International Paper Co (IP) 2011 Q1 法說會逐字稿

Good morning. My name is Lori and I will be your conference operator. At this time, I would like to welcome everyone to the International Paper first-quarter 2011 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

I will now turn the call over to Tom Cleves, Vice President Investor Relations. Please go ahead.

Good morning everyone. Thanks for joining International Paper's first-quarter earnings conference call.

Our key speakers this morning are John Faraci, Chairman and Chief Executive Officer, and Tim Nicholls, Senior Vice President and Chief Financial Officer. Mary Laschinger, Senior Vice President and President of xpedx will also participate in today's call.

During the call, we will make forward-looking statements that are subject to risks and uncertainties. These are outlined on Slide 2 of the presentation.

We will also present certain non-US GAAP financial information. A reconciliation of those figures the US GAAP financial measures is available on our website. Our website also contains copies of the first-quarter 2011 earnings press release and today's presentation slides. I will now turn the call over to John Faraci.

Thanks Tom. Just before I get started, since you're moving off to another assignment shortly, thank you for your work with investors over the last three-plus years.

Thank you John.

For the first quarter, we characterize it as a good, solid quarter for International Paper. The momentum that we talked about with you last year that started to build in the second quarter of 2010 continues.

One of the things that really made a difference for International Paper, has made a difference and continues to make a difference, is our global balance. As we talk about our performance during -- as Tim will -- you'll see that global balance really starting to pay off in our results.

The first quarter was solid returns, again in the cost of capital range. Operating EPS of $0.74 versus $0.04 a year ago and up 18% sequentially quarter-to-quarter.

During the quarter, as you know, we also increased our dividend for the third time, and increased it to slightly above pre-recession levels. During the quarter, we announced a strategic entry into the India paper and packaging market.

So just turning to the next slide here, a brief financial snapshot before I turn it over to Tim. Sales were up 10%. We improved EBITDA margins up 400 basis points over the first quarter, 60 basis points over the fourth quarter. Continued very strong free cash flow in a first quarter that always is and was seasonally weak, and this time was impacted by quite a bit of bad weather in the January/February time frame. Continued debt reduction and continued to have a strong cash balance on the balance sheet.

So with that I'll turn it over to Tim to take you through the first quarter in somewhat more detail.

Good morning everybody. As John said, we did have a very strong quarter in the first quarter, but not without some headwinds. Volume was seasonally weak. We are typically slower in Russia, slower in Brazil, and slower in North America, but we did have a weather related impact in North America that hit us as well. I'll speak more about that when I come to the Industrial Packaging business.

We also had higher input costs. I'll speak more about those in details, but we were really carried by the strength of our operations. It wasn't just here in North America; it was really around the world.

The other notable item on this page was the really strong results from Ilim. I'll share some more details with you in just a few minutes about their fourth quarter, our first quarter reported.

If you turn to the next page, we've got our normal input cost breakout, and we had close to $50 million in the first quarter. It was really in line with our expectations weighted toward North America. We had about 80% of the increase in North America and 20% in Europe. The packaging businesses were able to cover the input cost increases with operational improvements.

Printing Papers was hit disproportionately in the quarter by energy, chemicals and wood. I'll talk a little bit more about that when we get to the Printing Papers segment.

So let me turn to each of the segments now, and I'll start with Industrial Packaging. We had a really solid first quarter, even with the weather impacts and the rising costs. We had purposely pulled back a little bit on export shipments towards the end of last year for the first quarter, anticipating higher box demand in the US, and then the weather got in the way. But I think it was a real strength that the business was able to react quickly, take the market-related downtime that they needed to. So if you look at the volume bucket there, $10 million of that $14 million was really related to market-related downtime around North American box. Had very solid operations really across all the mills and converting facilities, not just here in the US but globally.

Turning to the next page to look at margins, in North America, the ability of the business to really react quickly led to the highest margins in the industry in the first quarter, if you look at the blue bar. If you look at the shift, the delta between the green, which was first quarter last year, and the blue, first quarter this year, we had the largest improvement year-over-year at over 900 basis points.

I think the real strength of the business and our ability to react quickly is highlighted on the next page where we are really different from most in terms of how we are positioned across multiple channels to market. You can see in the green boxes we're integrated to a level of about 80%. That includes both the US channel and our box plants overseas. We have about 20% of volume going to the open market, both here in North America and in the export channels.

Really what the business is doing is focusing on the right channel mix, period-by-period, to maximize value. That focus has led us to be a consistent long-term supplier in all of these channels over time.

