International Paper Co (IP) 2012 Q4 法說會逐字稿

Good morning my name is Phyllis, and I will be your conference operator today. At this time, I would like to welcome everyone to the International Paper fourth quarter and full year 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. Glenn Landau, you may begin your conference.

Thanks, Phyllis. Good morning and thank you for joining International Paper's fourth quarter and full year 2012 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 the call, as always, 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 which you will find on our website. Our reconciliation will be to our US GAAP financial measures as always. Our website also contains our fourth quarter 2012 earnings press release and today's presentation slides.

Lastly, given our expanded disclosure around our Ilim JV, slide 4 provides context around the joint venture's financial information and statistical measures.

With that I will now turn the call over to John Faraci.

Thanks, Glenn. Good morning, everybody. Let me just start off by saying 2012 was another milestone year for International Paper. I think as all of you know, International Paper's cash flow story in 2012 was an all-time record in terms of cash from operations for International Paper, $3 billion.

Some of the drivers, you know the story around Temple. The synergies have been far greater than we anticipated and we realize -- far faster. We have also successfully and fully implemented a price increase in our containerboard and box business. That didn't have a huge impact in 2012, but will have a pretty significant impact in 2013.

Looking at slide 7, 2012 is the third year in a row where we have earned returns in excess of the cost of capital and what I think the last three years have characterized as less than a robust or mid-cycle demand environment. We reduced debt by $2 billion on 2012, increased our dividend by 14% with more runway on the dividend ahead of us. And last but most important, and I'll cover this at the end, but just wanted to say it at the outset, we've made significant progress on our strategic initiatives that create more earnings and cash flow upside for International Paper in 2013 and 2014 even in a more of the same macroeconomic environment.

With that as a summary, Carol, I'll just turn it over to you to cover some of the fourth quarter and full year.

Sure. If I take you to page 6, you can just see the financial snapshot of the Company. And you can see that revenues were very strong year over year, up $2 billion to $28 billion.

We did have some modest earnings compression associated with lower pulp and export pricing. Realizations were down. We feel like the bottom has been reached on that and things are stabilizing, so moving forward should be very good. As John said, you can see that we continued to generate a very high level of sustainable free cash flow.

John referenced 7, you can see it. We had very good return on invested capital and we've had our third year now of return on invested capital above our cost of capital. And importantly, as we move towards 2013, and we see another step change in our performance on this metric, which should be our best returns and the highest in really decades.

If I move you to slide 8, let's take a look at the financial bridge from 2011 to 2012. I would frame our results as solid, and more importantly, the progress that we made integrating Temple-Inland in 2012 was meaningfully earnings accretive in under 12 months. Importantly this has built a strong foundation for steadily improving, as well as less cyclical earnings for the Company going forward.

While the slower global growth environment did take its toll on our pricing in pulp and our consumer grade, and really it impacted our export shipments across the product lines, as I said, I really believe the worst on that is behind us. And we've seen pulp markets stabilize, come off the bottom, and export markets and containerboard, importantly, have recovered nicely in the second half.

It was, all said, an excellent year of execution across our global operations. Mill performance more than offset the ramp-up cost that we experienced with Franklin and also with the new paper machine at the Sun JV. We did have lower average input costs that did help the Company offset some significant non-cash non repeat LIFO and standards revaluation swings from '11 to '12. Simply put, we had a positive $50 million -ish in '11 to a negative $50 million -ish in '12, creating about $100 million swing in earnings.

In summary, repeating John's message, we ended '12 stronger than we began, having made significant progress on many runway earnings driver projects that John's going to talk about at the end, which positions the Company very well for 2013.

Relative to the balance sheet, as you can see on slide 9, we made significant progress reducing our debt a further $400 million in the fourth quarter and that brought our total debt paid down, post the Temple-Inland acquisition, to $1.9 billion.

The discount rate used to calculate our projected benefit obligation ended the year down about 100 basis points, and that did result in a larger pension gap by $1.4 billion. We still remain on track to meet our Moody's debt target of less than 3 times adjusted EBITDA by the end of '13 through continued debt reduction. As I have shared before, the required cash contribution for the pension plan in '13 will be less than $40 million.

Moving to the fourth quarter, as John already shared, we exited the year strong in Industrial Packaging with our hitting the run rate of $360 million per year of synergies from the acquisition in the quarter, while also fully capturing the $50 containerboard increase. And, we did see $29 per ton on average in our box business versus the third quarter.

We did, however, experience higher costs in the quarter. Uncharacteristically for us, we did experience weaker mill operations and we had a fairly disruptive supply chain in our Industrial Packaging business in North America due to very low containerboard inventory. As well as we had some impact in the Northeast to our Box business and xpedx from Hurricane Sandy.

The Sun JV was ramping up in the fourth quarter; that also had a slight adverse impact. So, kind of wrapping up on the cost equation, along with higher inputs, this resulted in lower earnings by probably about $80 million in the quarter. As I would categorize, I just wouldn't call IP at its best in the fourth quarter, but roughly maybe $40 million of that is recoverable in the first quarter. So, it bodes well for the coming year.

Going to slide 11, bridging from the previous quarter, we, as we said, earned $0.69 per share in the fourth quarter and that's versus $0.81 per share in the third quarter. In summary, the increased earnings came from higher prices and a lower tax rate, which was offset by higher operational costs, weaker equity earnings from Ilim, and the planned increase in outage expense, which accounted for $0.11 in the quarter.

