International Paper Co (IP) 2012 Q2 法說會逐字稿

Good morning, my name is Christie, and I will be your conference operator today. At this time I would like to welcome everyone to the International Paper second quarter 2012 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. Landau, you may begin your conference.

Thank you, Christie and 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 Carol Roberts, Senior Vice President and Chief Financial Officer. On page 2, 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. The website also contains copies of the second quarter 2012 earnings press release and today's presentation slides. Lastly, given our expanded disclosure around our Ilim JV, slide 4 provides some context around the joint venture's financial information and statistical measures. So, with that, I will now turn the call over to John Faraci.

Thanks, Glenn and good morning, everybody, and thanks for calling in. Let me just start off by saying the second quarter was a solid result for International Paper. Temple is, the integration is going very, very well. The acquisition was meaningfully accretive in the second quarter, that's only 3.5 months, 4.5 months into the acquisition. The world has gone sideways in terms of the environment we are operating in. I think everybody understands that, but the good thing is International Paper isn't done. We've got a lot of headroom, a lot of leverage we are pulling. We are running our business and executing well, but we're laying the platform and the groundwork, and we will talk about that during the call for things that are going to meaningfully improve International Paper as we move out of 2012 and into 2013.

Just looking at our results for the quarter, we increased our EBITDA in the second quarter to close to $880 million. We continued to generate strong free cash flow from operations. The biggest single lever during the quarter was the impact of the Temple integration. And as Carol will outline shortly, we're well ahead of plan in succeeding our targets on most all metrics. In the five months since closing, we can say the acquisition is meaningfully accretive. We've got all of our peak outages behind us. Second quarter was a peak quarter. We executed just about flawlessly during the quarter on those outages, operated our assets well, saw some modest price recovery that was in line with our expectations. Didn't see much change in the demand environment you all netted out. The Franklin fluff pulp mill came up as we expected it would late in the second quarter. And we continue to make a lot of progress on a number of strategically important projects which will meaningfully impact earnings as we move out of 2012 and into 2013, and we'll cover those later as well.

So, given a largely balanced input cost environment, no real changes there other than seasonal outages. The only other headwind we had during the quarter was a very large unfavorable non-cash foreign exchange swing associated with the Ilim joint venture, and that's really what happens when the ruble weakens. It impacts our joint venture earnings, but as Carol will show you, an operating basis, Ilim results were about the same as they were in the first quarter and we are off the lag now.

With that, let me turn to slide 6, which is financial snapshot, revenues were up 6% in the quarter, mainly due to the Temple acquisition. We saw a slight bit of EBITDA compression year-over-year. More than half that was explained by the higher outages in the second quarter this year versus the second quarter last year, the one-time startup cost that we incurred in Franklin during the quarter which were meaningful and lower pulp prices, which were largely offset by the Temple accretion. But as I said earlier, cash from operations before special items continued to grow, both in the quarter over quarter basis and year-over-year basis, and that's what's really important. Carol, let me turn it over to you to talk about the businesses.

Thanks, John and good morning, everyone. Let me move you to slide 7 and taking a look at the second quarter financial bridge from the first quarter, we earned $0.46 per share from continuing operations before special items. While volume in our consolidated businesses was flat, we did see modest price improvement of about $0.05 per share across our global paper and packaging business. This was largely driven by the partial pass-through of our announced North American printing papers increases as well as successful paper increases that we implemented in Brazil and Russia. And on a positive, we also saw the pass-through of our announced export container board price increase, which was very much in line with our expectation.

To take a look at the operations and cost line, we did have higher startup cost to Franklin, and I will come back to that on a later slide, but they were more than offset by what I would characterize is very good global mill operations in some lower corporate expenses. A key point that John mentioned and is going to be a theme of today is relative to Temple-Inland. The full quarter earnings were really meaningfully accretive as we added $50 million in synergy, or $0.08 per share in the quarter. The two headwinds that we had that stand out pretty clearly was the incremental outage related expenses, and this was our peak quarter for that as well as our share of the Ilim JV earnings which were unfavorably impacted by currency exchange. And I have a very good chart on Ilim that will clearly lay that out.

If I take a look at the global input costs on slide 8, costs were largely balanced quarter over quarter, and we saw clearly the benefit of lower natural gas prices, which were offset by higher recovered fiber cost. As the quarter came to the close, everybody sees these two things switching. So, what we've got now is we've got some upward pressure on natural gas, fiber is coming down and as we look forward, we see those two basically canceling each other out into the third quarter.

Let me move now to slide 9 and talk about industrial packaging. Industrial packaging posted a very strong second quarter in 2012 generating $367 million in earnings, and that compares extremely favorably to the $278 million that we posted in the first quarter of '12 and also the $269 million that we posted in the second quarter of '11. The quarter's earnings were favorably impacted by the full quarter of Temple-Inland earnings and synergies, solid operational and seasonally improved demand. We saw our box demand up about 1% versus the first quarter.

The other thing that we saw in the second quarter which we will see for us ongoing in the second quarter is a seasonally strong mix for us, given that we are a fairly significant player in the fruit -- fresh fruit and vegetable markets. In addition to the US seasonal demand, global container board demand for us remained strong throughout the quarter and our open market export shipments are up nearly 15% versus the first quarter. The business met this total demand by running our system at about 94% capacity, and we also managed inventory down through the quarter by about 40,000 tons. An finally, domestic container board prices have been stable, as I mentioned earlier. The business did relies the pass-through of our previously announced export container board price increases in the quarter.

