International Paper Co (IP) 2010 Q1 法說會逐字稿

Good morning, my name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the International Paper 2010 first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will a question-and-answer session. (Operator Instructions). Thank you. I will now turn the call over to Tom Cleves, Vice-President of Investor Relations. Please go ahead, sir.

Thanks Christie. Good morning, everyone. Thanks for joining our first quarter conference call. Our 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 these are outlined on slide two of the presentation deck. We will also a 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 2010 earnings press release and today's presentation slides. This morning, Tim and I are in New York City, and John and the balance of the senior management team are in Memphis. We're conducting our portion of the call and the Q&A remotely, so please understand if some of the transitions are not as smooth as usual. With that, I'll turn the call over to John in Memphis.

Alright. Thanks Tom, and good morning, everybody, thanks for joining us. As is usual, over the next 20 to 30 minutes, Tim and I are going to review the financial performance of the Company, first quarter results and individual businesses and then we'll leave time for your questions and share our outlook on the second quarter.

Let me just drive into the first quarter now and say it was a tough quarter, but it was in line with our original expectations. EPS came out at $0.04, and there's no doubt about it in our mind the first quarter represents the cyclical trough. What's really important when you look at the quarter is the shape of the quarter. By that, I mean the earnings shape during the quarter. January and February were really rugged, and we made it all up and more in March, so I think the importance thing here is the trajectory of earnings by month through the quarter and all of the things that underlie that got increasingly positive. We absorbed $144 million of input cost inflation in the quarter. I think we had forecast about $120 million, it actually turned out to be more, and we had planned for a heavy outage quarter, which is about $30 million. So between the input cost and outages, that was about $0.30 a share.

While it was a tough quarter, there was some good news in the quarter. European paper and packaging and Asia performed very well. Tim will talk more about that, and I think importantly demand and pricing increased as the quarter progressed, and that's continued into April. So we've got a much more positive outlook now on the second quarter and for the balance of the year. So first quarter sales were $5.8 billion, up from $5.7 billion in the first quarter of last year. It's really our first quarter over quarter year-over-year increase in quarterly sales since the start of the financial crisis and the recession that we're just coming out of. EBITDA in the first quarter was $560 million, compared to about $600 million in the first quarter of 2009. Our free cash flow declined significantly, but declined because of the higher input cost, the significant increase in maintenance outages, and we used about $300 million of working capital in the first quarter, about half of that for nonbusiness one-time items in the Company. Operating working capital percentage of sales was about flat. And we ended the quarter with $1.7 billion in cash on hand.

Turning to slide six, the first quarter results in more detail. It was a $0.04 quarter versus $0.24 in the fourth quarter. The change again really driven by a fiber spike in North America that both wood and OCC, and higher maintenance expenses. Improved operations and reduced costs from the facility closures we announced last year that we implemented in the fourth quarter, or the first quarter as in the case of Franklin added $0.16. We had some seasonal declines in volume principally in Brazil and Europe, the reduced earnings by $0.07. Price added only $0.09 during the quarter, almost all of that was in March. Really with the exception of pulp, which has been steadily improving for several months now, all of our price flow through started to show up in March.

As I said earlier, in the January call for the fourth quarter, we estimated input costs were going to be about $120 million, we thought, higher. We really didn't know, but we knew they were going higher, and actually turned out to be $144 million higher. North American fiber prices wood and OCC were about 80% of that amount, so that's the significant mover there. Wood was up close is to $60 million. Wood and OCC up about $55 million. As the quarter ended, input costs began to moderate. OCC prices peaked in March and declined by $30 a ton in April, and another $12 to $15 according to some of the publications in May. Actually we think OCC prices are probably down more than that in the month of May. Virgin fiber costs also peaked in March, and had begun to moderate in April, with soft wood prices declining or falling at faster rate than hardwood prices, but they're falling from quite high levels. So we would expect fiber prices and other input costs to continue to moderate during the second quarter, and you can't be precise here, but I think what will happen is second quarter input costs will probably look like first quarter input costs, but again the shape of the curve we'll go out of the quarter with input costs falling, even though for the quarter the average may be about the same.

So I'm now on slide eight here, and business highlight slide. And before Tim reviews the performance of each of the businesses, let me just comment on a couple of the highlights. All of our European businesses performed well with solid earnings in all three segments. Actually a record quarter in both paper and packaging in our European business, which for us is Europe, Russia, the Middle East, and Africa. Those business earned a 16% return on investment and I think it just shows you the benefits of having some global balance to these global paper and packaging businesses. Its helping IP results. Xpedx also posted solid results. While sales were nothing to write home about, cost management led to a strong rebound in earnings in the first quarter, compared to the first quarter of last year on flat sales. And all around the Company, we're starting to show, again, the incremental benefits on top of all of the benefits we already got last year, of the facility rationalizations, those footprint decisions we made at Franklin, Albany, Pineville, and Valliant, and those benefits will continue to accrue as the year goes on. So with that, I'll turn it back over to Tim to talk about how we see the second quarter and let Tim go through the businesses, Tim?

