International Paper Co (IP) 2009 Q2 法說會逐字稿

Good morning. My name is Stephanie, and I will be your conference Operator today. At this time, I would like to welcome everyone to the second quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

I would now like to turn the conference over to Tom Cleves, Investor Relations. Mr. Cleves, you may begin your conference.

Thanks, Stephanie. Good morning, everyone, and thanks for joining International Paper's second quarter 2009 earnings conference call.

Our key speakers this morning are John Faraci, Chairman and Chief Executive Officer, and Tim Nicholls, Senior Vice President and our Chief Financial Officer.

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

Stephanie, before I turn the call over to John, could you please figure out how to mute the other line?

Yes, sir, that line has been muted.

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

Thanks, Tom. Good morning, everybody. Thanks for joining us.

As usual, Tim Nicholls and I are going to first review our second quarter 2009 results with you, and the performance of our individual business, and then we'll talk about the third quarter and take your questions.

Let me start off and just say International Paper had a solid second quarter. Despite the continuation of challenging economic conditions, we posted better results in the second quarter than in the first quarter. Once again, we demonstrated that we can execute in a tough economic environment. When I speak of executing, I'm referring to a couple of things; cost reduction, cash generation and debt reduction. We increased our earnings by 160% relative to the first quarter, generated $1.3 billion in free cash flow, and I think really importantly, increased our EBITDA margins by 180 basis points in the second quarter compared to the first. These strong results allowed us to reduce debt by $600 million during the quarter, and once again, our operations, big and small, all around the world, ran very well, despite a huge amount of down time we are taking in our North America paper and packaging business.

We made strong progress all around International Paper, both reducing operating and overhead costs during the quarter. We also had a great quarter in terms of accelerating the integration synergies in our industrial packing business. During the second quarter, which is the third full quarter since we merged Weyerhaeuser's industrial packing business with ours, we exceeded the three-year synergy target. So we have gotten to year three within nine months. I'll share more details on that with you in a minute.

Slide five contains a second quarter summary for you. Sales were up slightly from first quarter levels to just under $6 billion. EBITDA increased 21% from $604 million in the first quarter to $729 million in the second quarter. Free cash flow increased by 90% from $666 million to $1.3 billion. And after $600 million of debt repayment during the quarter, we ended the quarter with $1.7 billion of cash on hand.

Tim Nicholls, or CFO, is going to discuss each business in detail; but before he does, I just want to highlight the outstanding performance of our industrial packaging business, which delivered a 22% EBITDA increase over their strong first quarter earnings. This business increased EBITDA from $331 million in the first quarter to $405 million in the second quarter, and these excellent results were achieved despite more than 580,000 tons of down time, or 21% of our capacity. Those of you who are on our conference call when we announced the Weyerhaeuser acquisition last year remember that we said we could generate a combined $1.7 billion of EBITDA within three years. That is what we said when we bought the business.

As slide six shows, our second quarter EBITDA analyzes to $1.6 billion, and we have achieved these strong EBITDA results despite industry box shipments that are 10% lower than last year's levels, and taking a huge amount of down time as well. When the economy and box demand recover, and they will recover, we are going to be very well positioned to meet or exceed our three-year EBITDA objective ahead of schedule. We have got a lot more earnings runway in this business when volume improves, and more improvement within the business to get.

So I'm very pleased with the results being generated by our industrial packaging team. It is a combination of International Paper and Weyerhaeuser. It goes without saying the results are having a big positive impact on IP's overall importance.

Let me now turn the call over to Tim, who will discuss the results of our businesses in more detail.

Thanks, John, and good morning, everybody.

The waterfall chart on slide seven shows our change in earnings from first quarter to second quarter. In the second quarter from our operating businesses, earnings were $0.20 per share versus $0.08 in the prior quarter. Higher volumes increased earnings by $0.20, which was offset by lower selling prices, which reduced earnings by $0.19. Lower prices for inputs, wood, chemical and purchased energy increased earnings by $0.12, and cost performance was really exceptional in this environment. Our mills, our converting operations, continue to run exceptionally well. We continue to make strong progress on our overhead cost reduction efforts; so strong cost performance added $0.12 to earnings. A really good outcome, with the organization focused on cost management across a number of fronts. A higher mix of export shipments reduced earnings by $0.05, and higher planned maintenance outages decreased earnings by $0.06.

Slide eight just illustrates one component of that ongoing cost management effort. It shows our headcount, and you can see that we have continued to act very quickly to drive out operating costs. Relative to second quarter of last year, we have reduced the total number of employees by 8,000. That is a 12% reduction in 12 months. It was our year-end goal to be at 58,000 employees by the end of this year. We are now going to be below that by the end of the year.

Slide nine shows the favorable impact of declining input costs in the second quarter. Input cost reductions increased our quarterly earnings by $0.12 a share as I mentioned, or $77 million. Reduced costs for wood OCC added $25 million; lower chemical prices increased earnings by $24 million; and energy cost reductions boosted earnings by $23 million, with transportation adding another $5 million.