As always, a great metric to look at in the industry is our EBITDA margins, and so to put our industrial packaging results into perspective, slide 10 shows that our North American EBITDA margins improved versus the best of the competitive set again this quarter. And this I think is the ultimate measure that demonstrates the progress that we are continuing to make running our operations, both operationally and commercially, as well as, no doubt, the tangible impact of bringing Temple-Inland synergies to the bottom Iine. And I just want to make the point, you have to -- if the history was here, we would know that the Temple-Inland margins that we inherited were well below International Paper margins. So, I think this is the clear evidence that the synergies have made their way to the bottom line.

Slide 11, as we shared in the first quarter, depicts Temple-Inland's post-close EBIT, and this is, of course, after step up depreciation before special items and one-time cost. What's really exciting about this chart is with the $50 million of incremental synergies achieved quarter over quarter, we clearly are accretive in the transaction, and this is only 4.5 months into the integration. On another note going forward, while we will certainly continue to keep everybody posted on synergy progress, we will no longer be breaking out the EBIT of the former Temple-Inland facilities. And this is quite honestly due to the fact that we have integrated so quickly that the systems have become blended. We are moving board around, we are moving customers around, we are moving grades around and as we view it, we have one business today.

On slide 12 you can see that while significant progress has been made on all four key synergy buckets, really over 80% of the total synergies to date are reductions in overhead and box business improvements primarily associated with efficiencies, cost and system streamlining. So, just to reinforce where we are, our annualized synergy run rate is now $240 million as measured against our upwardly revised target that we told you about of $400 million, and we said that that $400 million would be achieved by the end of 2013. So, very positively, we are more than halfway there and the very early months of the integration, but we've got more room to go. And would call this a truly impressive start for the newly combined team led by Mark Sutton.

Let me move off of industrial packaging and move to our consumer packaging segment where operating profits were $63 million in the second quarter, and that compares to $96 million in the first quarter of '12. You can see the big item is the peak maintenance outage expenses, which really were a large factor in the quarter. Somewhat compounded by, as I would categorize, continued soft consumer demand, and this combination resulted in a bit higher cost. On a very positive part of our consumer packaging business is the food service business which had a strong quarter, driven by seasonality, and what's probably the best differentiator is the continued growth in the new product line, primarily our trademark Hold & Go insulated paper cup that is used for hot beverages. Even in spite of some of those headwinds, relative to our competition, the North American business continued to outperform of the best of the competitive sets in the quarter.

Moving on to slide 15, let me talk now about the printed papers segment where operating earnings were $106 million in the second quarter of '12 compared to $145 million and the prior quarter. Printing papers like consumer packaging was also disproportionately impacted by heavy maintenance outages in the quarter. And it is worth noting that in this chart there was actually higher startup cost at Franklin, actually sequentially, $10 million more from first to second quarter. And as you can see, these costs were offset by what I would categorize as a very solid operational quarter in the rest of the business.

I think it would be worthwhile to take a look, stepping back at the printed paper segment and taking a look at what's impacting it from a year-over-year basis. So, this chart is first half '11 versus first half of '12. And as you can see, the biggest driver of the year-over-year changes, the weaker pricing environment for pulp. So, pulp is $105 million negative swing year-over-year, of which about $60 million of that is pricing. And the balance of it is the cost for the startup and the ramp-up of Franklin. So, I would talk by the printing papers like this, outside of the pulp and the outages, I would categorize North American Papers as performing in line with last year and -- as well as Europe and Brazil. So, really a very solid performance underneath the pulp statistics and the outages.

Moving to slide 17, as John stated earlier, we are very pleased to announce that on June 29, the fluff pulp begin at Franklin. What's very positive there is that we once again are a meaningful employer in the region, and we've had a very positive ramp up that I'd like to talk about on Slide 18. This depicts or expectations given some very early indications of the productivity that we are seeing, the excellent initial product quality, the team is targeting an accelerated fluff pulp ramp up in the second half of '12, and this is one of the a good earnings runways that we had in the business.

Moving onto distribution, xpedx, we did see year-over-year margin improvement driven by a more profitable segment and customer mix as well as cost savings, and those cost savings are associated with both our procurement efforts as well as the asset utilization transformation initiatives which have been underway. The good news is these are more than offset the challenging demand environment for commercial printing. With that said, it's clear the job's not done and our team and xpedx expects to achieve further cost and margin improvement over the next 18 months, in line with the plan outlined at Investor Day.

In keeping with our commitment to provide a very transparent view on Ilim, here are the Ilim JV financials as we approach the completion of the capital build out. This shows the JV's consolidated results on an IFRS basis. We have the operating results, the operational EBITDA, before FX as well as the FX impact that takes it all the way down to IP after-tax earnings. And clearly, the results here are mixed. We have very solid shipments year-over-year more than offset by lower softwood pulp pricing in China. And although pulp prices did recover briefly in the second quarter, they receded again during the quarter. I think pulp prices seem to be finding their bottom now, but it will take some months for steady growth in China to pull down the demand until pricing starts to recover.

So slide 20, let me summarize before I turn it back to John, I would say that we clearly had a solid second quarter, in a large part due to our excellent progress integrating Temple Inland and despite being a peak maintenance outage quarter. John is going to talk about it, but as our strategic projects come online and add to our earnings engine, we continue to feel positive about our ability to expand our margins globally and to grow our business is in the platforms that we've invested in.