Yes. Thanks, John. Good morning, everyone. Let me walk you through the businesses.

I'll start with industrial packaging. I'll start off by saying for industrial, I was disappointed a bit with the results for industrial packaging in the the quarter, but it wasn't a typical quarter, it was transitional quarter, and there were a lot of things going on and I think we finished on a strong note, so made improvements through the quarter. One of the this to keep in mind is that when we started the quarter, we are coming off of running a fair amount of down time. We two mills down and then went to running a full scenario at the time we took the mills down right at the height of the extreme cold weather and wood shortages. So, it wasn't ideal operating conditions. We did see volumes across all of the geographies as essentially flat. The northern American box business was up 2%, which was good news. Then we had a combination of favorable operations in price that really offset all of the impact of the higher input cost, most of that being fiber. We started realizing the fixed costs savings from the two mill shut down that happened at the end of the fourth quarter, and our box operations ran extremely well. All that said, the mill system didn't run as well as it could have and we probably left $15 million of earnings on the table from the weather-related and the wood-related issues that were occurring in January and February, but I would say by the middle to the end of February, we had put most of those issues behind us, and, again, I thought we ran very strongly in March. So the real difference in the quarter, from fourth quarter to first quarter, were maintenance outages, and that's timing, it's how we had scheduled to take the mills down, and so $45 million higher in the quarter. The good news is we've taken half of what we'll take for the year, and we did fit in the first quarter. So when you look at our margins, our margins are not where we wanted them to be, but a couple of things, the maintenance outages where we were taking a higher percentage of downtime versus our competitors, and, also the high OCC, which has now peaked and is moving town, so I'm confident we're going going to be right back at top industry margins as we go through the second quarter and the balance of the year.

If we turn to printing papers, I thought the printing papers managed particularly well through what was a tough quarter. We held our margins in North America. We actually expanded margins in Europe by 200 basis points, and the European business turned in another cost of capital return quarter, so a very good news story there. Brazil we had disappointing results. We ran well, and the business was fine, overall, but we did have to take a hit for about $15 million in bad debt expense in the first quarter. We've taken the full impact of what we thought the exposure was, so that's behind us, and Brazil will return to solid earnings in the second quarter. Domestic volumes were up 2% north -- I'm sorry, North American volumes were down due the shortages, and were seasonally down in Europe and Brazil coming off the fourth quarter because of just the nature of their seasons. First quarter is always a much lower season than the fourth quarter in those two regions. We did see prices start moving up in all three regions late in the quarter, and outside North America, we ran extremely well. As I mentioned, not so well in North America because of the weather and wood shortages. And if you are recall, we had a lot of weather-related issues in the central and western part of the regions that we operate in in the fourth quarter, and then all of the weather shifted to the east as we went into the first quarter. The other notable item in the quarter or post quarter, I guess, and it will be important for the second quarter, is that we are starting to realize some of the reduced fixed costs benefits out of the Franklin mill closure, producing the last real paper the middle of April. So that will start flowing through in the second quarter and beyond.

Consumer packaging was really hard hit in North America by input costs and did have some operating problems in one of our mills. If you look at it, 70% of the input cost inflation for the consumer packaging business, which is the global business was in North America, and it's wood-related, hardwood related, so we're not going to see those costs come down as quickly as we're seeing OCC, and we're seeing the soft wood fiber come down, so that's possibly going to drag on just a bit into the second quarter. As I mentioned, we didn't run very well in Augusta, we think we're making progress, and I'm expecting that we'll have a much better operating quarter in the second quarter. The real notable items here for the sector, though, were both Asia and Europe, where performance was extremely good. In Asia, our Sun joint venture had revenue up 8%, and earnings actually doubled from the prior quarter, so that business is really starting to hit it's stride and making a lot of great progress. Prices moved up at the end of the quarter. And I guess the good news here is that backlogs are pretty strong. We now have backlogs that are at the highest level since precrisis, back to August of 2008.

Turning over to Xpedx, the story here is recovery and the business continues to recover very well. If you look at revenue, we're even with last year. I'll explain what that is in just a moment, but on the same revenue from the first quarter last year we had a $28 million earnings improvement, just phenomenal, given the -- what's going on around the business. As I said, revenue flat with 2009 levels. The volumes were up 4%. So we're starting to see recovery. It started in the east and in the midwest regions. It's now extending into the west. We're seeing it for packaging businesses, we're seeing it for facility supplies, and then at a smaller rate of recovery, we're also seeing it in paper. So the real story here is that costs have been managed extremely well, and all the work that was done last year leading into the quarter and the continued focus on costs are really providing the lift in earnings.

Let me wrap up with the Ilim joint venture. And again, just to remind you, we report Ilim on a one quarter lag. So this to this is in the joint venture's fourth quarter results reported in our first quarter. And this was really the bottom quarter for the business, we started seeing sales revenue increasing and prices moving up. Volumes didn't move up as much as they could have, because we had a major outage in the quarter, maintenance outage, it was planned. But earnings are starting to move up, and there will be a significant improvement in earnings in the second quarter, and by the time we hit the second quarter of this year for the joint venture, what we will report in the third quarter of the business should have recovered quite well. I fully expect to see that. So with that, I'll turn it back over to John and he'll take you through the summary and the second quarter outlook.

