International Paper Co (IP) 2011 Q2 法說會逐字稿

>> Operator Good morning. My name is Misty. I will be your conference operator today. At this time I would like to welcome everyone to the second quarter 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. Mr. Glenn Landau, Vice President of Investor Relations, you may begin your conference.

Thank you, Misty. Good morning, and thank you for joining International Paper's second quarter earnings conference call. Our key speakers this morning are John Faraci, Chairman and Chief Executive Officer, and Tim Nicholls, Senior Vice President and Financial Officer. During this call we will make forward-looking statements that are subject to risks and uncertainties which are outlined on slide two of our presentation. We will also present certain non US GAAP financial information, a reconciliation of those figures to US debt financial measures, is available on our website. Our website also contains copies of the second quarter 2011 earnings press release in today's presentation slides. I will now turn the call over to Mr. John Faraci.

Thanks, Glenn, and good morning, everybody. Thanks for calling in. What we are going to do from here is, as we typically do, Tim and I will summarize the quarter and then we will take questions on the quarter, then I'll make a couple comments on the Temple acquisition proposal, and if we have time we will take a couple questions on that. We will do it in that order.

Let me just start off talking about the second quarter. International Paper had a very strong second quarter in a recovering, but obviously not fully recovered, economic environment here in North America. Our results were driven by several things. A balanced segment and segments in global portfolio businesses around the world. Very strong contributions in printing papers in North America, paperboard in North America, and the Ilim joint venture. Really outstanding operations in cost management that is continuing. Good maintenance outage execution during the quarter. Some seasonal improvement in demand, and we offset significant input costs escalation, that Tim will talk about.

This next chart here just shows you the segment and global portfolio balance that is part of International Paper's business platform today. As you can see on the left, the good balance in terms of where the earnings came from by segment, and on the right, good balance in terms of where the earnings came from by geography.

Turning to the financial snapshot page, strong revenue growth. Revenues up 8%, EBITDA over $900 million for the quarter, up 16% from the second quarter of last year, a run rate of $3.6 billion, free cash flow of, amazingly, exactly equal to the first quarter, but I would say that also has $40 million of additional capital spending in the second quarter, so our free cash flow is actually up around 10% if you normalized for capital spending during the quarter.

Really, if you look at this next slide here, which is the EPS over the last really, 10 years, you can see there's a step change in our EPS performance. That's as a result of the transformation plan. The 2009 period you are looking at there is the global recession that is now in the rear view mirror, but importantly, our earnings over the last four or five quarters are not from land sales as they were in the prior year's. They were really operating earnings from our businesses, and as you see, we have achieved some of the step change in terms of capability of International Paper to generate earnings and free cash flow, and we think there is more left on the runway as we go forward.

In terms of return on capital, 8% return -- over an 8% return, on capital over the last four quarters, into the cost of capital zone, which is important in terms of one of our key metrics. So with that, let me turn it over to Tim to summarize the quarter.

Okay. Thanks, John. Good morning, everyone. As John said, we did have very strong performance in the second quarter. Volume contributed $0.08 to the change in the results from the first quarter. I would say that while volume here in North America is really moving sideways, and we will talk about that a little bit in more detail as we go through the slide deck, in other parts of the world we are continuing to see growth. Whether it is Russia or various parts of Asia. So volume, price, strong operations, and a great result from Ilim, more than offset the heavy maintenance outage schedule, the heaviest for the year, in the second quarter, and the impact of the Vicksburg flood, which cost us about $20 million.

Input costs were up in the quarter $31 million, in-line with expectations, about 75% of that in North America and 25% in Europe, which has been kind of the theme this year. It's really fiber and energy costs in Europe. All the businesses, industrial and consumer packaging, and printing papers also are higher costs.

So let me turn to the segments now. I'll start with printing papers, and printing papers, I thought, just had an excellent quarter. We've got a business in North America for the first half that is running at 14% return on investment. EMEA first-half running at a 17% ROI, but in the quarter pricing was up across all regions. Operations were really outstanding. A big improvement over the first quarter in all regions, but especially strong in North America and really good cost management.

