International Paper Co (IP) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2012 International Paper 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. Mr. Glenn Landau, you may begin your conference.

Good morning and thank you for joining International Paper's first-quarter earnings conference call. Our key speakers this morning are John Faraci, Chairman and Chief Executive Officer, and Carol Roberts, Senior Vice President and Chief Financial Officer. During this call we will make forward-looking statements that are subject to risks and uncertainties which are outlined on slide 2 of our presentation. We will also present certain non-US GAAP financial information. A reconciliation of those figures to US GAAP financial measures are available on our website. Our website also contains copies of the first quarter 2012 earnings press release and today's presentation slides. With that, I will now turn the call over to Mr. John Faraci.

Thanks Glenn, and good morning everybody. As we usually do over the next ten or 15 minutes, Carol Roberts and I will review our first-quarter results with you from each of our individual businesses, then we'll open up for your questions. We've got several of our business leaders here today to take some of those questions. Let me start right in and start off.

International Paper earned $0.57 a share in the first quarter, it's the second-best first quarter we've have had since 2000, the best being last year. We continue to generate strong free cash flow and importantly, got off to, I think, an excellent start, integrating Temple operations, where we closed in mid-February, and we've accomplished a great deal in the first six weeks. While our results were in line with slightly favorable for our expectations, we experienced a normal seasonal weakness that we always have in the first quarter coming out of the holidays in our US businesses, and the first quarter is also slow in Latin America.

The main driver for year-over-year, as Carol will explain, were lower pulp, paper, and packaging prices, primarily in export markets. We supply those export markets out of North America, out of Brazil, and through our Russian joint venture. With that said, all the global markets really bottomed in the quarter from a pricing perspective, and an average we're trending up as we exited in the quarter and moved into April. The pricing actions in the export markets are beginning to take hold. We really bottomed out in the first quarter.

We've also made very good progress on our strategic initiatives during the quarter. The Temple-Inland synergies began to accrue from day one, allowing us to basically get through the first quarter with Temple being EPS awash. We also continue to make a lot of progress at many initiatives we have in the pipeline which will be completed this year, and will produce results next year -- the Franklin pulp project, the new credit board machine, and the Sun joint venture in China, the two big projects in the Ilim joint venture, the [Mojo Gotsu] boiler, which is going to reduce our energy cost in Brazil, and the xpedx strategic initiatives, all those will impact earnings in a positive way next year.

Let me move to the next slide, slide 5 in your deck. Revenues for the quarter were up 5% versus last year in the fourth quarter, mainly due to the Temple-Inland acquisition. EBITDA margins were in line with expectations. Free cash flow -- International Paper's free cash flow story remains strong, at almost $360 million for the quarter, roughly equivalent to the first quarter of last year, when you normalize for capital spending levels.

Before I turn the presentation over to Carol, I would just like to once again welcome the employees of Temple-Inland, who are -- many are listening in to International Paper and reiterate how encouraged I am with the early progress that we're making, integrating the businesses and just reinforce our vision of aggressively building and operating the best corrugated packaging business in the world. We measure that a couple ways -- by our results versus the competition, the quality of our employees, and the quality of our customers, and the returns we generate for our shareholders. Good first quarter, and I will turn it over to Carol.

Thanks John, and good morning everyone. Let's take a look at the first quarter financial bridge, and we'll move from the first quarter of 2011 to first quarter of 2012. As John just shared, we earned $0.57 a share from continuing operations before special items. The good news is volume was up slightly, but we did see price erosion of about $0.20 year-over-year, and that was associated with the pass-through of market pulp price declines, as well as paper and packaging export price declines, mostly negotiated in the fourth quarter of 2011. Some came in to the first quarter of 2012, and we'll talk about that a little bit more at the end. We did see modest relief on input costs of $0.02 per share, which did help cover the higher pension-related corporate expenses.

Relative to Temple-Inland, as John spoke to partial quarter earnings, including synergies, fully offset the incremental interest associated with the acquisition, so definitely a very good start. Finally, our share of the Ilim equity earnings, adjusted for the elimination of the one-quarter lag in reporting, was down year-over-year on lower pricing, but we did have a favorable impact due to currency exchange rates in the quarter.

Moving to slide 7, let me just touch on input costs for a moment. Input costs in the quarter versus last year were modestly lower, $12 million total for the Company, with fiber and energy being the positives offsetting higher chemical and freight costs. Our industrial packaging business was the beneficiary of most of this, due to lower OCC and energy costs, and that amounted to $27 million upside for them, while our printing papers and consumer packaging were off $15 million and even, accordingly. That was driven by higher chemical and freight cost offsetting the positive.

