International Paper Co (IP) 2013 Q1 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 for the International Paper first-quarter 2013 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, and good morning. And thank you all for joining International Paper's first-quarter earnings conference call. Our key speakers this morning are John Faraci, Chairman and Chief Executive Officer; and Carol Roberts, Senior Vice President and Chief Financial Officer.

During this call, we will make forward-looking statements that are subject to risks and uncertainties which are outlined on slide 2 of the presentation. We will also present certain non-US GAAP financial information, a reconciliation of which you will find available on our website and in our other disclosures. Our website also contains copies of the first-quarter 2013 earnings press release and today's presentation slides. Lastly on page 4, given our expanded disclosure around the Ilim JV, we provide 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. Let me start things off by saying, overall, I would frame the first quarter as okay. At $928 million EBITDA, that's comparable to the fourth quarter of 2012 and up versus the first quarter of 2012, primarily driven by strong results in Industrial Packaging, European Papers, IP Russia and Brazil. We got to the achievement of our $400 million stretched synergy target for Temple and we got there faster than we thought we would. We got greater than the full recovery of the September containerboard price increase through boxes with $55 of realization in the quarter.

And after a challenging fourth quarter of operations and some early carryover issues into January and February, we closed the quarter strong, back to what we expected in International Paper, normal, good IP execution all around the world. In Brazil, we realized the full-cost savings benefit of the biomass boiler and closed on a corrugated packaging acquisition IP Orsa. We're off to a good start integrating the business and you'll hear about that a little more this morning.

But outside of the normal lower seasonal demand that we always have in the first quarter and some higher fiber costs, properly OCC versus the fourth quarter, we had some headwinds. The biggest one was a non-cash foreign exchange swing at our Ilim joint venture due to a weaker ruble and Ilim has got a sizable amount of US dollar debt. We had some headwinds on the revenue side in xpedx and so they were challenged. And we also had higher corporate expenses that were not S&A-related and that really accounted for most of the gap between where we came in and first call.

Before I turn it over to Carol, let me just say upfront what I'm going to say at the end but just want to make sure investors understand this, IP is a cash flow story. We're going to be approaching $2 billion of free cash flow in 2013. As we look at the year, we are now over four months into it. We think that's -- we've got a line of sight to that. And we're going to allocate that cash flow in a balanced way with a portion of it back to shareholders. Four months into the year, we now have a more clean line of sight to the $5 billion of EBITDA that we talked about with investors at that last Investor Day. So I'll come back and talk about that again at the end but I just wanted to get that out upfront.

So now let me turn it over to Carol to take a closer look at the quarter and then we will come back and take your questions.

Thanks, John, and good morning, everyone. As John just indicated, earnings in the first quarter improved year-over-year on stronger sales which were primarily associated with the acquisition of Temple-Inland. Despite some of the assignable headwinds that John just described, our free cash flow story remained intact in the quarter and our expectation is that we will continue to accelerate throughout the rest of the year.

To that point, cash from operations was negatively impacted by a working capital swing and that was primarily associated with higher receivables which is quite normal in the first quarter given the seasonal higher volumes that we saw in March versus December, as well as the additional impact of the higher box prices this year. The net impact of that was nearly $200 million of cash consumption which will largely come back to us over the next couple of quarters.

Moving to slide 7, relative to our return on invested capital in the quarter, we were flat with last year at just over 8% above -- and that's above our cost of capital. Looking at that EPS bridge from the fourth quarter of '12 to the first quarter of '13, IP posted operating earnings of $0.65 versus $0.69 in the prior quarter. Overall, higher average sales price and mix contributed $0.09 per share and that was primarily driven by Industrial Packaging. But was also impacted by increased export mix in printing papers and modestly softer paper selling prices in North America.

We saw the expected seasonally weaker volumes across our global operations of $0.05 and higher recycled fiber costs of $0.04 that more than offset the slightly lower annual maintenance outage spending in our core platform businesses. And as John indicated, xpedx earnings fell quarter-over-quarter by $0.02 due to continued weak printing and publishing demand. And finally, also as John stated, our Ilim JV posted a loss on the equity earnings line in the quarter due to a $17 million foreign-exchange swing as the dollar strengthened by more than 2% versus the ruble.

Going to slide 9. In terms of downtime in the quarter, the story was largely around planned maintenance outages, with nearly 170,000 tons in containerboard in our Industrial Packaging business and another 32,000 tons of paper and pulp combined. In Consumer Packaging, as we've previously disclosed, we successfully shut down the paper machine number 2 at Augusta at the beginning of March. And in the quarter, that removed 12,000 tons of capacity and on a quarter-average basis, that's 36,000 tons of capacity. So with that closure, we will effectively balance our coated paperboard capacity with our customers' demand.