We did have the outages I mentioned, that was mainly in Europe and Brazil. We have really good execution around all of those. We did have one issue at the Svetogorsk mill in Russia, where we found some things that required us to take a little bit more time and spend a little bit more money, probably cost us about $7 million in the quarter.

Let me turn to industrial packaging now, and I thought industrial packaging, again, had a good quarter, still running at a 9% return on investment. Box price was mostly flat, down about $5 quarter-on-quarter. Volume was seasonally stronger, up about 170,000 tons, but not as strong as we had expected, and I will talk about that a little bit more in a slide or two.

Operations were really good, and again, good cost management out of the industrial packaging group. Outages, heaviest quarter of the year, but we had great execution across the outages, and we also had great execution around the Vicksburg mill now. I think most of you know that we had to take the mill down for 49 days due to the flooding that was experienced on the Mississippi River, but the manufacturing team, the business, did great job protecting the mill. We had no damage to the mill at all. It's now back up and running, but we did lose about 80,000 tons of production during the quarter.

If you look at margins for industrial packaging in North America, IP has the highest margins in the industry in the second quarter at 17.6%, again, in a heavy maintenance outage quarter. Year-over-year, a solid increase of 180 basis points. Let me come back and talk about demand for a moment. As I said, we see demand really moving sideways, feels kind of like what it should feel like in a 1% to 2% GDP environment.

Second quarter for us is normally our strongest quarter of the year because of our exposure and waiting to -- agricultural packaging out on the West Coast. And we had a much lighter season in the West region around agricultural packaging than we expected, mainly due to weather. So what you've got on a chart here, if you look at the blue bars, those are total shipments, and then the gold bars we've have pulled out the Western region to show what the rest of the country looks like from a demand standpoint.

And as I mentioned, we were disproportionately impacted in the quarter relative to the industry because of our waiting. Just a couple examples, the strawberry season came late, so in the quarter we were down almost 6% year-on-year. Cherries were hit by weather; I think there was damage from hail and storms, and so we saw our cherry production almost cut in half on the West Coast, and avocados were down as well. You know, it was a number of factors on the West Coast that really hit us hard in the quarter.

Turning to consumer packaging. Another great performance by consumer packaging, stronger price, favorable Ops, offset by outages in input costs, but really solid performance across the businesses. Price, and operations, and cost management, nearly covered $20 million in outages and another $9 million in input cost increase, and continue to have really strong performance for coated paper board in all the regions of the world, Europe, China, and the US When you look at North America paperboard performance, for the first half we've got a business that in the first half of 2011, has already earned more than in all of 2010, and the first half of this year is running at a 12% return on investment.

I'll turn to the distribution business. Xpedx, only a slight improvement in earnings quarter-to-quarter, really, due to pressures from fuel costs and transportation costs. We did see a bit of a bright spot in packaging which is about 25% of xpedx's business which posted a 9% growth rate quarter-on-quarter.

The Ilim joint venture just had a great quarter. Again, we report on a one quarter lag, but Ilim's earnings in increased in the quarter from $44 million to $57 million. Volume was up, price was up, it was up both for pulp and container board. Operations ran well, and just under. Another very strong quarter turned in by the joint venture.

So if you look at margins in the first half of this year versus the first half of last year, strong performance across all the businesses. Different sets of challenges, region-by-region, business-by-business, different sets of opportunities, but business management completely focused on margin management and delivering the earnings and cash flows that we need to across all the businesses.

And I think if you turn to the next slide and look at returns, that's what's really making the difference in terms of our return on investment over the past four quarters. We are now in that cost capital zone and have been across each of the last four quarters. So with that, I'll end my summary and turn it back over to John for an outlook on the earnings.

Okay. Thanks, Tim. Before I do that, let me just summarize the quarter quickly. I'd say we've got the right assets in the right places. We are managing aggressively, and we are executing well.

Seasonal demand in North America arrived as expected, but as Tim said, the demand is not robust in North America. Outside North America demand is good. Latin America, China, Russia, places like Turkey, where there's a big presence in the corrugate packaging business, a healthy demand. We've got some flow through our pricing during the quarter. Our input costs went up as we expected, and OCC continues to move up as we look into the third quarter. And Ilim delivered just a spectacular quarter. Ilim accounted for 18% of our EPS during the quarter.