Thanks, Tim. So let me just summarize the first quarter. As I said, it was lousy January and February, a solid March. Good platform for the second quarter. Fiber prices peaked, spiked early in the quarter. Wood costs are moderating, and OCC prices are falling. We did run well in industrial packaging and consumer packaging in January and February. March we were running better and April, we are running well. We had high outage expenses, that's good news because most of its behind us at a point in time when demand is improving and with our right sized footprint, we need the capacity. We have the benefit of reduced operating costs, beginning to see the fixed costs come down in post industrial packaging and printing papers associated with those facility closures. Prices are improving as the quarter progressed We're getting our announced price increases, and I'll show you a slide in a minute. There's a huge amount out there. And we've just announced some additional price increases that have kicked in in quarter's end, or, excuse me, at the quarter's end, which will be coming in subsequent quarters.

So going forward looking into the second quarter, I think the global economy continues to improve. I'm not euphoric about it, but certainly more positive. Certain parts of the world, like Asia, are very, very strong, but I think incrementally what we thought was a slow recovery is turning out to be still a slow recovery, but maybe at a slightly faster clip. We see more and more of our customer segments start to feel more positive about their businesses. Since we're a business to business company, when our customers business gets better, so does ours. We're going to see significant impact from price utilizations in the second quarter. We're going to get an easing of wood and OCC prices, and will probably expect natural gas to decline a little bit as well. The second quarter is actually going to be our highest maintenance outage quarter. We just finished saying we took a lot in the first quarter. We're taking a huge amount in the second quarter. By the end of the first half of the year, we'll have more than two-thirds our maintenance outages behind us. Operations are running much better this quarter, and I think, as Tim said those issues we had earlier in the quarter are behind us now.

So I'm on the page at slide 16, I believe, that says earnings run way. The key component of our earnings going forward is going to be bringing to the bottom line these price increases. This table just lists the price increases that have been announced by segment around the world. The capacity they apply to. The date that the price -- the effective date of the price increase, and increase per ton, and the supply/demand fundamentals around the world were still very favorable. Inventories were low. Demand is picking up. So in terms of potential, if you sum all of that on an annualized basis, you have $1.5 billion to $2 billion of price increases which will start, have already started flow through began in March, picking up in April and will continue to increase in the second quarter and third quarters. Now, obviously that's not going to impact us all this year, because that $1.5 billion to $2 billion number is an annualized number, but obviously it's a very significant number, and this is coming at time when we see demand starting to improve.

Turning to cash and capital allocation, we continue to be committed to a balance capital allocation to increase shareholder value. We increased the dividend. We made that announcement this week, to return more cash, move from a $0.10 dividend, to a $0.50 dividend. We are committed to getting our debt balance, that including the pension gap on on EBITDA to debt basis to less than three. We're going to strengthen our existing businesses with focus capital that reduces their costs. We're looking for high return capital projects that offer short pay backs. Probably going to fund about $100 million to $150 million of those this year. No big project in there, but they all have got 40% return types of internal rates of return with short paybacks, and we're going to look for, and when we find strategic acquisitions like the SCA packaging business in Asia that I'll talk about in a minute, things that strengthen international paper and our global paper and packaging business that get returns, we'll look to use cash to do those as well.

Let me comment on the dividend increase that we announced Monday. Global economic conditions have continued to improve. Capital markets have certainly returned, if not to normal conditions, to much, much closer to normal conditions than they were. We paid down $3.7 billion of debt over the last 20 months, nearly twice our original debt reduction commitment for that time period, and we remain committed to achieving the debt target I just talked about with a three EBITDA to debt target over the cycle. So with our outlook on 2010, we decided to restore the annual dividend to a $0.50 level.

Also, a word or two about the SCA acquisition. I'm now on page 19. We announced Monday that we agreed to purchase SCA Asian box business for $200 million less than post closing adjustments. That net price when you take those post closing adjustments is about eight times 2009 EBITDA, about six times projected 2010 EBITDA, and those businesses in 2009 ran at about 40% of capacity because they've installed capacity to meet the needs of a growing market. So we have a huge amount of opportunity there to improve those businesses without adding any additional capital. Good strategic fit with our existing box business. High quality assets that we purchased at less than what it would have cost to build them. The way we've been building out our footprint over there is by building out our own plants. This gave us the opportunity to buy cheaper than we can build and obviously get the capacity in place a lot faster that we could build, taken us probably more than five years to build that capacity. We're acquiring a strong book of customers, some new high-quality customers, and the combined sales of our existing corrugated business, plus the SCA corrugated business will be about $350 million, more than three type this size of the corrugated business we have. So a big step out for us, and we have capacity in place to grow those sales to over $800 million without any additional capital.

