International Paper Co (IP) 2009 Q1 法說會逐字稿

Good morning. My name is Taylor, and I'll be your conference operator today. At this time I would like to welcome everyone to the first quarter 2009 earnings review. After the speakers remarks, there will be a question and answer session. (Operator Instructions)

I would now like to turn the call over to Tom Cleves, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Taylor. Good morning, everyone, and thank you for joining International Paper's first quarter 2009 earnings conference call. Our chief speakers this morning are John Faraci, Chairman and Chief Executive Officer, and Tim Nicholls, Senior Vice President and Chief Financial Officer.

During this call, we will make forward-looking statements that are subject to risks and uncertainties, and are outlined on slide two of our presentation. We will also present certain non US GAAP financial information. A reconciliation of those figures to US GAAP financial measures is available on our website. Our website also contains copies of the first quarter 2009 earnings press release and today's presentation slides.

I'll now turn the call over to John Faraci.

Thanks, Tom, and good morning, everybody. Thanks for joining us today. Today, Tim Nicholls and I are going to review our first quarter results and the performance of our individual businesses. We'll also discuss our outlook for the quarters, going forward.

I want to start, right out of the shoot, in saying that International Paper continued to execute and operate well in, I think what all of us would admit, was an extremely challenging and tough environment, both in North America and all around the world. Despite what I would call unprecedented levels of decline and demand, we posted positive earnings and very solid, free cash flow in the quarter. Tim will discuss each business but I would like to say right up front, that we're going to highlight two very strong performances of our large North America businesses, Uncoated Papers and Industrial Packaging.

North American Uncoated Freesheet EBIT increased in the first quarter versus the fourth quarter, and very importantly, margins expanded by 300 basis points. In the North American Industrial Packaging business, we also generated strong results, given the economic environment we're competing in. In just the second full quarter of combining our Industrial Packaging business with the warehouse acquisition, we improved EBITDA margins by 320 basis points versus the fourth quarter, and almost 500 basis points versus the first quarter of 2008, and we achieved those results in a quarter when we took more than 700,000 tons of lack of order downtime.

Despite double digit declines in paper packaging demand, selling prices in North America in both businesses fell at only modest rates. The only exception, really, for International Paper was market pulp and export prices, which declined significantly. As I said earlier, volumes were off all around the world. Input costs did continue to decline. The first quarter annual savings rate is about $700 million dollars, relative to 2008 levels. Our inventories remained in very good shape. They're down in all businesses, all around the world, except in Brazil, where we started up a new paper machine during quarter.

The strongest part of our performance were our operations, our managing of controllable costs and our realizing merger benefits. Our operations in our mills and our converting plants were just outstanding, given that we were already running about 70% of capacity. Our mills ran extremely well. Our overhead expenses were less than 2008 levels, and we realized nearly $100 million of merger benefits in the quarter alone. So, net result of all of this was strong free cash flow and significant debt reduction during the quarter, which Tim will discuss in more detail in a minute.

So in summary, I'm on the next slide here, the snapshot slide, first quarter sales decreased from fourth quarter levels by 13% to $5.7 billion. Without the impact of Weyerhaeuser's revenues, they have would have declined by about 20%. EBITDA decreased from $700 in the fourth quarter to $600 million, but importantly, margins in our operating businesses, expanded by 100 basis points, and free cash flow increased from $400 million in the fourth quarter to $700 million in the first quarter. And after $600 million of debt repayment during the quarter, we ended the quarter with $1 billion in cash, just about the same amount we went out of the year with.

Before Tim covers our result by business, I would like to just give you a quick update and we can come back on this with your questions, and tell you about our progress in creating the premier Industrial Packaging business in North America, which was our objective when we made the acquisition of Weyerhaeuser's corrugated business. When we acquired Weyerhaeuser's Packaging business, we said we would generate a combined EBITDA of $1.7 billion a year within three years of August 2008. As slide 6 shows, our first quarter EBITDA annualizes to $1.3 billion. We've identified an incremental $100 million in synergies, which we're going to get sooner.

So after the first six months of combined operations, we have line of sight of 80% of our three year target. When the economy and box demand recovers, and I believe it will, it's a question of when, we'll meet our three year EBIT objective with 10% less volume than we had assumed. So, we do not need the market to come back to what it was to get to our target, and if it does, we'll going to exceed it. So I'm very pleased with the results being generated by our Industrial Packaging team. Those results are having a big positive impact on International Paper.

So now, I'll turn it over to Tim, who will discuss the results in more detail.

Okay, thanks John. Good morning everyone.

I'm on slide seven, and the waterfall chart here that tracks earnings from the fourth quarter to the first quarter. Fourth quarter earnings from our operating businesses were $0.14 per share versus $0.08 in the first quarter, but if you exclude the one time impact of the Vicksburg Mill insurance proceeds, which was a fourth quarter item, first quarter earnings from our operating businesses were in line with fourth quarter levels. Had excellent operations, that combined with declining input costs and more than offset the impact of reduced volumes and modest price slippage. Our domestic paper and packaging selling prices held up well, but prices for market pulp and exports declined significantly. Higher pension expenses contributed to a $0.04 increase in corporate expenses, lower interest expense improved earnings by $0.04, and equity earnings from the Ilim joint venture decreased earnings by $0.06 per share.

Turning to slide eight, it shows the favorable impact of the declining input costs in the first quarter. Input cost reductions increased our quarterly earnings by $0.23 or $124 million. We saw reduced costs for wood and OCC that totaled up to $44 million of earnings improvement. Our chemical prices increased earnings by $31 million, and energy cost reductions boosted earnings by $28 million. Lower transportation costs added another $21 million. So, improvements all around.