The last slide on North American Industrial Packaging on the next page is just some data points to highlight the strength of the quarter. It's not our seasonally strongest quarter. It's probably our seasonally weakest quarter because of our heavy orientation to agriculture packaging, and that's really a second-quarter event. But we had a really strong quarter with improved margins. Part of that margin improvement has come from the realization of price increases from the announcements that we made last year. If you look at it year-over-year first quarter to first quarter, we have realize just over $90 per ton in price increases, so we feel really good about that.

We also generated cost of capital returns in the first quarter running at an operating rate of 93%. So the way we think about it, we look at it and we say, hey, there's still some earnings runway here. We took almost 100,000 tons of market downtime in the quarter and still had a cost of capital return.

If you turn to Printing Papers on the next page, another great quarter in Printing Papers. It was really balanced around the world. Printing Papers incurred almost half of the total Company input cost increases, driven by energy and chemicals. We had volumes up in North America and Europe in uncoated freesheet. We are seasonally weak in Russia and Brazil as I mentioned. It's really the weakest quarters they have.

We had stable prices and a slightly negative mix impact. That's kind of the normal occurrence in the first quarter, given our customer mix in Brazil, and again, strong operating results in both Europe and Brazil.

Let me turn to Consumer Packaging now. I thought Consumer Packaging just had an excellent quarter. They benefited from lighter outage quarter, but even if you exclude that, still had earnings up 30% in the quarter. It was really on the strength of all of the businesses. John mentioned the global balance, and this is a pretty good example of it. Volumes in North America were up 9%. Backlogs continue to be strong. We are still running at five-plus weeks. Prices were up in all of the regions quarter-on-quarter. If you look at price levels year-on-year, North America is up $92 a ton, our Asian business is up $80 and Europe, we are up EUR130 per ton in Europe.

Operations again strong in all of the regions, including North America, where we struggled with mill performance over the past few years. Our Augusta Mill finally turned the corner and we had the first favorable operating results since 2006 in Augustine.

So if we concentrate first on North American coated paperboard, let me just show you some history in the improvement. If you go back to 2008, we've had a 900 basis point improvement through the end of last year, and it's really a combination of three things. It's restructured commercial contracts and better performance there; it's improving operating result in the mills here; and it's managing the supply chain better.

Now you can see we were at a margin level in the first quarter, a run rate of 23%. Again, it's a light outage quarter but I think the business has positioned itself to be able to achieve margins in the low 20s% throughout the year.

Turn to the next page, and I'll talk about what I call the other packaging business. We spent a lot of time talking about Industrial Packaging business, but coated paperboard is a global business for us. It's a large business, about 3 million tons globally, and North America is a big part of that, but it's only part. We also have a very attractive business in Eastern Europe, Russia, and we have our Sun joint venture in Asia. You can see the margins for all three regions. Asia looks low at 11%, but all are earning cost of capital returns. Asia gets there by way of a lower capital base and higher turns. So Asia is turning [in their] capital roughly 2 tons versus a little over 1 in North America.

Now let me turn to xpedx, where we had a slightly better quarter in the first quarter than in the fourth quarter of last year, but we were well behind the first quarter of last year. Really there's several major factors to that. First of all, paper pricing is increasing, and so there's been a little bit of the margin squeeze from that. But we've also seen higher freight and higher fuel costs that hit margins in the first quarter, and then there was the negative LIFO accounting charge in the quarter that we didn't have last year.

So all in all, a better quarter in the first quarter but not where we think the business will run on a more normalized basis. As I mentioned on our last quarterly call, the business team has been undergoing a strategic review to dramatically improve earnings. Today, we have Mary Laschinger, who is the President of xpedx, with us to share some of those plans. So Mary, I'll turn it over to you.

Thanks Tim. Good morning everyone. We are going to use the next few slides to provide an overview of the xpedx profit improvement plan that was mentioned during the fourth-quarter earnings call earlier this year.

Just a little bit of background, our distribution business in North America is comprised primarily of independent paper and packaging distributors that were acquired by International Paper over the last many years. Prior to the 2009 recession, we were making significant progress in achieving the synergies from all of those acquisitions through increasing our sales revenue, and most importantly improving the bottom line, which is shown on Slide 17. And we were showing great progress towards generating cost of capital return.

Then the recession hit in 2009 and our sales declined by more than 15%. Demand in our primary segment, Commercial Print, was especially hit hard. Our earnings dropped by about 25%. So the organization, the business, went into aggressively reducing operating costs.

You can see we started to see improvement in 2010, but we are still performing below expectations and what we believe to be our potential. But this reset in the business in 2009 caused us to initiate a strategic review of the business. So over the last six months we've been conducting that strategy review and we have confirmed that this business still has significant improvement opportunities.

Also, as part of the study, we benchmarked other distribution companies, as shown in Slide 18. The data shows that although our asset turns are best-in-class, our margins lag.