To turning to the second quarter outlook, and this is the red, yellow, green chart we've person showing you kind of by business around the world. We anticipate a continued modest improvement, steady improvement in economic conditions in North America. That's what we're hearing from our customers. We expect stable volumes on shipments in North America and Europe in paper. We expect increasing volumes in Brazil and Asia on paper again, and we expect increasing shipments of industrial packaging in North America, and probably stable volumes in Europe, on average, although some places like Turkey are really showing a lot of strength in the packaging side. On pricing, we expect pulp prices to continue to improve. We expect to realize the announced price increases for North American paper and container board as the quarter progresses. The quarter is progresses, we're actually realizing those price increases as we speak in our April results, and we expect stable North American coated paper board prices during the quarter. We we also expect maintenance outage expenses to increase by about $8 million in North America and $16 million in Europe and Brazil quarter over quarter. Input costs we think are going to decrease through the quarter. First time we've been able to say that for a while. And even though first overall second quarter prices we expect will probably be about level with first quarter prices, the trajectory, the exit rate, will be down as we end the second quarter. We expect it Xpedx earnings to improve and we expect the contribution from our Ilim joint venture to turn solidly profitable with selling prices that will offset some probably higher input cost at Ilim throughout the year. So all things considered, we would expect second quarter earnings to increase significantly above our first quarter results. And with that, Tom, I think I'll turn it back to you so that we can get the Q&A started.

Great, thank you, JOhn. Christie, we're now ready for the first question, please.

Your first question comes from Gail Glazerman with UBS.

On the costs, can you just give a little bit more insight I guess maybe where you are need versus the prior -- versus the first quarter average, or just a sense of how quickly those costs are coming down or not?

Well, Gail, I can talk about OCC here. OCC prices, published prices were off $30 in April from where they were and another $12 to $15 in May from where they were. We think spot prices are off even more than that. So, OCC could be down $50 from where they peaked.

How about wood costs? I mean I appreciate --

Wood costs are falling as fast. The wood costs are falling on the pine side, which will impact packaging more than paper, they are probably down maybe $1 or $2 a ton, and in hardwood they're starting to decline. So a sharper decline on OCC prices than we're seeing on wood fiber, but wood fiber will unfold during the summer. We've had great weather, logging conditions are getting better. Actually, if we get some supply and saw mills come back onstream, we'll get some of our chip supply back, which will help take pressure off pulp wood. The color on that would be things are trending in the right way, and probably with OCC having recently falling faster than fiber costs have.

Okay. And just on, I guess, maybe some of the fixed costs benefits, are you seeing everything you would expect to see in the industrial side from the mill closures, and when we we expect to see the real benefits from Franklin.

Well Carol Roberts is sitting right here and so is Mark Sutton, and since Carol's has industrial packaging and Mark has Franklin, I'll let them talk about that.

Gayle, this is Carol. We did see the full benefit from Pineville and Albany, although with all of the heavy maintenance outages in the quarter some of our other fixed spending was up, and when John or Tim talked about the little bit of money we left on the table, about $15 million, be we probably had other spending that was maybe up $5 million to $7 million in the quarter, due to pushing the other mills hard to run, and I think that will come back and so I file like we're going to be quite successful in successful in getting that to the bottom line in the second quarter.

although with all of the heavy maintenance outages in the quarter some of our other fixed spending was up, and when John or Tim talked about the little bit of money we left on the table, about $15 million, be we probably had other spending that was maybe up $5 million to $7 million in the quarter, due to pushing the other mills hard to run, and I think that will come back and so I file like we're going to be quite successful in successful in getting all that savings from Pineville and Albany to the bottom line in the second quarter.

Hello, Gail. For Franklin, as Tim mentioned in his section, we just made the last real of paper in the middle of April and what we've been doing through the first quarter is transitioning the business that we plan on keeping, which is a significant percent of it to the other mills in the system, so while we're bringing the mill down, we have transition costs and logistics costs to get the grades and the right mill for the future. So the Franklin effect and fixed costs savings will really materialize in the second half of the year, and be an important driver.

And just one last question. Carol, can you talk a little bit about maybe current demand and what you saw in April, and how much of the first box price increase did you have in by the end of the quarter?

Yes, Gayle, on the current demand, as we've shown, we saw a sequential increase in actual shipments from fourth to first and a year-over-year increase of 2%. For our particular case, we had a fairly weak January and we saw our business improve through the quarter, and just to give you couple of examples, some of our consumer package goods companies were slower in the beginning of the quarter and got better. In April, we've seen that trend continue. So what I'm kind of anticipating is that the year-over-year increase if that 2% to 3% is still solidly there, but plus we'll get the seasonal uptick in the second quarter due to agriculture. And it does feel like it's going to be a good agricultural segment. Relative to the box pricing, we kind of hit our low in box pricing in December, and when we exited the quarter, we were about $20 higher, and then when April first hit, of course, we had contracts that came in. So in April, we got another pop, and I think we had in the appendix -- what page is that?