On slide nine, we've recapped lack of order downtime for you. During the first quarter, we continued to match our production to our customers needs, and as a result, we recorded 1.1 million tons of lack of order downtime, which is more quarterly downtime than we've ever taken in the history of the Company. We took 700,000 tons of downtime in the North American Containerboard system, which is about 25% of our total capacity, and we took 150,000 tons of lack of order downtime in the North America Uncoated Freesheet system, or about 20% of total capacity. We also recorded 127,000 tons of downtime in the Coated Paperboard business in North America, which again is about 25% of its total capacity. Because of the cumulative cost of down time is far less than the negative impact of chasing after volume or building unneeded inventories, we will continue to manage our production to meet our customers' immediate needs.

Now let me turn to the businesses, and I'm going to start with Industrial Packaging. The business performed extremely well in the first quarter, increasing earnings by more than 65%, from $112 million in the fourth quarter to $188 million in the first quarter. We benefited from the fallen input costs, but the real story is that even with demand falling in unprecedented levels, we made up the volume shortfall and the price leakage with outstanding operations in cost management. The price erosion reflects the lower export selling prices, and we had some leakage in open market containerboard selling prices in North America, but those were offset by improvements in box pricing. Box pricing was a key part of our synergies that we outlined when we announced the Weyerhaeuser transaction.

Now, let me turn to synergies and just take you through a reminder of where those synergies were going to come from. One was going to be around rationalizing the footprint on the box plant side and only carrying the number of facilities we needed to support our customers. I mentioned the mix improvements and the selling price improvements in the box business, which was another key part. Optimization of mill operations and logistics, and the final piece was the large reduction in business and corporate overhead.

During the first quarter, we achieved nearly $100 million in merger synergies which contributed strongly to our results. Using the March synergies run rate, we're on track to achieve more than $400 million in merger synergies in 2009. In other words, just after eight months of combined operations, we're at the annual run rate equal to the three year synergy target.

If you turn to slide 12, I have a few more data points on a few of the merger opportunities. We're running the combined business with 13% fewer employees. Given the significant efficiency gauge, we now believe we'll ultimately be able to run the combined business with 15% fewer total employees. By the end of the second full quarter of combined operations, we had removed 12 box plants and two sheet converting facilities, or said another way, we had already exceeded the three year target of facility rationalization and expect to achieve further gains in the converting system.

Commercial improvements on the Weyerhaeuser volume have improved those margins on the Weyerhaeuser tons by almost $20 per ton. And not only are we well ahead of the three year synergy schedules, we now believe we can achieve an incremental $100 million in annual merger benefits, and therefore, I have increased our three year target to the $500 million level. And I would just mention, as a sub point, that we're doing it by spending less to achieve those merger benefits. So, a good story all the way around. The results of all that are shown on slide 13.

When we acquired the Weyerhaeuser Packaging business, we set a goal of creating the premier North American Industrial Packaging business with the highest margins, and we think we're well on our way to achieving that goal. Our EBITDA margins improved from 14.3% in the fourth quarter to 17.5% in the first quarter, and we're 470 basis points higher than the first quarter of 2008 levels, despite the significant lack of order downtime that we're taking.

So with that on industrial, let me move on to Printing Papers. Global Printing Papers earnings declined from 113 to 101. While earnings in our North America Printing Papers business and North American market Pulp businesses improved from fourth quarter levels. For North American Printing Papers, earnings were up $12 million, driven by favorable input costs and strong operations that more than offset the volume decline, and selling prices were flat. For North America Pulp, where earnings were up $11 million, lower input costs, and again, favorable operations, offset lower selling prices.

In Europe, for the Printing Papers business, we experienced higher input costs and higher maintenance outage expenses, which were partially offset by favorable volume and in foreign exchange. And Brazil, we had higher maintenance expenses in the quarter, and lower export prices as well.

So, I turn now to Consumer Packaging. Earnings increased $22 million, and unlike demand in Printing Papers and Containerboard, we did not experience the fall off in coated paperboard demand until the first quarter. The sharp reduction in demand led to significant slowdown in shipments and a dramatic increase in lack of order downtime, which decreased earnings by $48 million. Significant improvements in selling price and input cost, and really, outstanding operations, added $56 million in earnings.

Turning to xpedx, we had weak demand for printed materials and for packaging supplies that led to a decline in shipment volumes at xpedx. The impact of the weak volumes was also compounded by declining coated paper prices. As a result, first quarter sales revenue declined by 18%. We also experienced an increase in bad debt expense due to the weak economy and tight credit markets. For xpedx, the focus has been and continues to be on reducing operating expense, and that focus enabled then, to turn to an operating profit in March, and for the quarter overall, the business did generate strong cash flow.

Forest products, earnings declined from $38 million in the fourth quarter to $2 million in the first. I think you're aware that in the first quarter we did agree to sell 143,000 acres of land. The transaction is now expected to close in the third quarter, and when that transaction closes, the remaining land portfolio will have a net present value of somewhere between $60 million and $80 million.

On Ilim, slide 18, and again I'll remind you that we report Ilim's earnings on a one quarter lag, so this would be the fourth quarter for Ilim and our first quarter. Sales of the joint venture declined by 25%, reflecting a weak pulp market in China and weak demand for paper and packaging within Russia. Pulp shipments declined by 9% and pulp prices dropped by $139 a ton. While containerboard shipments increased slightly, selling prices declined by $58 a ton. Higher input costs decreased earnings, but more than half of the equity earnings loss was due to unfavorable foreign exchange rates on US dollar denominated debt. IP's share of the joint venture earnings declined to a loss of $26 million for the quarter.