We are pleased with our position in terms of -- against other packaging and paper distributors, but our goal is to become one of the best among all distributors. The external benchmarking and the internal analysis confirm that we have potential significantly to generate significantly better returns. Therefore, our plans are to accelerate the profit improvement plans that we had started prior to the recession.

Our strategy for the business remains the same. We are committed to maintaining our position as the largest supplier to the print segment, and we are going to continue to invest in the higher-growth segments of packaging and facility solutions. But to support the strategy and to achieve the step change in earnings, we are going to be focusing our change effort around the three key drivers in the distribution business, which are outlined on Slide 19. We believe, by focusing improvements on these key drivers, we can improve our earnings by over $140 million annually.

If you look at our distribution business, what we do is we buy products from mills and manufacturers. We handle these products through our network of warehouses and our delivery truck fleet, and we sell these products to a variety of customers. In order for us to achieve significantly better returns, we've got to be operationally excellent in all three of these functions, and that's what our goal is. For example, in the buy function, we have further opportunity to centralize our procurement processes and decision-making so that we can more effectively leverage our size and scale and, most importantly, provide a consistent product and service offering to our customers.

For example, today in our Packaging segment, we have about 150 tape suppliers and over 1200 SKUs. By rationalizing the number of suppliers to a few strategic suppliers and reducing the total number of SKUs, we have the opportunity to improve our asset turns and improve our margins.

In the handle function, we manage and operate over 100 warehouses across North America. We have further opportunity to optimize our warehouse network and inventory around our customer demand, which will allow us to streamline our operations with fewer, more efficient facilities. For example, we recently announced our plans to consolidate three facilities in the Salt Lake City area to one larger, more efficient facility, which will be centrally located to support our customer needs.

We are also in the process of implementing world-class warehouse management systems and fleet routing and tracking systems. With all of these initiatives, we have the ability to further reduce our operating costs and improve service to our customers. It is our intent to continue to service all of the geographic markets that we currently serve.

Finally, in our selling function, we have opportunities to increase productivity of our sales force and invest in additional sales and marketing capabilities for the higher-growth Packaging and Facility Solutions segments. For us to achieve the $140 million of earnings improvement, we are going to incur about $100 million of net cash costs over about a three-year time period. We are very confident in our ability to implement the plan and improving the earnings, and most importantly generate greater than cost of capital return over the next three years.

So with that, Tim, I'll turn it back to you.

Let me turn to Ilim and talk about what was a great quarter. Again, this is Ilim's fourth quarter, our first quarter, because we report on a one quarter lag. But volume was up slightly. Price was essentially flat on pulp, and operations had a record quarter. So all in all, Ilim turned in the result we expected and we expect that result to continue to improve as we go into our second quarter, their first.

Just to recap for you, we did -- John mentioned the dividend we received in the first quarter. That now brings the total dividends received from Ilim over the history of the joint venture to right at $200 million on a $650 million investment. So if you look at Ilim's results today, and we reported on an equity accounting basis, but if we were consolidating, Ilim would have the highest return on investment in the Company at right at 25% with 30%-plus percent EBITDA margins.

So one last slide before I turn it back over to John, and this is really a summary slide. We look at the transformation plan which happened three to four years ago, but we say that transformation plan is really working. If you go back to 2008, we thought we were on pace to have a cost of capital year in 2009 before the crisis [had]. So as we come through 2010 and recover faster than probably what most expectations were, we positioned ourselves in the second half of last year to have a cost of capital year in 2011. In the first quarter, we are in that zone and we see the momentum continuing. So we expect that, in 2011, we will have the year we expected to have in 2009.

With that, I'll turn it back over to John for the outlook.

Thanks. I'm going to set up the quarter by just repeating what Tim just said. The momentum continues. Despite the input cost headwinds that we've got, we've got the right businesses in the right places with good, disciplined and focused execution. What that's leading to is continued, strong earnings per share results, free cash flow and ROI.

So I am now on the chart that shows all the red, yellow, and green. That is really how we think about the outlook going forward. Near-term, it's more of the same. We're going to get some seasonal volume improvement -- that's around the world, not just in North America -- some sales pricing improvement, another solid quarter at Ilim. We got to significant changes in the second quarter, one internal that we manage, and that we're going into the second quarter with a lot of outages that were planned [as] our heavy outage quarter, so that is going to cost us about $0.11 a share kind of quarter-over-quarter.

We see more input cost headwinds, specifically transportation. As Tim said, we had $50 million in the first quarter this year versus the fourth quarter, and the second quarter, we don't know how it's going to turn out but it could easily be another $50 million. So with that, though, we still expect the second quarter to be solid, expect good operations. We expect strong cash flow, and we expect good solid return on investment across the International Paper portfolio.

