International Paper Co (IP) 2008 Q3 法說會逐字稿

Good morning, my name is Laurie and I will be your conference Operator. At this time I would like to welcome everyone to the International Paper third 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)

Thank you, I will now turn the call over to Tom Cleves, VIce President of Investor Relations. Please go ahead.

Thanks, Laurie. Good morning, everyone, and thank you for joining our third quarter earnings conference call. This call is also being webcast.

John Faraci, our Chairman and Chief Executive Officer, and I will conduct today's call. Tim Nicholls will not be with us today. Tim was injured in a bicycle accident and currently is in outpatient surgery to repair his shoulder.

During this call, we will make forward-looking statements that are subject to risks and uncertainties which are outlined on slide two of our earnings presentation. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP measures is available on our website. Our website also contains copies of the third quarter earnings press release and today's presentation slides.

I will now turn the call over to John Faraci.

Thanks, Tom. And good morning, everybody, and thanks for joining us.

Today Tom and I, with Tom standing in for Tim, will cover our third quarter results, the performance of individual businesses, and we will also talk about business conditions and our outlook going ahead.

Turning to the third quarter, I am now on page 4. Despite continuing input cost escalation and tough market conditions, we delivered solid results. Third quarter earnings from continuing operations before special items are $0.84 a share, which is 47% higher than the third quarter of 2007. Revenues in the third quarter compared to the second quarter are up $1 billion. That's mostly the result of having Weyerhaeuser as part of our revenue base for the quarter. And we achieved these strong results despite input costs that increased $0.47 a share since the third quarter of 2007. That's the quarter-to-quarter comparison. The sale of our Haynesville shale mineral rights increased our earnings substantially, which we told you about on the second quarter conference call. Earnings from our operating businesses, that is businesses excluding Forest Products, were $0.36 per share.

Our solid third quarter results reflect increased selling prices, some weakening in volumes and the addition of Weyerhaeuser's packaging earnings, as well as reduced operating costs. Finally, and I think very important, we generated nearly $700 million of cash free flow during the quarter, more than twice that we delivered in the second quarter.

Slide five compares our third quarter results with the third quarter 2007. We achieved $0.56 of improvement in price, volume, cost of mix, but these improvements were largely offset by the $0.47 of increased input cost which I talked about a minute ago. So in essence, despite the price increases we continue to have a lot of cost inflation flowing through. Interest cost increased as well, reflecting the additional debt from the acquisition of Weyerhaeuser's packaging business. But there is good news there, we paid off more debt faster than we thought during the quarter.

Let me just give you a couple of details about factors that impacted our earnings before I turn it over to Tom. In the third quarter, global input cost increased by $286 million, that's the $0.47 per share I was talking about, with energy and chemicals continuing to account for the largest increases. The appendix of the material that you all have has addition detail on input cost by element, if you want to look at that.

Slide seven here shows the North American price increase and input cost comparison. We see, in the green, price increases; in the red, input cost increases. During the first six months of 2008, our selling prices only equaled 78% of our input cost; we have a lot of pricing but we have more cost inflation. We lost a bit of ground in the third quarter, during which our selling price is running 60% of our input cost inflation. Now we have price improvement coming out of the quarter, but during the quarter we weren't even.

Now, I will turn it over to Tom to review the business segment results, and then I will come back and talk about - sum up and talk about the outlook at the end.

Thanks, John. Slide eight, please. Third quarter printing paper earnings declined to $210 million, reflecting input cost inflation that exceeded selling price increases by $50 million. North American paper earnings were flat, but North American market pulp earnings declined by $27 million. Higher pulp selling prices were offset by higher manufacturing costs, escalating input and trade costs, and the cost for the two-week market-related shutdown of our Louisiana mill. Brazilian earnings increased $4 million, benefiting from higher prices and $16 million in foreign exchange gain, but hurt by input cost, lower export demand, and a nine-day maintenance outage at our Luiz Antonio mill. European earnings declined slightly, as higher priced were offset by lower volumes, higher raw material costs, and foreign exchange losses of $26 million.

I would like to mention that in October, we announced that we will begin a consultative process with our employees to conduct a review of the strategic alternatives for our uncoated free-sheet mill in Scotland. Inverurie is a high-cost, unprofitable mill, competing in over-supplied markets. We will study the options for this mill, and we will be prepared to discuss our plans for this facility late in the first quarter of 2009.

Slide nine, please. Year-over-year, North American Printing Papers volume declined due to the conversion of the Louisiana mill from uncoated free-sheet to market pulp conversion. This conversion led to the 22% increase in North American market pulp volume. By the way, on Monday we announced that we will take at least seven weeks of market-related down time at the Louisiana mill in November and December. This down time is necessary to continue to match our production with our customers' pulp needs.