Slide 29, Carol, slide 29.

29. You can see that as of the 28th of April, which is really pretty solid through the whole month of April, we're up $39 on boxes on the first increase, so I would say the first increase is pretty much done, and now we're moving to implement the second 60.

Okay. Thank company.

Thank you. Your next question comes from the line of Mark Wilde with Deutsche Banc.

John, can we talk a little bit about that issue of returning cash to shareholders? I think everybody is happy to see that did back at $0.50. Any thoughts about further restoration, maybe going back to that dollar that we were at kind of precrisis?

Well, I think the move we made is indicative of what we -- what we think we can maintain, and we're going to be cautious about that to the extent we generate cash, and we're pretty positive about our free cash target, but we would rather be distributing the cash when we have it as opposed to in advance of having it. If we knew then what we know now, we may not have needed to decrease the dividend, but back last year, everybody was planning for the worst, and we are committed to a balanced use of cash, and we're going to benefit $1.5 billion of free cash flow of that a year, a good portion of that ought to go back to shareholders in are the form of dividends and/or share buy backs.

And any thoughts on buy backs?

I -- again, I think that's a balance program of how you return cash to shareholders I think is what we ought to have and we are going to talk to share owners about some prefer buy backs, some prefer dividends. We had what we thought was a healthy dividend in place. We had to cut it. We didn't want to. We did. And we're in the process of bringing it back in steps.

Okay.

John, if I could just comment, I think that's all right. And Mark the other thing we'll look at is what might happen with tax rates on dividends as we go through this year into next year. So all of the things John mentioned, as well as that.

Okay. And then, John, if I could, just as a follow-up. If we just take two steps back, this seems like a very good setting for international paper right now. As you mentioned price seems to be moving up on a global basis, we're seeing signs that kind of costs are ease, demand seems to be picking up even a little better than a lot of us expected. So with that back drop, what are the things that you worry about, that you're concerned about at this point?

Well, OCC isn't going to fall to $100 a ton for sure. The fiber cost increase we got hit with in the first quarter was not anything other than weather-related and a contraction of supply due to what's going on in the lumber and plywood markets. I think OCC has taken a pause, probably got higher than it should have, so we're not going to see continuing falling prices in OCC. We don't know where they're going to level out. So we are thinking about that, but we have a lot of flexibility in terms of how we run our system. So frankly for us, given that we're 65% versus fiber over OCC prices over the long term are a good thing for us. The thing I think most about Mark, is getting the right people in place to do the job that needs to be done around international paper, which is different in Russia than it is in consumer packaging and different in Xpedx than it is in coated paper board and I think we've got the right people in place. We made a number of moves at the end of the year, which I think enabled us to get some fresh thinking into a lot of businesses and get some new leadership in place. That to me is, that's my job.

Okay, very good. Thanks John and good luck.

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

Good morning. Just wanted to follow up on the industrial packaging segment for a moment. Last quarter you talked about a $300 million productivity benefit through the year or exiting 2010, just wondered if you could update us on where you're at in that process and what you saw in the first quarter in terms of benefits, and how you see that trend going through the year.

Yes, Rick, this is Carol. We did make progress in the first quarter on a couple of fronts, very specifically, and I'll give you the highlights. Our plan is a pretty broad-based plan. Number one was the fixed cost savings out of the mill system, and as we already comment on that, we successfully implemented that, and that will flow to the bottom line. The second piece of our plan was clearly on the box side, driving further improvement in our box operations. People don't realize how much money actually gets spent in the box side and making those productive efficient low cost is absolutely vital. So we did well there. The other two big areas that we have identified for this year, one was on the supply chain on our distribution cost. That's an area where we did not have a good quarter, mainly due to our low inventory levels and the challenges in our supply chain, but I'm very confident that we will get those efforts back on track as soon as we get our inventories to a manageable level. The other area, obviously, is just in our mill system. We're transitioning from running slow and not full to pretty much running full. We made progress on our consumption in the quarter, things like fiber, energy, chemicals. We did not do as well on spending due to some reliability issues that John and Tim had mentioned. So at the end of the day, I believe we'll be on track. We exited the quarter slightly behind, but I believe we're on track and our commitment is to hit that $300 million run rate on top of what we did last year by the end of the year and I feel confident that we're going to be able to do that.

Okay. Maybe just a couple of quick follow-ups. So you still feel comfortable with the $300 million, if I heard that last statement correctly, and second just wanted to follow up on your prior statement about box pricing and think you said that you were up $39 at the end of April, and essentially moving on to the second price increase? Can you just elaborate on that $39 versus the $50 increase that was announced for January, and is that suggesting that there's $10 that's being left on the table, or $10 that you're going to see show up in May? Thanks.

I was speaking in the majority of it. We still have some contracts, some things that will lag in. We have some stuff that will come in July, that had a longer lag. Its not a lot. The other thing that happened in the quarter, which we had some other contracts that some prices went down at the first of the year a few dollars. So when you add it all up, I think we're going to get close at the end of the day to the full $50 when you take everything into consideration.