If I take you to slide 8, as you can see, our North American mills ran strong at 95% in the quarter, and that was up from 91% (inaudible - background noise) it was a good quarter in North America. We continue to match our production to our customers' demand while closely managing our inventories. Our inventories are in good shape off a little bit of that (inaudible - background noise). Let me continue. I know there's a little noise on the line but hopefully you guys can hear me fine.

I'm on slide 9, let me move to industrial packaging. Industrial packaging posted a strong first quarter in 2012, generating $278 million in earnings, and that compares very favorably to the $274 million that we posted in the first quarter of 2011. The quarter's earnings were favorably impacted by Temple-Inland, as we discussed. We did have the lower input costs, and very encouraging, we had very solid box and exports shipments. Partially offsetting this was the lower export price that we've talked about, higher maintenance outages, and we did have a bit weaker mill operations in the first quarter relative to the fourth and last year, with some one-time events that are behind us.

If I take you to slide 10, I want to talk about our EBITDA margins in the industrial packaging business, to put our results in perspective. This slide shows that our North American EBITDA margins, and this does include Temple-Inland, remained better than the best of the competition, set prior to achieving the merger benefits. This is really a nice outcome, this is what we expected, but it does point to the real exciting opportunity we have of combining International Paper's corrugated packaging business with Temple-Inland's business to create a superior operation.

This is a little bit of detail on Temple-Inland. For the partial quarter that post-closed, Temple-Inland operations delivered $33 million in earnings, and that does include about $10 million of synergies which were mostly attributable to overhead reduction. Factoring in the incremental interest expense associated with the November bond offering, the term loan, the roll-over debt, pre-tax income from operations was neutral to slightly accretive, and that is definitely a good outcome.

Moving on to 2012, as John stated, we are off to a very good start, and we have a tremendous amount of work going on to capitalize on this opportunity. In the next 90 days, we will continue to accelerate versus our synergy realization timeline, and further assess more potential that this transaction brings to us. Stay tuned, I've got a good plug here for Mark Sutton, who on Investor Day, which is May 24, will provide a thorough update on the progress to-date, and our most current view on any potential headroom we're finding as we work together to cover more opportunity.

On a parallel course to this discovery process, I think it's very important that we point out that we remain very focused on maintaining and improving the customer experience throughout this process. We're off to a good start there, but that's clearly a high priority. While we're going to make significant strides with our box plans, our mills, our supply-chain optimization, that's going to definitely positively impact the bottom line, our cost structure.

I think it's equally important that our efforts are also going to result in improved quality and service. If you think about it, we will have an expanded product offering. Put that all together, that is going to allow us to extend to our customers, both domestically and globally, the best value proposition in the business. Finally on Temple-Inland, we are making good progress on the sale of the mills, and are preparing for the sale of the building products business.

Let me move on to consumer packaging. Consumer packaging is on slide 13. Operating profits were very solid, at $96 million in the quarter of 2012, compared to $101 million in the first quarter of 2011. We did see lower prices, but this was driven largely by export mix and some margin squeeze that we experienced at the Sun JV. We did have weaker year-over-year volumes, and some of this was offset by the absence of the Shorewood results in the quarter.

In North America, relative to our competition, the business continues to outperform in this space. As you can see on slide 14, the EBITDA margins actually improved, and we're well ahead of our competition. Another great story is our food service business. As we discussed last quarter, they continue to reach new highs, finishing the quarter with record earnings and excellent returns. The key for this business has clearly been aligning with growing customers, the best customers in this space, as well as introducing new and innovative product.

One thing that we've got going on that's very exciting is our hold-and-go insulated hot cup product line, and that is currently being rolled out by a number of market leaders in the quick-service restaurant space, as well as the convenience store segments. What we like about this most is that it is effectively replacing foam cups with an environmentally sustainable solution, which drives new demand, profitable growth, mix improvement, and it's well-suited for integrating back into our consumer packaging business in our mills.

Let me move now to printed papers. Printed papers operating earnings were $145 million in the first quarter of 2012, versus $209 million in the first quarter of 2011. Lower pulp and export prices did more than offset the benefits of the lower maintenance outage expenses, the improved volume, and the stronger mill operation. I think slide 17, though, is really a great view of what's happening inside the business, and most of the headwinds in our printing papers business are from pulp. You can see in our North American uncoated papers business, it performed very well on a stand-alone basis. It delivered a great return on investment of 14%, and actually earnings in our paper business were up $12 million on a year-over-year basis, on volume growth of 4%. A good outcome on the paper side.