Let me move on to the third-quarter outlook. That's page 21 for those of you who are following along. You know, the US economy is growing at 1% to 2%, and from a demand standpoint, it feels like 1% to 2% GDP economy. Export demand on container board is good, but domestically whether it is paper, coated paperboard, container board, or xpedx, it feels like 1% to 2% GDP growth. Demand is not up; it is not down. I characterize it as moving sideways.

Outside North America, as I said, demand is solid year-over-year, and we think that will continue. The biggest area of concern as we move into the third quarter is input cost. And while our outage costs are going to be down $65 million quarter-over-quarter, we could easily see that chewed-up, all of it chewed-up, by input costs. The biggest head wind we have on the input cost side is OCC. That could end up in accounting for almost half of all the input cost increases that we can see on the horizon. The quarter is not over yet, but we can get on the horizon as we look out to the third quarter. So I will just stop right there and turned it back to Glen, and we will take your questions.

Misty, we are ready for questions.

(Operator Instructions)

Anthony Pettinari, Citi

Regarding the Temple-Inland bid, there's been a second data request from regulators. I was wondering if you could talk, maybe with a broad brush, about what you are expecting in terms of a time line for a response from regulators.

We are going to come back and take simple questions in just a few minutes. What we wanted to do was really talk about International Paper's earnings in this Q&A session.

Maybe moving to container board. You discussed the impact of the Western region and agricultural difficulty we've seen there. You gave us some color on one of the slides. Can you talk about to what extent that tonnage has been lost versus pushed out and when you would expect to see some of those volumes come through in the third quarter, if at all?

Carol, why don't you take that.

Anthony, the only commodity that I think we get a chance to get back is going to be strawberries. Strawberries got pushed out; they are going to come, but I think a lot of the other commodities, they were just poor harvest and they are gone. I think we will see some strawberries in the third quarter, but I view it as most of it is lost.

I think that is the ag business. We are having a great fruit and vegetable season in Southern Europe, and Morocco, and Turkey. We didn't have a great one in California; we may have a great one next year.

And then maybe outside of ag and container board, can you talk about how demand trended in the 3 months of the quarter and what you are seeing in July?

As we all know, after 6 very solid quarters of year-over-year growth, in the second quarter, for the first time, the industry saw a decline. I would characterize our performance relative to that similarly, but when you look inside the quarter, April was okay, May was the low point, and then June bounced back to, what I would categorize as mostly flat year-over-year, and it feels like July is trending in that same direction. Kind of moving sideways, as I recall it.

Mark Connelly, CLSA.

In container board, with your outages and other people saw some outages, we are not hearing that customers are having difficulty getting boxes. Would you describe the current inventory situation as healthy or tight? And I'm curious whether you incurred extra costs at your box plants to deal with customer demand this quarter.

I will only speak for our situation, and I would call our inventory stock very, very tight, in May and June. When you lose that many tons out of Vicksburg, that we intended to use, we got way below where we needed to be. Behind the scenes there was a tremendous amount of juggling, extra freight, moving things around. We've made a few box customers nervous.

One of our challenges, because we've gotten so good with juggling, it gets pretty low and pretty tight, and the market doesn't necessarily see it. I would categorize inventories as on the low side, and we've got to replenish those inventories in the July and August time frame to get back to a reasonable level.

Did those extra costs actually clip earnings?

Yes, absolutely.

In any sense of -- was it a meaningful number?

Well, it's in the $20 million that we call out for Vicksburg.

So it's all in there.

Yes, we kind of put it all in that bucket, Mark.

It's great substitutions, Mark. It's extra freight as we move rolls around from one box plant to another, or ship from a mill we don't want to ship from.

In white paper, the trade rags keep talking about weakness. You haven't reported any. We don't hear it when we talk to the big retailers. Is there a significant difference in the market right now between cut size and rolls the way you are thinking about it, or is this just noise around the edges?