Now let me turn to free cash flow, slide 19. In a very difficult environment, our operations generated $650 million in cash during the quarter, and we had a very strong focus on operating working capital, which contributed strongly to the cash flow generation, and we also reduced capital spending by nearly $100 million. The result was free cash flow of $666 million. And even excluding the cash from the alternative fuel credits, our free cash flow in the quarter was the second highest of any quarter in the last five. This strong, free cash flow has allowed us to make significant progress on debt reduction and so I'll turn to that now.

During the quarter, we repaid $550 million in debt, and in April, we reduced debt by an in instrumental $400 million. So in the 9 months since we completed the transaction of the Weyerhaeuser Packaging assets, we've reduced our pro forma debt by $1.6 billion, and we're well ahead of our commitment to reduce long term debt by at least $2 billion within 24 months of the acquisition, and continue to be very strongly committed to further strengthening our balance sheet.

Slide 21, just a reminder on our cash and committed facilities. Coupled with our large cash balance at the end of the first quarter, we have $2.5 billion in backup liquidity consisting of the receivables securitization, and also the $1.5 billion corporate revolver.

Let me turn to debt maturities now, and just take you through the next couple of years. We have approximately $1.3 billion of remaining debt maturities that will need to be repaid between 2009 and 2011. The cash we have on hand is sufficient to pay these maturities in 2009 and 2010, and also, some of the remaining $550 million in 2011. We also have, and you can see it in the grayed out part of the columns, we also have approximately $700 million of 2009 through 2011 debt maturities that consist of about $200 million of non recourse joint venture debt, which the joint venture intends to roll over. And also, about $500 million of timber monetization debt ,which we intend to roll over.

Just a couple of comments on pensions. We now expect that we will not be required to make a cash contribution to our pension plan until 2011. If I could remind you, at the end of 2007 our pension plan was fully funded. In fact, it was fully funded through a good portion of last year, before returns deteriorated late in the year. There has been a recent ruling from the Internal Revenue Service which provides greater leeway around selecting the discount rates for valuing pension liabilities in order to determine funding obligations. This ruling has allowed IP to select a discount rate that is nearly 130 basis points higher than the original estimate, resulting in somewhere between a 10% and 20% reduction in our 2009 funding obligations.

So with that, let me turn it back over to John, and he's going to take you through first quarter summary and second quarter outlook.

Okay, Tim, thanks.

Before I do that, I would like to take a couple of minutes and talk about the alternative fuel mixture tax credit, which I know is of interest to a lot of, if not all, investors. Let me just start off by saying, International Paper, in our industry, has a long history of sustainable, renewable, and largely self sufficient energy use. At International Paper, we generate more than 70% of the energy used in our US integrated mills from renewable resources, and we've done so for decades, long before the green energy movement began. And I guess, I would have to say that all of the attention that fuel credits have gotten have enabled us to talk more positively about how our industry is renewable and sustainable.

Our industry is the biggest generator of renewable power among all industries. So, a large part of our renewable energies involves our practice of converting a by-product of making paper, comes from a tree, and it's known as "black liquor" when it fits into our process. Since 2008, we've been mixing in a small amount of diesel fuel in order to qualify for the alternative fuel mixture tax credit because it requires a mixture. One thing we want to be clear on is, because the diesel fuel replaces fossil fuels that would have otherwise been used at any one site in the manufacturing process, International Paper is not burning any incremental fossil fuels at any location of these 20 mills where we're generating these alternative fuel credits.

This process of transforming waste into bio energy has been an integral part of our business model for a long time and we believe it's one of the most environmentally beneficial and responsible practices in any industry, and we do think existing users of renewable fuels, and new users of alternative fuels, ought to be treated on the same playing field. So we believe the alternative fuel mixture tax credits, and the IRS obviously concurs, because they've certified us, supports a sustainable environmental practice that merits the tax treatment similar to other users of renewable energy and fuel types. There are other industries adding diesel fuel to bio fuels to qualify for the tax credits. We believe that they too should be treated as we are, and we should be treated as they are.

During the first quarter, we received $145 million of cash in alternative fuel mixture credits, and the total of tax credits received or accrued since the fourth quarter of last year, and we began mixing during the middle of the fourth quarter of last year, so the total accrued for that period of time, which is about four-and-a half months, is just over $550 million. At the end of the quarter, we substantively received an additional $275 million in tax credits of the $413 million accrued as of March 31. So, we can come back and talk about that if you wish

Let me just turn now to sum up the quarter and talk about the outlook. In summary, despite some very strong headwinds, and I think the strongest that I probably have seen in my career and this Company has seen in decades, we posted solid results, especially when you look at the free cash flow and the debt reductions. Shipment volumes declined, and in response, we continued to match our production to our customers needs to avoid tieing up working capital and unneeded inventories, and producing more product than our customers want to buy.

We ran our operations very efficiently, generated almost $100 million in integration synergies, and posted more than $30 million of overhead cost savings in addition to that. We generated strong free cash flow, which contributed to our ability to reduce our long-term debt by $600 million in the first quarter, and as Tim said, by $1 billion through the end of April when we make some additional debt reduction payments. As of today, we have no material debt maturity repayment requirements remaining in 2009, and have enough cash on hand right now to satisfy all of our 2010 maturities.

So looking ahead to the second quarter, I wish I had a good crystal ball to share with you, but I don't. But, I do expect that we're going to face challenging economic conditions. I feel that the economy in North America has probably reached the bottom, but we seem to be bouncing along the bottom, and if we see any uptick, it's really only the inventory correction, which was severe, may be over. We have seen a slight uptick in volume in early April, some of it in our Box business, but we do not have clear line of sight because our customers do not have clear line of sight on their demand. And, when we look at xpedx, we still see packaging and shipments being weak.