Let me take you now to slide 12 and once again look at our financial snapshot. Revenues were strong in the fourth quarter, up sequentially versus the third quarter and greater than 10% higher versus the fourth quarter of last year, obviously primarily driven by Temple-Inland. As we said earlier, we generated strong cash from operations in the quarter, over $760 million, less our capital spending of $380 million, for free cash flow of nearly $390 million in the quarter, which is very strong for a fourth quarter performance.

Moving to 13, in terms of downtime, we did have more scheduled maintenance outages, and we had good seasonal demand out of our Corrugated Box business. This meant lower market related downtime to effectively match our supply with our customers' demand in IPG. As a result of that, the significantly less market related downtime, but importantly, a net impact of approximately 150,000 tons less total downtime versus the third quarter in our containerboard mill system, as the Business worked to rebuild inventories prior to what's coming up -- a very heavy maintenance outage schedule in the first quarter of '13.

Consumer Packaging on the other hand did continue to experience soft domestic demand and weaker export markets in the fourth quarter. We've been looking at that business and this resulted in the decision, announced last week, to permanently shut down one machine at the Augusta mill with an effective capacity of around 140,000 tons of coated paperboard.

This closure will balance our supply with our outlook for demand for coated paperboard, and it will allow the remaining system to operate more efficiently. Our expectation is that we will run the new system full in '13. And finally, for the eighth straight quarter our Papers and Pulp business in North America continued to run full, supported by higher export shipments.

Moving to inputs on slide 14. Costs were up in the quarter by $27 million or $0.04 per share. It was pretty much spread across all the segments with higher cost from wood, energy, with gas coming off a very historical low, and chemicals driving most of the increase. On balance, OCC, while trending up throughout the quarter, averaged roughly flat with the third quarter.

Moving on to the businesses, let's, on 15, take a closer look at Industrial Packaging. The containerboard and box price realization that I mentioned added about $80 million, while lower market related downtime and some seasonally stronger demand in Europe added another $18 million versus the third quarter.

As I stated earlier, we did have weaker mill operations and we had a very stressed supply chain due to tight inventories in our box plant, as well as the interruption from Hurricane Sandy. This drove costs higher in the quarter, and they were partially offset by an insurance settlement that we got in Europe of $16 million related to the May 2012 earthquake in northern Italy.

Additionally, maintenance costs were up $44 million in the third quarter (sic - see slide 15 "fourth quarter") from inputs primarily, as we talked, wood, energy and chemicals. That added another $18 million incremental headwind.

I think 16, once again, really sums it up though. With all that said, and despite the impact of these operational issues, heavy maintenance outages, slide 16 shows that our North American business continues to compare very favorably to the best of the competitive set. Once again this quarter, it further demonstrates our belief in our structural advantage versus competition in this space.

A big reason for that is what you see on slide 17, which is the Synergy Chart. As we've said, the Business will achieve the current target of $400 million on a run rate basis in the first quarter of '13, which is essentially $100 million better and one year ahead of the original plan. No doubt an impressive achievement and importantly not the end, as Mark Sutton and the Team moves from integration to optimization in '13.

Here's the Synergy Chart that you've seen and you can see where they're coming from. You can see that the overhead, the box efficiency and the sourcing buckets are essentially a target. We have some remaining opportunity in the paper machines and the supply-chain optimization and those will be largely achieved in the first quarter. Of course, this sets the stage for further improvement in the Business as we continue to optimize that 13 million ton system next year.

Page 19 is an exciting new opportunity that we've got. It's our newest venture in Industrial Packaging in Brazil, depicted by the pictures on slide 19. This is our Orsa International joint venture and we are now in full integration mode closing earlier this month.

Although it's still very early, we are certainly energized by what we've seen to date. We see incremental opportunities where we can improve the efficiency, expand the production capability, leveraging our global mill experience and particularly our mill experience in Brazil as well as our vast corrugated packaging knowledge. This provides us an opportunity to take advantage and participate in this growing market.

There will be more to come next quarter. We plan to give a more in-depth view of this year's potential both in terms of earnings and EBITDA, but I do want to comment that we will be reporting, to start, with a one-month lag. So for the first quarter results will be essentially two months' worth of results.

Moving to Consumer Packaging, segment operating profits were $39 million in the fourth quarter of '12 compared to $67 million in the third quarter. This was a result of weaker price and mix in the domestic and export markets, continued unplanned market related downtime in North America, and some ramp-up costs associated with the Sun JV. We also had higher outage related maintenance expenses, quarter over quarter, that negatively impact results. As I previously stated, we have announced the closure of the machine in Augusta, which will help this business manage their cost more effectively going forward.

In Printing Papers on slide 21, Printing Papers also experienced some seasonally weaker export margins, as well as higher planned outage related maintenance spending quarter over quarter, resulting in operating profits in the fourth quarter of $147 million versus $201 million in the third quarter of '12.

With that said, I think 22 is an interesting chart. It takes a look at our full year-over-year change for our Global Printing Papers' uncoated freesheet sales volume in each region. Our global volume is up just over 2% across all segments and geographies compared to the same period last year, clearly out-pacing the global markets that we view as essentially flat in this combination of these regions.

While uncoated freesheet demand is down in line with expectations in North America, the emerging market businesses are growing at or above market and we've been able to take advantage of our global market access to increase exports out of North America as opportunities arise. Example is we get the chance to fill void with current customers when, for example, export volume from Brazil is repatriated back to Latin America to meet that growing local customer demand. So this kind of synergistic opportunity to leverage our global footprint really differentiates IP's paper business from our regional competitors, and we believe will continue to afford us advantages in the medium and the long-term.