We had 2 very good months of cut size shipments. I characterize it maybe it's noise around the edges. We are a big enough player in the market, we are going to see all parts of the market. It's down 2% to 3% year-over-year; supply and demand are in balance, are inventories are in good shape, and I think our earnings support what I said. We are in pretty good shape.

Gail Glazerman, UBS.

On industrial packaging, can you talk a little bit about the export markets and can you talk about how easy it's been to secure trade tons in the markets? Just giving a sense of how tight things have been?

In industrial packaging?

Yes.

The export market has been very healthy. I think it shows up in a data. The demand is good. The mill mets are very solid, so I would categorize the export markets as solid, steady, at a healthy rate. And the second part of your question?

I have been trying to get a better sense of the market. Did you try to seek incremental trade tons, push forward tons to make up for Vicksburg, and, if so, how easy or hard was that?

The trades get locked in. It's really hard to move them in a meaningful way. We attempted to get more, but it wasn't a meaningful shift in our order patterns with our trade partners in the second quarter.

Can you give an update on your industrial packaging business in Asia and when we might start to see, you know, that turnaround?

We are in the second quarter -- we saw some improvement, and I will say consistent profitable operating results. We also took down a facility that clipped us for a couple million dollars; it was really the final step in our integration plan from the acquisition. Our volumes are up about 7%, but the real story that we have been working on is getting our margins up.

The business we inherited in the acquisition was much below our expectations, and we've gotten prices up well into the mid-teens from when we closed on it. So we will start to see cleaner numbers in the third quarter and it will be profitable.

Can you give an update on the India position, getting the approvals there is taking perhaps longer than expected?

Remember, Gail, it's India.

Yes that's -- we are still waiting on government approvals. It's slow, but it shouldn't be a surprise, because as John said, that's India. We have our management team on the ground as of August 1, and we are looking to close early in the fourth quarter.

Mark Weintraub, Buckingham Research.

The $129 million asset impairment. What was that for?

It was in our consumer packaging business, it was Shorewood. We looked at performance against plan, and as we looked at it, we realized the business was underperforming, so we took the charge in North America. It's primarily a North American business, not the international locations that we have.

On xpedx, last quarter, you gave us the overview, and I realize it's a 3-year, but when do we start potentially seeing benefits from xpedx start flowing through?

We've already started to see some of the benefit flow through on the footprint side. We will wait until we get the year-end because while it is a 3-year program, we will have some meaningful progress. We are expecting some and we will get some, and we will probably summarize that the end of the year, rather than try and do it every quarter.

I realize mix can make this a difficult to analyze, but it looks, based on that slide you showed on the box shipments and then taking out the West Coast, it looks like you may have lost share on the West Coast. Is there something going on the share side in the West Coast for you?

We have a disproportionate share. We have a higher supply position in ag than average, so we are more predisposed to that. But what I would say about our approach to the box business in general, our objective is to maximize profitability and make the most money we can. We are continuing to make choices around where we sell and what we sell, and the decisions we make commercially. I think we see a combination of all those things.

I just add to that, Mark. When you lose a customer, you've lost share. When a customer doesn't get some business, you haven't lost share, the customer doesn't have the business.

In the ag market, if the crop is half of what it was, and that was cherries, that doesn't mean it's a lost share. Our customer base didn't have the business, but in the ag business they will get at the next time around, in the next season.

Roughly what percentage of your West Coast business is ag?

If you think about the industry, 7% to 8% of the total industry is ag. That is not all California. And we are -- 10% of our total business is ag. That doesn't sound like a lot, but if you look at the percentage, 7% to 10%, that's a much higher degree of concentration. And obviously, with Weyerhaeuser our ag position became a much more important part of our business.

Stephen Atkinson, BMO Capital Markets.

Question about Ilim. Would you be able to give us an update as to the project at Bratsk and [Oblast]?

We've got 2 projects going on, a $300 million project at [Oblast], which is the addition of a paper machine. That project is on schedule, on budget, expected to start up on the first part of next year.

The other project is at Bratsk Pulp Mill. That's a very extensive project, $700 million. We expect that to start up in the latter half of 2012. We are a little behind on schedule, and so far so good on the cost side.