Carol, do you want to comment on how the Ag business works, too because we have a big Ag piece in there now?

Yes. The agricultural piece, that pricing gets set by season, and so in the first quarter, because that price was happening through the quarter, and of those prices got set preseason, and so that kind of comes in chunks as the commodities come on-line. So it's little choppier Rick, than some of the standard consumer packaged or industrial segment.

But at the end of the day, we get the price increase.

Absolutely.

Great. Thank you.

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

Good morning. I thought we would just spend a minute on the acquisition in China, the SCA box plant. It looks likes we their 15 plants you tripled your revenues there, and that would suggest that perhaps their through put was a little more than yours on a legacy basis, and if you could just talk a little bit about how you expect -- what kind of fiber -- I'm sorry, board flexibility you have there, will you depend solely on domestically sourced test liner or recycled liner board, or will you be able to export from the US to help fiber those plants.

My sense, Chip, at least for now, we're going to are net board buyer in China. We have been. We are in Europe and we like that position. There's a lot of recycled capacity that's been committed to by the board producers over there, and they bring on all of the capacity we're talking about, we'll like being a board buyer in Asia, just like we like being a board buyer in Europe, and I wouldn't anticipate us bringing liner board in from the US in a big way. The -- probably the low cost provider of liner board into China right now is out of Russia. Now, when we finish the [Braouts] project, we won't be making liner board at [Braouts], we'll be making market pulp. And China is mostly a recycled market. There is not a lot of virgin fiber that gets used there now.

Got you. And what year saying about the ability to ramp up to $800 million, that's basically with this just sort of 27 box plant facility footprint you have now?

Yes, they're running there. SC A's plants are running about 40% capacity, we had roughly an $100 million box business and acquired roughly a $250 million box business. So if you just kind of extrapolate the -- we're probably a little more than 50% of capacity in our plants, because we haven't built them as fast as SCA had, the markets over there are growing at 10% to 15% a year pick the number, it's not going to take long for those plants to really start to ramp in terms of capacity utilization.

Got you. And just a quick follow up. We've heard a lot in recent months about the activity in keeping up with export liner board orders. And in fact people like perhaps yourself or others that make craft liner are turning away export business. Are conditions still the same as we've been hear?

Yes, it's tight. It's tight all around the world, and why would you sell export liner board at a price that's below your mill net in North America when demand is starting to increase in North America for it. So we're out there, and I'll let Carol comment on this, we're out there getting our prices up around the world so that our margins are comparable on a mill net basis anywhere we sell.

We definitely constrained export production in the first quarter, and will continue to do so in the second quarter. The demand is still strong. The deeds are there, prices are moving up, so that's a good thing.

We've got the capacity to meet our customers planned needs over the cycle, and we made a footprint decision so we didn't carry a lot of excess capacity which we didn't think we would need, and as the market plays out and we get modest but steady growth in North America of 2% let's say a year, we'll be in great shape to continue to meet our needs, and we want to be able to economy is our strategic customers, but supply and demand are at a point where we don't have to sell product at a larger margin somewhere, we're not going to.

Got you. Thank you.

Thank you. Your next question come process them line of Claudia Hueston with JPMorgan.

Hi, thanks very much. Good morning. Maybe just building off that question, I just wondered if you had seen any change in trade flows on the paper side of your business, just given the change in currency and some of the wood supply issues about.

I would ask Mark Sutton, who runs our paper business in North America and Brazil to talk about that, Claudia, if you have any perspective on it.

The own thing we saw which was partially related to currency was a few more imports into Brazil in the first quarter than we had probably seen in the past, and than we were expecting. As far as Europe, I don't think there were any issues, and exports out of the US were actually as in industry done and IP was down, but most of that was the inability to get fiber to meet all of our commitments. So the Brazil import piece was the only thing that I see from a currency, potentially currency influence in the quarter.

Okay, that's helpful. And then I was wondering if you could comment on the visibility of your customers now and how you think it compares to what might be normal. Have you seen any changes in the buying patterns or inventory management on their end or just any really noticeable change in mood?

Our business is closest to a lot of customers is Xpedx, and maybe Mary Laschinger can add some color on that.

Hi Claudia, Mary Laschinger here. Claudia, I think what we're seeing, first of all, on the print side of our business is that I would characterize it as more stable with some optimism in the marketplace. Again, we saw some improvement more or less focused in the east coast as a stronger region for us that the west, but we are starting to see some greater demand coming across the country. But again, on the print side, I characterize it as stable to some optimism. When we move over to packaging, we've actually seen a pretty healthy improvement in volume in packaging in our business across the country. More heavily focused in the mid-west, and the customers seem quite optimistic about the packaging side of the business.

Tom, what are the bleach board customers saying?

This is Tom Kadien. In the consumer packaging, the bleach board and our converting businesses, it was really a bimodal quarter. We went from down time in coated paper board in January to being sold out in March, and we also experienced similar trends in our shore wood business and in food service. So our -- again, like John said, we're not ready to call it a recovery yet, but our customers are feeling a whole lot better in March and April, probably sooner than we expected.