During the second quarter, we continued to match production to our customer's needs, and as a result we recorded nearly 700,000 tons of lack of order down time in North America, which was in addition to almost 200,000 tons of maintenance down time. We took more than 580,000 tons of down time in our North American Containerboard system, which is about 21% of total capacity. And we took 170,000 tons of total down time in the Uncoated Freesheet system in North America, or approximately 23% of total capacity. And we also took another 110,000 tons total down time in the Coated Paperboard system in North America, or about 23% of its capacity. So we continue to take substantial amounts of lack of order down time in order to manage our gross margins. And because the cumulative costs of this down time is far less than the negative impact of chasing volume or building unneeded inventories, we will continue to manage our production to meet our customers' immediate needs.

So with that, let me turn to segment earnings. As John discussed, industrial packaging generated exceptional earnings in the second quarter, increasing earnings by 36% from $188 million to $255 million. Increased shipment volumes added $76 million, and that was offset by $75 million in price erosion. We did benefit from declining input costs, which increased earnings by $38 million. And here again, cost performance made a big difference to earnings; capturing the synergies, strong mill and box operations added $37 million to earnings. Maintenance outage expenses were similar to the first quarter, but a higher mix of open market export sales reduced earnings.

The North American box business had a shipment -- a box increase in shipments of 5.8%, which compares favorably to the Fiber Box Association level of 5%. We now believe that through the second quarter, we have probably passed the bottom of the down turn in box demand. During the second quarter, domestic containerboard prices stabilized. And as I said, our mills and box plants ran very well. And earnings also benefited from significant structural cost reduction and the merger synergies. As we exited the quarter, we did see an increase starting for OCC, and we expect that to continue in the third quarter. But overall, inventories are lean, which should help us capitalize on any uptick in demand.

Turning to synergies, during the second quarter we achieved nearly $120 million in merger synergies, which contributed strongly to the results. And just as a reminder, there were four major categories of synergies that were going to drive the total improvement. One was rationalizing box plants, which we have been very aggressive in doing. Mix improvements in the box business was the second one. Optimization of mills and logistics, and also a reduction in overhead rounded it out.

Using the June synergy rate, we are on track to achieve nearly $500 million in merger synergies. So to put this in perspective, after the first 11 months of combined operations, we are at an annual synergy run rate of nearly 20% greater than the total we were going to achieve over the first three years of the acquisition. The combination of capacity management and cost performance is driving improved margins.

If you turn over to slide 14, you see when we acquired Weyerhaeuser's packaging assets, we had a goal of creating the premiere North American industrial packaging business with the highest margins, and we feel like we are well on our way to achieving that goal. Our EBITDA margins improved from 17.5% in the first quarter to nearly 21% in the second quarter; and we are almost double the second quarter 2008 levels, despite more than 20% of total down time. So our second quarter year over [year] shipments were down more than the industry average, and significantly more than some key competitors. But our margins and our profits are up. Our objective is not to maximize volume, but rather to maximize profitability.

Moving on to printing papers, the Global Printing Paper business earnings declined from $101 to $86 million. Higher shipments and favorable input costs in all global regions were more than offset by lower selling prices in all regions. For the North American Printing Papers business, where earnings declined by $24 million, favorable input costs and improved volumes were offset by lower selling prices and lower margins from increased export shipments. The North American Market Pulp business, where earnings were up $16 million, had strong mill operations, lower input costs and higher shipments that more than offset the lower selling prices. European Papers' earnings declined by $9 million; improvements in volumes and input costs were offset by higher operating costs and maintenance outage expenses. And in Brazil, where earnings increased by $2 million, seasonally higher volumes, strong operating results and favorable input costs were offset by reduced domestic and export selling prices.

Consumer packaging earnings increased by $16 million to $38 for the quarter. Increased shipments improved earnings by $18 million. We had just a small erosion in selling prices. And then favorable input costs increased earnings by $6 million, costs were $9 million favorable, and mix improvements increased earnings by $2 million. We did have more planned maintenance outages in the quarter than the prior quarter.

For xpedx, earnings increased to $10 million in the quarter. Shipment volumes improved, but the sales revenue remains relatively flat, reflecting the decline in paper selling prices, especially the prices for coated papers, which represents the majority of xpedx's printing paper sales. Sales revenue per day was flat with the first quarter levels, about 20% lower than second quarter of 2008 levels. Xpedx is continuing to focus on reducing operating expense to match it to its current revenue levels.