And other note that's not on the chart that I think is worth mentioning, we did have a positive impact from the highway bill as we talked about at Investor Day, and we had pointed out about a $500 million required contribution to the pension plan for '13. With the highway bill, this looks like it will be less than $100 million, allowing us to take those funds and work on reducing balance sheet debt versus putting it into the pension plan. So, now what I'd like to do is turn it back over to John to talk a little bit about the strategic earning drivers, as well as our outlook for the third quarter.

Thanks, Carol. Let me just go through some of these strategic projects, because I think they are, as I said, are setting the stage for more levers for International Paper to pull to improve our business as we move out of 2012 into '13. And I will talk to what we expect to be happening during the third quarter. First, Franklin, we are up and running, as Carol said. In xpedx, which is not a big capital project, it is more of a strategic repositioning, we are making -- starting to ramp up on both the procurement side and the realignment of warehouse side. The sales side is a struggle because of what's happening in commercial print, but Mary Lassinger will be on the call at the end of -- when we do the third quarter to give you an update on that, but we are starting to see and get some traction there. We've got a big boiler project going on down at Mogi Guacu, which moves us close to energy self sufficiency at that the facility in Brazil. And as we move into the third quarter, we are on schedule and -- are ahead of schedule and on budget. We may be able to bring that up before the end of the year.

At the Sun JV where we've -- building our fourth coated board machine, the project is well underway. There's a picture on the next page that shows what's happening in there. As you can see, we've just about got the machine built. We will be starting that up on schedule during the third quarter.

At Ilim, where we've got two big capital projects going on, one a new paper machine at Koryazhma. In the third quarter we'll be running the converting equipment. In the fourth quarter we expect to be starting up the paper machine. At Bratsk, we are building a new fiber line and basically upgrading that mill in a lot of areas. The wood yard is complete, and we will be starting up the recovery boiler in the third quarter and get ready to bring on the pulp dryer in the fiber line toward the end of the year. In India, we've got the first major outage they've ever had at the facility under IP ownership behind us. 34 days long, and we are already seeing a 10% improvement in pulp production per day. And the good news about India is we can sell all we can make. That's a good place to be in that business. I think the -- on the strategic project front, execution is going well, and these initiatives are started -- we can see the light at the end of the tunnel and they're starting to get to the completion point.

Let me move now to what is the third quarter outlook changes from the second quarter. It is mostly yellow and mostly stable. The big changes there, we will have less outages during the quarter by about $130 million. We've got the divesture impact of the three mills that we sold, that's roughly $30 million, Carol, in a quarter. There is some green here. We don't expect currency impact again -- we don't expect the Russian ruble to continue to weaken. They said a lot of maintenance outage stuff is green, and Franklin should start to contribute cash now that we are running and start to ramp up the fluff pulp line. And basically, everything else is kind of more of the same going sideways.

I think I will just stop right there and not go through all the yellow boxes, but again, just summarize. International Paper is going to continue to outperform. Looking at our margins, as Carol pointed out, in the key businesses in North America, I can see -- I think you can see the margins are, number one, they are strong, and number two, we are doing better than our competitors. The synergies from Temple are coming more and faster, and they are not CapEx driven. They are really execution driven.

We feel good about and positive about the container board and box price increase that we announced earlier and the week. That's going to start to show up in the fourth quarter. And I think I will end just where I started, I think IP is very well-positioned, and the message here is we aren't done. We've got lots of levers to pull as we approach our potential, even in a global demand environment that's a lot more sluggish than we'd like it to be. As we look at the world, we don't see a repeat of 2008 and '09, but we see pretty sluggish growth, but -- as far as we can see, which is very far. But we are prepared to outperform in that kind of environment. So, I think we will stop right there and open it up for your questions.

Thank you. (Operator Instructions). First question comes from Phil Gresh of JPMorgan.

Good morning.

Phil, how are you?

Good. Just on Temple-Inland synergies, obviously off to great start here. The $400 million that you've talked about, how conservative would you say that is at this state just given what you've been able to do so far? I know you talked about the $200 million in optimization opportunities later on, but is there upside to the $400 million as well, or should we'd be shifting to the optimization from here?

I will let Mark Sutton talk about how he feels about that because he's sitting right across from me and is running the business. But we revised our target up, we had Investor Day in May. And we feel pretty good about -- we full very good about where we are at, and we will take a look as we go through the quarters where we are at and if we have more good news to tell you about, we will.

Yes, thanks John. Phil, as you remember what we said at Investor Day when we broke out the $400 million in synergies, some of those synergies were -- we had line of sight to and we thought we could do in 24 months, and we happen to be to be doing it a little bit quicker than we thought. But there were some other things we talked about that have either mill outages tied to them on the manufacturing side or could be in the commercial area where you just take -- it takes more time. And so we talk about that being in the post-synergy but merger benefit and optimization time period. I think that's where we still feel it will be. Carol mentioned 80% of the synergies are in, so far in our overhead reduction and fixed cost and operating improvements in the box business and so of course, that overhead reduction is not going to continue limitlessly. We've done a lot of that a lot quicker than we thought because we were able to execute, for example, pulling the supply chain teams together but faster than we thought we could.

Okay. Helpful. Thank you. And then just again on container board, maybe you could talk about the trends you're seeing here in July both from a demand and from a supply standpoint for your own system. Would your expectation be in July that inventories will be up or down? Just kind of how are you progressing here. And also, are you seeing any demand pull forward as result of the announced price increases?

