costs.

I have another question but I'll follow that offline, given the time.

Okay.

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

Thank you, Cynthia. Thanks everyone for participating on the call, and as they say on TV, Investor Relations Operators are standing by for additional questions. So give me a call, 24/7. Thanks.

Ladies and gentlemen, this concludes International Paper first quarter 2008 earnings conference call. You may now disconnect.