Brazilian paper shipments declined due to lower demand in export markets. Selling prices were higher in all regions, with the exception of a slight decline in Western Europe. The 5 Euro decline in European Papers reflects Western European paper pricing only. Year-over-year industrial packaging earnings increased by $69 million, despite the negative impact of $80 million in increased input cost. Higher selling prices increased earnings by $37 million. Higher volumes, including the Weyerhaeuser packaging volume, added $64 million. And improvements in cost and mix increased earnings by $47 million. We achieved these strong results even after absorbing the cost of 35,000 tons of market-related down time in September, which we took to continue to match our containerboard production to our customer's needs, and to avoid an inventory build.

In early October, we began an extended shutdown of the 250,000-ton machine at our Albany, Oregon mill. This machine will remain idle for at least 90 days. Also, we will shut down the 430,000-ton machine at our Valiant, Oklahoma mill. We intend to restart our Vicksburg mill in early November, about the same time that we will shut down the Valiant machine. Most importantly, we will continue to match our production to our customers' needs.

Slide 11, please. Year-over-year, North American containerboard volume was flat, while North American box shipments declined by 1%, although shipments dropped significantly at the end of the third quarter. European box shipments declined by 5%. Board and box prices increased in North America and Europe. In the legacy IP system, September containerboard prices were $55 per ton higher than July average prices, and September box prices were $45 per ton higher than July average prices. We expect higher average box prices during the fourth quarter.

I would also like to comment on the progress of our Weyerhaeuser packaging integration project. After the transaction closed on August 4th, we successfully separated the packaging assets from Weyerhaeuser. The new leadership team was in place on day one, and they hit the ground running. We are utilizing transitional services provided by Weyerhaeuser for certain finance, human resources and IT functions. The sales team and the supply chain systems for both businesses have been merged into single entities. We are on track to achieve the forecasted synergies, and are very pleased with the progress of the integration.

Slide 12 shows that consumer packaging earnings declined to $6 million. Input cost inflation was 65% greater than the cumulative improvements in selling prices and cost mix. Year-over-year North American coated paperboard shipments increased by 2%, and selling prices increased by $67 per ton. Food service volume is holding up well, as consumers trade down to quick-service dining, and as ecotainer cups continue to gain share. Revenue in our converting businesses increased by 4%.

Slide 14, please. Xpedx posted strong operating profits of $35 million, benefiting from solid volumes in paper, packaging and facility supplies. Xpedx earnings also benefited from continuing operating cost reductions that reflect our ongoing business redesign efforts. These structural cost savings partially offset $20 million in fuel and freight surcharge inflation during the quarter.

Forest Products earnings were $305 million, including $260 million in earnings from the sale of the mineral rights in the Haynesville shale. We were able to coordinate this mineral rights sale with the purchase of Weyerhaeuser assets, such that the sale was a tax-free exchange of like-kind assets. Therefore, the cash taxes will be deferred for a significant amount of time.

In the third quarter we also sold 33,000 acres of land, which generated earnings of about $45 million. The mix of land sales includes timberland, which led to the decline in the average price per acre. We continue to sell our land at or above the original 2006 appraised value. At the end of the third quarter, we have 237,000 acres remaining in our land portfolio. Given the weakness in U.S. credit and real estate markets, we expect land sales in the fourth quarter to be less than half of third quarter levels.

Slide 16, please. Sales at our joint venture with Ilim declined by 5%, due to lower export demand and annual maintenance outages at the two Siberian market pulp mills. Due to the expense of the two outages, and $18 million unfavorable swing in foreign exchange impact, earnings declined to $5 million.

Slide 17 contains an overview of our special items for the third quarter. We recorded a $84 million after tax charge for the impairment of the Inverurie mill assets. We recorded $69 million in after tax charges related to the acquisition of Weyerhaeuser's packaging assets, and for a writeoff of supply chain initiative development costs. We have made the decision to scale back our plans to implement our supply chain project throughout our combined box plant system.

We also recorded a $29 million after tax charge for the U.S. taxes on the gain on sales of assets of our Ilim join venture. Ilim sold shares of a Russian subsidiary, and U.S. Federal tax law treats the gain on sales of stock of foreign subsidiaries as taxable income. Finally, we also recorded a $22 million after tax charge for legal reserves for costs associated with the end of our siding and roofing claims period.

Slide 18 shows our nine-month 2008 earnings relative to nine-month 2007. Earnings per share increased from $1.54 to $1.80. Excluding Forest Products in both periods, earnings increased from $1.08 per share to $1.21 per share. 2008 earnings were reduced by $1.07 in increased input costs, which were offset by $1.07 in increased selling prices and improvements in cost mix. Our earnings also benefited from improvements in volume, reduced corporate expenses, and the addition of Ilim earnings. Increased interest expenses, mainly reflecting the incremental debt incurred to acquire the Weyerhaeuser assets, reduced earnings by $0.14 per share.

Slide 19 please. In addition to the earnings per share improvement, through the first nine months of 2008 we increased our free cash flow by more than $600 million over 2007 levels. Excluding the cash flow from the mineral rights sale, 2008 free cash flow increased by 60% over 2007 levels. Working capital reductions are driving this improvement in free cash flow. We used this free cash flow to pay down nearly $1 billion of the $6 billion acquisition price of the Weyerhaeuser assets.