India, touch on India for a moment. We did finish almost our second quarter in India. We closed in October of 2011, so we finished our first full quarter of operations, and we had record volume. It was up actually 15% year-over-year. While it's still early, we remained energized by what we're seeing to date, and the opportunities we have to expand production, leveraging our global expertise, the knowledge we have in uncoated free sheets, how to run mills, is going to be great and we're excited about the chance to participate in this fast-growing market.

Moving to xpedx on slide 19. Xpedx fought strong headwinds in the quarter, and they were related both to seasonality and really the secular decline that we're seeing in the coated free sheet market. But we did see improved earnings year-over-year, and this speaks to the progress we're making on the cost reductions associated with our strategic transformation, which we will continue on with.

Let me move to slide 20 and summarize. As slide 20 illustrates, I would categorize definitely the first quarter as solid results, despite seasonally weaker demand, environment in the America's, and lower price realization in pulp and our export grades. All things considered, although it seems to be a bit saw-toothed, we continue to feel more positive about the demand trends in North America, and our ability to expand our margins globally, and importantly, to grow our business in the emerging markets that we've invested in.

Clearly, a theme that has been resonating throughout the presentation has been what's happening with our pricing. Before turn it back over to John, I just wanted to point out some of the underlying trends in the first quarter relative to pricing, since it's a very important topic. As John alluded to earlier, almost every grade across our global platform is exiting the quarter with stable or improved pricing versus our average pricing in the quarter. That clearly indicates that we've reached and moved away from the recent bottom, and I think that's obviously good news, and it bodes well for the quarters to come. You can also see the list of announced price initiatives on the right column, so we expect further realizations in the second and third quarter as these increases are implemented. I think it bodes well for the rest of year. At this point, John, let me turn it back to you.

Thanks, Carol. I'm on the slide that's got a lot of yellow, with a little bit of red, and some green on it, which is basically framing up our outlook for the second quarter, and then I'll talk about the rest of the year. Looking ahead to the second quarter, we're going to be moving into a seasonally stronger period of the year. That said, the GDP growth numbers this morning weren't all that impressive. It did feel like closer to 2% GDP growth. We are going to see some seasonal improvement, because the first quarter is one of the seasonally slow ones. We'll see that in North America and we'll see it in Brazil. In Brazil that'll give us a more favorable domestic export mix.

So far in April, US box demand is, I'd say, modestly outpacing last year on an average-day basis, and we expect that trend to continue throughout the quarter. Additionally though, industrial packaging earnings are going to be impacted by both the full-quarter of Temple-Inland, as well as increased synergy capture, which will start to fall through the bottom line in a much bigger way as we come out of the second quarter.

Moving to pricing, as Carol just shared, we expect further price realizations throughout the quarter, associated with our announced increases for papers in North America and Brazil and Russia. Container board exports from our North American operations, as well as global market pulp and fluff pulp exported out of North America. That said, the second quarter is our heaviest maintenance outage quarter of the year. It's about 40% of our global annual spend in the second quarter. That's an incremental of $105 million, or about $0.16 a share for first quarter. Think of that as equally split between our papers and packaging businesses, but it's also all around the world. We're right in the middle of our annual outage in India here right now.

As far as input costs go, we expect to see higher costs in North America. It'll be close to $25 million if just you look at the exit rate coming out of March into April across OCC chemicals and freight, that's $25 million in total. Most of, but not all that will be offset by lower natural gas prices. Input costs were tailwind in the first quarter, and be a bit of a headwind in the second quarter. Lastly, we had an FX gain in Ilim of $30 million in the first quarter, and you were assuming that's not going to be repeated, unless the Russian ruble continues to get quite strong.

Just turning to, I think more importantly, the full-year outlook, and I'll kind of use that as a ramp to talk about how we see 2013, because we've got a lot of things going on inside the Company that aren't really macro- demand related. We see a positive trend in underlying business results in the second quarter. It's going to be offset, as I said by big maintenance outages, but those will be behind us, so we won't have those outages in the third and fourth quarter. The global economy is uneven. We've got a recession going on in Western Europe. The growth is slowed in China and India, but still remains robust. We've got great paper demand year-over-year in India, but the economy has cooled off a bit. North America -- it's a recovering, but far from fully recovered, economic environment.