On the cost savings front, in Brazil, this is a picture of the newly installed biomass boiler that is online and fully operational since the beginning of January. This virtually eliminates our consumption of fossil fuels and meaningfully reduces our purchased electricity. This moves us to a renewable fiber source that we can get both from our own and from adjacent sustainably managed forests. This project alone will result in reduced costs of approximately $6 million to $7 million of savings per quarter.

Moving on to xpedx, on 24. xpedx is the Company's North American distribution business. We reported operating profits in the fourth quarter of $11 million compared to $24 million in the third quarter. Positive, our quarter over quarter we did have modest volume improvement, primarily in packaging which was great. But these were more than offset by lower Commercial print margins and higher operating costs in the quarter.

On 25, let's talk a bit about our Ilim joint venture, where slightly higher pulp and containerboard prices were more than offset by seasonally higher wood and energy costs in the quarter. The IP equity earnings were further impacted positively by an after-tax benefit of $6 million in the current quarter and this resulted in total after-tax equity earnings of $8 million in the fourth quarter compared to $33 million in the third quarter of 2012.

But, what's important about Ilim is looking forward with the completion and commissioning of our projects both at Bratsk and Koryazhma that remains our top priority for the first quarter of '13 with commercial start up planned for the second quarter. These projects just generate a lot of potential and runway for the Company going forward.

Summarizing, on 26, recapping, it illustrates that we did deliver on many fronts solid results in the fourth quarter led by strong industrial packaging success, not only with the Temple-Inland integration but implementing the containerboard and box increase. Offsetting these gains, as we've talked about, we had some uncharacteristically weaker operating performance due to a number of issues, tight supply chain and IPG, and higher planned outage expenses and input costs.

Before I move on to the outlook, let me just talk about capital allocation and balanced use of cash on 27. I think this chart and this discussion will underline our commitment to a balanced use of cash that drives shareholder value. First, we returned more cash to our shareholders in the form of the dividend increase in the fourth quarter of 14%. We do plan to review our dividend annually and continue to adjust in line with our principal around 30% to 40% of mid-cycle free cash flow. We will deliver on our dividend growth commitment as earnings and free cash flow grow.

Next, we did successfully execute $1.4 billion in capital spending. That is $100 million below guidance and that did include about $400 million on strategic projects primarily, Franklin and Sun, and $200 million in high returning cost saving projects; the biomass boiler in Brazil is a great example of that. This investment will definitely drive incremental earnings in '13.

As John and I have both said, we aggressively reduced debt on the balance sheet, post the closing of Temple-Inland by $1.9 billion. We said we would continue to reduce debt into '13.

And lastly, we've reinvested in our businesses, selectively. We invested in our core segment of Corrugated Packaging, not only with the acquisition of Temple-Inland at the beginning of the year, but in fast growing regions with our investment in Turkey and Brazil.

In terms of capital spending going forward, we have revised down our outlook for the '12 to '15 time frame by $400 million to an average of $1.4 billion per year. This is due to factoring in the reduced regulatory spending that we see that will be required from boiler mass in this period.

Let me move now to slide 29 and provide you more detail on our outlook for the first quarter. Looking ahead to the first quarter of '13 we expect seasonally weaker volumes in our European, Russian and Brazilian paper businesses and stable demand across North America.

Moving to pricing, we expect the full benefit of our fourth quarter box price increase to be realized in the quarter. This will be partially offset by some seasonal mix in Brazil essentially related to a mix of more exports.

In operations, as I've said, we should see the impact of improved operations across the mill businesses as supply chain and conditions are definitely improved and one-time issues in the fourth quarter do not repeat. We do expect that we'll have further lower costs at Franklin and the full impact of the biomass boiler in Brazil. These will also provide additional tail winds.

As to inputs, we view this as a headwind. We expect higher OCC, wood and energy costs and this is probably worth an incremental $50 million to $60 million in the coming quarter. And lastly, we do have another heavy maintenance outage quarter. So our quarter-on-quarter expenses will remain fairly high with only a modest decrease of $7 million in the quarter.

With that, let me summarize, on 30, the first quarter outlook. The first quarter is essentially a seasonally slower quarter relative to demand. While we will see the full benefit of the North American box increase as well as the improved performance that I've talked about, this will be offset by higher inputs and some higher taxes. I'm going to talk about taxes for a moment.

As you'll note our tax rate is going to move up from the fourth quarter to the first quarter, from 21% to 25%. Both of these remain well below are normalized level of 31% to 33%. The impact in the first quarter of '13 is due to the American Taxpayer Relief Act of 2012, was actually signed into law this month, therefore the impact of that will be felt in 2013.

At this point let me turn it back over to you, John.

Thanks, Carol.

On slide 31 now here, the map. What I want to do before I get into talking about 2013 and some of the -- revisit the strategic initiatives that I referenced at the beginning, just to give you a sense of how we see the world where International Paper operates, this map shows the six global economies that are important to International Paper in four businesses -- paper, corrugated packaging, coated board and pulp. As you can see when you look at all this, overall we're forecasting 3.5% of global growth, which is consistent with most of what you see forecasters thinking now, with North America being a lot slower than that, and the rest of the world being better, especially places like Russia, India, and China.

So if I may just move on to the 2013 outlook. It's still all about cash, as I said. And I just want to reiterate International Paper is a cash flow story.

We're going to see the full impact of pricing we've gotten. In fact, we're just about there now in January, on our containerboard and box business. That is $400 million plus. These strategic initiatives, which I'll come to an in a minute, are going to add about $350 million to $400 million of improvement in the year. When you take in modest global growth, all that adds up to roughly $1 billion of overall improvement.

There are some headwinds. We've got some cost headwinds of a $200 million. So, we expect another record year in terms of cash generation for International Paper. As Carol said, what we'll be doing is returning some of that cash as it gets produced to share owners and also reducing our debt.