So the major variables, you know what they are. Our volume, lack of order downtime, selling prices and input costs. We expect input costs to decline incrementally. We think there is more room as chemical prices start to slide. And on the fiber side, energy prices and transportation prices are already pretty low. So we know our second quarter earnings will reflect a significant increase in planned addage costs, and we obviously expect to continue to run our operations as well as we did in the first quarter. Equity earnings from Ilim joint venture we know will be less than first quarter earnings because we're on a one quarter lag. Almost all of that is related to the unfavorable foreign exchange impact on their US dollar denominated dollar debt with the weakening ruble.

So in summary, there are a lot of puts and takes, and I cannot predict how all those variables will go, but I think it's likely that second quarter earnings will be less than the first quarter. So going forward, I just want to be very clear, so that you know where our priorities are. We're laser focused on aggressive cost management, and we've got more to do and we'll do more. We're going to continue to match our productions to our customers needs and manage our inventories. We're going to continue to strengthen our balance sheet by continuing to pay down debt and managing our working capital.

So with that, I will turn it over to Tom Cleves and we'll answer your questions.

Thanks, John. Thank you, Tim. Taylor, we're ready for our first question, please.

Thank you. (Operator Instructions) Your first question comes from Gail Glazerman of UBS.

Good morning, Gail.

Good morning.

Congratulations on the cash flow. John, I was hoping get maybe a little bit more color on the demand trends that you're seeing, maybe taking it back to the progression through the first quarter by some of the key businesses?

Well, as I've said, I'll ask my colleagues if they can comment, in North America, paper and packaging had been weak since November, and we didn't materially see them get any weaker in that business. Bleach board was weaker in the first quarter than the fourth quarter. I think it's just that customer base there is different, and the inventory liquidation or draw down probably started later. Tom, I don't know if you want to say something about xpedx, what you see going on in the print and packaging side of xpedx.

Sure, John. The way I would look at it, we started seeing it significantly in December. Coming off a record third quarter, we were off 10% in December in terms of revenues per day. In January, we saw another step down of another 10%. So, significant inventory destocking in that December, January period. And I would say, we have seen across our paper and packaging, almost a dead, flat trend through the first quarter. And to me, that means there is some slight unit growth because we've experienced some real price deflation, particularly in coated grades. So I would not call it a recovery, but I would agree with what John said, it seems like the inventory correction occurred early in the quarter and now we're seeing relatively flat bumping along the bottom.

I'm somewhat pleasantly surprised, I guess, to see consumer spending move up in the first quarter. In the GDP numbers that came out, consumer spending was up 2%. We're going to see that in our orders, if that's the case, because that's who our customers are selling to. If you go around the world, demand in Brazil is not off as much. It's off 5% to 10%. Demand in China is pretty healthy. Our business is there. We're going to ship twice as much bleach board in the month of April as we did in the month of last April, which says that the economy is not growing at 12%, but it's growing at 6%, and the domestic economy is pretty solid. Our volume is holding up in Western Europe, although the underlying demand for paper is not down as much as it in in North America, but it's down. I think we have all parts of the world, with the exception of China, caught in negative number territory. North America is probably the most severe. But I think we've seen the worst of it, the question is, how long do we bounce along the bottom.

Okay. And would the same be true for your exports of board out of North America?

Pardon me?

Your export volumes of board, is that also kind of bouncing around or is that still getting weaker?

It's bouncing around the bottom. Volume is off 30%, 40%, and prices are awful.

Okay, and just changing gears a little bit. Can you talk a little bit about the sustainability, kind of ex operating items, of the cash flow if the quarter? Were there any seasonal factors or swing factor that's we should think about, moving forward?

Well obviously, when your sales are down, your working capital will be declining. We planned for a couple hundred million dollars of capital working improvement in the Company because we saw some opportunities in packaging with Weyerhaeuser. So, we're getting those, but we're also getting some working capital generation from sales declines. When demand comes back, we will generate more cash from running our facilities, but we'll have to put some working capital back into the business. I hope we don't get, consistently, $200 million a quarter working capital declines. All that will suggest is that sales are under more pressure and I don't think that's going to happen.

Okay. Thank you.

Your next question comes from Claudia Hueston of JPMorgan.

Thanks very much. Good morning.

Good morning.

I was hoping you could just provide a little bit more detail on input cost trends in the quarter and maybe where costs were trending as you exited the quarter? Probably most interested in chemicals and fiber, just trying to get a sense of sort of how much more relief there is to come?

Well, I'll jump in here. John may have some comments to add, Claudia, but in the appendix we give you the typical progressions, they're indexed, but chemicals is the one category that have not come off as much, and wood is still a little bit higher ending the first quarter than where we were early last year. Of course, we've seen a big drop off in energy costs, and transportation is a lot better, but it still seems like there is room to go on both chemicals and on virgin fiber.

I think it's fair to say we've got a lot of, I don't want to call it deflation, but a lot of price coming out of everywhere in the economy. And if you think about that $2 billion of input costs, that's not general inflation, it's input costs increases we've seen over the past four years. We think we're at a run rate of $800 million. It's hard to see we're going to get all the way to that $2 billion in a short period of time, but I think incrementally, there is more upside there, but we probably got the biggest slug of it in the last six months.

Okay. And as chemical costs fall, or if they fall, do you feel that pretty immediately or is there a quarter lag, just the way you purchase the chemicals?

There is so many chemicals. There is starch, there's sulfuric acid, there's caustic, there's specialty chemicals. There is no more than a quarter lag, and some of them are more near term.

Okay. That's helpful. And then, just given the very strong cash flow performance and the magnitude of the fuel credits that are coming in, it looks like your balance sheet will be very strong by the end of the year, relative to where you started. How are you thinking about capital allocation and returning value to shareholders as you think about the next year or two, going forward, just given the improved cash flow position?

Well one step at a time, Claudia. Debt reduction is focused like a laser beam. So as we see the economy and where the economy is going, I think that will definitely influence our thinking about where cash may need to be allocated. But for the current moment and the current economic environment, I think it's focused on maturities over the next couple, three years.