So, with respect to what we've seen so far in July, it is about what we expected for our business. Carol mentioned earlier that we have a pretty big position in fresh food and produce and of course, that strong season is in the second quarter, so we see some seasonal changes in our mix and demand. We expected that and we are seeing that. As far as how we are looking at inventories, most of our outages are behind us so we don't see any reason to build inventories, and we are going to continue to make the board we need for the orders we have in the box system. And what we see is about what we expected as we start the third quarter.

Do you want to comment about expert demand?

That's a good point, John. Export demand I would say has been a bright spot. We had very strong second quarter. We see export demand, for craft liner I'm speaking about, actually continuing to improve, pretty much in all the regions we serve, Latin America, Europe and the Mediterranean Region in Asia. And pricing is also improving in those regions, so we feel good about the export demands.

Okay, and it's my last question for John. Things have slowed a bit since -- even since the Analyst Day just globally. I'm just wondering if this makes you think at all -- think any differently at all about growth CapEx moving forward, particularly in the emerging markets where some of that slowing is occurring?

Most of our growth CapEx, Phil, is just what I talked about, is currently underway. Probably 80% done at the Sun JV, 70% done at Bratsk and somewhere, probably 70% to 80% done at [Katliss]. We need paper and Russia, the Russia paper market is growing at 5%. We are sold out, both at IP and at Ilim, so we need that capacity. The Sun joint venture is -- we're going to bring on a lot of capacity, we've done that before, we will sell that over time, ramp up maybe a little slower than last time, but we are not worried about that. And the project in Brazil is really a cost reduction project, it is not aimed at more capacity. We don't have a big agenda of a repeat of these growth projects right behind what's currently underway, so don't be thinking about that we are going to continue to be piling on these projects. We've got a number of that are underway now that are either ramping up and going to ramp up. And in the fluff pulp area, we are basically sold out as we can get the fluff pulp qualified with customers, we are sold out because most of that product is going in the export markets where fluff pulp is growing at a faster rate than it is in North America.

Okay, thank you. Just be clear, I was talking more the 2013 to 2015 that you talked about in the Analyst Day, but I will turn it over.

We still see -- remember, there is not a lot of growth CapEx going in there, but there's more CapEx in that 2013 to '15 period because of boiler mat.

Okay, got it, thank you.

Thank you, your next question comes from Gail Glazerman of UBS.

Hi, Gail.

Gail, your line is open.

Gail, are you there?

Hi. Sorry. Headset problem, I guess. To follow-up on the pension comments, are you just not looking at the change from the highway bill as a reduction in debt at all and you're still sticking to the $3 billion 24 month target but it is just going to be weighted more towards fixed actual debt versus pension?

Yes, clearly, the highway bill, it is only changes the funding requirements, it doesn't change the accounting so we recognize that. But rather than putting the money into the pension plan, we will just push it towards the balance sheet debt, and that's a little bit of a shift of what we have talked about.

Okay.

We still have our target of getting to three times, so debt repayment is our goal and we will move it towards the balance sheet debt versus pension.

Okay. And can you talk a little bit about the price trajectory during the second quarter? There were a lot of movements, I guess a couple specific questions. You referenced some improvement on Koryazhma. Can you talk a little more specifically about what you saw? And in terms of the export container board price increase, initially you were expecting that to be a little bit weighted towards the end of the second quarter, and I'm just wondering what that would imply for third quarter pricing?

Gail, I will give you a generic answer because I know in the appendix, we provide the information by the segments. And so I'm not going to paw through the pages, but I think the paper segment I think we saw a $17 improvement in paper prices. We saw a pulp improvement. We don't specifically call out container board in the appendix. We do actually do boxes there, but Mark, I don't know if you want to comment on the container board side?

Sure. Good morning, Gail. On container board on the export market, we saw an exit rate from the second quarter that was about $40 a ton higher than what we exited the first quarter. Okay. That's helpful. And then just one last one. Can you give any update on the status of the marketing of the building products excess business?

We are going to be going out in the market with offering the building products business very shortly. And at this point it is too soon to say the -- what's going to -- what the response is going to be, but we've had a lot of interest. That will be in the market in the third quarter and very shortly.

Okay. Thank you.

Thank you, your next question comes from Chip Dillon of Vertical Research.

Yes, good morning. Question on the wood products business and just one quick one. When you look at the discontinued operations results, it looks like it did quite well, can you give us an idea of how it did in the second quarter?

It did a lot better than we thought was going to do and we put it in discontinued operations.

Yes Chip, this is Carol. John Balboni, who is heading up the overall integration for Temple-Inland from the corporate side and systems side and also looking after building products. It was a positive quarter, and he would categorize as all three segments were a bit better. On demand was better, pricing was better and we ran well. And there's very good team over there that has been running that business well. It is Temple-Inland team, they are on board, they are aligned, engaged, so it is been a positive outcome for us.

And can we infer that EBIT was around $25 million?

Yes, EBITDA, I think a run rate in second quarter is about $80 million in that range, and if we can be doing that and $700,000 housing start environment, that business is very well-positioned for an improving housing environment over the next several years.

Got you. And then looking back at your target adjusted debt ratio, maybe I missed this in the past, but you've added this $ 1.2 billion operating lease adjustment. Is that something you've had for a long time? And I guess more importantly, you are down to 3.7 times and we'd expect with the sale of the wood products business that would push that down lower. But we wouldn't expect you to be below 3 until well into next year would be my guess, depending on how fast EBITDA comes up. Are you going to wait until you get to 3 times before you would consider a dividend increase or a buyback?