Let me take a minute, and I am on page 33 now, slide 33. Let me take a minute before Q&A just to go over the strategic initiatives. I think this is one of the things that makes International Paper different and gives us the earnings and cash flow runway for not only 2013, but 2014 even in a less than mid cycle economic environment.

What you see here are the initiatives, the timing of when they're going to impact International Paper and the pie chart on the right is meant to reflect the percent of the total impact that we expect to realize in 2013. You can see it's just starting off with Temple. We're going to be there on synergies. The synergy window is basically at the end of this year, we're well beyond our initial synergy target. So, we're going to realize that all in 2013.

There are others like Olmuksa, which is the buyout of our joint venture in Turkey. And the Orsa packaging business we just acquired in January in Brazil. They're going to add to International Paper earnings in 2013. So you see those as full green.

Others like Franklin, the fluff pulp line, we should be about 60% to 70% fluff pulp this year, 100% fluff pulp next year. We'll see the full impact -- we'll see an impact in 2013, which will be positive. We'll see the full impact next year.

APPM and Sun are really more about 2014 than they about 2013. All those projects added up represent, as I said, $350 million to $400 million of EBITDA potential. That's at 40% of the total impact of those projects. So you can see we've got a big chunk coming in this year and more to follow in 2014.

And finally, down below the EBIT line, but in our equity earnings, Ilim is going to become more positive in 2013. Even with the continued weak pulp market, because we're in the commissioning phase. We'll be in the startup phase, commissioning phase both at Koryazhma, where we're adding a new paper machine, we're running the converting equipment. At Bratsk we're adding new fiber line, we're now running the recovery boiler on liquor. And, the full impact of those projects will be realized in 2014 when they're both up and running full.

What all that means for Ilim is another $400 million of improvement at mid cycle. Not all of that will come into equity earnings because we've got increased depreciation. We've got increased interest with the debt we've taken on, but it does mean that in 2014 a big portion of that will be flowing through equity earnings and potentially in dividends. When you add all that up, what we're thinking about is close to $2 billion of free cash flow as we move through 2013, into 2014, which we're pretty excited about.

I am going to stop right there and open it up to questions. I have most of my colleagues here with me in Memphis, so I think we're ready.

(Operator Instructions)

Chip Dillon, Vertical Research Partners.

First question is you mentioned on the improvement, on slide 33, from on the projects and that $350 million to $450 million on a mid cycle basis would be just 40% of the improvement. Could you just clarify that is the amount you would expect and hope to see in 2013 and the all-in improvement from these projects would actually be north of $1 billion plus whatever Ilim gives you? Is that the right way to read that?

Yes.

Okay, that's very helpful. And then the next question is you mentioned, Carol, that the downtime in the fourth quarter in containerboard -- or in particularly not the downtime, the lack of downtime was to build inventories ahead of the seasonal downtime you are about to take. I was just wondering if you could give us a gauge as to what the inventory increase was for your system in the fourth quarter and even if you have a look at January?

I'll let Mark answer that question, Chip.

Good morning chip. Great question on inventory. We had entered the quarter with very lean inventories, as Carol mentioned. We had a couple operating problems that made it difficult for us to build the inventory we needed, so we ended the fourth quarter trying to build inventory to prepare for outages in actually the first two quarters and we didn't quite reach our target. We did build some finally through December, but not enough, so we're working toward getting our inventories in shape in January so we can execute the outages that we have in the first half.

I would just add there, Chip, on a 13 million ton system, when you have supply chain problems the numbers get big pretty quickly. So we want to rectify that so we don't have those supply chain issues internally with customers going forward.

Got you. I mean, could we have seen like 100,000 tons, given the size of your system increase since the low point in September?

We would have loved to have seen that to prepare for, like I said, really the first half of the year, upwards of 60% of our outage, but we didn't have anywhere near that number.

Got you. The last question is when we look at a goal of getting the total debt including pension below 3 times, and you mentioned that you can see getting there at the end of the year. A couple things, one is the year is only a month old. But it is fascinating to see that the probably 25 basis points, I'm guessing or 20 of that 100 basis point hit you took that created that $1.3 billion or $1.4 billion increase in the pension under-funded position, a part of that's reversing and your assets have gone up. If you looked at this in real time you're already seeing that reverse. And do you feel you need to get below that 3-point before you would consider buying back shares?

You know, Chip, I think what's important is using the cash in the most effective and prudent way that we can. We'll continue to evaluate debt pay downs, as well as other uses as you mentioned. Dividend is a priority and share buybacks certainly are something that we would consider.

Chip, what we've said consistently is our objective is not to fund the fully-funded pension plan with the discount rate at 50-year lows. That's not our -- we certainly want to get the balance sheet debt down to less than 3. We are conscious of the pension obligation.

We've got, in our cash flow planning, we've got plenty of cash to put in the pension plan as we need to. As Carol said we don't need to -- it's a modest amount for 2014. So, interest rates, you're right, I think will go a long way into helping us fund the pension plan. And, you know, we're not going to do it all with cash.

Got you. Well, thank you.

Steve Chercover, D.A. Davidson.

It's great to see that your market related downtime in containerboard was down by basically one-sixth of what it was. But why even take downtime if you had the supply chain disruptions? Or you just didn't realize you are that you were that lean?

Steve, this is Mark. That's part of the issue. All of the lack of order, our market downtime was taken very early in the quarter. Usually we expect a little more seasonal decline in the fourth quarter and it wasn't really happening.