Now, I will turn the call back to John.

Thanks, Tom.

Before I talk about the fourth quarter, I would like to talk a bit about the recent deceleration of global economic activity and its expected impact on our fourth quarter. There is no question from my perspective that the world changed in the third quarter, and International Paper was not immune from these changes. If you ever wanted to make a case for how Wall Street is connected to Main Street, I think the impact of the credit markets freezing up, and its ultimate impact on what is happening to economies around the world, is a good indication of how close that connection is.

So for us, we experienced a sharp decline in demand for our paper and packaging products in North America, and mostly around the world, and also for market pulp globally. Market pulp prices declined during the quarter. We don't think they've hit the bottom yet. But the combination of decreased economic activity - and really, we saw this start to happen about the second week of September. So more or less we had ten weeks of continued weak economic activity, which has been happening all year, but the last two weeks of September, the last two weeks of the third quarter and the first three and-a-half weeks of October have been dramatically weaker than the prior nine months.

Despite these challenges, we will continue to manage our capacity to meet our customer's needs and to maximize or generate positive cash flow. We are going to produce volumes required by our customers. We're not going to tie up working capital inventories, and as a result, we are taking significant market down time in the fourth quarter in our uncoated - in our North American uncoated free-sheet system and our North American Industrial Packaging business. Currently, we are taking 350,000-tons of down time that is right now in our Industrial Packaging business, to balance our supply with our customers' demand.

So just with that perspective in context, I think it is very important to understand how things have changed dramatically in the last six weeks. Let me turn to the fourth quarter, and we have got a couple of charts here trying to show what is going on with pictures and colors. With respect to pricing, we expect average North American prices for uncoated free-sheet to improve, as we continue to realize the third quarter price increases. Uncoated free-sheet prices in Brazil will improve as we implement our announced 7% domestic price increase, and we expect uncoated free-sheet in Europe to be more or less flat. Overall, as I said, I don't think we've hit the bottom on pulp prices.

We expect fourth quarter prices for boxes to be higher as we continue to realize our third quarter price increases, and as Tom indicated, I think we have gotten good flow-through, very good flow-through, of our announced priced increases, both on board and very importantly on boxes. Because if don't get it on boxes, it doesn't matter. U.S. [coated] paperboard prices will also benefit from the continuing implementation of announced price increases, and a lot of our contracts have been restructured so we will get pricing improvement as we go into the first quarter of next year.

Global demand for market pulp declined significantly as we ended the third quarter, and we expect this is going to continue. The slow down of - in the U.S., now, and the major global economy has also led to a sharp decline, particularly in Industrial Packaging late in the third quarter, and if the economy plays out the way everybody is thinking it is going to, which is sharply weaker in the fourth quarter from the third, I think we will see that volume decline with us throughout the quarter. We do expect some seasonal improvement, though, to demand in our European container business, driven by the agricultural markets.

So I'd like to spend a minute now, turning to the next slide here, and I am on slide 22, and talk about what is going on with input cost inflation, because there are a lot of moving parts here and I just want to be clear on what we see today. You know, so far, input cost, and that is including transportation, so we've got that input cost, our commodity inputs plus transportation, have reduced our 2008 earnings by more than $1 a share. While costs for energy and OCC are moderating in our North America system, we continue to face high prices for other inputs. However, input costs in Brazil and Europe are expected to be unfavorable in the fourth quarter.

Prices for natural gas, electricity and oil are declining, but for other input costs they are expected to either remain high or to increase. You know, the Weyerhaeuser system uses more natural gas and OCC, so we are going to get more benefit on that side of the equation. But wood, and we use wood everywhere, wood costs continue to go up, driven by the lack of residuals from the weak housing market and the resultant need to go out further to procure wood, and with fuel surcharges on top of that, we've got additional miles and additional cost per mile. So when we look at our input costs today, without making a forecast, our input costs today are about equal to our input costs for the average of the third quarter. So we don't see any dramatic decline in input costs yet from where they have been during the quarter.

So looking ahead, our fourth quarter earnings will reflect a decrease in total maintenance outage expenses, and we are going to continue to run our facilities very well. We expect earnings from our operating businesses, that is excluding Forest Products, to be less than third quarter innings. How much less is going to be a function of the amount of down time required to balance our production with our customers' needs, which is in turn a function of how the economies play out, how credit markets behave, and how long consumers, which are two-thirds of our GDP, sit on the sidelines. It is very clear that they have stopped spending. Equity earnings from our Ilim joint venture are going to be less than third quarter earnings, primarily due to foreign exchange losses. And remember, there we continue to report on a one-quarter lag.

So before we start the question-and-answer period, I would like to summarize our third quarter performance. Because while we are heading into a different set of market and business conditions, I think we are heading into it off a pretty strong platform. Despite very tough conditions in the third quarter, we delivered solid results. We absorbed continued input cost increases, and the effect of weakening global economy activity, yet our earnings and our cash flow were up. We achieved price improvements for most of our major products, and our strong third quarter results continue to reflect efforts to reduce our costs and run our big facilities well.