We are well into construction on both of those, and the Bratsk project is probably the biggest project in industry in 40 years in Russia. We've got a really, truly a global team over there. I think there are 900 people on-site now, and that will peak at probably a couple thousand, as we get into the heavy construction period next year.

Would there be any benefit -- my understanding is you are putting in the recovery boiler first, and would there be any benefit before the latter half of next year?

No, no. Don't expect to see any meaningful benefit out of that until we get into the latter half of the year. Although on the paper machine, it should be starting up sooner than that, so we will start to see some benefit from that.

I know you provide guidance on corporate charges of $175,000 to $200,000. You did $36 million in the second quarter. Are you moving down towards that level? What would that be a target that we could annualize down the road?

No, I think our forecast that we gave at the beginning of the year continues to be the range that we think we will be in.

Would you be able to update me a bit on the fluff pulp market?

Fluff pulp market?

Yes.

Fluff pulp market continues to show pretty health growth. Outside some of the emerging markets, 5%, 6% a year, year-on-year. We like that business. We are converting or re-purposing the uncoated free sheet mill that we closed in Franklin, Virginia, to fluff pulp. That will be coming online next year. While it is not a core business to International Paper, it is a segment of our paper business, because we produce fluff at the mills where we produce uncoated free sheet. We find it quite attractive and we've got a good position in it with a solid customer base.

And the order backlog is still good?

Yes.

Peter Ruschmeier, Barclays Capital.

John, you mentioned the second quarter, I think you said the second quarter, felt like 1% to 2% GDP in your business. A number of companies pointed to a bit of a slowdown as the quarter progressed with some of that continuing in July. I'm curious if you can help us with a little more granularity of, you know, was that even in the quarter in terms of the demand trends you felt, or was it skewed? Any initial read on July would be helpful.

I think, Pete, it's all over the map in our different businesses. Carol said May was the low point for industrial packaging, but just look at any of the economic reports. Housing is still weak, there's been somewhat of a slowdown in manufacturing on the durable goods side. The economy -- I think it's going sideways. Not up, not down.

From our perspective, there's going to be some seasonal pickup in some of the businesses, but not all of them because we are in a lot of different segments when you look at xpedx, uncoated paper board, industrial packaging, and print papers. The commercial print side, xpedx is still a struggle.

Shifting to fiber cost. Timber Mart-South showed a 9% sequential drop in pulp wood costs on a stumpage basis. I guess the delivered basis wasn't much. I'm curious if you saw any benefit from that in the second quarter, and if you anticipate any benefit in the third quarter?

The logging conditions are excellent in the South. We have gone from too much water to not enough in a lot of places. Stumpage costs are down, but diesel is almost $4.00 per gallon, so surcharges kick in when you get over between $2.30 to $2.50 a gallon. A lot of that stumpage is getting eaten up by fuel surcharges.

We've still got this issue that's a big issue across the South, with housing at 600,000 starts. Sawmills are curtailed and we are having to go longer distances to get wood, than we normally would in anything close to an average kind of housing environment, which probably is several years away.

In the quarter you have the Vicksburg outage, but as you look forward, do you have any ability to flex your system more toward virgin, away from the rising recycled fiber costs output that you have, or are you more or less maxing out your virgin capacity at this point?

That's one of the advantages I think we have, the fact that we have the current operating rates that we are running, and how we are running our system. We do have some flexibility to move a little bit, even take a mill like Valiant. When we shut that third machine down, we have more backend than we have paper machine, therefore, we can push on our virgin when it's to our advantage and back off OCC and vice versa.

We feel it we are in pretty good shape. Our mill inventories on OCC are in good shape. Our wood inventories are in good shape. We will do everything we can to optimize that for the best benefit.

On working capital, it looks like there was a big drag in the first half. How do you think about working capital in the second half in terms of its impact on cash flow, both on the second half basis and a full-year basis?

I don't think it's good to be a big drag on cash flow. We were up in the first quarter. We unwound the AR securitization program we had in Europe which had an impact on that, but if you look at our operating working capital percentage of sales, we are running just north of 14%. It some of the best performance that we've really ever seen across all the businesses in terms of really being focused on working capital, inventories, receivables, and payables.