So we unwound the planned lack of order downtime early in the quarter, and everything looked good until we had a couple of reliability issues. That resulted in us having some additional costs, mainly in freight and in waste in the box plant, because we were sourcing board from less than optimal mills. But, we really got the lack of order downtime out-of-the-way early in the quarter really in October.

Okay and we know you're taking some maintenance in Q1. Can you discuss your order trends in the first few weeks of January?

For the box business in North America or in the US the order trends look about like what we expected. So for us, we've been tracking probably a little lower than the overall market. In the box market in the US, and that's kind of what we're seeing. But I will remind you that the way we run the business is to try to maximize our potential through all three channels, the North American box business, but also the open market and the export market for containerboard. And we'll constantly move between those three segments to optimize the business.

And why do think you are running a little below the North American trend? Is it just that you're turning away bad business?

I think if you think about what we've been through in the last year, obviously we took on a lot of new business with the form of Temple business. There is a lot of integration activities on the Commercial side. Not all of that business met our objectives in terms of capability or economics.

So, in order to make improvements in the business, we have to make choices. We've been doing that, and probably continue to do that for a period of time, until we have the best mix for International Paper and the best service for our customers. So, it's not anything that we are alarmed by, it's part of the process of optimizing the new company that we've built.

Understood, thank you very much.

Another point, Steve, is we're under weighted in durables relative to maybe to the overall market, and over weighted in non-durables. So, as you get the flow-on impact of housing, which is going to be significant, on the durables side, we're underrepresented there now. We're probably going to grow that durables segment over time, selectively.

Excellent, okay, thank you both.

Anthony Pettinari, Citigroup.

You have a helpful slide showing your returns over the past decade, and maybe two questions there. When you think big picture about the dividend returns from 2011 to 2012, should we think about that as being primarily driven by the heavy lifting around the Temple integration and maybe a slightly larger capital base?

And then a second question, when you think about moving those returns higher in 2013, what are the businesses or geographies within IP that really have the most potential to improve their return on capital in 2013 relative to where they were in 2012?

Anthony, this is Carol. I'll take the first part of that. Yes, the dip you see in '12 was certainly the fact that we made a big investment. But, when you see the rebound that's going to happen in 2013, it's going to show how successful and accretive and synergistic the Temple-Inland acquisition's going to be to the financial performance of the Company.

Some of the big levers, Anthony, in terms of where returns are going to improve, Industrial Packaging in North America, for sure. And with a full-year of merger benefits now, and a full year of the implementation of the pricing, of the containerboard and box price increase, that's big.

In Latin America, the returns in Brazil get better because we're selling more paper in the region where the EBITDA per ton, or the EBIT per ton is significantly higher than it is the rest of the world. And that market is growing, and we've got the boiler project in India. We paid a price to get into India, and we see a lot of improvement.

We can sell all we can make, which is something you can't say about the paper business necessarily in North America, but we've got good growth there. So, India is still small, but those are three of the places. One very large, Industrial Packaging, one smaller where we see a lot of upside for improving return on invested capital.

Okay, that is helpful. And you mentioned North American paper business and you had pretty positive performance globally, but when you look at -- I was wondering if you could talk about how maybe volumes in 4Q trended versus your expectations? And we seem to have a pretty bad industry number in December, if you have any kind of observations on that? I saw that you have like a 3% volume decline assumption for 2013, and maybe if you could just comment on those trends?

Hi, Anthony, it is Tim Nicholls. Actually in the fourth quarter, I think as the quarter started we felt relatively good about our volume levels, and they held up well in October and the first half of November as well. Then you always get the seasonal down tick around Thanksgiving.

But, I think what was notable, first part of December looked very good and then I think probably around the 20th of the month, the weekend before Christmas, everything shutdown and it pretty much shut down for the year. We heard that consistently across all segments of customers, and I think it was probably a combination of what was going on in Washington as well as everybody wanting to run inventory levels down as much as they could, or had sufficient inventories, they felt, to hold them over.

So, I don't read too much into the December number. I think it's overstated. When you look at this year, the 3% is really not our forecast per se, although we agree with it. It's what third parties are seeing. So it is a blended rate between PPPC and RISI.

But I think when you look at volume for total year 2012, a little bit higher than the 3% to 4% that we think on a secular basis, but I think secularly we're right in line where we think we should be. Cyclically we didn't get as much help from the economy as we thought we would.

Okay, I will turn it over.

Mark Wilde, Deutsche Bank.

A question for Mark Sutton just to start. Mark, it looks like you had about 570,000 tons of market downtime for the full year, and I assume in 2013 you're going to get some more operational benefit from integrating the Temple mill. Is there any reason, with that kind of slack in a systematic and a low growth scenario in front of us for the next 12 months, where you wouldn't look at making some permanent moves on the supply side?

It's a good question, because we obviously don't want to take that much lack of order downtime if we don't have to. But you've got to remember what I said earlier about the three channels of export, open market, and domestic box, and the fact that we have these off-take agreements from the mills we divested.

When we look at all of those moving parts, we believe we're going to need the containerboard that our system can currently make going forward. So, while it might be a little slack in the near-term as we move through those divested mill off-takes and as we look at the global growth in containerboard, and as I said earlier, we don't intend to track below the market forever in box, we just have to get in the right segments and optimize the business.

I think we're in pretty good shape. We would have to believe, Mark, in a real structural change in the demand profile for us to be considering permanent capacity adjustments.

That's fair, those off-takes are pretty important. Can you remind us generally how long those off-takes run for?

It is a three-year agreement starting from the summer of 2012, and it goes down in commitment volume each year.