With that, I think I'll turn it back to you, Tom, for questions.

Thanks. One personal note -- this will be my final quarterly earnings call as the head of Investor Relations at IP. I've enjoyed working with the investment community over the last four years and I appreciate your support. I am turning the IR reins over to a good friend of mine, Glenn Landau. Glenn has been with IP for more than 20 years. He's worked in our US and European container businesses. He headed up strategic planning for our Forest Products business, and for the last four years, he's been running our containerboard and recycling businesses. I look forward to introducing Glenn to many of you in person. Glenn and Emily and I will be available after the Q&A for follow-up questions.

With that, I'll turn the call over to Lori for the first question.

(Operator Instructions). Chip Dillon, Credit Suisse.

Good morning and congratulations on a great quarter. I had a question actually about Ilim. You mentioned how you've pulled almost $200 million out of that investment. Could you just remind us how the footprint of Ilim has changed since you made the investment in '07? I know that's going to continue into '12 with the pulp expansion, -- and what their balance sheet change has been?

The footprint hasn't changed a whole lot; it's in the process of changing. We did sell an interest in a bleach board mill that we had that was part of Ilim, but the three big assets that we purchased -- the uncoated freesheet and containerboard facility in the north/northwest [Decoblis] and the two Siberian pulp mills are -- they're still in the portfolio. We built a box plant; that's new. We are right at I'd say the first third of the modernization strategy that was part of the whole acquisition where there is a project going on at [Decoblis] in the northwest at a paper machine and a coater. That paper machine was relocated from a mill that IP shut down [in Brury] in the UK, and then the big pulp modernization expansion project in [Broskis] is underway. So the footprint is in the process of changing. Ilim is funding that capital project through its own balance sheet and through the free cash flow they are generating. So their debt -- their balance sheet debt is going up but it's on their balance sheet, and it's well within Ilim's financial capability to service that debt.

Got you. And then just a quick follow-up on Consumer Packaging. It's nice to see the bleach board business coming back to levels like we used to see it back in the '80s and '90s. I've noticed the improvement is mostly in the US. I saw that Europe did well, is up as well. But as you look ahead, as you look at the Asian number which seems to be stuck somewhere in the $10 million per quarter range in terms of its operating income, how could that improve going forward, consistent with what we've seen recently in North America and Europe? Or is it sort of at its potential right now?

Tom Kadien, who oversees the bleach board business around the world, is here. So I'll just let him take that question.

Good morning. Our business in China, the JV, is essentially sold out, so we are capped on throughput. If you look, we are selling about 200 some-odd -- 220,000 tons a quarter. I think we were flat year-over-year in terms of output. It's a non-integrated facility. We have to manage our margins there. We did a great job recovering our margins in the first quarter after the run-up in pulp prices hit us in the second half of last year.

We had about an 11% ROI on the business in the first quarter. If you look at the first half of last year, I think we were at our high point, about a 15% ROI. That's the range we're going to be in until the new machine starts up, which will be about the fourth quarter of 2012, the next machine.

Got you. Let me just say thanks to Tom, who I think has been terrific in helping us understand your Company better. Congratulations, Tom.

Thanks Chip.

Richard Skidmore, Goldman Sachs.

Good morning John. Just wanted to spend maybe just a minute on containerboard and how you see your inventories trending through the quarter, given the amount of maintenance downtime that you're expecting to take.

This is Carol. I'll take that question. Clearly, as you can see, we have a very big outage quarter coming in the second quarter, and then that will be combined with what we'll see as a seasonal uptick in box demand mainly driven by the seasonality of agriculture, which is a significant part of our portfolio. So the expectation for us is that our inventories will come down due to that imbalance through the quarter. We enter the quarter about where we need to be, I am hopeful. The challenge will be for us, if there is an uptick in demand, that will create a challenge but that will be fine. We'll manage through that. So that's the phenomenon we're going to face as we go through the second quarter.

Our inventories are down 30,000 tons March compared to February and they're also down compared to the end of last year.

Then just sticking with containerboard, on Slide 11, you showed the slide where your prices on boxes were $91 Q1 '11 versus Q1 '10. How do you reconcile that with what pulp and paper [weight] showed, if you look at that you had pulp and paper weight prices up essentially $110 over that time period.

This is Carol again. That's a great question. What we have to remember is these are quarterly averages, and so, as you recall, prices were rising through the first quarter of last year, so it's an average. So if you go from -- if I extract the data on a monthly basis, the high point, from the low point to the high point on box pricing for us was about $107 a ton. So, you have to take that into consideration. That's a quarterly average.

This is Tim. We felt like we got the full increase

Great. Then just one last question, John, if I might? Just on the India acquisition, can you just talk about that business a little bit more and how you see that impacting 2011 and sort of your strategy within India, given that recent acquisition?