Now let me turn to Ilim. Slide 18 provides the summary of Ilim's first quarter 2009 results. I would just remind everyone we do report Ilim on a one-quarter lag. Sales of the joint venture declined by 27%, reflecting the weak pulp market at the time in China and the weak demand for paper and packaging within Russia. Pulp shipments declined by 1%, and pulp prices dropped by $148 per ton. Containerboard shipments declined by 5%, and selling prices declined by $110 per ton. IP's share of the joint venture's earnings declined to a loss of $30 million, $22 million of that equity earnings loss was due to unfavorable foreign exchange losses. We believe that this quarter of performance, their first quarter reported and our second, represents the bottom for Ilim, as prices and demand for market pulp have improved during the second quarter calendar year, and the results continue to improve in July. So their second quarter will be part of our third quarter earnings release.

You know, in Ilim we're approaching the two-year anniversary of the joint venture. We have been through a great first year, followed by a tough second year, driven by dramatic changes in both the global and Russian economic climates. Because of that, we haven't had as much progress on the capital investment program that will drive future earnings growth of the joint venture. We now see the economy and the performance of the business improving, which will allow us to get the joint venture back on track with the investment plan that remains attractive.

The original partnership agreement allows each partner the right to reassess their ongoing participation in the joint venture anytime after the second anniversary. Right now, neither party is interested in changing the ownership structure of the joint venture; but it's possible that either partner could elect to do so. If the decision to exit the joint venture were made, it would take up to six months or even longer for a transition to occur. So given the current economic conditions and their impact on the joint venture, we and our partners are discussing potential revisions to the original agreement, including a proposed scope and timeline for a revised capital investment program. But at the moment, we look forward to continuing in this joint venture, which is in a low-cost high-demand growth region, especially as business conditions improve.

Before I complete the earnings review segment of the presentation this morning, I'd like to just mention a few highlights from some of our international operations. As you know, we completed the construction of our new Uncoated Freesheet machine in Brazil, and it started up earlier this year, and it's had a very successful start up. It's currently running seven months ahead of the production ramp plan. We are also very pleased with the significant mix improvement on our coated paperboard machine in Svetogorsk. That improvement is worth $12 million on an annualized basis. The mill in Poland continues to perform very well, running extremely well, setting new production records and operating at a high level of machine efficiency. And our coated paperboard shipments through our Sun joint venture were up 75% versus the second quarter of 2008; reflecting the new production on the new paperboard machine, which is targeted for domestic China consumption.

So with that, let me turn to cash flow and balance sheet. As we shared with you during the recent Investor Day, maximizing cash flow remains a top priority. Despite the continuing economic recession, our operations generated $700 million in cash during the second quarter, and margin management and a strong focus on working capital are contributing strongly to the cash flow generation. The result was nearly $1.3 billion of free cash flow in the quarter. Even excluding the cash from the alternative fuel tax credits, our free cash flow was the second highest free cash flow in the last six quarters. Strong free cash flow has allowed us to make significant progress on debt reduction as John mentioned, and slide 21 shows you where we are through the end of July.

By the end of the first quarter we reduced our debt by $1.2 billion, and in the second quarter we reduced debt by another $600 million. By the end of this month, we will have reduced debt by another $600 million. So in the 12 months since we completed the acquisition of Weyerhaeuser's packaging assets, we have reduced our pro forma debt by $2.4 billion. In doing that, we have already surpassed our target for debt reduction of $2 billion within the first 24 months, and continue to be strongly committed to further strengthening the balance sheet, and we are now projecting that by the end of this year we will have reduced our debt by around $3.2 billion, or more than half of the acquisition debt.

Slide 22 shows our debt maturities through 2012. In July we reduced 2011 debt maturities by $280 million, and in 2012 by $200 million. As of today, we have sufficient cash on hand to meet the $1 billion of cumulative debt maturities through 2012.

So with that I'm going to turn it back over to John, who will summarize second quarter and give you an outlook for the third quarter.

Thanks, Tim.

So in summary, despite continued strong economic headwinds, we posted solid results in the second quarter. We continue to match our production to our customers's needs to avoid tying up working capital and unneeded inventories, that would only put pressure on pricing. We ran our operations very efficiently, and generated nearly $120 million in integration synergies in our industrial packaging business. We generated $1.3 billion in free cash flow, which contributed to our ability to reduce debt by $600 million in the second quarter and, as Tim said, another $600 million just in the month of July. In other words, we have reduced our debt by $1.8 billion for the first seven months of 2009. Since we closed the Weyerhaeuser acquisition, we have reduced debt by $2.4 billion, as Tim said, and are going to -- we plan to have more than 50% of the acquisition debt paid off by the end of the year.

So let's look ahead to the third quarter. We anticipate that we'll continue to face challenging conditions in North America. I'm on slide 24 here, which gives you a snapshot of how we see volume pricing, maintenance outages and input costs for all of our businesses, North America, Europe, Brazil, Russia and Asia. We expect a slow recovery in North American demand. You know, this recession's going to end. How it's going to end and when it's going to end is yet unclear. The good news is, mill and channel inventories are lean in both paper and containerboard, which positions us well for the eventual upturn in demand.