We are pleased with the strong start to the integration of Weyerhaeuser. Day one was almost seamless; the separation of Weyerhaeuser took practically no time. We'd been planning it for six months, and I'd have to say this was the best integration given the first three months that I have seen over a number of sizable transactions. We are going to get more merger benefits faster, and we are confident we have good momentum in those combined businesses going into the fourth quarter and on into next year.

Finally, we generated nearly $700 million of free cash flow during the third quarter, significantly up from the second quarter, even without the impact of the gas sale. In every quarter of this year, our free cash flow has continued to improve.

I with that I will turn it back to Tom, and we will take the rest of the time answering your questions.

Thanks, John. Laurie, we are now ready to entertain questions, please.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Claudia Hueston of JP Morgan.

Thanks very much. Good morning. I was hoping you could talk just a little bit about trade flows across your businesses, just given the changes we have seen in currency and obviously just a globally slower economy. Have things changed at all in uncoated or bleached for containerboard at this point?

Not as of yet. Just to remind you how volatile currency is, I mean the Euro was $1.24 three days ago and now this morning it was over $1.30. So we are going to see just a lot of volatility in currency. As of yet, Brazil, Russia, North America, China, we haven't seen changes in trade flows. I would say in China, there is no question that exports from China to the rest of the world have slowed down. That is not currency-related, that is reflective of what is happening in Western Europe and North America, as far as demand goes.

Thanks. And then just looking at the Consumer Packaging business, your costs there were just a little bit more significant than I had expected. I was just wondering if you provide a little bit more color on what the cost input pressures are specifically in that business?

We have got more polyethylene and polystyrene costs in that business. Wood costs are sharply up in that business relative to others, just based on geography. And we are using more coal, which is lower cost, but costs for coal are going up while prices for oil and gas have been coming down.

Okay. You talked a little about restructuring some your contacts in that business. Is there an opportunity there to maybe better match some of the cost pressures you are seeing?

Yes, yes, and yes. Most of that will show up in the first quarter of 2009.

Lastly, on free cash flow, which was very strong in the quarter. Your working capital has improved a lot over the last several quarters. How much more room to do you feel like you have to go on that side of things?

We don't know. That's a great question. I think we're going to keep on pushing it, because on that one I don't think we know how far we can take it. With our supply chain capabilities now, we've really had the ability to manage our inventory down to levels we thought were impossible, both on containerboard and in uncoated free-sheet. You know, there is going to be pressure on accounts receivable, but we will have to manage that.

Okay, thank you very much.

Your next question comes from the line of Peter Ruschmeier of Barclays Capital.

Good morning. John, I was hoping you could help us with the $286 million of cost pressure, as you indicated, if we were to assume that cost pressures remained flat today, how long would it take to feed in and how much would it drop?

I'm not sure I - say it again, Pete?

The 286 million of costs, if oil prices stay constant from here, how much benefit could you get from that over time, and how long do you think it would take given the lag effect?

There is lag effect on the fuel surcharges, which is 10 to 30 days. I'm still not sure what you are asking about in terms of the flow-through effect. I mean, our pricing - we are not asked more than a month or quarter on any of the big commodities. So if we see a change, and with gas, we're buying gas every month, we're doing a bit of hedging, so we are partially in the stock market, partially hedged. And you will see on page 50, the last sheet. It has got all the consumption of input costs, so you can make your own assumptions about pricing, because you have the quantities there.

Okay.

I know that didn't answer question, but I am really not sure what you are asking.

I guess I am just suggesting that the oil price today is down 50%, and a lot of these costs are going to be direct and indirect derivatives of oil.

Well, chemical products are - still remain very high. I mean caustic soda is five times what it was a couple years ago, and it hasn't come down yet. But if we have a significant global recession, you would expect that to impact commodity chemical costs. So I think it is a question of how much inventory exists in those businesses, and some of them got disrupted by the hurricanes. You know, this $150-barrel of oil, we didn't see that go in right away. It was almost like $1,000 pulp. Remember when we had $1,000 pulp, and everybody said - you know, only one container probably in the world sold as $1,000 and then the price went down. I'm not sure we ever saw the full impact of a $150-barrel of oil, because it didn't stick around long enough.

Okay, that's helpful. Shifting to the containerboard integration, I'm curious if you can remind us, John, on the amount and timing of the packaging synergies that you've targeted, and maybe share some more, if you could, of what you have learned so far through the integration process, you know, maybe positive and negative surprises, and kind of how that would impact your thinking on those synergies going forward?

Well, I have got Carol Roberts sitting right here, who is right in the middle of that business. I will ask her to comment on it. But I will just say from my perspective, we are getting more merger benefits faster, and Carol, if you want to just briefly talk about what you are seeing?

Sure, John. And Pete, thanks for the question. As you might recall, we had said that our target synergies for Weyerhaeuser was $400 million, with a first 12-month target of $175 million, and what I would say there is that we are off to a very good start so I feel very confident about the doability of that goal. We are off to a good start.