Or maybe the way to say that is think about it is we're not calling it euphoric, robust recovery, but certainly a recovery that is starting to get more legs and tentacles.

Thank you so much. I appreciate the color.

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

Thank you, and good morning.

Good morning, Pete.

John, I was hoping you could update us on the Ilim strategy and the recently announced investment there. Is that presumably a fiber that's going to go into China, but can you elaborate on your thoughts on the strategy?

Yes, it's the same strategy, Pete, that we had when we made the joint venture investment two-plus years ago. The whole notion here was to build out the position in Siberia and modernize the facility in western Russia so that we could reduce costs and improve product quality and expand capacity. That all got put on hold by about -- for a year, maybe 15 months because of what happened at the end of 2008, 2009, because it was being financed off Ilim's balance sheet. So we're basically going ahead with call it a $1.5 billion modernization program, the single big effort project and the single big effort piece being the pulp project at [Braouts] of about $7 million. That is about half of the overall program. There's another investment underway that's being studied, or kind of finalized for (inaudible) which is the facility that serves the Russian market in -- on paper.

Okay. That's helpful. And I was curious to see your 9% headcount reduction in Xpedx. Pretty big number. Can you elaborate what you see going forward there? Are we kind of through and of the right-sizing, or do you view this as ongoing? How should we think about that?

Well, I'm let Mary talk about Xpedx and then I'll just make a comment about International Paper.

As was reported, we did experience a 9% reduction in 2009. We continue to look at the business in terms of what's going to be the right structure as well as headcount going forward. I would not anticipate at this time that we're going to see a -- the kind of reduction we saw in 2009, but we'll continue to evaluate the business in accordance with the revenue that we're being able to generate within the business.

Pete, just from an International Paper perspective, we have roughly 80% of the revenues we had eight or nine years ago with less than half the people. Now, I mean, no one likes to have fewer jobs, because it means a lot of tough decisions, but at the end of the day, that's what we've done over the past eight years, and we've done it systematically as opposed to episodically, so we're going to look for ways to get the job done in all of our businesses with a big push on productivity and planning for attrition.

Okay. That's very helpful. And maybe just quickly a quick one if I could, John, I think you minced pretty heavy maintenance expense in 1Q, a little heavier in 2Q, and I think you said first half is two thirds of of the year year. So what kind of drop might we expect between 2Q and 3Q in terms of a lower maintenance expense level?

I think that's in the appendix, isn't it, Tom?

It's on slide 27, Pete, in the appendix.

Perfect. Thanks very much, guys.

You bet.

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

Good morning. Thanks very much, by the way, if I'm getting that right on that downtime, that's like a $0.15 swing from second to third quarter? Is that right, Tom?

About 90 -- it's about $90 million, Mark.

Okay. Great. I apologize if you were more specific on this than I heard, but in terms of pension funding, have you determined order of magnitude what you might contribute this year?

Tim, you want to talk about that?

Yes. Thanks John. Hi Mark, we haven't made a determination yet, as you know, our think that we don't have a funding requirement in 2010, we probably do have one in 2011, unless there is some change in legislation. But we're looking at a potential voluntary contribution this year as part of our overall debt reduction plan. So we're thinking of balance sheet debt and pension combined, and looking at the options we have for further debt reduction as we go through the year.

Okay. And then I guess what is striking with the list of the price increases, which you had, with the fact that you do have input costs coming down and maintenance will be coming down, that the free cash generation, if things play out, as hopefully they will, will get really very, very strong, and you talked about dividend and share repurchase as things which you'll be sorting through. I mean, is it feasible that within six months, if we do see things are working out as hoped for, that that would be something you would be revisiting potentially, and we would be hearing more about either another step up in the dividend and/or share repurchase? Recognizing that already a number of factors you allowed to that would help you determine what the mix, et cetera, might be.

Do you want to comment on that, Tim?

Yes, Mark, I think it's something that we constantly look at, so, yes, it will be tied to economic performance, it will be tied to our earnings growth and our cash flow generation. I think 2010, you're right, 2010 is going to be a strong cash flow year for the Company, so it's something we'll consider as we go through the year.

If you think about where we are on some of these uses of cash, we still have our balance sheet debt is about where we think it ought to be, but we still have a pension issue to deal with. That number becomes a moving target based on interest rates and returns, so we don't want to end up with on over flooded pension plan, but we have a couple of billion dollars over a several-year period that we anticipate we're going to need to put in the pension plan. So our cash will be used for that, and it will also be used to go back to share owners. We don't need to sit on $2 billion or $3 billion of cash.

Okay. Great, because I guess it struck me that that was the one gating factor perhaps was getting the cash in to deal with the pens before you would then be ready to then potentially be more aggressive, because as you said, arguably you would not need have even cut the differed at all from a dollar, which raised the question of why you couldn't go right back to a dollar now.

Yes, I think we moved the dividend at the right time, moved it the right amount for where we are, Mark.