Mark Wilde, Deutsche Banc.

I have a couple questions for Carol. Back to the container board market. Did you have any fallout from all of that produce upheaval in Europe?

Yes. Our colleagues in Europe had some loss of some volume. Of course we supplied them their kraftliners, so that was definitely a bit of a hit, but they still ended up having a pretty good quarter over there.

There was a report in one of the trade papers a couple weeks ago that European, German, testliner prices had fallen. This created some concern. Do you have any insight into what's going on over there in terms of European container board prices?

Well, we do know that testliner prices have dropped a little bit, so that report is accurate, but my outlook on kraftliner is it has been fairly stable still. But they are kind of moving a little bit in the opposite directions, but there was some price reduction on a testliner side.

And then just one other question for John. A little bigger picture question here. I think the restructuring of the Company has made you a better operating company, but with the dollar so weak right now, whether you are concerned at all going forward, if for some reason we were to get a real rally in the dollar, how defensible your earnings and margin levels are? Historically currency has been a big swing factor for the US industry.

There's no question that it's helping our customers, Mark. The more export, the more competitive. Without the big customer base, even though we have a more focused portfolio, we have a very diverse customer base. But, on balance when you look at the macro numbers, exports from the US are up, which is something good. They're still a small part of the economy, so they are not going to overtake consumer spending as the economic driver.

A material and sudden strength in the US dollar would probably hurt our customer base, but if it was reflected in a weaker currency in some of these emerging markets we would get some help. We are getting hammered in Brazil, on currency as the real continues to get very strong as a result of the weak US dollar, so there are some offsets there. On balance, as we become a more global company, that's how we are going to look at currency; there will be some pluses and minuses, and that's how you have to think about it. You are always going to have some currencies moving against you. But in the US, I think a materially stronger dollar would impact our customers from the ripple effect of exports.

Chip Dillon, Vertical Research Partners.

You look at Ilim and it's earning, after tax, for you, over $200 million annualized. What is your net investment in Ilim at this point?

$450 million. We put in $650 million to start with, we've taken out about $200 million in dividends. I think that the Ilim is something that is probably unappreciated by many of our investors in terms of its earnings potential to International Paper. It's the pulp business, but it's also, when we finished with [Cablos], we are going to have a much bigger domestic presence, similar to what we have at Svetogorsk, with our paper business.

We are pretty positive on the outlook. Remember to recognize it is the pulp business so it is going to have a cycle to it. We are just coming off probably what may not be the high point of the cycle, but a high point. But even in [Alignmat], demand for pulp in China is going to continue to be robust going forward. We are going to have the lowest cost softwood pulp mill on the planet, delivered to China, at Bratsk.

On that point, we all know that you are going to report in October what Ilim did in the second quarter. And of course pulp was rising through the quarter. Are there any other factors we should take into account as we think about Ilim in terms of what they do between what you just reported, and what you report in October?

You are going to have some currency moving around. You are going to have probably a heavier maintenance outage schedule. It's not going to look drastically different, but there would be some puts and takes.

And then just lastly, quickly, I've noticed that it appears that [Bleak' s] board back logs have gone from being quite super strong to maybe just more normal. Is that your experience, and does it concern you at all? Is it still at a healthy level?

I characterize them as seasonal. This is the slow time of the year, as we look at our system. We didn't build any inventory throughout the second quarter, and we are expecting a seasonal pickup here shortly. So it has come down from 4 weeks to 3 weeks, but that's about where we were this time last year.

We have reached the allotted time for question and answers for this portion of the call. I now hand the floor to John Faraci.

I'd like to stop here for a moment and provide all of you with an update on our offer to acquire Temple-Inland. Then, if we have time, we will take a couple questions. As we said from the start of this process, we are very committed to seeing this transaction through to completion. We believe the industrial logic of the combination is solid, and I don't think there's any debate there.

We haven't heard any from anybody. It and makes a very good business at IP. They are our industrial packaging business, an excellent one, and it creates a powerful cash flow engine that will continue to drive free cash flow in [ry] improvement in International Paper. It strengthens our portfolio and is consistent with the object of our transformation plan, which is focusing on solid cost of capital returns and all of our businesses throughout the cycle.