We don't know how it's going to impact 2011 because we haven't closed on it yet. We don't know when we are going to close, but we expect we will close at some point in time during the year. I'll let Tom Kadien talk to that, because he is the one that spent all the time in India over the last year getting this to the point where we said we are ready to go.

Right now, we are in a 90-day approval period where we have to get approval of both the Bank of India and the Security Exchange Bureau. Then we expect that will end around the end of June, so we are hopeful to close. We've got no indication of any issues, so it could close early third quarter.

The first phase for us is really to optimize the assets that are on the ground. We think we can get about a 20% productivity improvement out of the existing pulp mill and paper machines that are at the two locations, and we think we can do that inside of two years with really no capital. After that, what I would call Phase II, two years down the road, we'll be looking at expansion projects as we have when we got into other emerging markets. So, I think it will be incrementally positive. The business has got good EBITDA margins right now, 23%, and we think we can improve on that in the next year or two.

I would say we'll talk more about India once we have the business closed. But this looks to us like Poland looked with [Quidzan], like Ilim looked, very attractive opportunities to build out what's there in a market that's got a lot of growth ahead of it, both in paper and in packaging.

Thank you.

Mark Weintraub, Buckingham Research.

Thank you. Thank you for that presentation on xpedx. That was really clear. There are a couple of follow-up questions I did have. One is the $140 million, can you give us a sense of timing on when you're hoping to see that improvement flow to the bottom line? If it's possible perhaps to give us a sense as to which of the buckets would it come from, if it's the buy, the handle, the sell, or how you might think about from a kind of bottoms-up perspective how to get to the $140 million? That would be a great start.

Mary Laschinger. First of all, in terms of the timing of the $140 million, we would begin to see those benefits impact the business as early as next year and would hope to see the full benefit within a three-year time period.

In terms of where those benefits come from, from the key levers of the business, they are across the board on all three of those. They are fairly well equally weighted.

Okay. Then just shifting gears, in the containerboard business, you mentioned you'd taken about 100,000 tons of market-related downtime primarily I guess weather-related, etc. (inaudible) would that cost like $25 million or $30 million, so is that a partial offset to the step-up in the maintenance downtime we will see in the second quarter?

This is Carol again. I would say that your number is a little high. If you think about it from an unabsorbed fixed-cost perspective, it would probably be in the probably $12 million range. Then in addition to that, one of the things that we've gotten pretty good at is we actually like our flexibility. Our ability to match our supply to our demand, where that used to be kind of a big headwind, now we are pretty good. So we optimize the system, optimizing low-cost fiber, so I don't think we have much of a consumption penalty with that downtime.

Since that comes up pretty quickly, and we plan outages well in ahead, schedule contractors in, we can do a little work but we can't do the outage work when we have market-related downtime because we are doing that on the fly, not planning ahead for it.

I understand that $12 million for the unabsorbed (inaudible) presumably though perhaps you were then using the fact that you'll have more tonnage to make profits on, you'd throw that into the seasonality bucket, and that would also be a partial offset to the maintenance downtime. Is that the way that you're thinking of it? I just want to make sure that I'm not under-counting the kind of offset to the maintenance downtime.

Yes, I think the big offset that we would see for ourselves will be the seasonal uptick in volume. So we will see a stronger second quarter on volume than the first. That's the lever that we've got to offset the increase in cost due to the outages.

And you've got the uncertainty of what input costs are going to do, Mark. That's been a wild card at this point.

Thank you.

But they're probably headed up.

Yes.

The wild card is --

The wild card is how much.

Right. I think you mentioned $50 million might be for the overall Company.

Yes.

(multiple speakers) $50 million first (inaudible) so it could be another $50 million first to second.

Okay.

George Staphos, Bank of America Merrill Lynch.

Good morning. Tom and Glenn, congratulations on your roles and you guys do a wonderful job on Investor Relations. So keep it up. I guess the first question I had, and maybe piggybacking off of Mark's question, hopefully not putting too fine a point on this. At this juncture, given what you can see, would it be unreasonable to expect a sequential drop in 2Q earnings versus 1Q, or is it too hard to call that at this juncture?

George, you know we don't give guidance.

I know, but I always try. I will take that and duly note it for next call. Maybe a question for Carol. As we think about the Industrial Packaging business and the opportunity that you have to improve returns over the next two to three years -- and here I am thinking mostly about North America -- do you see more opportunity within the box business to improve returns, or do you see it more in the way of mill optimization and further integration there? How should we think about that?