Okay. Appreciate it. Thank you.

Mark, on pension, I have more visibility on what the legislation is going to look like, skill think we had a $700 million change in that liability from an accounting standpoint just in one year, so we know it can move operate significantly both ways. The dividend, Mark, is something we've just decided to take -- I guess we could have gone all the way back to a dollar in one step when we thought the right think to do was to make a meaningful move, which I hope is a sign to investors that we're feeling that 2009 is behind us, and IP has a lot of earnings and cash flow ahead of us.

Great. Thank you.

Thank you. Your next question comes from the line of George Staphos with Bank of America.

Thanks. Hi, guys, good morning. Thanks for taking my question. Some last remaining ones. Could you update us at all in terms of how you're thinking about capital spending and investment longer term? I know you have the estimate for this year at $800 million. Would that number perhaps move a bit higher now as the platform is growing internationally?

Tim?

Yes, we are moving higher this year. Most of the increase is focused on cost reduction, consumption reduction projects, George, that are quick return, quick pay back types of opportunities, that really we put off last year, as we were going through the crisis. So we've said for, I don't know, 12, 18 months now, we think a more normalized level is probably around $1 billion capital investment on average through the cycle, versus D&A of about $1.5 billion and I think it will be situational. We've learned through the crisis that there might some opportunities to be more efficient about how we invest, given pricing on inputs, or components that go in, and so -- but somewhere between $900 million and $1 billion an average a year through the cycle. Sometimes a little bit higher, sometimes a little bit lower.

I think that's the important point, George, sometimes a little higher, sometimes a little bit low person it was lot lower last year. Some year it maybe $1.1 billion or $1.2 billion, but we are focused on keeping it well below depreciation, and that's going to include some organic growth in outside North America, if and when those projects look like they have good returns inside that $1 billion of capital.

That's clear. But if I result that, John, so what your saying earlier of $1.5 billion of free cash flow -- and I took your comps as being an average figure over the course of a cycle, that would then roughly translate, if I assume nothing longer term, for pension funding and working capital, to roughly about 250 of average earnings power through the cycle. Does that figure sound about right, given your long-term planning horizon? How should we think about that, if that is the right number?

That may be your forecast, it's not necessarily ours. The way we think about that, George, is what's it's going to take to get a $20 billion capital basis, and that roughly $20 billion capital base to cost of returns over a cycle, and our target is get at a mid-cycle basis, which means less than a down market, more in an up market, and 2011 is -- or 2010 is certainly not anywhere near a mid-cycle market. So you can do your own math and figure out what the EPS has got to be to earn an 8% return on $20 billion capital.

Okay. I was just again relating it to what you said before. Last one, I apologize, last one, just a trade flow question again maybe for Mark. One of the European companies was out saying recently that they are beginning to ship some cut size here to the US. I realize it's probably not a big effect, given how much of the market is driven by the big box retailers, but have you sign any effect of that at all in the market, or over the course of the year? Thanks very much, guys, and good luck in the quarter.

We haven't seen a significant impact. There is always some movement and it really tends to be tied to the two things that you mentioned, or that was mentioned earlier. One is currency, and one is when there is excess start-up capacity in the market, but we haven't seen any noticeable impact from increased imports and cut size.

Thanks very much, Mark.

Thank you, your final question from the line of Mark Connelly with CLSA.

Thank you. Just one quick question, John. What assumptions, do you --

Mark, can company speak up?

Sure. Can you hear me now?

Yes.

What assumptions do you have to make about SCA and your existing container business in Asia to make the SCA acquisition accretive and when, and do you expect it to be cost to capital in 2011? I'm just trying to get a sense of what kind of growth and assumptions you need to make that deal hit your own hurdles.

Tom, do you want to talk to that?

Mark, let me use our box business that we've got in China right now, as a proxy. It's growing north of 15% a year. We've got a number of brand-new plants that we have built in the last couple of years, but we've got several plants that I'll say are four years or older, and if you look at those, they're earning north of cost of capital returns right now, and as we fill them up, they are in cost of capital returns. The key to it in China is to not over pay for the capacity and what's kind of unique is our EBITDA margins are about what our ROI is, which is at least, to my experience, a bit unusual, but as long as you're paying the right price to build it or to buy it, we feel we can earn cost to capital in China just like we do in our nonintegrated business in Europe.

So would SCA be accretive this year?

I would say --

We haven't done the calculation. I don't know, Mark, I just don't know. We can take it up with you offline and kind of work it out.

I appreciate it. Thank you.

Thank you. I will now turn the call back over to for closing remarks.

Thanks, Christie, we appreciate your help. Thanks everybody for joining us for the call today. Investor relations will be available for further questions. With that said, I'm going to go the airport and get on an airplane. I'll be back in my office in Memphis by mid afternoon, but Emily Nix will be in our office for some immediate responses, so please call either one of us with additional questions, and thanks for joining today's call.

Thank you for participating in today's International Paper 2010 first quarter earnings conference call. You may now disconnect.