Okay. That's a good answer. Thank you.

We'll talk more about that, Claudia, at Investor Day, coming up.

Yes.

Your next question comes from Mark Wilde of Deutsche Bank.

Good morning and congratulations. I think it's a great quarter in light of everything you faced. I wondered if you can talk a little bit about whether you think you've gotten smarter in terms of how you manage the down time and the cost of that, because you've seem to have done very, very well in spite of taking proportionately much more down time than most of your competitors.

Yes, I have Wayne Brafford here who runs our Printing Papers business, and Carol Roberts who runs Industrial Packaging. I'll ask them to talk briefly about what they're doing because I think they're doing it differently, but they're responding to what they need to do in a way that enables them to run the business, very, very well. Wayne.

Thanks for noticing, Mark. We did change the profile on how we manage our market related down time. In the fourth quarter, we tended to just go to the high cost machines and balance the demand that way, but as this persisted, we began having what we call, a rolling mill outage. So we rolled two weeks outages across several mills, so that allowed us to take a lot of the back end costs off as well, rather than just shutting down a paper machine. That had a very significant impact on the cash cost of the downtime.

Mark, I would say we did something maybe a little different, that we were uniquely able to do with our larger footprint. We had two attacks. One was optimization of direct variable costs, and given the mill's footprint that we have now and the virgin fiber versus OCC grade mix freight, we worked really hard at it and have some good tools to really optimize the direct variable. And, we didn't see the penalty you normally see, maybe see in the back end of the mill.

The other piece that we've done real well is we've just minimized spending, and when you have this much downtime, if you have outages, you do them on straight time, you do them with your people and do not hire contractors. You just do everything a lot smarter, and we've got the mills very fired up, and we've done this in the Box business as well. So, just major focus on direct variables, curb marginal economics, and then tight, tight spending control.

And if I could just follow on from that, particularly for you, Carol. Can you give us some thoughts on when you go from just taking downtime to really reassessing your overall footprint on the mill side of the business?

Sure. And Mark, you know from our past actions, our attention to our mill footprint is something that we continually do. So obviously, with the market we're in and with the combination of Weyerhaeuser, we've been evaluating our mill footprint. The key determination, of course, is where is demand going. I know obviously, short-term matters and we have to manage that, but we continue to look at where is long-term, the need for craft liner. Where are the export markets going and where is US box demand going? I can tell you, meantime, the fact that we are managing it affectively, we'll continue to manage our supply to match our demand, and as soon as we see that path forward, which we're working hard on, our past track record says that we'll move decisively when we reach that point.

And then just finally, Carol, is it possible for you to give us some kind of metric in the first quarter on your box volumes versus the industry box volumes, because I know that you were shutting at least a bit of former Weyerhaeuser business?

Yes.

Mark, there is a slide in the appendix that has our box volume on page 35.

Okay.

Yes, actually, Mark, we underperformed the industry relative to box volume. Our box volume was down from the fourth quarter, 5%, and we were also down year-over-year about 17%. Now some of that is from plants that Weyerhaeuser had completely closed prior to the acquisition. I would say that we made some moves in the market that we were aware of and were conscious of, so we did lose and shed some box business through the third and fourth quarter.

On our closures, we've maintained 98% of the business on our closures, so our closures have been very successful. And the other thing I would point out is, you'll see our box price, actually, was sequentially up from fourth to first, so we feel real good about the portfolio of the box business we have, and we're going to continue to work on building a competitive and profitable box business.

Okay. Sounds good. And Tom, any sense on those bad debt expenses? Can we get a number on how big those might have been and what the track would be like going forward at xpedx?

Sure, Mark. We like to think we're pretty good at the bad debt part of our responsibilities, and I would say, I'll tell you it was two times what it would normally be in the first quarter, and on our size portfolio, that's a fairly big number. I will say, the month of April, the month of March, it got better through the first quarter. So, most of the hit we took was in January, February, and it seemed to slack off after February.

Okay. Sounds good. And again, congratulations on the cash flow and the progress on the debt reduction.

Thanks. Mark, I think the number for us in the first quarter was $7 million of bad debt.

Okay.

Your next question comes from Richard Skidmore of Goldman Sachs.

Good morning. Thank you. John, could you talk about how you see pricing? In your past slide decks, you've had the chart that had where you are currently, verses the prior month average. Could you just talk about how you're seeing pricing trends and how you think the industry can maintain pricing, given the rapid raw material cost declines that you're seeing?

Well, I can only talk for International Paper, and we are focused on matching supply and demand, no matter what the market environment is. You can have growing demand and still have excess capacity if you do not manage the supply side. So the prices in North America, our prices have slipped a bit. They haven't slipped precipitously, like they have in market polls in some of the export markets. And you've got our coat and board prices have gone up. Our paper and packaging prices, industrial packaging have come down a bit. There's been no acceleration, and I think it's just been a steady leakage. Our business is not a cost push business, so when input costs go up, that doesn't mean our prices go up, and when input costs go down, it doesn't mean our prices go down because we're not a cost pass through business. We're a supply demand business.

In the rest of the world, things are behaving somewhat differently. We've seen probably more price leakage in Europe than we have in North America, but we're not a big factor in Western Europe, so we do not have a lot of capacity to be able to try to manage our inventories aggressively and have much of an impact on overall inventories.

And as raw materials come down, you haven't seen some of those high cost producers that have been taking downtime, increase the volumes that they are supplying to the market?

There's no question that if you look across the industries, that not everybody is taking the same amount of downtime. That's because everybody is making their own decision based on their own set of economics. We know there are some, if you have one mill and one machine, you're not going to take any downtime because you're either in business or not in business. That doesn't mean that that is the situation we have to follow. So, no question, people are taking different amounts of down time.