We have a lot of confidence in our full-year earnings and free cash flow outlook. Temple is going to have a growing impact on the year as we go through the year. We're really setting the stage, I think, for a big step up in 2013 -- again driven off a lot of projects which we're spending money on now, which will be completed during the course of this year, start up and have an impact on next year's results. As I said, those are the Franklin pulp project, the big energy project in Brazil, which will make us totally self-sufficient, Mojo Gotsu, the Ilim expansions on paper machine, the xpedx strategy, and finally the Temple ramp-up on merger benefits and full integration.

You'll hear more about all of that on Investor Day, I think it's March 24, and additionally, our business leaders at Investor Day will have -- May 24, excuse me, not March 24. Additionally, we're going to have Paul Herbert, the CEO of Ilim attending Investor Day in May, so we'll talk about more about Ilim, as well. I'll stop right there, and we'll open up for your questions.

Thanks John, operator we are ready to take questions.

(Operator Instructions)

Steve Chercover, D.A. Davidson.

Thank you, good morning. First of all, I just wanted to ask, did your results in the first quarter surprise you at all? Were they perhaps a bit better than you might have thought?

I don't think we -- it always turns out, Steve, that we got there probably a slightly different way than we thought we would. I think we left a little money on the table in terms of our mill operations. We had a great running quarter in printing papers in North America. We ran really well in Russia. We left a little money on the table in industrial packaging in some of the IP legacy mills, the Temple mills. With the global balance we have, we're always going to have pluses and minuses relative to expectations, but we're pleased with how the quarter came out. Again, looking at the free cash flow, I think that's kind of the important number for us.

Indeed. With respect to the expenses associated at Franklin and the Sun JV, did they peak in the first quarter, or are they behind you, or just going to trend down?

They're pretty much flat. We're running, Mark, $2 million a month, at Franklin.

Is that mill producing commercial grade now?

No, we'll start up mid-year.

Great.

That was Tim answering the question, not Mark

But we can trade back and forth.

Okay, thank you very much.

Gail Glazerman, UBS.

Quick question on corporate expense. The first quarter was a lot higher than I would've expected, unless I'm missing some adjustment. It's a huge percentage of your overall annual guidance. Was there something kind of unusual driving that, and what would drive it back down?

Gail, I think we had spoke to -- the corporate expense is higher due to pension expense. It's on page 26 if you look at the -- in the appendix, it shows the corporate expense.

Yes, but it was like $65 million or $69 million for the first quarter, which would be a lot higher than that run rate. I mean, I would kind of assume it would come back down then?

Yes, it should even out through time. There could be a little timing there on things, but the $220 million is the good estimate to use for the year.

Okay. Just looking at the demand environment a little. When you look at industrial production, performance and consumer non-durables is significantly under-performing. It seems to be reflected in overall box volumes and as well as consumer packaging volumes. Is there anything structural you think is going on? Is there anything you're hearing from your customers?

No, I'll let Mark comment on what he sees in corrugated, but the GDP numbers were a little over 2%. That kind of feels like last year. It slowed a bit from the fourth quarter, what, box demand was up 0.5% last year, and we're kind of going along that path sideways.

John, I would agree with that. We're seeing nothing really structural in that. I think some of those non-durable categories, quite honestly, are affected by short-term issues like gasoline prices and other things. We aren't seeing anything structural, and we are pretty much tracking -- our box business is tracking with the market, which is our strategy.

Okay and just one last one. Given the performance of the Temple assets in the first quarter, is there any change to kind of the original guidance that you gave that would be a slight drag or neutral this year?

Well, if we're neutral in the first quarter on two months of financials with $10 million of merger benefits, I think you can do the math yourself. We'll talk more about that at Investor Day at the end of May, but we're pretty pleased with where we are.

Okay, thank you.

Anthony Pettinari, Citigroup.

Looking at 2Q outages in industrial packaging. In terms of down time, obviously last year you had a little bit of a unique comp, with the Vicksburg flood. When you add Temple's down time, and you kind of look at it apples to apples, would you expect to take significantly less tons down, or kind of a similar number, or maybe more tons based on what you're seeing in the market?

I think -- I'm not sure if you're asking about last year's second quarter. What we have in the chart here is really what we forecast all in, both IP and legacy and Temple mills for maintenance outages. I think -- is this the third quarter, or is this the second quarter for last year? It looks to be pretty similar.