It's a great question. My learning from being in this business for the time I've been in it is it's a large business. If you want to move the bottom line, you've got to have a systemic approach. In my opinion, it needs to be a fairly broad-based approach, because one thing is not going to move the needle. So we have still opportunity to get better. There is no doubt. We have a very systemic approach on our mill side. We have focus on consumption, fiber, energy, chemicals. We have focus on reliability which then ends up impacting our spending. We've got capital projects which I've referenced in the past relative to some very high return targeted -- we're talking in the $1 million range, not $50 million or $100 million by project.

Box plants equally important. The great part about the box business is you've got to play off offense and defense, meaning you need very good, competitive facilities. So we are focused there on waste, productivity, throughput, bricks and mortar. We closed three facilities last fourth quarter because we could get more through the bricks and mortar we have.

But simultaneously with that, we've got to be focused on our commercial effectiveness. This is the game that they are selling. It's a broad-based selling effort, so we've got a lot of effort there around making sure that we sell value, that we price well, that we do the right things there.

Then the other thing we've got is supply chain. We move 10 million tons across the globe. There's a lot of opportunity to keep getting better and smarter in that, and we are making that probably the last piece of our Weyerhaeuser work. We're putting our operating model in the Weyerhaeuser mills right now, and that's going to allow us to really make a step change in how we operate that part.

So all that said, at the end of the day, the key theme thing that we've got to do is the low-cost mills for competitive advantage and manage supply to demand. This business has to be run well from that perspective, and then have a great box system to take it to market, and then as we put in our presentation, leverage our global reach to find the best markets and optimize. So, we've got a really great hand to play, and I'm convinced we've got more opportunity to make it better.

George, We talked about shifting from integrating the business to optimizing it. As Carol talks about, optimizing a $9 billion business doesn't happen in 12 months. The supply chain capability we're going to have across the mill system as we go into 2012 is going to enable us to really take another chunk of working capital out, because we're going to have less rolling stock moving around the system because we're going to have much better visibility into how to schedule mills and get the right rolling stock, the right box plants.

John, I realize this is a bit of an over simplification, but given that you are now at cost of capital or higher returns within Industrial Packaging, and I'm presuming within North America, perhaps one strategy might be to, as you optimize to also perhaps shrink some of your capacity either at converting or in production so as to preserve and grow the returns from that avenue, what is, in your view, wrong with that thinking, or what are the opportunities down the road perhaps for that to occur?

As Carol said, we're going to match our supply to demand. We made a major shift in footprint when we decided to permanently close two big facilities, Albany, Oregon and Pineville, Louisiana.

The box business is recovering, but not fully recovered. We're going to get back to 2000 levels of box consumption, and I'm talking about the industry now. It's just a question of how many years is it going to take? But that's going to happen. So we are not looking at a business that's got shrinking demand. As Tim pointed out, we have -- our strategy is to serve all three markets, the independent market in the US, the integrated market, and the export market. The global demand for virgin linerboard is growing at 3% a year. We're the -- the US is the low-cost producer and we're the low-cost producer in the US. So we are not going to go build another linerboard mill, but we are not looking to shrink the business because we don't see the market shrinking.

Last question and I'll turn it over. With Augusta, can you remind us what have been some of the issues with that mill in terms of turning it around? I think you said you had your first up quarter. I forget exactly how you phrased it, but the comparison was versus 2006. I recall wood fiber being one of the factors. So if that was the case, why did it take so long to turn the mill back to where you had wanted it to be? Thanks, good luck and the quarter guys.

(inaudible) the wood costs, I think Tom can talk to that.

It's really we underinvested in Augusta for a couple of years, going back five years. It was more about maintenance and reliability of the whole process from the back end through the machines. We've just gotten our process back under control. We have invested more than our usual share of maintenance capital over the last two years, and we worked our way from the back end to the machines and have improved reliability. So, we are seeing significantly better quality and throughput, and we don't have the upsets that we are managing from in a weekend or month in and out. It's all about liability.

Thanks Tom.

Mark Connelly, CLSA.

Thank you. Two things. Good morning. John, Mary gave us a pretty clear rundown of what you're doing within distribution to get that back to where you had it had before. Can you just walk us through and remind us what the strategic benefits of being in that business are? It's been a long road obviously, but I think you guys believe pretty deeply in that business, and maybe a little more deeply than some of your investors do.

We do. 80% of what xpedx sells, IP makes. They are heavy into the paper merchant channel, and they are heavy into packaging. That's International Paper's core business in North America. The merchant channel happens to be a big channel for paper companies, because a lot of paper gets sold through merchants. xpedx happens to be our largest merchant customer, but we have a lot of very good and very strategic independent customers.

So we don't run the business on an integrated basis. We run it as a standalone profit center. It's a great window to the market for us around paper and packaging.