Relative to the acquisition, I am very pleased. The good news is the separation was a non-event, and what I have been most pleased with is the strong, fast start we have gotten. We fielded our leadership team on day one, which speaks to the positive attitude of the employees out of the Weyerhaeuser packaging business, they are actually very pleased to join forces with us and to build a strong business. That has gone very well, the assets are very good. Probably the curve ball that we've got is we didn't this market we will be in, but we will manage through that. So I think we are doing very well.

One the big areas we have got a great opportunity is S&A side, and we have been very aggressive there, and we are already at a $90 million annualized rate on S&A reduction. So all in all, it has gone very well.

You know, Pete, that S&A came from all the planning we did, there was a whole bunch of Weyerhaeuser S&As that stayed with Weyerhaeuser that served their business that we didn't take on. So we didn't have the severance costs, we didn't have any of (inaudible), so we got ourselves organized to run without it.

Okay, that's helpful. Just the last one, please, and I'll turn it over. John, I know you've had a lot of discipline on running to demand. I'm curious, without showing your hand on what you may or may not do, given the macroenvironment, can you remove enough tons in container board, if needed, to stabilize the market, or do you think you have really done what you need to do for now?

We are going to run our system to match demand, and manage our inventories. I don't want to speculate about what we might do or what others might do, or what the industry situation might be. It's just not something we can do. But we are committed to manage our capacity. I think - what I told you we're right now, that's not a forecast, what we are doing right now, we are doing that, and we would expect our inventories to stay in check, and industry inventories are in good shape. In fact, our inventories will come down in the fourth quarter.

Very good. I will turn it over. Thanks.

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

Good morning. John, can you talk a little bit about what you are seeing in the uncoated free-sheet market, the volumes there for the industry were pretty weak for the first part of the quarter. As you look out, how do you see that business evolving here in North America?

Well, shipments are down about 6% year-to-date, Rick. That is kind of an aggregate across the board. If you look in the different grades, it is different in some of the different grades. Imaging papers are up. Some of our key brands like HP are up, and we are aligned with some of the stronger merchants and some of the strong retail channels, where we are down but we are down less than the market. There's no question in the last six weeks, the same thing I talked about in terms of what has happened to demand in packaging has happened in paper. You know, commercial printing has had a sharp pullback. As you know, envelope and direct mail has really been hurt by what is going on in the financial services market.

Did you give a number for down time that you are taking in uncoated free-sheet, or the number - the down time number, was that in just containerboard?

The down time number was just in containerboard.

Okay. And just on the uncoated free-sheet in Brazil, as you look at what is happening in Brazil with some of the large market pulp producers there, any concern with regards to supply of pulp for your paper machines there, and any view about maybe doing something strategic in Brazil with one of those pulp producers that may be now in a little bit more distress?

We're glad we're running - a new pulp seller, I think about 100,000 tons in Brazil, out of Luiz Antonio. I think right now we are in the right, we're in paper not pulp. The paper business is - I was in Brazil about ten days ago. I would have to say it is all around the world, probably the demand dynamic is best in Latin America than it is anywhere else in the world now. But they are not isolated from what is going on, but I was with 150 of our customers in the region, and they were feeling pretty good about their business, which was two weeks ago, so it is not today. But there are lower exports going out of Brazil, there's a little bit of weakness in the surrounding economies. But the [REI] strengthening has helped us.

As regards opportunities for the pulp market down there, I mean our focus right now is to run with what we have, pay down debt and generate strong free cash throw, and manage through this downtown and come out of it better and stronger.

Thanks, John.

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

Thanks. Hi, everyone, good morning. Congratulations on the Weyerhaeuser integration thus far and the cash flow generation. I guess first question, maybe piggy-backing off of Pete's question. Did you mention what the Weyerhaeuser synergies were, if any, in the quarter?

What are they going to be for the year, Carol?

The calendar year? About $50 million.

So $50 million in the first four or five months.

Okay. So, you would say you got about - a pro rata amount in the quarter, if I am implying correctly what you are saying?

Yes, basically, but there's a build into the fourth quarter, a slight build in that.

We got $6 million, $7 million a month right away, which was the impact of not taking on the Weyerhaeuser S&A. So in a way we got a whole bunch of it day one, but some of the other stuff takes a little while to ramp up. Like transportation, getting the system realigned, and you know we've announced four box plant shutdowns, and the savings of those will come as we take those plants down.

Right. John, Carol, given your experience and your conversations with customers, you know, in recent weeks, does the pullback that you are seeing in boxes, and paper for that matter, as well, does it match what you have seen in past recessions, or at this juncture does the downturn seem better or worse than what you have seen in prior periods?

I think, George, that it is worse than we have seen in prior periods, because it was so sudden and the magnitude was so large. As you would expect, some segments were hit less than others. If you look at, say, processed foods, processed foods are off a percent or two, not real bad, but durables fell off much more dramatically, and they were already down due to very slow housing and other impacts. So I would say that it is deeper and quicker, which really speaks to the behavior of the American consumer. They just made decisions not to shop. The good news is, it won't last forever and they will come back when things settle down.