Okay, in terms of total tonnage it would be sort of a similar number to 2Q last year? I was wondering if you could maybe give a little color on what you're seeing in terms of domestic box markets. It looks like the pricing was flat, and I'm wondering if you think you're in a position to gain a little box business, given that you have sort of an expanded product offering, or are you maybe losing a little business with customers who maybe bought from IP and Temple and are trying to diversify suppliers? What are you seeing in the marketplace in boxes?

Good question, Anthony. I mean, there's -- the box business is always moving around given the size of the market and the diversity in the segments, but we pretty much are tracking with the market, so we win some and we lose some. We had -- half of our business was in sets exposed to segments that actually grew quite nicely in the first quarter, and the other half was in segments that didn't grow as much. We don't see any specific issues around businesses trading hands just because of the Temple-Inland merger. There are obviously customers that both companies shared, and we're working real hard to keep that business where we can, and if we lose any we're going to replace it. Our strategy is to grow with the market, and our performance in the first quarter is pretty much tracking that.

Yes Anthony, on page 30, and you probably already caught up with it. We were very pleased, and this is with Temple-Inland in. We were up with the market 0.6%. Importantly, our box pricing from the fourth quarter to the first quarter was flat, so we feel good about that part of it.

Okay, and maybe just one last question. Is there one specific segment, maybe in agriculture, where Temple gives you some capabilities that you didn't have before?

I think a couple of segments that come to mind -- Temple adds to our capability in sort of the fast-moving consumer goods, and that's big companies, big customers and smaller customers, and we'll be a lot stronger in the retail packaging segment, as well, with a lot more capabilities than we had before.

To add to that, we've got a much more expansive footprint now in Mexico. We got into Mexico with Weyerhaeuser. We've now added to that with Temple, we like that. Our ag business, particularly in California, is substantially bigger now. It's a seasonal business, but this year it's going to be a good season out in California on the fruit side.

Thank you, I'll get back in the queue.

Phil Gresh, JPMorgan.

A couple questions -- one, just on Ilim. As you plan to bring this capacity on line, I'm wondering how you think about the dependence on China there. It's obviously not a big piece of global softwood supply, but it's a reasonably sized piece of China, and China a bit over-stocked right now. Just wondering how you're thinking about managing that over the long term?

China is going to be a net importer of fiber for as far as we can see. With 8% growth in the economy, there is still incremental demand, it's basically all about supply and demand. China is importing fiber now and 80% to 90% of their demand will be on imported fiber. That's either going to be logs, chips, pulp, or waste paper. We really like our position. We're the lowest-cost softwood delivered to northern China on the planet, and that's not going to change. Over the long term, with a low-cost facility making high-quality pulp, we like our position right next to the biggest market in the world.

Okay. On wood fiber costs, they ticked up a little bit in the quarter. I'm assuming some of that's just seasonal. I'm just wondering how you think about that longer-term, let's say in an environmental where housing comes back. You get some more residual wood chips which is a positive, but are you at all cautious around potential for higher wood costs longer-term if housing comes back, or how do you guys think about that?

I think of it as the opposite. When housing comes back, you get two things -- you get the residual chips, which takes pressure off ground wood that comes in a long distance, and we get what we call the pulp wood spin-off. 80% of harvested acre is soft timber, 20% of it is pulp wood. That pulp wood is not getting harvested now because housing is still pretty depressed. What's going to happen when they housing market comes back is, we'll end up tightening our drain area, so we won't go as far for fiber, which will be good.

Fiber costs always go up in the fourth quarter because it seasonal. We can't get into the hardwood lands, we're taking wood out of inventory, so we're double handling it. That's just a normal seasonal trend. I'd say structurally we're positioned probably for flat-to-lower fiber costs on the virgin fiber side going forward, which we think is an advantage for our virgin-based businesses, particularly in container board.

Okay, great, thanks a lot.

Chip Dillon, Vertical Research Partners.

Good morning. I wanted to ask you about Ilim. I know you report Ilim on a one-quarter lag operationally, but was the foreign-exchange gain actually something that occurred during the first calendar quarter, and that's why the line item is a lot stronger than we thought, or was it something that you would have known back earlier, let's say in January, February?