Importantly, it is a meaningful accretive to IP shareowners that synergies are realized, and that is an acquisition requirement. As far as the price goes, we believe we have a very strong offer on the table, which deserves serious consideration. We believe our offer is highly compelling on a present-value basis, and reflects the future outlook for Temple, for both container board and for building products, and as a reasonable split of expected synergies.

At $30.60 a share in all cash, it represents almost a 20% premium in Temple's all-time high and a 46% premium to their prior-day close, and it is also priced significantly above their 52-week high.

As all of you know, we have attempted to engage Temple in negotiations. We told them that a negotiated process, with us having an opportunity to do some limited due diligence, would lead to the best value. We strongly prefer to negotiate this directive with Temple, but we are prepared to let Temple's shareowners decide the compelling nature of our offer.

On the regulatory side, just one update that we posted yesterday. As expected, we received the second request from the Justice Department yesterday. We have been working with them for several weeks to help them understand the economic benefits of this transaction.

And, of course, we will be continuing to cooperate with the Justice Department in their process, and expect to be able to address any questions they have quite promptly. So with that, I would be happy to take a couple questions if we have some time, on Temple if any of you have any.

(Operator Instructions)

George Staphos, BOA Merrill Lynch.

What are the next mile markers for you in this process? You put an offer out. Temple-Inland has refused, and it seems that, at this juncture, to the outside observer, it's a bit of a stalemate. Do you consider your offer, depending on what facts you get back from the Justice Department?

Are you waiting for additional certainty on the strength of the economy or capital markets based on what happens with the debt ceiling? Help us understand what the next steps are in your view, to the extent that you can, and what the mile markers are behind that.

We would like the next step to be a negotiation (laughter) We've made what we believe to be a serious offer, 20% above Temple's all-time high since they became the new Temple several years ago. After that, having discussions, we've got to continue with the process. We are serious. We are committed. We intend on seeing it through.

We had 2 conditions in our proposal. One was regulatory approval, and the other was the withdrawal of the poison pill. Our next step is to go get regulatory approval.

Do you potentially see this taking as many as 3 years to complete the process?

I don't want to speculate on how long it's going to take. It's going to take a while to get regulatory approval. That's not going to occur overnight. I think we just take it one step at a time. We are committed to the process. We believe it's a good transaction for both Temple shareowners and International Paper shareowners. It has to be, for it to work.

Chip Dillon, Vertical Research Partners.

As you go through the process with the second request, which was totally expected. Does Temple have to do anything to be compelled by the government to provide information, or is the onus completely on International Paper?

As I understand it, Temple will also get a request to supply some information, and they will have discussions with the Justice Department. Ultimately, they, as we will, will have to provide the information to the Justice Department's request. The time line that they will be on is one that they will work out with the Justice Department.

Will either side, if you can answer this, have access to the answers of the other party?

Pardon me?

Will you be able to find out what Temple says to the Justice Department, and can they find out what you say to them?

I believe those submissions are confidential, Chip, for both parties.

Steve Chercover, D.A. Davidson.

Thanks. My question is for the previous section, if I may. It was the $20 million expense that was taken for Vicksburg, is that reflected, in your -- the pro forma numbers for the container board segment?

We won't make you wait until the next quarter to answer that question, Steve. (laughter) But it was reflected in the pro forma numbers for --

Think about it this way, Steve We had to charge $20 million from all of the lost production, and the other things we had to do to move some volume around. That hit us in the second quarter. We moved a couple of outages, because of those complications, out to later in the year. We won't have the Vicksburg impact as we go through the rest of the year, but we will have more outages that were moved from second quarter to third and fourth.

So the $279 reflects the impact of Vicksburg?

I'm sorry, say that one more time.

The $279 operating earnings reflects the impact of Vicksburg?

Yes, that is correct.

Yes it does.

Good. Okay, well I'll keep listening on the Temple-Inland soap opera. (laughter). Thank you.

(Operator Instructions)

Mark Wilde, Deutsche Banc.