This is a much sharper that we've seen in the last six weeks. I mean, our box business is off double-digits.

John, does that in turn, if we hold input costs constant sequentially, you've got some pricing momentum in your businesses but obviously demand is week. Should we expect that within your paper, paperboard and packaging businesses, that earnings should be flat to down in the fourth quarter? Or do you think with the Weyerhaeuser synergies and benefits that, in total, you would be up sequentially? Or is it too hard to call it at this juncture?

I think - when I went through the outlook, I said we expect earnings to be down.

Okay. I did catch that, then.

If we have a fourth quarter with negative 4% to 5% GDP growth versus basically a flat GDP growth in the third quarter, you know there are some of these scenarios out there that says earnings go up, but I don't know what it is.

Okay.

Now, Consumer Packaging is probably the one bright spot in terms of demand. We are seeing still good backlogs there, good order book, and we're running full, but that I think reflects the fact that most of this customer base is in the processed foods and fast consumer goods staples, as opposed to that kind of stuff. There are some places where, you know, golf balls are off, but by and large our consumer packaging business is pretty solid.

Okay. Two quick points in sequence and I'll turn it over. The decision on the supply chain system and U.S. box network, can you give us some color in terms of why you decide not to roll it out? And then any additional impressions with Ilim, what things can you do within the business as markets slow to continue the progress there? Thanks, guys.

Let me answer the supply chain decision. You know, when we were pre-Weyerhaeuser, we were working on building that capability and it was going to add a lot of value. But I think it is quite simply that with Weyerhaeuser, we just have much higher priorities right now in where our resources need to be applied. One thing we did learn out of that work, that a lot of the supply chain benefit comes from the middle through the roll rooms and the box plants, with some tools that we will continue with. So while we are stopping on the overall deployment of the big operating model, we will continue to get a lot of benefit out the things that link our mills to our box plants. But we just have some higher needs right now, and better opportunity to improve the business.

George, would you repeat your question about Ilim, please?

Yes, just obviously markets around the world have gotten soft or volatile. Ilim, what are your impressions with it thus far, what do you do to continue the progress and improve the performance there, in light of the slowdown? Thanks.

George. Mary Laschinger is here, right in the middle of that business, so I may her fresh from Russia to talk about what is going on there.

First of all, George, on the more positive note, you know, demand as we have looked forward for the next outlook has been strong domestically, and so we are seeing the shortfall more coming to us from the Asian market. We are dealing with that on a daily basis, in terms of how we are responding to that. Operations are solid, but again we are starting to see some weakness in demand and price in export markets, and some of that beng offset by continued good demand and pricing domestically.

Okay.

Currency probably has had the biggest impact on the business.

All right. Thanks for all the details. Good luck on the quarter, guys.

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

Thank you. Two questions. Following on that last question about Ilim, your partner over there has made some comments that suggest that the expansion might not go forward. We have learned not to believe everything we hear out of Russia, but I wonder if you could comment on that?

And second, I wonder John if you could talk broadly about the competitive position of your white paper system? Certainly, as pulp prices were going up, integrated producers like yourself were getting some real competitive advantage. How much do you think declining prices are going to affect you competitively? I mean, obviously, demand is lousy but where does that really hit you?

I will let Mary, Mark, talk about Russia, and then I will come back and answer the processed paper side of the question.

Mark, regarding the expansion plan, again things have changed dramatically in Russia. To say that it is not going forward I think is a fairly bold comment. The way we are looking at this today is that we are going to make decisions based on what we see with market conditions, and our ability to secure financing. But we still feel strongly that this is, if we have - it is more likely to be delayed versus stopped. And we'll look at prioritizing projects in terms of providing the best generation to approve the business.

You know, looking at Printing Papers, Mark, I think we need to look at it around the world. In Brazil, Russia and in Poland, we have got very low-cost systems. So - and we are not competing in Russia and Poland against non-integrated producers, but we are very low cost delivered in those countries, and that's where most of the product goes. In Western Europe, it is not a big deal for us. In Brazil, we are also very low cost. And with a significant market position, again we are not competing with non-integrated producers in Brazil, we are competing with other integrated producers, and there is not much in the way of exports - or imports coming into Brazil. In the U.S., you can look at our numbers, our return on sales is about 500 basis points better than the next best.

I haven't calculated it, but it is probably four digits better than the non-integrateds. Some of that will get eaten up by lower pulp prices, for sure. But I can't see where some of these smaller non-integrateds are going to have better margins than we have, given that we are - I bet we are 1,000 basis points better than they are now, but we are 500 basis points better than one of the big players that we compete with. But you are right, pulp prices will give them some cost relief.

But it is fair to say that both domestically and globally, the decline in pulp prices isn't going to hurt you that much, is that fair? I mean, competitively?

I don't think so. It is going to hurt us in our pulp business, obviously, but not in our paper business.