Chip, this is Carol. Actually, we closed the quarter lag this quarter, so going forward and starting with this quarter, we are reporting Ilim current. The results that we reported for Ilim were actually what we achieved in the first quarter. Relative to the currency, it happened in the quarter, and it's the end of the quarter how you get to it, so it was happening through the quarter. You just don't know how currency is going to come out, but the ruble strengthened and then stabilized. It happened in the quarter, and right now the ruble is kind of flat so kind of hard to predict what it's going to be at the end of the next quarter.

I guess when you look at the quarter you just reported, I guess net of the gain it's roughly $14 million. That's actually two quarters of results, right?

No.

But it also includes the low point of the first quarter, which I would imagine -- how does that shake out going to the second? Obviously it's a better environment, but you're only going to be reporting one quarter's results. Is that correct?

No Chip, what we do is you actually go back and you go back in 2011 and you push all the quarters back to the appropriate -- so the results we reported were just for the first quarter of 2012.

Got you, that's very helpful. Secondly, on the Temple situation--

We re-stated 2011. As part of doing all this, we re-stated the 2011 numbers to put them all on the current quarter.

Got you. Moving on to the Temple-Inland, I know it's only been a couple months or so, but are you seeing anything incrementally, especially on the box plant side, with transportation that might give you either greater confidence in the ultimate synergy number, or maybe even cause it to be greater than you originally thought?

Mark, do you want to comment on that?

Sure. Chip, we are seeing what we thought we would see, which is tremendous opportunity when you put these two networks together. I think in the specific area you're asking about in freight, I would say yes, we are seeing more than we had originally modeled. We're just putting the finishing touches on estimating where that's going to be, and I'm going to share that, as John said on May 24 -- that, and a number of other synergy areas on -- during our Investor Day.

Got you. Thank you.

There are huge freight opportunities, Chip.

Thank you.

Mark Connelly, CLSA.

Good morning, this is actually Kurt Schoen filling in for Mark.

Okay, well good morning, Kurt.

So it's interesting to see --

Can you speak up Kurt?

Can you hear me now?

Yes, you're better.

It's interesting to see that white paper margins are holding up well in Europe and Brazil, given recent economic weakness in those markets. What is your outlook for margins in those businesses going forward, and how does that differ from your US white paper outlook?

Tim, do you want to comment on that?

Yes, I'll comment. I think, actually, our margins in North America are holding up pretty well, too. The biggest impact on margins in the quarter, I can't really speak to Europe but I'll speak to North America and Brazil, is really around export paper pricing. Export markets started decreasing in the fourth quarter, and then continued that into the first part of the first quarter of this year before starting to rebound. We look at Brazil, and you've got about 50% of the capacity that's exposed to export markets between Latin America and Europe, primarily. Those margins will recover in the second quarter, and we think they'll be strong the balance of the year.

Our business in Europe, our paper business, is really tilted to the east. Most of our paper production is in Poland and Russia, we've got one mill in Western Europe in France. We really don't see the impact of the slow-down in Western Europe as much in our paper business as we see in our corrugated box business, which is France, Italy, Spain, and then Turkey and Morocco.

Just following up in white paper, over the next year, do you expect your mix of cut-size and roll to change in any meaningful way, given the shrinkage in the roll market?

I don't know. No expectations at this point, but I wouldn't want to speculate on what we might do or where we might do it. I think we looked at demand in the first quarter and thought demand looked a little bit better than we had expected coming into it. Here in North America, we feel pretty good up with the mix that we've got today.

All right, thank you very much.

George Staphos with Bank of America.

Thanks. Hi everyone, good morning. John, I want to just go back quickly first to the comment on input costs. Is $25 million using current run rate negative variance in 2Q versus 1Q. The total that one could calculate right now, or would nat gas prices offset most of that? What's the appropriate interpretation of that?

Nat gas is going to offset some of it.

Okay, fair enough, thanks for the color on that. Second question, and you touched on this a bit, we had heard from our own trade contacts, and you mentioned today that the mills within industrial this last quarter didn't run as well, perhaps, as normally they do within International Paper. You called out the $20 million year-on- year variance, and if we look a little bit later on in the slide deck, I guess on page 41, it was actually a fairly steep sequential drop-off, $75 million. I guess to the extent that you can comment, what was driving that negative variance either year-on-year or sequentially in mill ops within industrial packaging?

Mark do you want to comment on that?