You know looking at volume, we anticipate demand for printing papers in North America and global market pulp to be similar to second quarter levels, and we expect paper shipments from our Brazilian business to increase. We expect North American demand for containerboard and boxes to increase, and we expect higher export shipments of containerboard. Those increases in North America are going to be very, very modest. We also expect increased shipments of our coated paperboard business in our Sun joint venture. The domestic economy in China is quite strong, as you've all read about. In fact our shipments in second quarter of folding box [coated] were double than they were same quarter last year.

Now looking at pricing, we expect global prices for uncoated free sheet to remain at end of second quarter levels; and global pulp prices to continue to increase, although from very, very low levels, given what's happened over the last nine months to pulp prices. We expect North American containerboard prices to remain stable at second quarter levels. But box praises will decline, reflecting the impact of containerboard price decreases, which occurred in the second quarter. And we expect steady North American coated paperboard prices.

Planned outages are going to decrease by about [$16 million]. We expect in North America input costs to increase, and that's principally going to be through OCC. OCC prices bottomed in the second quarter, and actually moved up slightly in the second quarter from where they -- from the first quarter average. We probably have gotten more input cost relief over the first nine months than we are going to get over the next nine months. And finally, we expect a significant improvement in equity earnings from our Ilim joint venture, which as Tim said, remember that is reported in our one quarter lag; and as pulp volume and pulp prices improve, so will Ilim's earnings.

In our second quarter outlook, we have said that we expected the land sales from American Timberlands to close in the third quarter. American Timberlands' investors are progressing with their due diligence, but it's taking longer. So we no longer expect this transaction to close in the third quarter.

So taking that all in and I realize there are a lot of colors on this chart here, and we don't have, you know, perfect clarity on what's ahead, we are still in a global recession, and we expect third quarter earnings to remain -- to be about the same as they were in the second quarter.

Going forward, our priorities remain the same. We are going to focus on aggressive cost management, we are going to continue to match our production to our customers' needs, and finally, we are going to continue to strengthen our sheet by continuing to pay down debt. Our goal remains the same, to reduce total debt to less than three times EBITDA over the cycle.

Basically International Paper is getting ready for an improvement in the economy. We don't see one yet, but one is out there, and we are going to be ready for it with a stronger better Company when that happens.

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

Thanks, John. Thank you, Tim. Stephanie, we are ready for our first question, please.

(Operator instructions)

Your first question comes from the line of Gail Glazerman with UBS.

Good morning. I guess just to start, can you give maybe a little bit more color on what you are seeing in demand, maybe talking about what you are seeing in July relative to June?

I have got -- Wayne Brafford runs our paper business here. And Carol Roberts, who runs our packaging business. I'll let them talk about North America, and I'll fill in on outside North America. Just briefly, Wayne?

Well very briefly, as John mentioned earlier the pulp business has improved. Most of that is related to China. In fact, I would say the rest of the world has not improved a whole lot at all. But China is up quite a bit.

On the paper side, Gail, shipments are solid, but solid relative to where they've been. We are seeing some dip in the order book, and that's kind of ancipated in July. There is a bit of a seasonal factor there, so I feel the order levels have lightened up a bit versus June. But again, that's not a -- not unusual for July. But still, it is a lightening.

Gail, this is Carol. In boxes, U.S. boxes, we had a good, strong beginning of July, which was very encouraging, because that's around a holiday and you could expect people to be down. That has kind of moderated a little bit towards the second half of the month, so I would say -- categorize July as very similar in aggregate to June levels.

It feels like demand's going sideways in North America. If Tom Kadien were here, he would say xpedx sales are -- if they are up, sales are just up a little bit. It just feels like more of the same.

Asia is solid for us. And that's again, most of our business is for the Chinese domestic economy. Europe is in a slow time of year, you know, summer is not a heavy shipment month, and our shipments are probably going to be not much changed from where they were in the second quarter.

Okay. Carol, can you talk maybe specifically about exports and containerboard? Obviously, the industry data showed a very solid uptick in June. Is that something that you think can be sustained?

Yes, Gail, I mean, the export did show an uptick, and I think there's lots of reasons for that. I think that, you know, once again, we saw the bottom on exports earlier when -- you know, that supply chain's a little bit longer so people have more on the floor. We kept shipping into that pipeline longer when the downturn came, so we are coming out of that. I think there's some parts of the world that are maybe being opportunistic and taking some orders now, because prices are at a fairly low level. But I feel pretty good about the sustainability of the exports at pretty decent levels going forward.

Okay. Just two more quick questions. The comments on renegotiating the Ilim joint venture, I just want to be clear, is one of the options you would consider putting more cash in? Or is that completely off the table?

As Tim said, we are satisfied with the ownership structure the way it is. And that joint venture, Gail, is meant to be self-funding as it relates to the capital investment program.