Thanks.

Your next question comes from the line of Steve Chercover of D.A. Davidson.

Thank you. Two quick questions. First of all, given your significant exposure both in Brazil and in Europe, are you doing any hedging to mitigate the change in currencies?

Steve, it is Tom. You cut out for a minute, there. Can you repeat the question?

Sure, sorry. Just wondering whether you are doing any hedging to avoid any losses or the exposure to currency changes both in Brazil and in Europe?

First of all, with regards to Europe we are doing some hedging, more related to the (inaudible) and Euro but not a significant amount.

In Brazil, let me say very emphatically that we don't have some of the positions that you have probably read about in some of the industrial companies in Brazil. So, you know, we have done some hedging on a small portion of our export receivables, which are dollar-dominated, but it is not significant at all. And we have looked at - we have none of what you've been reading about.

Yes, I was kind of thinking of some of those folks. Secondly, and I realize it is a delicate position, but in respect to Inverurie, I know that one of the folks in your midst will say you will never see IP selling a mill for pennies on the dollar, and having it turn around and compete with us. Do you have the same viewpoint for your European assets?

We will not be selling that facility to manufactured paper. We are looking at strategic alternatives for other industrial uses.

Perfect. I am glad you are consistent in different continents. Thank you.

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

Good morning, John. When you were talking about operating profits being lower in the fourth quarter, was that just an overall statement or would that have been applicable to each of the segments?

That was an overall statements about profitability in the fourth quarter.

So it is fair to say - I would assume that since you got another month of Weyerhaeuser and you got pricing, your Industrial Packaging business would be better in the fourth quarter than the third quarter?

I was talking about International Paper overall. When you get into the segments, we have pluses and minuses. But International Paper overall - and a lot of this is a function of how weak does the economy get in the fourth quarter, and I think we are going to be surprised with how weak this economy is, I really do. I think we're going to be shocked how weak it is.

Presumably, you are taking the - you are matching your supply to demand, and hence that's what -

We are taking 350,000 tons of down time in Industrial Packaging right now. You can figure out what that annualized number is, it's huge.

Out of curiosity, what was that number in the third quarter? You have moving parts in Vicksburg, I am not sure how to interpret that 350?

[35,000] tons plus Vicksburg wasn't running.

Okay. So if I try and go from 3Q to 4Q, obviously I have got some down side, small hopefully, but uncertain on the operating line, and then I don't have my $0.42 from mineral rights. If I understood rightly lands sales would be about half, so that's another $0.03. And then there were just two other items that I was a little unclear about. One is, interest expense, if I look at your slide on the key financial statistics, it looks like that is going to be up like $40 million or $45 million in the fourth quarter, is that about right?

If it is on the slide, I think you should assume it is about right. Why don't you call Tom Cleves, and he can take you through all that stuff, Mark?

Okay. And lastly on the corporate, it looked like there was a significant increase expected in the fourth quarter, and wasn't quite sure what that would have been about?

I think again, I would ask you to call Tom and he can give you some clarity on that.

Okay, but bottom line, if I take all those numbers I just put together, the $0.42 for mineral rights, the - with the land sales, the interest expense, I am kind of in the low 30s and then whatever I can do operationally. Are there any other big drivers that could move this different from that for the fourth quarter?

Absolutely. Volume, and down time. Absolutely.

Okay. Meaning that's where the risk is operationally?

Yes.

Okay. Fair enough. Thank you.

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

I have a couple of questions for Carol and then one for John. Carol, can you just talk about with all the changes in these input costs, it looks like OCC on the yellow sheet is down another $30 to $60 in November. With that, and gas prices, is it changing where you are thinking about taking down time or any kind of longer-term capacity decisions you might make? And can you talk just generally about this process of renegotiating some of the box contracts?

Yes, Mark, thanks. You are absolutely right on the inputs, and that's one of the reasons why we are actually quite glad we are going to be facing these headwinds with the larger systems, because as you can imagine we have a lot of options. A lot of these mills use a combination of both OCC and fiber, wood fiber. So we have a chance to try to figure out how to balance and how to take the highest marginal cost out, and now to balance it back into the mills to get good energy efficiency. So we are looking at that, and we have a lot of engagement on the part of our manufacturing team with our commercial team, and we are working it, you know, I wouldn't say daily but certainly weekly, as we figure out what to do. On the short term we can manage that, and of course that will make us think harder about any long-term decisions we make, factoring that volatility, and we want to make the right long-term decisions.

Regarding customers, my comment there would be that we have had very good dialogue with our customers and, of course, that was one of the first things we did was get out and get in front of our new customers and with our existing customers, and quite honestly, we feel very good about our ability to deliver great value to them, and be a very valued supplier, and we are having very good conversation on that. So, I think that's going to go fine. You know, we are in the midst of raising prices, which has gone very well, as John commented on. So I think there is a lot of work to do there, but we are having good dialogue with our customers right now.