Sure. George, on the sequential, that $76 million that you talked about, a big portion of that was really related to the way we value inventory and manage that inventory reserve. From an operational standpoint, we did move a few things from the fourth quarter to the first quarter, just timing of certain jobs, Cutting to the chase on how we ran, the big difference between sequential and last year's first quarter was at four of our mills and as John mentioned, they happen to all be legacy IP mills, we had one-time reliability events that we've solved and they're behind us, ranging from problems with a boiler to some mechanical problems. Nothing chronic, one-time reliability events, but they're expensive, and we've got them behind us.

It would be fair that, having looked at 2Q versus 1Q, most of that variance is therefore turned basically to nil, would that be fair?

I think we've got -- our objective, obviously, is to recover from some of that, but we've got a few things that are lingering into the second quarter.

Okay. Last question, and I will turn it over. Just stepping back on Ilim, you've obviously now synchronized the results to be in line with the rest of International Paper. You're going to have Paul Herbert also presenting at the Analyst Day coming up in May. It seems like, perhaps, you're trying to highlight Ilim a bit more to investors. Maybe you agree with the premise of that, maybe you don't. If you do, what are the implications of the moving up of the timing of the results and again, trying to maybe increase our appreciation for Ilim within International Paper? Thanks, and good luck in the quarter.

George, we think investors don't fully appreciate the inherent value of the Ilim investment and its impact on International Paper, and we understand why. We haven't -- it's equity accounted. It's not a consolidated joint venture, given the structure that we have, which is a 50/50 structure. We are at the back end now with $1 billion of capital spending that's done on. Ilim's balance sheet. IP didn't fund it. We think this is a great story. We've invested $650 million, taken out close to $250 million in dividends over the last five years.

We're coming up of the five-year anniversary of the Ilim joint venture, and poised to add another paper machine and significantly expand our market pulp production. When you think about International Paper right now and over the next five to ten years, we think Russia's going to be an important part of our future. It's an emerging market, so it's different than the rest of the world, but we know how to operate there. We operate the way we need to. I think giving investors more clarity on that from the people running it will be a good thing.

Could you see it being consolidated, John, in the next five years?

We're happy with the joint venture structure. With the joint venture structure we have, with 50/50 ownership of that joint venture, it will not be consolidated, and no reason to believe that will change. As you know, our partners have a foot agreement that they chose not to exercise, and we're glad we have the partners. We're well aligned strategically, the businesses is commercially successful, and we're running it well.

Okay, thank you very much. Good luck in the quarter.

We're adding value, and IP's adding value, and our partners are adding value to the JV.

It shows from the results. Thank you, John.

Mark Wilde, Deutsche Bank.

Good morning. John, just curious, there have been some reports domestically and offshore about you guys looking at acquisitions. Without getting specific, I wonder if you could just tell us how you're thinking about acquisitions versus debt reduction over the next 12 months?

First of all, I'll let Tom Kadien comment on India. I think that where some of that stuff was coming from.

Yes, there's not a lot of validity to what's been coming out of the papers in India. We're evaluating the business that we just closed on about four or four and a half months ago. We're pleased with how it's going so far, but we're not ready to go off and do anything else in India, other than improve what we've already got.

I think that's people trying to create expectations for evaluation for themselves. Back to the overall cash allocation strategy, Mark, it continues to be one, a balance. We'll talk a lot more about that on Investor Day. We've took on some additional debt with Temple, we've financed that in a way that we're going to -- we can pay it back quite quickly. Most of it is term debt, and obviously with the sale of the three industrial packaging mills that we need to sell, part of the consent decree to get the approval to close, plus the sale of building products, plus the strong free cash flow we're generating in the Company.

We've got enough cash to do what we want to do on the balance sheet side and to consider other things, which will be a balanced use of the cash. Acquisitions -- we're not on an acquisition hunt. We're on a make International Paper as it is, the best Company it can be, and generate some value for share owners. Some of that will come by returning cash to share owners.

Okay. Turning to a broader view of the Company, you've really done a tremendous amount over the last several years to turn IP into much more of a packaging company. If you look across the packaging market, it seems like, whether it's cans or plastic bottles or folding cartons, or flexible packaging, a lot of those businesses have all moved to more of a cost pass-through model. The model for container board, which is maybe a $12 billion business for you guys, is still largely based on one journalist's estimate of market prices every month. I'd just like to get your thoughts on whether you can change that model in your biggest business, whether you could see that changing over the next three to five years.

First thing I'd say, we're still International Paper. We're not International Packaging, and the Company isn't going to change. With respect to pricing, I don't think it's probably a good place for us to be commenting on this call or in this kind of forum on how prices are determined in the marketplace. Really, at the end of the day, it's all around supply and demand.