Can I just ask one other question on xpedx? I think you mentioned March was back to profitable in xpedx. Should we expect that things have kind of stabilized and you'll be back to the normal kind of operating margins that you've seen there in the last couple of years?

We've caught up with the revenue declines. In the first quarter, we caught up bailing out costs, so we caught up and made some money in the month of March. I would say it's not correct that we've caught up with the returns that we had over the last three years. We still have more cost work to do before we get back to that level of earnings.

With sales being down 20%, and gross margin dollars following that, that's a hard mountain to climb back up.

Great. Thank you.

Your next question comes from George Staphos of Merrill Lynch.

Hi, everybody. Good morning.

Hi, George.

Congratulations on the progress. I guess the first question, the performance in Containerboard and Industrial Packaging was impressive. Congratulations on that. Can you just parse the comment a bit more about being able to hit your EBITDA goals within the business with 10% less production? It looks like most of that is coming from the improvement in the box plant component of the synergies. Is that largely being driven by headcount, by footprint or by processes, and what are your key macro or underlying assumptions behind that?

Well, we think we'll get more merger benefits. That's covering it. We have some of the input costs assumptions we made a year ago, looks like there is some upside there. And frankly, we think we've gotten out very aggressively, and I'll let Carol Roberts comment on this, on the box side. We've got a lot of optimization to do in the mills, once we can get back to, I would say, a mid cycle way of running these mills.

Right.

So, I think it's the combination of merger benefits, seeing more upside in mill optimization, and possibly, a bit of help on input costs. But even if input costs go back to where they were, we're pretty confident we can deliver those level of earnings, and we do not need box demand to be growing at 3%, 4% a year to do it.

The only thing I would add, John answered the quantification of it very well, we're very pleased with what we got on two dimensions for sure, which we expected, but it has exceeded expectations. The assets that we've gotten and their capability have been very good, and so we found a lot of opportunity to bring how we think about things and how those folks think about thing together, and that has shown up in more synergies. But the other thing we've gotten is a great group of people who are fired up and very eager to win and do whatever it takes to do that. So once again, it's an upside. You have upside in the mills, which we really haven't had a chance to take advantage of yet. We've had tremendous upside that we found in the box business. And so, while we didn't intend to shrink, we found more upside to take the place of the revenue from the volume.

And let me just make one more comment there, George. That upside that we're going to find in these mills isn't going to result in producing more containerboard than our customers need to run their business.

I understand.

All it will result in will be business in that containerboard with ultimately, fewer machines.

That's been clear from your intent and results here the last couple of quarters, so good work on that. I guess on the mill side, in terms of optimization, is one key area just producing fewer grades and concentrating them at various machines or mills, relative to what your customer mix ultimately looks like on the box side? Is that one key area?

Absolutely, because each mill, and even a machine, has some different capabilities. Let's take Pensacola. Very good at running very light weight, high strength. So, we can load that machine and mill up with a larger box system's needs. We can optimize medium for ourself, which is something we haven't been able to do as well. So with a bigger system and more chances, absolutely, we can move each mill to its sweet spot, and back to that comment I made about optimizing the direct variable costs. We have more choices and more options to optimize.

George, the logistics piece to this too is we knew it'd be big, and it is big. Just to think about it for a minute, whereas we're at nine facilities and sixty box plants, shipping all this linerboard around. We had six facilities and sixty box plants, and now we're taking all the miles of shipping past each other out. And one thing we also learned from Weyerhaeuser is, they were a lot better at maximizing the use of rail car loading than we were, so we've gotten on that in a real hurry and increased our average load per rail car by 10%, right out of the shoot. That's huge on the number of rail cars we ship every day.

A few, last, quick ones and then I'll turn it over. First, on containerboard, how do you see the future, Carol, in terms of lightweight? You obviously have Pensacola and that puts you ahead of the curve relative to the peers, but do you see the market progressively moving that way over the next 5 years, 10 years? And then quickly, you showed the CapEx budget for this year. We appreciate that. Tim or John, what do you think the CapEx is for IP in a more normal environment, looking at whatever number years, two years, three years?

Well, Carol, why don't you comment on that?

Yes, I don't see a big change on the lightweighting. I think it will continue to progress as opportunities present themselves. Still a long supply chain here in the US, and people would rather make sure they have a product and a box that will work, but I think we'll see continued opportunity. I think the area we'll see more opportunity is the continued move from RSC's to dye cuts, which is about area. So I think that's where customers see a lot of opportunity for them to save costs, and for us, we have to deliver value to see a continued shift in the product mix there.

Got it.

On capital allocation uses of cash, Georgia, we take that very seriously because we know it's important to us and it's important to investors. We said, before Weyerhaeuser, we were going to spend about $1 billion a year, on average, over the cycle, and sometimes a little more, sometimes a lot less, and we're in a period of time now where we can do with a lot less. We're spending less capital on the Weyerhaeuser facility than we thought. So, we're getting the job done at $600 million, but we're not improving the business. We have lots of cost reduction opportunities that are 40%, 50% return projects at today's input costs that we're not doing, but those will always be there. So, we're also going to be discretionary about where we spend our capital. Not every business, not every facility will get the same amount, relative to depreciation, because there are some facilities that may not be around and some businesses running for cash.

Thanks very much.

Your next question comes from Chip Dillon of Credit Suisse.

Good morning.

Chip, welcome back.

Thank you. First question is, very impressive box price realizations. You pointed out what I was going to ask you about. Could you talk a little bit about how, number one, you were able to keep your box prices actually at a higher level sequentially, and is there sort of a lag we should look at relative to some of the published pricing for linerboard?