Just I wondered, Carol, it looked like A, maybe your prices are up a little more than other folks prices so far, but B, that double-digit decline in boxes that John mentioned was bigger than a lot of your other public competitors have reported, so I'm just trying to get a sense of is the economy just hitting you harder or is that shutting off some marginal business?

Mark, nobody's reported volume yet for October, have they?

A lot of people have mentioned the numbers that they had seen through the first three weeks, two or three weeks of October on their calls. I would say the average has probably been running 6% to 8%.

Yes, Mark, we looked hard at that. First, let me comment on the pricing. I think one of the reasons our pricing realization is good is, you know, we - our principles around this business are, you know, we don't do fixed pricing, we are very mindful of contract structures on how we [go]. So we didn't have any barriers in our legacy business on our ability to push for pricing. That's been very helpful on the realization side.

Regarding the box, you know, I thought about that but at a 29% or 30% decline position, to me it would be hard to believe that we would be significantly different than the marketplace, because we are in everything. And some markets are hit more than others, but we have done a sensitivity on segments. So I don't believe we've lost share, and I don't believe we are significantly different than what the market should be experiencing.

One thing we say is, having a strategy to try and run box plants full, in our view that makes absolutely no sense.

Okay. John, just from a bigger picture perspective, we are looking at a much different backdrop than when you made the Weyerhaeuser acquisition announcement early in the year, or even when the deal closed in early August. Can you just step back a couple of steps, and tell us what you are doing differently right now to deal with this environment? You've already mentioned kind of down time here. You have mentioned a closure in Europe and mentioned throttling back a little bit on capital at Ilim. But other things that you are doing to weather this environment?

We are throttling back more on capital around the company, and we will share that with you when we have our next conference call. I am very glad we got started back in April, frankly, on something called belt-tightening, which is an effort to just look at discretionary spending, and that saved us about $10 million a month. And beyond that, I think I mentioned at the last conference call, we've got an initiative again that we started last December before Weyerhaeuser to take about $400 million of our costs, our S&A costs, it happened to be the same number as the Weyerhaeuser merger benefits, but $200 million of it comes from Weyerhaeuser, and the other $200 million comes from IT. So there is a big chunk of cost savings that is going to come out of International Paper, and some of our businesses already implemented those plans. So that's what is going on around the rest of the company.

And Carol just talked about what we are doing in Weyerhaeuser. We have more levers to pull. I really believe that what you want to have in a time of difficulty is lots of options to improve your cost structure. With Weyerhaeuser, we have a lot more options than we had with just the legacy Industrial Packaging business we had before Weyerhaeuser.

So yes, the world has changed, and we are getting merger benefits faster, we're running our system differently than we were, you pointed out OCC prices are dropping. So we have lots of options to be looking at.

Very good, John. Good luck.

Our final question today will come from the line of Gail Glazerman of UBS.

Hi, Gail.

Thank you. Sticking on containerboard for a minute. You have talked about the domestic volumes, and what is happening there. Can you talk a little bit about your key export market for liner board?

Yes, Gail, we haven't seen any big change relative to demand. The markets that we participate in are markets that require craft liner. They tend to be agricultural markets. So from a demand perspective, while obviously things are slowing, we haven't seen any significant decline in our market access or demand for our products. Of course, that is something we will monitor very carefully but so far it's okay.

Okay. And when you look at the July/August price increase, as has already been commented, you have had good experience. I'm just wondering, do you think you can pass through more of the - more than the board price increase into boxes as several other competitors have mentioned?

Yes, I feel very good. Of course I talked, or Tom mentioned, that point to point, we had already seen $45 and then we saw - we will see more in the fourth quarter. So I feel very confident that we will get some box price higher than the board price.

Okay. Just a couple of quick questions for Mary. Mary, given what is happened in the economy over the last month or so, do you think there is any change in Russia and how they consider the wood export tariff, and just a reminder if you think that is going to really make a difference for your Svetogorsk mill?

With regard to the wood export tariff, we do not anticipate that there will be a directional change from the government in terms of their intentions around the log export tariff. As it relates to Svetogorsk, we actually further anticipate that to be a benefit to our business.

Okay. Just a final question. Are the comments you made about the demand environment of Russia, do those hold for the rest of your Eastern European business?

Eastern European business has been strong for us, and has continued to be strong. We are anticipating some back off of demand, but it is still robust relative to other regions of Europe.

You just might talk about box - packaging business.

Packaging business is a different situation. The packaging business, we are in fact seeing dropoffs in particular in the industrial segment, double-digit dropoffs. Our volume should not drop off that much because we are anticipating a more robust fruit and vegetable season than what we saw last year, which also supports what Carol was saying around the craft liner, because the craft liner goes into those fruit and vegetable segments.

Thank you. I will return the call to Tom Cleves for any final remarks.

Thank you, Laurie. Thanks for joining our call today. If you have additional questions, Emily and Anne-Marie and I will be available via telephone. This wraps up today's call. Thank you.

Thank you. That does conclude today's International Paper third quarter 2008 earnings conference call. You may now disconnect.