Chip, let me answer the first part of -- that operating lease adjustment has always been there. Thing metric we use for this is we generally use the Moody's metric, so this is just a Moody's methodology, so it is always there. And yes, the goal is 3 and if you do the math, it is going to take into next year and it's going to take a little bit of time to do that. The good news is we're generating strong cash, we sold the mills, we've got the building products. Relative to timing, as we said it at Investor Day, we don't view these things as sequential, we view them as in parallel and we will continue to look at our cash and capital allocation strategy and keep everything in front of us at all times. I don't know, John, if you have anything else.

You said it very well.

In other words, you don't have to get to that level but if you're moving close to it, it might give you -- you'll feel the flexibility to do what I mentioned either a dividend increase or a buyback?

It is all around your trajectory and the outlook and where you are going, and given the positive trends we see in some of the businesses as well as the levers we have, we feel good about our cash flow generation potential going forward.

And then quickly on the boiler mat, I know you, and I believe you're the only major company in the industry that actually included it in your projections of CapEx in future years, but we are still a ways from a you absolutely actually have to commit to those funds. Or should I read something differently? Is it something you're going to do no matter what, or do you think as regulations could evolve into next year there could be some change in that guidance?

We pretty much have our arms around what it is going to be. EPA hasn't come out with the final regulations, they probably won't until after the election. But at this point in time, I think based on the conversations we've had with EPA and the Association has had, we can put a pretty close set of parameters around the capital we are going to spend. And the timeframe is really going to be three to four years, depending upon the states, from when the regulations get issued. So, it may get pushed out a couple months, but we know what we're going to need to do and when those regulations come out, we will start to do it.

Okay, and last quick question, in Latin -- in Brazil where you have an option I believe to build another uncoated machine down there, I believe that option is stated to have to be exercised by year-end, but given you're probably the only option for the other party, is there a chance you might be able to push that out? Or are there any further thoughts you can give us about the possibility of that next machine?

I would say this Chip, it is premature to speculate on what we are going to do there. But we've got a very good relationship with Fibria. They are running the pulp mill, we've got the paper mill right next door, and so we are having an ongoing dialogue with them about their future plans and our future plans. And I think we are looking -- whatever we do will be in the best interest of both parties.

Thank you.

Thank you. Your next question comes from Mark Wilde of Deutsche Bank.

Good morning.

Mark, how are you?

Good, Carol, just a couple questions for you to start off. Can you just help us think about the delta at Franklin going from the second quarter to the third quarter? And then can you also just clarify what you mean with that green light signal on Ilim and FX going from the second quarter to the third quarter?

Yes, and I know Glenn can follow up with some more of the specifics but think about Franklin as a cost in the second quarter with no revenue and then think about Franklin now running and producing revenue. It's a nice positive swing, and I think I'm getting the signal that it is okay to talk about it in a $0.03 range from second to third.

There's a cumulative impact there, Mark. If you look the ramp curve, we're not going to get as much fluff pulp in the third quarter because we have got to qualify it with customers. So, you'll start to see Franklin really swing as we move into the fourth quarter and first quarter of next year.

Relative to Ilim, Ilim is just assuming that the ruble stays where it and we just don't have to pay for the marking the debt to market again, so that just goes away. We don't have the hit.

Okay, all right. Got that. Another question, John, for either you or for Mark Sutton. I'm just curious with this container board hike out in the market, why is it that you wouldn't just announce the box at the same time? At the end of the day, you sell more boxes than container board and if they -- you sell mostly boxes. If the container board hike is going in place, aren't the boxes going up anyway?

We announced I think the container board price increase late last week and the box price increase earlier this week. So, there wasn't -- I will let Mark comment on that, but I wouldn't say there was much time between the two, and we wanted to make sure we had a good plan to let customers know what's going on.

I think that's right, John. And Mark, the real concern is properly communicating to our customers in an appropriate way, whether it is on the board side or on the box side. And as John said, we are only talking a few days difference here.

Okay, but I wasn't aware you had at the box side out there on the market. And then finally, John, can we just talk a little bit about acquisitions? We've talked about the potential for the likelihood of further debt reduction as well as buybacks and dividends, but I know that you have been continuing to look at growth opportunities offshore. I'm just curious, with these emerging markets slowing down now whether that prospectively creates a little better environment for you and looking at where you want to grow long-term?

Well, first of all, Mark, we don't (inaudible) on acquisitions or investments or portfolio realignments, and we're in the business for the long-term. Committed to a balanced use of cash, which we talked about at Investor Day, so I don't think -- I don't want investors to think that we're -- on an acquisition, on the acquisition hunt. We are not. We still have got very good metrics about what the criteria for making acquisitions. We have made some and we've stuck to that criteria. And if we don't find anything that meets our criteria, we won't do anything. But we are committed to balanced use of cash which means cash back to shareholders, debt repayment, a strong balance sheet and selectively and carefully, where we think there's an opportunity at a good value, to do something that improves International Paper and improves our businesses, we will do it and we will look at it.

Okay, very good. Thanks, John.

Thank you. Our next question comes from Mark Weintraub of Buckingham Research.

Good morning, Mark.

Good morning, and first of all, congratulations. Really is a lot of visibility on bringing those Temple and Ilim synergies to the bottom line, and that's very impressive. Couple of clarification questions. One, on the box price, can you give us what the specifics are? Start there.