Okay, and just one last quick question. The debt reduction target this year, is there any sort of assumption on fuel credit lasting through December 31 on that, or do you give any --

We are taking the fuel credits as they come. We have no line of sight on when they might end. So -- but we are pretty confident that somewhere around the $9.5 billion level is a realistic target.

We are going to get there with or without the fuel credits.

Okay, great. Thank you.

Your next question comes from the line of Claudia Hueston with JPMorgan.

Thanks very much. Good morning. Congratulations on the quarter.

You talked a little bit about trade flows in containerboard. I just wondered if you could comment on what you are seeing in terms of exports in your other business, and if there's been any real change in imports noticeable in your businesses?

Wayne, do you want to talk about paper?

Yes, just a brief comment. We are exporting paper, as John mentioned. Interestingly, overall exports from North America through June reported by AF&PA do not show an increase in exports on Uncoated Freesheet. But we have been successful at exporting paper. And interestingly, we are seeing some pricing lift in the export markets, off the American shore markets. I believe that's related to the fact pulp is moving up and energy is moving up, and a lot of the offshore suppliers of paper are not integrated.

Where we are doing most of our exporting, Claudia, is out of Brazil. About 58% of Brazil's production now, with the new machine, is for export out of Brazil. That includes the region and also Europe. A little bit into North America.

Okay and then on the bleach board side? Has there been much change --

Bleach board is pretty steady. I mean, the way I think about exports is that exports were very strong in 2008. They collapsed in the fourth quarter of 2009 in the beginning, and now they have come back. Have they come back to the levels they were at in the beginning of 2008? They haven't, but they are significantly better than they were.

Okay. Thanks very much.

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

Good morning. Congratulations on a really solid result, John. I think the impact of that Weyerhaeuser transaction, both for you and for the industry has been more powerful than most of us on the outside assumed.

I wonder if we can talk about those comments you made about China, and try to tie them together with the strength that we're seeing in Chinese purchases of pulp? Do you have a view, based on what you see at Sun and elsewhere in China, of how much of those increased pulp purchases may be just ending up in inventory, and how much of it may reflect kind of just strong internal demand in China?

I think -- we are in the pulp business in China in a lot of ways, Mark. Ilim exports pulp to China, we have a distribution company that sells pulp in China, some of it from -- not produced by International Paper, and then we also buy pulp through Sun. You know, frankly -- so I think we can triangulate this pretty well. I mean there isn't the transparency across China that we have here in North America, but it looks like this is consumption-driven, and it looks like it is demand driven.

I think you -- that kind of makes sense when you see what's going on in automobile sales and you know consumer sales, the housing market, the stock market in China. You know it is hard to say there is no inventory building up anywhere, but it appears to us the consumption in China is pretty healthy. If you think about GDP growth, even in the ballpark of 7% to 8%, with the domestic economy being I think 65% of China's GDP, exports being 35%, that all fits together with GDP growth slowing from 12% to 7% to 8%.

In other words, you guys might view then this pickup in Chinese pulp purchases as something that's maybe a little more sustainable?

Yes.

Okay. A question for Carol. Back to this containerboard export question, I'm just curious with the very low prices that the trade papers are reporting on export sales, why you think U.S. producers would be exporting more into that kind of pricing environment? Or are the trade papers missing something?

Well, you know, Mark, I think we do know that those prices are under pressure, and it is just a -- it's a business decision and an economic decision to decide whether that makes sense for you or not. Ultimately, I don't believe those prices will stay there long-term, so I think it just comes down to a decision around your cost competitiveness, and whether it makes sense to participate at those levels or not. I would say that I continue to believe that U.S. craft linerboard is globally competitive, so if somebody's going to participate, we ought to be taking a look at it and then just make the best business decision that we can.

The last question I had, on both of the waterfall slides for the segments, you showed a negative impact from mix in both containerboard and in Uncoated Freesheet, and I wondered if you could just give us a little sense of what that negative mix was in both of those businesses?

That's geographic mix in both. What that is, is that is -- the way we do that is there is a negative impact because you are shipping at lower margins, both in paper and containerboard when we ship export.

Okay. Very good.

We do have some positive mix you know when we ship -- let's say make more [accepted] packaging board in Russia, and sell it in Russia, that is better than making [weight] line cartons. So the big ones that are standing out are the -- are geographic.

Mark, I would add over on that swing chart, there is a positive from that volume that's over in the volume bucket. So it's probably just the way we categorized it on that swing chart. But there is a corollary positive from volume.

If we didn't believe we were making more money by selling that product, we would be taking the down time.

Okay. Again, congratulations on I think a really great performance.

Thanks, Mark.

Your next question comes from the line of George Staphos with Banc of America-Merrill Lynch.

Hi, everyone, good morning. Again, congratulations on the performance of containerboard and overall. I guess the first question I had, and I realize you haven't hit your full targets yet, but given the progress you are making with the Weyerhaeuser acquisition, that you are nearly at the synergy target, what is holding you back from perhaps raising that synergy target over time? Is it just the fact that you haven't achieved it yet, or are you just trying to guard against macroeconomic conditions or some other factors, John?