Okay. And then, John, a question for you. Can you just talk with us generally about the potential for further acquisition or growth initiatives over the next year or two? I'm particularly curious in some of the offshore markets, say the packaging business in Russia or the packaging business in India. You've talked about, particularly in India, wanting to grow in packaging.

Well, International Paper is not an M&A story. We're through the transformation plan; that is over. We have rebuilt the Company, it looks different, and it's got a lot of performance potential upside in the existing assets we have. So, I just say that to reinforce that we're not out saying we have to do things to improve International Paper. We've got plenty on our plate that we have put in place over the last several years.

India, we think is going to be an exciting market for International Paper for a long time. That doesn't mean we're going to be doing a whole lot of things in 2013 other than continuing to make improvements at APPM.

We're going to generate a lot of cash. Our priorities are to use that in a balanced way. If there aren't opportunities to reinvest in some of our strategic businesses, we'll return more to share owners. But, International Paper is not M&A driven at this point. We have put in place what we need to make International Paper a much better Company and we are excited about the runway for '13 and '14 with just what we have.

Okay, the last question I had was for Carol. I wondered if you could help us with the ramp-up that we might see from Ilim in the second half of the year? And, if you can give us any color on this next phase of Ilim build out talk Paul Herbert had talked about publicly about 15 months ago.

Let me take that one, Mark. We'll be starting out, starting with Koryazhma. That's where we put the new paper machine in that we moved from Scotland. That will be starting up in March. We are ready running the converting equipment. Behind that we've got a coder going in in the second quarter, so be able to make 50,000 to 100,000 tons of coated paper. We'll be the only producer of coated paper in the Russian market.

Going back to Bratsk, that pulp line will start up probably late in the first quarter. We're going to do that right, because of what's going on with the markets in China. You'll see those facilities ramp-up the pulp lines, you'd be a little shorter than the paper machine, because we've got to get all the grades qualified. We should be at full ramp as we come out of '13 into '14.

The objective at Ilim is going to be to pay down the debt that the joint venture has taken on to fund the projects. Though we're going to have a whole lot more debt capacity, because as I said, we'll add $400 million of EBITDA to an already pretty healthy Ilim at mid cycle.

And there are some possibilities that Paul talked about. The Ilim Board has not made any decisions. They'll be talking about that as we move out of '13 into '14. But, the priority at Ilim is to get those projects started up and start to give Ilim some more head room on its balance sheet so that it's got some options.

Also, we're talking about an opportunity to increase the dividend. All those things are available to us.

Okay it sounds like, John, in summary, we shouldn't expect a lot of benefit in the second half of '13 just from an equity contribution standpoint. That's really more 2014. Is that correct?

That's correct. Because, you've got increased interest and increased depreciation that's going to kind of offset most of the EBIT improvement we expect to see if pricing stays where it is.

Okay, good enough. Thanks and good luck in 2013.

George Staphos, Bank of America Merrill Lynch.

Good morning, everyone, and congratulations on the year. John, I guess I had a question for you and the team. As we look at the incremental runway drivers that you called out in total, worth $350 million to $450 million, what confidence level would you place on the lower and upper bonds? And are there discrete factors you are risk adjusting for that provide the range of outcomes in your guidance? What could you share with us in terms of how those numbers, or how that performance rather, could move over the year?

Starting at the top, we have a lot of confidence in what we see with Industrial Packaging with Temple. As I've said, the price increase is in. We know what we've got to do to get the more synergies. We can't wait to get through the synergies and turn to optimization. A lot of confidence on that and that is a big number.

Franklin, we basically sold all the fluff pulp, what we need to do is qualify it. Our customers are waiting for us to qualify the pulp. We're going to have more tier one and tier two customers than we thought, which is better margins than tier three, so a lot of confidence on that.

xpedx has made a huge amount of progress on the warehouse side and the purchasing side, it's all been offset by what's happening on the revenue side in Print. So xpedx has been treading water. But if they hadn't been working hard on what they've doing, we wouldn't be treading water.

The Muji boiler's up and running. I would say that is in the bank. We've got to work through the excess capacity that exists in China around the coated board business. But as we've seen before when China's market -- since they're all growing, when they grow they can absorb capacity pretty quickly. And I think the Chinese economy has seen its slow point.

Olmuksa and -- at Olmuksa we've been operating for decades, so we know that. Orsa is new, but we like what we see so far. It's been early days.

Ilim is -- we're operating in Russia. It's going to take some time to get those ramped up. Hopefully, they come on faster. But, we know how to do this. We've done it before. I'd say all in we're pretty confident. This all assumes a more of the same economic environment. If the economic environment gets better, that's terrific.

Okay, so really the $100 million is really driven by the macro not any specific issue you have in terms of execution on any of the projects? It sounds like maybe out of all of them, Asia and China relative to Sun JV is where you might potentially have the most swing factor. Would those be the two broad areas?

Yes, I'd say that's probably -- that's a fair statement, George. Trying to forecast what's happening in China is never easy, and we could easily have a $50 million swing.

Okay, appreciate the color on that and for that matter all the details on the slide deck and the conference call. I want to take you back on an earlier question I think Mark had asked, and directed at Mark Sutton in terms of the supply chain and output potential within containerboard.

Now, given as you see the world and given your three channels, you believe that you have a need for all of the 13 million tons that you produce and certainly the results you've been putting up would suggest that that's correct. Do you see the footprint necessarily being unchanged in producing those 13 million tons over time? Or could you have a leaner or lighter footprint as you get those tons out of your system over the next couple of years? What are the next big moves within the mill and supply-chain optimization program?