Sure, Mark, we informed our customers of an 8% increase on boxes and a 10% increase on sheets effective September 1.

Okay. And second, and I apologize, and know you were saying something about $80 million on the building parts. Is that what the -- was the EBIT or EBITDA run rate, and what is the EBITDA run rate of building products in the second quarter?

That's EBITDA run rate, Mark.

Okay. That was EBITDA. And then lastly, you had mentioned that your $40 higher on the container board exports exiting 2Q versus 1Q, can you tell us what the difference was exiting the quarter versus the average for the second quarter?

I think for the quarter, the second quarter, the average price of second quarter to first quarter was up about $15.

Okay, so you're -- I'm sorry. So, how much higher exiting the second quarter where you than the average for the second quarter, do you know?

Let me let Glenn follow-up with that. What I have in the top of my head is the exit to exit price, what I don't remember is what the average was in the first quarter. We can get you that.

Okay. Actually, if I could just --

Mark, this is Carol. There no doubt that the export price recovery is a very positive. The only headwind we have there is when you are looking at price we have to also consider the exchange rate and how that exchange rate might move through the quarter. And of course, that does influence the pricing on a dollar basis a little bit.

Understood. And then actually lastly, John, you had mentioned in your remarks that you thought OCC and gas would neutralize each other, yet on the slide it was green when you have to lower fiber versus higher energy. Is that because of wood being down, or can you clarify that?

I think what I was referring to is expectations for the third quarter, the slide was showing the, I think the second quarter,

Okay. Thank you.

Thank you. Your next question comes from George Staphos of Bank of America Merrill Lynch.

Thanks, hi, everyone, good morning. I wanted go back to Temple-Inland a little bit in terms of the progress you have seen, and congratulations with the efforts thus far. When you think about what's gone better than expected, you mentioned getting a supply chain teams together more quickly which in turn enabled maybe a bit more quicker reduction and overhead. Are there any other things that have gone a bit better than expected relative to what you were talking and seeing at the Analyst Day?

George, I think the number one thing I would highlight, and I mentioned it at Analyst Day, but we just know so much more about it now, is the talent level that we have with the new Temple team members and their ability to get aligned with what is the different business model than they were used to. And that has led us to, for example, operational improvements that are much faster rate than we thought. I can think of waste improvement in our box system, for example. Freight optimization, and then the streamlining of the operations, whether it was plant rationalizations and moving the business. Because of course, when we rationalize a plant, the goal is to keep 95% of the revenue in the customers, and that's a tough -- a tall order to do and do it quickly. And then also changing the scheduling concept of some of the larger plants so that we optimize what customers those plants serve. That takes a lot of people alignment, and I think that people alignment has gone better and faster than we probably anticipated.

George, I was at a Temple -- a state where there were Temple and IP box plants, now they're all IP box plants, the first week and the plant managers were already talking three days into it about how they were going to move business around after they informed customers, take logistics cost out. And remember, this is something I don't think people appreciate, our logistics costs are higher than our larger costs in the box business. We have huge opportunities on logistics that weren't available to us because we have a new system, and we've got after those very, very quickly. And the waste reduction that Mark Sutton referred to has just been really remarkable. Just getting those metrics on in front of people, and they've jumped on that really quickly.

Mark, one more -- George, one more thing, Mark is being a little modest too. The leadership that's been provided has been great. But the depths of the bench at International Paper, we didn't get a lot of the senior talent from Temple-Inland, but the people down in the facility, they're very aligned. But we were able to come in with the team that we had and are running it and absorbed it very quickly.

On the waste issue, was it a function that people just didn't have the data in front of them, or it was not necessarily the focus of the prior organization? I know it is maybe not the fairest thing to talk about on a conference call, but nonetheless want to pose the question.

It is a fair question because I think it was in two areas. One, it wasn't a tremendously high focus, but also the way that the business was run before had higher structural waste. So, part of it is improving the way the business is run. And the principal there is what we talked about in our strategy, and that is we believe a box business can be profitable and that each plant should have a P&L focus. And then you have to put, as John said, the metrics in front of people to see all the sources of waste in a box plant, and they are many, and then put systems in place, which we already have and are easy to roll out, and educate people. And then make sense, when you look at the data and people get on board pretty quickly. So, that's really the two issues. Focus and structurally running the business a bit differently.

Appreciate the comments. I have one last one on Temple and then one for Tom Kadien, if he's there. It sounds like you're pleased with your share retention, so it sounds like you are over your 95% goal. I wanted confirmation on that, and do you think perhaps you are, because of the capability as you were in the first quarter, perhaps gaining share from some of the other folks within the market? And then on the food service side, you're not the only company that's been talking about across all of packaging better food service trends. Do think it is purely related to the new product offering, or are you seeing some sort of secular trend, either towards away from home, replacement of at home food preparation or is it just the fact we had a hot first six months and people are drinking more soft drinks and that sort of thing? Thanks, good luck in the quarter.

George, I will take the first one, and Tom Kadien is here and I will hand the food service question off to him. On share, we are pretty much tracking very close to the market, so I wouldn't say we are gaining share. We are working very hard to keep the customers that we have and obviously, the box business, there's customers moving and business moving on a continuous basis. So, my comments about keeping 95% we are specifically about rationalizing plants and consolidating business and the changing schedules of plants. But we are largely tracking the market and at the macro level, not quarter to quarter, but over a longer period of time, that's sort of our strategy, to grow with the market. And the question is, what customers and segments do we pick that might give us an advantage in a market, and that's the approach we take. And with that, I guess I will turn it over to Tom.