If xpedx was in the plumbing supplies business, we wouldn't be in it because that's not our core business, but paper and packaging is. We are figuring out ways also to go joint the market with xpedx and some of the other IT businesses where we have a capability to do something, having distribution and manufacturing that the competition (inaudible) just has distribution or just has manufacturing doesn't have. Now, having said that, xpedx has got to earn its cost of capital on its own capital. It's a different kind of business. As Mary said, it's a buy, handle, sell business, not a capital-intensive process business. So the strategic linkage is what xpedx sells.

Very helpful. Just one more question on container. It seems to me that you not only offset your costs in the quarter, but as I look at the cost of sales, it looked like you managed the input costs a little bit better than some of the competitors did this quarter too. So I'm wondering if, Carol, if we could just ask you one more time, what specifically were you doing this quarter that you think drove your performance to look so much better?

Once again, I would say we had a very good quarter. We did operate well, and I think the fact that, believe it or not, that we possibly had match of our supply to our demand, we had that downtime, we were able to flex our fiber where we ran, and we backed out some of our highest cost fiber -- the OCC and [leveraged] virgin, which was good. We continued to see the modest growth, which was helpful. So I think those are some of the things that we -- we've got a great system. One of the things we're building into our mindset, into our operations is flexibility. So we have operators by control room that are focused on how to get gas out of boilers, how to [optimumly] run based upon the demand we've got. So I think that's a real competitive advantage we've got. It's a big system, and if you can get your hands around it, you can really leverage it for benefit.

Commercially, if you look at our results, they speak for themselves. We've got $90-plus of price improvement in the box business year-over-year, and we are still getting price improvement in the box business through the first quarter. We are managing the business very well on the commercial side.

Looks like it. Thanks very much. I appreciate it.

Gail Glazerman, UBS.

Good morning. I was wondering if you could talk a little bit about underlying demand trends and help us see through some of the seasonal noise that happened in the first quarter, and what you're seeing kind of early in the second quarter.

I think we are seeing what we would expect, Gail, seasonal improvement in the US in the face of -- the GDP numbers just came out. It was 1.8%. March feels a whole lot better than January and February, for obvious reasons, and April is feeling like it's the usual kind of April in call it a 2% GDP environment. So, we are feeling pretty positive about that demand in the US, but not euphoric.

On the paper side, the underlying structural issues haven't changed. We just got a recovering economy. I think March was the first month that we had fairly strong paper shipments. So -- but even if we got a couple of months of positive year-over-year paper shipments, we still think the underlying demand trends are slightly down. We will have to see how that plays out.

Around the world, it's a different story. Brazil paper shipments were up 7% quarter-over-quarter. Our box business, including Turkey, which we do equity accounting, (inaudible) volume for our box business in Europe was up 11% quarter-over-quarter. So those kinds of numbers are indicative of the fact that the world outside North America is growing at pretty healthy rates, and we are in those markets. That's kind of one of the IP differences.

So the bleach board business looks quite solid. That business came back faster than containerboard. In terms on the demand side, it fell very sharply in the first quarter last year; that was the low watermark. But we are back to sold-out with strong backlogs. So, it feels like a recovering but not fully a recovered economy in North America. Outside North America, it feels like the rest of the world, even in places like Europe that we think are -- you really have problems are showing some pretty good growth for us, especially in packaging.

Thanks. That's a helpful perspective. Not to belabor the issue too much, but just going back to the operating issues you might've had because of the weather in the first quarter, is that separate from the $10 million, $12 million downtime, incremental market downtime that you had? If so, is it something you could quantify?

I'll let Carol speak to it but what I was talking about was that we had stepped back from the export markets a little bit, anticipating higher box shipments in North America and then weather hit. So we had to react to -- or we had to react with the manufacturing system to what we were experiencing in the market.

I would add that I think the hit in the quarter from the weather was mainly a volume hit. I think we managed the cost side of that extremely well. It didn't hit our mills other than, as Tim said, a little less demand, which we actually I think in some respect took advantage of, and our box business responded very well. So, I don't see the weather as a huge cost hit in the quarter. I see it as a volume deduct.

It was more around converting plants in xpedx locations that weren't running because people couldn't get to work our people could get to work, customers couldn't take product. It wasn't, as Carol said, impacting the operation of our big mills, which has happened before when we get cold weather. This is more unusual and it hit the converting plants in the markets where we are shipping to customers.

That said, for those plants that were impacted, there was a headwind there, and they worked very hard to make that back up. So --

That's helpful. Just going back to the India acquisition, you mentioned that the market feels a lot like kind of Poland and Russia when you went in. I know you are requiring some plantations of those assets, but Poland and Russia actually have a pretty good fiber base for your operations. I'm just wondering how you view that in India. Are the plantations there something you can build on enough to support growth?