Is it possible for you to just recap for us, the marching orders you have given Carol, in terms of continuing to manage her business while this is going on? There's been a lot of concern about, particularly around pricing type issues, and I think, with your costs going up, what a lot of people are concerned about is, if costs continue to go up, would you be unwilling to try to recoup those through a pricing initiative as long as this deal is under review?

First of all, we don't give marching orders to International Paper. (laughter) But we do agree on priorities, and then we go out and execute, and that is not only Carol, but all the leaders in the Company. I'm not going to talk about pricing on this call because I can't, and I shouldn't. We just don't talk about pricing in a forward-looking way.

But in terms of, you know, is the focus in industrial packaging just to manage the business kind of as you would under normal circumstances, or does this deal change anything?

Absolutely. The focus is on International Paper everywhere from Shanghai to Memphis to Brussels to San Paulo, is run your business. The reason we can consider something like Temple is because the cash flow we are generating, the balance sheet we put together, and the business performance we put together. I feel pretty pleased with how the organization has responded to that.

Without asking you to kind of predict or make any call about what you would do on pricing, is it fair to say that, if you thought the market conditions were right it, you would be willing to consider a move on price in the midst of this bid or not?

I'm just not going to comment on pricing, Mark, but I think we have talked -- what's important in any business -- in any of our businesses around the world, as it relates to price, inventories have got to be in good shape.

Supply and demand needs to be in balance, operating rates need to be high, and demand needs to be consistent with supply. We are not in a cost-push business, where automatically when costs go up, prices go up. The flip side works, too. When costs go down, automatically prices don't follow.

Mark Weintraub, Buckingham Research.

I think when originally you were talking about the Justice Department review, you bracketed it as it might be a 6- to 7-month process as a gap. Do you have an updated view on that?

No, we don't, Mark. We are just getting the process started with DOJ, and absent any meaningful discussions with Temple, that time frame is going to be one of the gates.

Peter Ruschmeier, Barclays Capital.

And operator, we will make this the last question.

I guess 2-part question, if I could -- 2 different questions, if I could. First, I'm curious whether there is an opportunity cost related to the deal dragging on overtime, and I'm really thinking about, the type of response and behavior that Willamette had in reaction to the Weyerhaeuser bid over the 2-year period. And whether or not, you view this as something that could be disruptive, which potentially has a true cost to your business. How do you think about the opportunity costs of a deal that could drag on?

In terms of our business performance, Pete, I don't see any opportunity cost. We are focused on running International Paper as it is. All across the Company, as I said, from Memphis to Shanghai to San Paulo to Bratsk in Russia. In terms of a time frame, I think there's an opportunity cost to Temple shareowners. We've made a serious offer that is 20% above their all-time high. And, we think the right thing to do is sit down with Temple and have a serious discussion.

The world moves on, and we are committed, we are serious, we are patient, we are disciplined. If things change, at some point in time, and we think the right thing for International Paper is to do something else, we will make that call, but we are serious and we are committed to this, and we will be disciplined.

As we all try to figure out the next steps here and what appears at the moment to be a standoff, one point that I am not clear on is, is it even possible for Temple to have a confidential conversation with you at this point? Or doesn't the hostile nature of the deal at this point preempt that from happening?

Well, now that we've launched a tender offer, there are some things we have to comply with. I guess I just -- leave it right there. We've got plenty of advisors, at least International Paper does. I presume Temple does. There is always a way to have a discussion if we choose to have one, but I'm not going to get in to what we have to do under any circumstance.

On the tender itself, with the date coming up, shares of Temple trading roughly at the bid, can you remind us on the flexibility you have with that tender? I guess you'll cross the bridge when you get to it, but can you extend that tender offer, in an effort to try to facilitate a higher participation rate?

Sure, we can extend at a number of times. We launched a tender process because we weren't having meaningful discussions, and we are serious, and we wanted to get the train rolling. So that's where we are, but we can extend the tender offer, and expect that we will do that. Operator, I think that wraps it up, so thank you very much for tuning in. We are pretty pleased with the quarter. Look forward to talking to you on the next quarter.

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