Yes, George, our food service growth is really a result of innovation and the new products that we're bringing to market and being aligned with the right customers. I think our volume was up 4% in the quarter. That's significantly better than I will say the overall market is doing. And I think our customers are fighting food inflation and as it rolls through the menu, and they are putting a lot of emphasis on the beverages as a place to make money and to innovate, and that fits very well with our strategy around the new products.

Thanks, congratulations, have a good quarter.

Thank you. Your next question comes from Al Kabili of Credit Suisse.

Hi, thanks and most of my questions have been asked but I guess maybe one for Tim on the uncoated free sheets volumes. North America, you continue to outperform the industry, and I was just wondering how sustainable do you think that is and what's driving that?

Hey, Al. Well, I think what we are doing is sustainable and the way we look at it, we have North American customer base that we service and we also have export markets that we service. So, our feeling is that through the first quarter and second quarter we see the market as being stable and our mix in the market being stable over the next couple of quarters.

Okay. All right. And was exports -- can you help us with what exports, how much that helped the volume number there?

Well, they were down in the quarter because we had a heavy outage quarter, and so we didn't ship as much in export in the second quarter as we did in the first. But we are doing a couple of things. We are anticipating the capacity that was asked about in Brazil earlier and the call, and we are working between our Brazilian business and our North American business to look at markets and base load volumes. We are also backfilling some of the product that Brazil has been shipping into Europe as Brazil pulls back and grows in region.

Okay. Thanks, I appreciate that. And if I could just switch the other, just quick question on the container board, I'm going to switch to that. Can you help us with -- give us some parameters on the negative mix impact sequentially? How we should be thinking about it, maybe some more color there? If there's any kind of quantification you could also give us in terms of dollars per ton or something headwind there?

Sure, Al. The mix comment in what shows on the outlook (inaudible) chart is really designed to focus on the change in our agricultural business from the second quarter to the third quarter. We are a lot bigger in that now post the Temple merger, so it is in the neighborhood of $1 a ton on boxes. That's really what that comment is focused on.

Okay alright, I appreciate that. And then final question, while we are on the topic of agricultural, do you -- how do you see the risk of the Midwest drought to your volumes on the ag side? Are you getting any early indications there? Thanks.

I think most of the ag that I'm referring to tends to be on the coast, the fresh produce. And if you look at what's gone on in the Midwest, I think our biggest potential impact is really the knock on effect of cost. Some of our customers are seeing their costs rise for feed, corn, feed for the animals. That means they may have to deal with that and could affect their demand. And then our own input materials like starch and others that are related to primarily corn is where we see a potential impact from the Midwest drought.

Okay, great. Thank you very much.

Thank you. Your next question comes from Mark Connelly of CLSA.

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

Hi, Kurt, how are you?

Good. Can you give us some more color on how the Indian business has performed recently and relative to initial expectations?

You say -- was a question about India?

Yes, India.

(inaudible) he just got back.

Yes, hi, Kurt. I would say India is just like we thought it was going to be. The Q2 was all about, frankly for them a very large outage. It was our first experience doing a very large outage in India and that really impacted April and May. But we saw a very good June out of India and demand. While we're talking about it slowing in terms of uncoated free sheet, as John said, we can sell everything we can make and we are looking at double-digit year over year increases in uncoated free sheets there. So it's -- as I think I said at Investor Day, it's everything we thought it would be. It's got a lot of upside potential and it is hard, so I'd say we are right where we thought we would be in India.

Tom, you like to comment about the pulp mill running coming out of the outage?

Yes, we had a significant pulp mill outage and our hardwood pulp is up over 10% which is a real advantage for us in the marketplace. And now that we've got, frankly, at this point a little bit excess mark -- excuse me, excess hardwood pulp, now we can put the pressure on getting the paper machine productivity up. We think we're going to continue to grow and we've gotten nice integrated mill over there in Rajahmundry that's got a lot of upside.

If we look at it in terms of people, assets and markets, we are pretty pleased with what we see.

Okay, and then has the weak monsoon affected demand there or do you expect it to?

I'm aware of the weak monsoon season. I think kind of like what Mark Sutton just said, it is probably going to impact food prices, that may have a knock on impact, but I don't think it is going to hit our uncoated free sheet business.

Okay. And then going to the Sun JV, can you give us some more color on how that's managed the downturn thus far? And given the downturn, do you think you guys can expect to see any more opportunities to expand your footprint in China?

Well, on the Sun JV, that -- we are a largely non-integrated producer, so we follow pulp pricing. It is been fairly volatile. If you look at the page and the deck, you can see pulp prices have come down on the input side for Sun and pricing has come down accordingly, so it is all about managing margins over there. We are sold out. We are still solidly profitable and looking forward to having more capacity to sell, starting up late in September and putting product out into the market probably in October. So, our Sun JV is running very well. It is all about execution and the kind of market they are in right now, and they run just a great operation over there. And I think it is a volatile market right now, but as long as we are managing our margins, were are going to be fine. I'm not going to speculate on further expansions into China. Our box business over there, we are starting to get traction and we have a lot of capacity in our box business that's not full. We have a lot of growth in China without putting in more expansion or acquisitions.