Chip, let me answer the first one. I think it's really a combination of things. One is that some of the business that we do not have any more, was not priced particularly well, so that is a help in and of itself. So while we may have lost some business, it wasn't generating very good profitability. The second piece is we implemented some increases that we had negotiated in the fall time frame in the first quarter. We did those in January. And, we continue to just push our mix. So, I think it's very real. It's real box price due to the mix in the portfolio of the business we have.

Chip, I don't think, from my perspective, we're not selling boxes at above market prices. As Carol said, we've gotten some business we couldn't get to market. Somebody else has got it now. And business that wasn't at market, we were able to get our customers to market. But we're in the market every day, so we're not selling above market price boxes.

What proportion, roughly, would you say, your domestic box sales are tied to one of the published prices for board?

That's an easy answer. A lot.

Too much.

There is a fair amount, and we have some mixed views, obviously, even here at IP around those. Some of the bigger customers, where you need something to help folks run their businesses, we have a fair amount. You would expect the national business would be heavily tied to that, where the local business is very much less so.

Okay. And then, the last question is, on my math when I stripped out all of the one time items, I'm getting about a 46% tax rate. I don't know if your numbers agree with that for the first quarter. And that to me would suggest that you probably expect the rest of the year to see, proportionately, a little bit better outside the US and a little bit not as much from the US. Is that fair?

Yes, I don't know the 46%, Chip. We had a 33% ETR for the quarter.

I mean basically, at $70 million pre tax, when you take out the charges, and 32 of tax expense when you take out all of the tax affects. But I guess in general, do you expect to see, relative to the first quarter, better proportions from outside the US versus inside the US?

I think our crystal ball is pretty fuzzy on how we see things really all around the world. The only place I feel we have some clarity is in China, and it's a relatively big business, it's a $1 billion business, but it's relatively small in the context of International Paper, but we feel pretty good about how we see demand over the next two or three quarters there.

And final, quick one. Ilim, obviously you have a lag reporting of that. Any sign there that in real time, that business is stabilizing and therefore, we might see stable or better results later in the year?

Yes, I think importantly, remember 65%, 70% of Ilim sales are export, and China accounts for probably 80% of that 70%. So, demand for pulp in China is firmed up. It came back after Chinese New Year. Prices are still low. I think soft wood prices have moved up a bit, but they're still way below where they were six months ago. So demand there, right now, is better than it was. The Russian economy is still quite weak, as all of you know, but Ilim has more exposure to the export markets and the Russian domestic market than our paper business, and Svetogorsk, who has more exposure to the Russian domestic market.

So probably, what you report in the third quarter will hopefully be better than the second quarter.

Well, what is really swinging this is the financing side of Ilim and not the commercial side, on a quarterly basis. and with a lot of Ilim's debt being US dollar denominated, a weakening ruble increases the rubles out the door.

Got you. Thank you very much.

Your next question comes from Mark Weintraub of Buckingham Research.

Thank you. First, if I could, on the containerboard system, how much savings would there be if you were to shut a facility? Obviously at this point, if you're running 70%, you don't need anywhere near all the capacity, and I understand it's complicated in the decision making process because you have to think about the future as well. But, how much savings would there be if you were to take out a mill, on an annual basis?

Carol, do you want to answer that?

Yes. Mark, I would say it depends on the mill, and if you take an integrated mill, it's got most of the heavy fixed costs to run the thing. I would say that the prize is eliminating about $50 million of fixed costs that go with that capacity.

Okay.

Recycle mills would be a little less.

A lot less.

Okay, so $20 million or so, for recycle $30 million?

Yes, it's probably more like $15 million to $20 million, because you're not taking care of that back end so most of that cost is coming in the bailed OCC, so it's a much smaller price on fixed costing.

Okay. Great. Second, totally separate, you're buying about 15 or 18 MMBTU of gas each quarter, billion, was much of that hedged in the first quarter and if so, at what prices?

Mark, it's Tim. We were hedged about 40%, 45% for all of 2009, and it's closer to eight box MMBTU, the hedge price.

Okay. But it's fairly steady from quarter to quarter, or are we going to see a nice improvement as the year goes on as hedges from the earlier in the year roll off?

It's pretty steady throughout the year.

Okay.

If you think about 2010, you'll see a meaningful improvement in our gas costs as we go forward. If you just take the run rate and blow that out.

Right. Curious, are you putting in hedges right now for 2010, at these types of price levels?

Yes.

Okay, so we can pencil those in. On the black liquor, what's your level of confidence that you get to keep all the credits through the end of 2009, and are there prospects for anything in the years beyond?

Well, I'm not going to try to be the expert on what's going to happen, how it's going to happen. There are lots of discussions going on about leveling the playing field for producers of renewable power, going forward, and Internation Paper has been engaged in that discussion. So, whether it's some kind of modified extension of what we have, or no modification, or something totally different like Section 45 fuel credits, what we want to do and what the industry wants to do is get recognition for being one of the biggest users of alternative fuels and generators among industry, which I think we've kind of have that issue on the radar screen now. So, I don't want to speculate. The law that was passed by Congress expires at the end of the year, and at this point in time, nothing has changed.

Okay, great. And then, lastly, you've obviously acted really boldly in many of your businesses and it's showing up in your Containerboard and your White Paper business, in most better resilience than most people would have expected, had we been thinking about it a couple of years ago. Doesn't seem, yet, to be translating as much in the Consumer Packaging business. Any thoughts there?

Well, one of the things that we had in Consumer Packaging that we also inherited with Weyerhaeuser is, with hindsight, a bunch of pricing decisions we thought were the competitive ones at the time, but didn't turn out to be that way. That's one issue. We also had a real structural change in the packaging side, the Shorewood side of Consumer Packaging, with the rapid decline of music, the collapse of home entertainment margins, and basically, the shift of a huge chunk of our business out of North America. Mike Balduino is here. I'll just ask him to make a brief comment. He runs our Consumer Packaging business. About our footprint in Shorewood North American facilities, three years ago versus now.