We did [rate], if you remember --

I understand that.

In the coming quarters, we're going to be talking to you more about what's next for containerboard. That business didn't finish with its improvement plan. There is a lot of runway that's more than volume runway, in terms of improving earnings in that business, even once the synergies are over. Because we haven't even gotten to work on the footprint and the cost structure and the optimization, all of which are -- got significant upsides for us.

I would just add to that, John, that you know, past a certain point of the combined business, it is less about synergies and just driving total business improvement.

Sure.

So that is where the business is focused now.

Could you give us a quick update on what the level of investment is right now within industrial packaging? I remember something around $10 billion. Has that number changed much year-to-date? Where do you think returns are, if you can comment at all, what the spread might be between virgin recycled right now, either for you or within the industry?

Well, capital employed in the industrial packaging business is what, Tim?

Total capital employed is about $8.8 billion, George.

Okay.

And your second question was returns?

Yes, just the spread in returns that you are seeing right now, either you or what you suspect is in the market, you know, virgin versus recycled?

I'll let Carol comment on that. She's probably closer to it than I am.

George, I really don't have a view on that relative to returns right now. So we could probably get back to you and think about that, but we look at ours as a system and optimize it, so I can't comment on returns relative to recycled versus virgin right at this moment.

You're thinking return on investment, George, or margins?

Really more return on investment, but either way you wanted to answer the question would be fine. We can follow-up with you afterwards; that is fine, too.

We look at return on investment in the business and by customer, but not by grade of product.

Okay. Two last questions and I'll turn it over. You know, in looking at the price charts in the slide deck, it looked like you saw a bit more of an accelerated drop in Uncoated Freesheet pricing in the second quarter versus 1Q, relative to what you saw 1Q versus 4Q. Wayne, was that more geographically-driven or market-driven, say, offset versus cut size? Could you give us a bit more clarity there?

And on the Timberlands sale, John, can you comment at all on whether you still expect to get the proceeds that you initially targeted on that sale? Thanks, guys.

Quick comment on that, you called it right. It's primarily geographically-driven, like the mix. There was some drifting down, but I would say the pundits are pretty close to being right. It is in the $5 to $10 drift, depending on whether you're talking about rolls or cut size, rolls having more drift now than cut size.

On the Timberlands sale, George, the terms of the agreement haven't changed.

Okay, fair enough. Thanks, guys.

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

Good morning. Just to follow-up, perhaps, on George's question with regards to synergies in containerboard John, what is really the key driver to getting the synergies faster thus far than what you had initially anticipated?

Then a second part to that is you had mapped out the road to $400 million over three years, would it be reasonable to assume that years two and three, those benefits would be on top of what you have already achieved thus far, so you could maybe extrapolate that you are going to be somewhere north of $600 million, $650 million in year three?

Well, I think the reason we got the merger benefits more faster is because of the planning that went into the integration. When we announced the acquisition in March, we closed it in August, and it was really, really important that everybody knew what their job was day one, all the leadership was in place day one. Day two, they knew what the strategy vision message was, and everybody started paddling real hard on day one. And there was no confusion about where we were going, who was responsible, and that's what happens when an organization has got the right people, and they know what the plan is.

In terms of synergies going forward, I think we are beyond the synergies that come from, you know, putting two organizations together and defining a box plant footprint to how do we run this business better, and there are lots of levers in this business now, twice as big as it was before, that we haven't tapped into yet, which will take some time. But as I said, we are going to get the $1.6 billion EBITDA, even without the volume, over time. And the volume, when it comes back, and it will, we'll be on top of that. So we are pretty positive about -- those synergies are going to stay with us, and there is more we can do that is not synergy-related.

John, in that initial $400 million of synergies, was that second step of running the whole business better, was that included in that $400 million?

No. No. That was all headcount, box plant rationalization, logistics and the commercial side of it, which was the box plant contract -- box contracts.

Then just maybe shifting just to one other topic, in terms of input costs you mentioned that you thought input costs in North America would essentially be flat, except for OCC. Can you talk about caustic soda? Is caustic soda going to be flat from here? Or should you see more meaningful or continued improvement from caustic soda?

There is a charge in the appendix, George. I'm not sure what page it's on. Maybe Tom can point it out. Right near the very end, it shows caustic soda trends. Caustic soda has come down sharply. The pricing at the end of the quarter probably is -- maybe is close to -- our low pricing, because we have got a mix of pricing, is probably as low as it's going to go.

Thank you.

Your next question comes from the line of Mark Weintraub with Buckingham Palace -- I'm sorry, Buckingham Research.

I like that change.

Mark, you have been promoted. London, right?