One of the things that we talked about in the outlook page, that heat map, I didn't talk about it but it is on there, is we are going to incur the startup costs for the Sun paper machine this quarter. We won't have a repeat of the Franklin cost, but we are going to have some startup expenses out of Sun.

Thank you.

Thank you. Your next question comes from Anthony Pettinari of Citi.

Hey, Anthony.

Good morning. To move back to consumer packaging, I was wondering if there's any noticeable trend, either positive or negative on how demand moved through the three months of the quarter and into July? And then on your outlook slide you referenced packaging volume and pricing to be basically stable in the third quarter. I was wondering if you were to split that out into industrial and consumer, would consumer be a little bit weaker or in line or stronger than industrial? Any color you can give would be helpful.

I will handle the consumer side. I would -- we saw some sequential growth second quarter better than first, but it was really -- the slope of the line was better right up until Investor Day and then it just kind of moved sideways. The back half of May and June was really moving sideways. We will see some sequential improvement in the third quarter again, but I wouldn't call it a recovery. I think we are moving sideways and seasonality is going to improve. Pricing I would say is stable at this point in consumer packaging.

Okay. And on the container board side, it seems like the biggest chunk of synergies that have yet to be realized involve the mills and I was wondering, as we look out to the work at the mills, is there's significant downtime or heavy engineering work that might bring some operational risk or some work that's maybe non-routine? Or how should we think about that over the next 1 year, 1.5 years?

Anthony, the mill synergies, as we discussed at Investor Day, some of the work we've identified does require mill outages and based on when we close the deal, we miss the window for some of that. That's why some of those synergies are later in the time period. But we are not looking at anything unique or things that we haven't done before. There's a lot of projects, some capital, some just operational changes that have to do with energy reduction in consumption reduction. Better choices on how we provide fiber to the mills, whether it is virgin fiber or recycled fiber. And in some cases, it's just operational changes that we are able to make while we are running to improve quality and cost. So, there's nothing out there that we've discovered in our GAAP analysis that is unique or things that we haven't done before.

I think the really important point to understand is those mill synergies aren't CapEx driven.

Right.

There things we will do when we have a regularly planned outage, and we've spent an incredible amount of time planning outages at International Paper because we spend over $400 million year on them, and we usually execute flawlessly. That's the standard we expect.

Okay. That's very helpful. Thank you.

Thank you. Your next question is from Steve Chercover of D.A. Davidson.

Good morning, to just a couple quickies on free sheet and container board. First of all, Carol, I think you said that domestic container board prices were stable. Can you talk a little bit about how box prices have eroded over the last year or so?

Well, I think our chart shows that there's about a $7 erosion through the full year, and there's -- also is a little bit of mix in there, so it is kind of hard to look at that, so that's why we would categorize boxes has been relatively stable.

Got it, and you did indicate how they are going to change on September 1. How do you feel about your inventories presently and I guess going forward?

I will let Mark answer those questions relative to the business.

We like our inventory levels right now based on learning how to operate our new system. They're at a good absolute level and under control. And as I mentioned in an earlier answer, as we look at the third quarter and where our orders are materializing, given most of our big outages are behind us, we are prepared to run the capacity that we need to serve those orders and don't see any reason to build any inventory whatsoever.

Perfect. The only red square on I think what was referred to as the color chart or the heat chart, is the mill divestiture impact. What do those three mills contribute in Q2? Was it maybe $20 million or so in EBITDA?

John mentioned, I think, or Carol did, it's closer to $30 million in Q2, so we are just calling that out as those earnings go away for the third quarter.

Thanks for clarifying. And the final question is on uncoated free sheets, I guess for Tim. The June statistics were fairly weak, down 7.1%, although I recognize you guys are outperforming. Is that an indication of escalating demand erosion or were customers giving the Heisman to the price hikes?

I don't want to speculate on price, but I would say about the demand is, and I think if you go back to a number of the months, a least two or three of them so far in the first half of this year, some of the month can be a little bit deceptive. There were things that were going on last year, and what we're -- we look at each month, but we are continuing to pay attention to year-to-date numbers and those numbers look right in line with what we had expected in terms of demand decline. So, saw the June numbers. Yes, it is a big decrease, but when you look at it overall, I think it is pretty much in line. Watch -- see how it plays out over the third quarter.

Very good. Okay, thank you.

Thank you. Our final question is coming from Paul Quinn of RBC Capital.

Yes, thanks, just a question on the sale of the Temple building materials division. Is that -- the structure of that sale, is it going to be -- are you thinking of it as one unit or collection of assets?

Paul, it is one business, it is operating one business. We're going to put out on the market as one business, and there's some bidders that may be -- some parties may be interested more in lumber or gypsum panels, and we will just have to see how that plays out. We've really got options to try to realize the highest value, but our preference is to sell it as one business. But obviously, we're going to be driven by where the value is, and the businesses are set up where they can be if we end up there selling them as a gypsum business, a lumber business and a panel business.

Thanks for that, and what do you expect on the timing of the sale? Is that by the end of the year?

It depends on how it gets sold. We're going to be out -- we are already starting, will be out next week with the information to perspective buyers. And so we will move as quickly as we can, but our objective will be to maximize value.

Great, thanks, guys, good luck.

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

Yes, this just brings our second quarter earnings conference call to a close. We certainly appreciate everybody's participation this morning and of course I, along with our media contact Tom Ryan will be available today. And as always, for follow-up questions at the numbers listed in the appendix. Have a good day.

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