George, that's a great question on the footprint. We are optimizing the 17 mills that we have now. It's always possible that we could find a way to make the needed containerboard with a lighter footprint. We don't have anything in the near term that would say we found that.

The biggest work left to do in the supply chain is, we don't talk about this much, but we're operating these mills on two different, distinctly different supply-chain systems. But, we've completely blended the supply to the box plants and to the open market between the two systems. So there's a level of manual operation that will go away through 2013 as we install the new supply-chain systems that we use in International Paper in all of the former Temple mills.

That is probably going to produce the opportunity for the biggest internal cost benefit and external service benefit for our customers. That's what we're focused on for this year. In addition to -- Carol mentioned the one area in the synergy target that's not quite filled. The bucket that's not quite filled is the mills and the supply chain.

There are some projects we are going to execute in the first half of the year, mainly in the first quarter, that will allow us to capture those mill synergies from a cost and operational flexibility and in some cases from a quality standpoint. So I think we've got a lot of opportunity. We are always studying the footprint, not only in this business but in all the businesses in the Company, and looking for the smartest way to produce the product we need for the demand we have.

If we can make what we need to with less facilities, we'll do it.

Okay, appreciate that. Two last quick ones and I'll turn it over, one on xpedx and the other on maintenance spending for the year. On xpedx, taking a step back, were you pleased with the performance in the Business in the quarter and in the year, in light of the discussion from a year or so ago where Mary gave a review on the next step change -- we'll use that as a phrase of the day -- in terms of xpedx's potential improvement in profitability? How would you have us think about that?

And then on maintenance spending, we appreciate the schedules. I thought I heard you say at one point in time, there's a $7 million improvement or reduction in maintenance spending. One of the slides has $11 million.

And then when I compare slides 38 and 37 to look at the sequential change in maintenance, I don't see much of a difference, at least not in my deck. Can you just tic and tack that for us? Thanks, guys, and good luck on the quarter.

Well, George, Mary is not here. So, I'll speak to the excess one. I think if Mary was here, she'd say she wasn't satisfied with xpedx's performance in 2012. Principally because we weren't able to offset all the challenges we had on the print side with revenues.

And that said, we like the progress we've made on the buy, handle, sell front. If we hadn't done that, we wouldn't be where we're at. But we've got to quickly get our warehouse configuration in place. That will be in place by the end of the year and get all of the purchasing that we're going to centralize centralized so we can get the advantage of that. More work to be done, but I would say we're basically close to being on schedule in terms of the internal stuff.

What we didn't see was the challenge we're going to see in the print space was principally commercial printing. So, it's not paper overall. It's also coated papers. That's xpedx's biggest product line. So, no, we're not satisfied or pleased where we're at, but this is where we are at. And, we are holding our own.

Related to your question on maintenance, and I see what you're saying is on 37 and 38, we're showing essentially flat, and yet I called out a change. We'll clarify that for you, but my guess is the back schedules are probably closer, and we probably had some other projects that I included in that, that were operational in nature.

Okay. Fair enough, thanks guys, have a good quarter.

At this point I would like to inform everyone to please limit your question to one question only. Phil Gresh, JPMorgan.

On recent calls it seems there have been some diverging views around virgin wood fiber prices in the US South and your charts obviously do show a bit of an uptick in your wood basket. I'm just curious how you guys are thinking about these recent trends? How much would you say is seasonal versus perhaps the start of a structural trend, given the recovery in housing and increased wood pellet demand?

I guess I'd characterize that, Phil, saying we probably see more upside, more pressure on recycled fiber costs than we see on virgin fiber costs. But we see upside pressure on both, but more on the recovered fiber side of it. We're big, obviously, big in both.

But you're right, what's going on with housing, OSB plants coming back online, lumber mills coming back online, we're going to get the chips but we're not going to get chips from OSB plants. And you've got some wood pellet plants that are starting up. That's all principally softwood.

On the hardwood side, I'd say it's not as acute on the demand side, but we see some upside pressure. But hardwood prices didn't come down as much as pine prices did. We don't see a blowout in fiber prices.

We see some upside pressure, but probably more upside pressure on recycled fiber prices, just because of the impact that China has on recovered fiber markets around the world. They've got a 40 million ton box market now. Most all of that is recycled fiber and that's going to continue to grow. It's going to grow all with recycled fiber.

And to clarify the $200 million input cost, does it assume stable wood fiber prices after the first quarter, basically, or declines? Or how do you think about that?

We are assuming some virgin fiber prices rise through 2013. And we're assuming that the OCC prices rise through 2013. Then you've got a little bit of year-over-year energy costs. We see low-energy gas prices but we don't see $2 gas on the horizon. We had that for a while in 2012.

Got it, okay. Thanks.

Gail Glazerman, UBS.

I'm just curious, when you look at the comments on uncoated freesheet demand in late December we saw that across all the printing rate in grades. Just wondering did you see that type of phenomenon in any other product area where at the end of the year things dropped off? And just to clarify exactly has that bounced back, to what extent in January?

Gail, this is Tom Kadien. We saw, I think a similar pattern, as Tim described, in uncoated freesheet and the coated board segment, but I would say that I am feeling a bit better as January has gotten longer. Things have seemed to come out of the seasonal fourth quarter, which was pretty weak in the back part of the quarter.

And, Gail, it's Tim. I would build on -- I should have mentioned earlier, but we saw a similar thing in the uncoated freesheet business as we moved into January. It seemed like people were building or rebuilding pipelines, inventory pipelines as we got into the first couple of weeks of this month. In our mind it just reinforced the fact that things shut down at the end of the year.