That's exciting. Staying with the input costs, you guys, I believe, have historically had some hedges on that gas and on that final slide, I think it says that your total nat gas consumption is order of magnitude 65 billion BTUs. How much of that is hedged? If we were to basically assume the current cost of nat gas, what type of tailwind would that be to your earnings?

Well, it wouldn't be a huge material number in this year, Mark. We are about in the mid-40s in terms of a hedge position versus our total consumption, and you know the hedges are underwater right now. Last year they were, you know, in the money by a long shot. The markets flipped around on us. But if you think of spot being somewhere sub $4, it's going to be closer to $8.00, $8.50, so on the hedges that we have.

Doesn't that mean though that you basically have, let's say, you have 20 billion BTU hedged, and can't we say that as those hedges roll off you get the benefit of $4, $4.50? So that's worth $80 million, $90 million, is that about right?

You could say that, except we don't do it year by year. We look out in time. So we are putting on positions, you know, into 2010 and 2011 as well.

Okay. And those positions that you are putting on I presume are at much lower prices than the $8.00, $8.50?

That's correct. They are going to be lower. But just to remind everyone of how we do this, we don't try to develop a point of view, we try to reduce volatility in the numbers. So, you know, we may move slower or faster at given points in time, but it's within ranges, and all we are trying to do is lessen the impact, you know, that would be overly dramatic from one quarter to the next if we didn't have the hedges in place.

Mark, it surprises me too, I think you are alluding to this, but the forward price for 2011 gas is still close to $7, which --is a whole heck of a lot higher than the spot price.

Fair enough and true enough. Shifting gears, just the second question and I'll be done. It seems that you are operating rate in your containerboard business, order of magnitude was about 79%; is that about right for the quarter?

It may have been just a little bit lower than that, Mark, but it's right around the mid-70s, 75%, 76%.

Okay. In the past, you have talked about eventually shifting your containerboard footprint, and most likely being more productive with fewer facilities. When do you think you will be ready to start making decisions on that part of the process?

When we are ready, you'll hear about it.

I'm waiting. I'll be listening.

We'll know where to find you.

Okay, terrific. Thank you.

(Operator instructions)

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

Thanks, good morning. Congratulations on a strong result. John, if you keep this up, maybe you can lease Mark some space in the Buckingham Palace.

I wanted to ask you a question, if I could, on slide 39 as it relates to alternative fuel credits. It looks like $482 million pre-tax, $294 million after tax. I want to make sure I better understand the cash effect, and whether you have in fact received the cash that you're due to date, or if there is some carry into the third quarter?

Well, there is going to be carry as we file the claims, and the claims are paid, but we are current on filing. So through the end of the second quarter, we had received $840 million in cash.

Okay. And do I understand correctly that the -- there is not much of a tax effect, because you are going to use NOLs against this?

We are booking book tax, but the cash tax impact's going to be minimal.

Okay. That's helpful. And Tim, how do you think about working capital second half of the year, in terms of opportunity, you know, a plus or a minus?

Well, it depends in some measure on what happens with overall demand levels. But I can tell you that, as an organization, across all businesses, there is an extreme focus on managing working capital as tightly as possible. So we are not going to -- to let up on how tightly we squeeze it.

Okay.

The improvement we have got or the cash generated from working capital on the first half of the year is going to be tough to replicate in the second half of the year, unless sales continue to decline, because part of that is just collecting receivables faster than you are putting on sales. Because we had sales declines of 20%, got [masked] overall because of the condition of Weyerhaeuser.

So Tim's right, we have the full court press on managing inventories and collecting receivables, but we got helped by a weak economy, which we'd rather have a strong economy and generating some more sales.

Okay.

But we continue -- the receivables is going to go up and down pretty, you know, closely correlated in time with what happens with sales. But we continue to really focus on inventory levels and inventory management.

Okay, that's helpful. And there was a headline, I think it came from one of your slides, but 8,000 job cuts on a year-over-year basis? Is that accurate? And I presume that is largely containerboard. But can you elaborate on that figure, and kind of the source of those eliminations?

It's all around the Company. It's not just containerboard. A big chunk of it did come from merger benefits, but it's been all over the Company. Not just North America, but most of it in North America.

That is total employees, Pete; that is salary and hourly. You know, part of this is getting the footprint right, and taking costs out where you don't need it.

Okay. How does that progress for the next two quarters, as you get to the year end targets that you have?

We are not going to make a year end headcount target, but we are not finished.

Okay. Very good. Congratulations on the quarter.

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

Thank you and good morning. First question is with respect to white paper. I guess the comment that it will be similar to Q2, does that imply negative 15% is the new negative 5%? And can you maybe discuss a little bit how, you know, market share in Brazil figures into that?

Well, I'll let Wayne, you know, comment on that. But I'd say you know, we are still in the middle of a -- the worst recession we have had in 80 years. So you know, you have got -- yes, there is a structural decline in the demand for Uncoated Freesheet North America, which I think Wayne at Investor Day said we think it is about 4% plus or minus. But you've got the recessionary impact of a decline in demand that is not permanent, but it's going to be with us as long as we have this economy.