Over time, the shape of the cost structure does have an impact on pricing. I think when we think we're advantaged on that, because we see OCC prices buy us up over time, 65% of our capacity in North America is virgin-based, and we're going to benefit from that. In a world market that's OCC short, and with China being so fiber short, pulp for paper and softwood for packaging, we like where we're at. It may not be that our month-to-month pricing is triggered off costs, but over time it certainly is. The cost curve is changing, and I think we're advantaged by that.

Okay. The last question I had is just going back down to Brazil. When you first started the corporate transformation, we were -- you were highlighting EBITDA margins down in Brazil of somewhere between 35% and 40%. We're significantly below that now, I think largely because of currency issues. What is a reasonable bogey for that business, John?

What are you thinking about the business?

Well, we'll share more about this when we have Investor Day, but I think mid-30%s is still a reasonable target, and that's what we're going to be focused on over the next couple of years. Currency has had an impact. Export exposure, especially out of the region, has had a big impact. What happens over the next couple of years is volume comes back into region at higher margins, and we'll see where they currency goes. Little we can do about that, but I think mid-30%s is a reasonable target for that business.

Okay, and Tim on that --

Our margins have come down, but really what we're doing is we built a business there that is really, I think, well-positioned to be the leader in the Latin American paper market, as the Latin American paper market, which is growing at 4% to 5% a year, continues to grow. The Brazil that we bought with Champion was basically a Brazilian business, and what we're doing is we're using Brazil as the platform to serve Latin America. It's a low-cost place to serve Latin America, and our EBITDA in dollars has grown quite a bit. Our margins have come down, but as Tim said, selling more in the region is going to improve our margins, and this boiler project we've got going, just that by itself is, I think, a $40-million impact on our bottom line.

It's a huge impact. More details when we get to May, but yes, cost structure and geographic mix improvement are big levers in terms of getting to a higher, more sustainable margin in the business.

All right. Tim, just any thoughts. I think you have to make a decision on that option around the second machine down there at Trace Lagos over the next 12 months. Any thoughts about that?

Well, we liked what we got with the first machine, and we're currently going through the evaluation process on economics and financials, but the market growth dynamic is very good in the region, as John just said, in the 4% to 5% range. We haven't made a firm decision, but assuming that it will look similar to the first machine we built, it's something that we're very excited about.

Okay, very good. Thanks guys, and good luck.

Mark Weintraub, Buckingham Research Group

It's going to be a pedestrian one to start. One of your big competitors had talked about the first part of April being pretty strong in the box business. Can you share what you've seen?

Sure Mark, this is Mark Sutton. April is, I think John mentioned it earlier, is starting off pretty decent. It's above March, but it's very similar to last April. I think last April probably is a tougher comp than we've had recently, but we've improved through the quarter. We exited the quarter mimicking the market, but we would say April so far is up over March, and very similar to last April.

Okay. On a different line of inquiry, your US pulp business is not a big business for you, but it kind of stood out there, because you were actually EBITDA negative in the business. I realize it cyclically -- it's not as strong a position as it might be, but prices don't look like they've been that low. It's kind strange, where you do so well in so many of your businesses competitively to have that as such an outlier. Any thoughts on how that can change, and is there a wide dispersion of profitability from facility to facility, or is it pretty similar across the board?

No, we do have disparity across the board. As we grow the fluff mix, we're going to see higher, more consistent types of margins across the business. One of the big drivers in the quarter was just Franklin start-up costs, which was roughly $9 million in the quarter that we did not fully anticipate. One of the things I would say is that mills don't age particularly well when they're sitting idle, even though you do things that try to preserve the asset. When we got in, we found pumps, motors, valves, things that just needed attention, and the right thing to do is deal with it now so that we have a really good start-up.

When you look at those EBITDA margins, I think you're looking at the appendix on page 35, those are fully loaded with all the business and corporate overhead, as well. Don't think of that as negative cash. We try to allocate as much of our corporate costs or overhead costs to be business as we can.

Okay, appreciate it E

Still not a number we like.

Understood. Looking forward to May 24.

There are no further questions at this time. I will now turn the floor back to Mr. Landau for closing remarks.

Thank you for joining us for our first-quarter conference call. We'll officially close the call now. Any follow-up questions can be directed to myself or media, Tom Ryan, phone number's in the appendix. Thank you, good evening.

Thank you for joining today's conference call. You may now disconnect.