Keeping in mind IP is the global company, we had in Europe, in South America, in India and Russia, we finished the year probably as strong on the demand side as we started the year. We're gaining share in Europe. We're gaining share in South America. We're probably growing with the market in India, and we need more capacity in Russia. So, the trends that you are -- we were talking about are really North American trends, but they're not the same as the global trends.

Okay, thank you.

Mark Weintraub, Buckingham Research.

Just some questions on the containerboard export market. If you could give us more color on what you're seeing there, and in particular what's happened to pricing in the last little bit? And maybe, if possible, where mill mets are on export tonnage versus domestic?

Mark, the export market, really, that was one of the positives in the fourth quarter. It remained strong where we normally see a bit of a dip. We saw strong demand especially in Europe, the Middle East and Asia and also in Latin America. Craft liner demand in Asia wasn't quite as strong, but it was stable with the prior quarters. We just didn't see any uptick.

And the prices continue to improve. I think our prices were up over the third quarter, close to $40 a ton, and $57 to $60 from the beginning of the year. So, in essence, demand has been steady to improving in all of the markets we serve and pricing has been improving.

And have those trends effectively continued in the first part of this year?

Yes, they have.

Okay great, thank you.

Scott Gaffner with Barclays.

I just had a quick question on the box plant system. You mentioned that you're at 100% for the synergy savings. That got you to the $150 million of the box plant savings for the synergies.

But you also mentioned at the analyst day $50 million of optimization savings above and beyond that $150 million. Can you talk about when you think you can attain that? What else is left to do to optimize the box system going forward? And, maybe, how soon you can get to the $50 million run rate?

Scott, the $50 million was part of the overall optimization. That's the part we pegged for the Box business. We still feel very good about being able to achieve that. I think a good portion of that we'll achieve through the 2013 time period. It's a lot -- it's not a silver bullet. It's a lot of initiatives on the Commercial side. Some of it relates back to what we talked about on the supply chain. As soon as we can have one system and really optimize our supply chain, we'll make sure that freight is at an absolute lowest and box plant waste is at an absolute lowest. Then we'll have opportunity to improve our Commercial performance. We still feel very good about the optimization targets that we shared back at Investor Day.

Maybe there's some potential upside to the $350 million to $400 million projects in 2013 from the box optimization? I didn't see it listed in the projects anywhere.

Part of the reason it's not listed as a project is we view it as we move through the synergy acquisition period, as John said, we view it as optimizing business. So, we don't call it out. But it's inside of the words we used around the upside of Industrial Packaging for 2013 and beyond.

Great, thank you.

Stephen Atkinson with BMO capital.

In terms of Orsa, are you able to talk about any, shall we say, low hanging fruit or synergies with regards to your existing businesses there?

Hi, Stephen, it's Tim. I think we're -- it's two weeks, so as I think John said, it is early days. But what we see so far, we like. It's right in line with expectations. If you recall, this was all about taking what was generally a good commercial operation and looking at the manufacturing side and increasing efficiencies and lowering cost. Our first view, being in the facilities for a couple of weeks, is that everything that we thought was there is there. And there may be other opportunities.

Thanks a lot.

You know, it's a 20% EBITDA margin business and we think we can get it to the 25% range.

Great. Thank you.

Mark Connelly, CLSA.

Following on that question, do you think that Orsa's lack of timber land is a competitive disadvantage versus the other virgin producers? And do you expect to acquire timber land to support Orsa?

No, that's not the plan currently, Mark. In the holding company that Orsa was pulled out of, there are forestry assets. We chose not to have them included in the business, because, quite frankly, we didn't feel like we needed them to support the business. There's supply arrangements with their forestry operations for a portion of the furnish, but a lot of it will be coming from open market.

Super, thank you.

Mark, the dynamics of the pine supply side in Brazil are very different than the hardwood side. A lot of pine was planted a long time ago. So, you don't have to have plantations like you do in the paper business to be able to access fiber.

Sure. We've seen those prices move up, that was why I was wondering. Thank you.

Yes, the prices will move up, but you know the land business, prices then should move up on your own land because you need mark to market.

Sure, thank you.

Alex Ovshey, Goldman Sachs.

I think you said that you expect free cash flow in '13 of $2 billion?

I said we should be approaching $2 billion.

Approaching $2 billion. That would imply that free cash flow's up about $450 million on a year-over-year basis?

In that ballpark, yes.

Okay. Then, you guys talked about the incremental run rate from the internal projects of $350 million to $450 million, so a mid point of about $400 million. Does that imply that price cost minus the impact from divested mills is about $50 million in 2013?

Part of the free cash flow generation is coming from that $400 million of strategic initiatives improvements. Then you've got the box price increase and containerboard, and then you've got a bunch of cost head winds. So, all that nets out to just what we -- $450 million roughly of free cash flow. But remember, that's only 40% of the impact of those projects. There is another double it to come in 2014 and 2015.

Okay, got it, John. Thank you.

Let me just -- before I need to wrap up here, just summarize how we see things. 2012 is now behind us. We thought it was very much of a transition year for International Paper, setting an all-time cash from operations record in a transition year. We're pleased with, but we're not satisfied that you've seen all that International Paper can do. We're excited about 2013. IP remains a cash flow story, and even in a more of the same economic environment, we're pretty positive on the kind of incremental earnings and cash flow we're going to generate in what still is in the mid cycle environment around the world. So, we'll be looking forward to talking to you in the quarters coming about our progress.

Thanks, John, and thank you all for joining today. Of course please direct any further questions or follow-ups to me or Michele Vargas at the phone numbers on page 34 in your appendix and for media to Tom Ryan. Thanks again and have a great morning.

Thank you. This concludes today's conference. You may now disconnect.