And I would just add that if you look at it year over year, through June, you're right. We are still seeing from AF&PA mid-teens types of reduction. But if you look at it month to month, what we are beginning to see is we are -- I think John characterized it right. We are kind of bouncing along the bottom here. And if you look at the data month to month, June was up a little bit from May. But I wouldn't say there is a rally going on, I would say we are bouncing along on the bottom.

Yes, we won't get a meaningful improvement that's cyclically related to Uncoated Freesheet demand until white collar employment starts -- stabilizes and starts moving up, because that's the statistic that consumption's most correlated with.

Got it, thanks. Second question, and please don't misconstrue it, because I think we are all delighted with the results, but does IP have a policy on when they would issue a warning if results would be materially better or worse than consensus?

Yes, that is a good question. We do have a policy. We want to make sure we are operating in a way that is, you know, reflective of how -- what our obligation is to investors. But our policy is not to give guidance in the first place. So we look at the business indicators that we do provide an outlook for, and we ask ourselves comprehensively across all of those whether we feel we have a duty to update, and those are ongoing conversations, quarter by quarter. And if you recall, we did update -- forget the quarter, but around a land transaction, last year or year before, because we felt we -- you know, we had an obligation to inform shareholders before the release.

Thanks. Keep up the good cash flows. Thank you.

Your next question comes from the line of Chip Dillon with Credit Suisse.

Yes, good morning. When you look at the reduction target you gave us, and I don't want to pin you down, because you mentioned you want to hit it with or without the tax credit. But are you depending on the land sale to help you get to that $3.2 billion reduction by year end?

No. It's a joint answer.

That is simple enough. Another question, on Ilim, as we looked at a lot of companies that operate from the U.S., they are expecting foreign currency to turn into a positive in the fourth quarter, which would mean for Ilim, the way you report it, we would see that be a positive influence next year in the first quarter. I'm just wondering if we sort of took the pulp volumes and prices today and overlay that with where currency is now, do you think Ilim could be -- you know, would swing into the black, you know, if the dollar doesn't you know strengthen a lot more and/or pulp stays at or above current levels?

Ilim is going to have a significantly better reported second quarter than they had in the first, because pulp prices started to improve irrespective of currency. So we are not relying on currency for Ilim to get into the black. The question is, you know, how much -- how fast does their profitability return? You know, if we had 2008 pricing with today's ruble, Ilim will be making a lot of money. Because a weak ruble and strong pulp pricing, we've got pulp pricing improving, and we've got a ruble that's weakened substantially on a year-over-year basis.

And then --got you. I guess the last question, and maybe this is better for Carol, you know, with OCC going up, especially overseas, and with that putting cost pressure on the overseas recycle producers, is there -- how do you see the spread between craft liner and recycled overseas? And do you think that there is any chance that you would see, you know, an opportunity to raise prices in board say before next spring?

Well Chip, I would say that absolutely the export prices -- for one thing, I know they are got going to go any lower. So I think there is upside. So any price pressure that comes from any front, really, will help us get those prices back up. So I think there is definitely opportunity for export prices to go up, particularly in the time frame you mentioned.

Got you. Okay, thank you.

Thank you. Your last question comes from Mark Connelly with Sterne Agee.

Thank you. Hi, John. Two questions for Carol, primarily. The first is what should we be expecting in terms of additional merger integration charges over the next couple of quarters? And the second question is, if we look at your -- the cost of the down time that you're taking today, how would you compare that to the cost of taking down time the last time we went through this, four or five years ago?

Relative to the cost, there are no real significant, one-time charges coming up for the synergies and for the acquisitions. And I would defer to my financial partners if we provide more specificity on that, but not a lot.

Okay.

Regarding the costs for the down time, I would say that definitely this time the costs have been lowered due to the way we're managing. And part of the reason we're able to manage differently is we have a lot more choices around mills, around costs, between OCC mills, virgin mills, a lot further reach, whether it be optimizing the last truck of wood, the last truckload of OCC. So we've really had a dual effort, and one is managing direct variable costs to the optimum level, which we have choices on that, and then just managing overall spending. So we have actually done pretty well on managing with a lot of down time.

I would echo that Mark, across all the businesses here in North America, the mill businesses, they are all pursuing similar strategies where we take maintenance outages, we don't use contracted labor, we don't use overtime; even our capital dollars are going further because of the economic environment that we're in, and I think it's just all about managing costs and keeping spending as low as possible.

Very good. Thank you.

There are no further questions at this time. I would like to turn the call back over to Tom Cleves, Investor Relations.

Thank you, Stephanie. Wayne, Carol, John, Tim, thank you. Emily and I will be in our offices. If you have any follow-up questions, please give us a call. Thanks for joining us for today's call.

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