Yes they are. We are excited about APPM and it's not unique but it's one of the few -- not every paper and packaging company in India has plantations that they can get fiber from. We think kind of the farmer forestry program that APPM has is a good one and can be expanded.

Thanks. One just last question --

Just to be clear though, we do not own those fiber plantations. Those are owned by private landowners, about 40,000 of them, who grow trees and provide them to APPM.

So you just have contract agreements for the volume then?

I wouldn't characterize Poland as having a great fiber base. It's some of the most expensive wood in the world for us. Russia is a different story.

Just one last question, just broadly speaking. The dividend is back, say, [way above] where it is. You're making some acquisitions. That is kind of approaching target. Just any update on how you view capital allocation over the next year or two? Would we expect to see more return to shareholder, more acquisitions?

I think you'd expect to see more of the same. We've been balanced and we said we wanted to be balanced, and so I think, if you look at our actions over the past year, you see that balance, and how we're thinking about it has not changed.

Mark Wilde, Deutsche Bank.

Good morning and congratulations. It was a good quarter. I just want to also add my compliment to Tom Cleves. I think he has done an outstanding job. Actually, I think the disclosure that the Company is putting out today is just light years ahead of where we were ten years ago.

The questions I had, first of all, in the Industrial Packaging business, can you talk a little bit about how the performance is, from a profitability standpoint, in Europe and in Asia? I think you're non-integrated in both of those areas.

I'll start with the Asia piece. This is Tom Kadien. We are in the middle of integrating the SCA box plants that we acquired less than a year ago. We're also really focused on pushing up prices as we've had significant OCC pricing increase that flowed through to the recycled containerboard that we buy. We've caught up with the SCA plants. We were breakeven in the quarter, but much better than that in the month of March. We are seeing progress on the acquisitions there, but it's been a tough environment to raise box prices in.

In Europe, our Industrial Packaging business makes double-digit returns. If you take the first quarter and annualize it, they were at double-digit ROI.

Then also in the containerboard business, I'm just curious maybe from Carol's standpoint. Could you envision a scenario where you might look at shutting down some smaller machines here in North America and maybe putting in something that was a larger machine or potentially a machine that gave you the ability to run lighter-weight products?

I think we'll always be evaluating our footprint and speaking ideas to unlock more value. If ideas like that had stellar returns from an investment perspective, I think that would definitely be something we would consider. I'm not sure I've seen the math that would tell me that we are there yet. We don't -- our system is pretty good today, so it's not like we've got some low-hanging fruit to go to eliminate some real high-cost, inefficient facilities. But we will always continue to evaluate our mill footprint to match supply with demand and make it lower cost.

And then just finally on the cost side, I wondered. Have you put in any freight surcharges? Could you just talk with us about any contracts or hedges that you might have in place that might mute some of the cost pressures in the near term?

We really haven't. It's really difficult to do it on the transportation side. Surcharges, to the extent they exist, are really business specific, business-to-business. The only place we really have them to a small degree is in xpedx, but it's really very small. So it's an exposure that we pretty much take as it comes and then look to decrease miles. So our hedge against higher transportation cost is through the supply chain operating model, and we can't offset it all when we have these spikes.

The hedges use less of it.

Yes.

What about just contracts, whether it's for chemicals or whatever that might be -- might provide you a little near-term protection?

In terms of our contracts, we leverage the size of the Company. And so --

As you should.

-- there's not really any hedging out there from a financial instrument standpoint, but we use the buying power of International Paper globally to look at how we supply inputs and try to maximize that leverage.

Mark, you go across the whole spectrum of commodities and raw materials that we buy, we are not buying everything on a truckload-by-truckload railcar-by-railcar basis. But we are not buying anything on multi-year basis either. So we've got some agreements that reprice every quarter. We've got some that are coming up every month. We've got some that are six months. But by and large, we're going to see input cost increases if they are out there.

Then finally, Tim, you mentioned in terms of capital allocation just sort of more of the same. One of the things we haven't seen recently is share repurchase activity. Now with the dividend back up at $1.05, is it possible we'd see a little more focus on that over the next 6 to 12 months?

It's something that we look at, but I think what we want to do is be balanced in terms of how we return cash to shareowners versus the other uses of cash, and we have options around how we do that. So I'd just leave it at that.

(multiple speakers)

Fair enough. Good luck in the second quarter.

I'm sorry Mark. What did you say?

Good luck in the second quarter.

I'll now return the call to Tom Cleves for any closer remarks.

Thanks for joining our call today. Glenn and Emily and I will be available via telephone for follow-up calls.

Thank you for participating in today's International Paper first-quarter 2011 earnings conference call. You may now disconnect.