Over the last three years, we've reduced our costs in North America, probably have half as many plants as we did in that period. Our customers have exited North America, so the focus is really a tremendous amount of overhead reduction and cost improvement. As John said, on the Coated Paperboard side, we worked really hard to exit ourselves from some of those contracts, and that's why we saw price improvement in the first quarter, because we did a very poor job of recovering our input costs last year. So, both of those things, I think, are going to contribute to improved margins as we go forward.

There's no part of our business, Mark, that's seen a bigger shift in terms of customer base from inside North America to outside North America, other than Consumer Packaging. It's been tobacco, it's been cosmetics, all the consumer products, golf balls. Now, we've been following our customers. We have a joint venture in Mexico that's engaged in tobacco. We have a number of plants in Asia which are doing golf ball packaging and tobacco, but that's been costly and it's taken a while to rebuild the sales base.

Very helpful. Thanks a lot.

Your next question comes from Mark Connelly of Sterne, Agee.

Thank you. Just a couple of quick things. John, a clarification. With respect to CapEx, if you go back to your original 2009 estimate, is it safe to say that most of the reduction in the CapEx estimate is related to Weyerhaeuser?

I don't think so, Mark. I'll also say, welcome back, before I forget.

Thank you.

We're taking a $100 million out of CapEx from our original target, and I don't think that all relies on Weyerhaeuser. I think that's all around the system. We just figured out jobs that had just started, were slowing down or stopping.

Is that more likely to be North American, than overseas?

Mark, a big portion of it is North American.

Okay.

It's really, we are not doing cost reduction projects unless they are already started, anywhere. No new ones, because they'll be there at another point in time, and they're good projects. That's why I said our capital spending is not going to remain at $500 million to $600 million forever, but it's also not going to be close to depreciation over the cycle either.

Just one last question, John. You mentioned the Brazil machine startup. Can you talk about the conditions that machine is facing and whether we're going to see a normal ramp?

It's running very well, as all these machines do when demand is down.

Exactly.

What we're doing is the markets in Latin America are showing better demand than the markets in the more mature worlds. Pricing is lousy, but demand is okay, so we're shifting around. We export about 50% of what we make in Brazil, and that's going all over the world. So operationally, it's going really well. We have a great pulp price because remember, we're not integrated there, so we're getting pulp from our pulp supplier at very, very competitive prices, which is allowing us to be profitable on that machine, even at today's export pricing.

Thank you very much, John.

Your last question comes from Peter Ruschmeier of Barclays Capital.

Thanks, good morning, and congratulations on the progress. Couple of questions. Maybe a question for Carol. Given the alternative fuel credit, I'm curious on how much ability you have to flex your operations to increase your virgin output and reduce your recycled linerboard output, just to take maximum advantage of the credit?

As I told you all, obviously, if we're doing our direct vigorous award, that's definitely a factor that we look at. You'd be surprised. You might think it would create a significant swing in how we would run, and it was really more of a tweak than a significant shift, and that comes from other issues relative to grade, freight, and other variables, So, I would say it has not caused a wild shift in how we intended to run. More of an adjustment.

Okay, and maybe a question for Tim. On the cash payments, I'm curious if you can speak to the timing of the cash tax payments you would have on the credits themselves?

Yes, we have an LOL position that will offset a large portion of that, so I don't see a material change in cash taxes for 2009.

Okay, helpful. A question again for Carol. I'm curious. Of the 20,000 or so employees, I don't know if you know off the top of your head, the breakdown between salary and hourly. I guess the reason I'm asking, I'm curious the degree to which you have ability to flex your workforce if you have sustained, market related downtime, to minimize that fixed cost of the labor?

Well, I would say that it's really three buckets of people. We have had a fair number of salary. About a third of the folks have been salary folks, and we did that very quickly and very aggressively. There's a large group of folks that came from the rationalization, and that's a big chunk. The piece that we found that we didn't expect was we found higher staffing levels in the box plant than our own box plant. A tribute to the CBPR Weyerhaeuser legacy managers, they stepped up to that and they addressed those issues, so we had some significant reductions that were not related to the volume. As you would expect, the box plants are a lot more flexible handling workforce during times of low volume, and know that each one's a little bit different and unique, but we've been able to handle that.

Okay, that's helpful. Lastly, maybe for John. Back on Ilim, I'm curious on the trends that you're seeing for fiber costs in Russia. I would think they're coming down, but maybe you could comment on that? And, any color you may have and be willing to share in terms of the export duty situation that was put on hold this year?

Well, fiber costs are coming down for a variety of reasons. One is, demand is weak. Second is, in Ilim we've made some investments in forest productivity, which is paying off. The export duties, they're not going in as fast as we thought, but whatever is going on there, and it's different in the east than it is in the west, is helping our fiber costs. They are some other things, like demand and forest productivity, and rearranging leases. We're looking at how we can redo our concessions to improve our logistics, because a big chunk of our wood cost in Russia is cut and haul. So, redoing our concessions at a time when we can, to get wood both at Ilim and at Svetogorsk, closer to home, has a big impact.

Very good, that's helpful. Thanks, very much.

Okay, thank you, everybody. Before we wrap up, I just want to remind you of our Investor Day, June 9th, in New York City. Hopefully, you all have that information, as to where and when. It's going to be a half day meeting. We'll be providing updates on our key businesses and our financial positions, and it will give us a chance to visit with you in more detail, more depth, before we talk about the second quarter at the end of July. So, we look forward to that day, and thanks for participating in today's call.

Thank you. This concludes today's first quarter 2009 earnings review conference call, You may now disconnect.