Taking a look at input costs on slide 10, costs were up $22 million quarter-over-quarter, or $0.04 per share. And our North American Industrial Packaging business absorbed a lion's share of this headwinds and it was primarily associated with higher recycled fiber costs, which rose to $150 per ton on average that delivered by the time we ended in March.

Moving onto Industrial Packaging on slide 11. Industrial Packaging posted what I would call a solid first quarter with operating profits of $369 million. The primary driver was the full realization of the September domestic containerboard and box increase, which added greater than $70 million to the quarter, Coupled with higher containerboard export price realizations that added an additional $10 million. So we saw $80 million in higher prices but this was partially offset by a seasonally higher mix of export which resulted in a net $68 million upside that you see on the bridge for price and mix combined. This was offset by seasonally weaker volumes for us, higher planned and maintenance outages and input costs and an increase in the overhead allocation that we assigned to this business.

One detailed point on operations and costs. The mill did run better in the quarter, nearly $10 million better, and we did see incremental synergies of an additional $10 million, but both of these were offset in our earnings by the non-repeat of a net benefit of $11 million we saw from earthquake insurance proceeds that we received in Europe as well as some other one-offs in the quarter. Overall, I would characterize the market conditions as steady in the second quarter, with continued tight supply and demand, although our supply chain is operating effectively as we leave the quarter. And as we know, we are moving into a stronger seasonal agriculture mix into the second quarter.

Moving to slide 12, I think this just continues to be an important metric for our business. Even with incremental outage expense in the quarter, we've remained among the top of our industry peers with a 19.2% EBITDA margin in the first quarter of '13 versus 17.3% for the first quarter of last year.

It gives me great pleasure taking a look at slide 13, just about one year since we closed on the acquisition of Temple-Inland to declare that our Industrial Packaging team has crossed the finish line and exceeded their stretch goal of $400 million in run rate synergies in the quarter. Achieving this result involves really literally hundreds and hundreds of unique initiatives and efforts really across the entire Company and certainly most focused in the Industrial Packaging business. So let me compliment the team for a job well done and just let me add a little bit of additional color.

During the last year, we reduced S&A by over $100 million. We leveraged best practices and rebalanced our combined product mix across the mill system to significantly reduce consumption of fiber and raw materials worth over $60 million. We took the cost step and closed 10 box plants, reducing fixed costs and labor worth over $100 million and we did this while continuing to meet our customers' demand. And importantly as well, we leveraged our consolidated purchasing position across the Company to structurally reduce input costs by $45 million. So all in all, a great effort. Now with that said, the synergies are in the back but we're not done. We have significant optimization in front of us for some time given the scale and reach of this combined system.

Looking forward, as you can see on page 14, we have successfully implemented the April containerboard increase. And we're implementing the box increase with our customers with expected realization of the box increase to come in as it comes in towards the end of the second quarter into the third quarter and fully complete by the fourth. It's important to note that given the required purchases of containerboard associated with the mill divestitures outlined by the DOJ, we will be, and are paying higher prices for the board that we buy from these entities in the second quarter on.

The exposure to this increased purchase containerboard costs in the second quarter combined with a normal lag on box price realization will result in a margin squeeze for the second quarter, with the earnings upside to be realized in the third and fourth quarters as we implement the box increases. And just a reminder, the required purchases outlined in the supply agreements will be reduced in a stepwise fashion from the roughly 200,000 tons per quarter that we are doing now to zero required by the second half of 2015.

Moving to Latin America on slide 15, we closed the purchase of the 75% of Orsa's corrugated packaging units in the first quarter, on January 15, forming Orsa International Paper. We're very pleased with the transition process to date and the integration is going really well so no surprises here. The good news is that the Brazilian corrugated demand continues to grow and Orsa IP outpaced market growth in the quarter with a 5% year-over-year increase in sales. So more to come as the team finalizes and implements the '13 and '14 market synergy and cost savings priorities. But we feel really good about our start [down] with Orsa IP.

Moving on to Consumer Packaging on slide 16, in Consumer Packaging, the segment improved operating profit quarter-over-quarter, a lower planned maintenance outage spending. Ivory board prices were up at the Sun JV and an improved mix kept SBS pricing relatively flat in the quarter. Volume was a seasonally stronger but was more than offset by an unplanned reliability issue in January on the digester at our Augusta mill in Georgia and some other efficiency issues early in the quarter, but we did finish very strong in March. And once again, I already mentioned that it should be noted that we did successfully shut down the Augusta 2 machine in the quarter.

Slide 17, important, very important to our business, our backlog of unmade SBS orders like the industry chart that's shown here. We are at the highest level we've seen in a couple of years and we are out four to five weeks. We see this is an inflection point that may drive some upside to the relatively weak year-over-year demand comps that we'll see in the coming quarters.

Moving to Printing Papers. The Printing Papers segment operating profit improved quarter-over-quarter to $149 million despite modestly lower prices in North America, seasonally higher export mix in Brazil, and seasonally slow demand across our global operations -- North America, Europe and Brazil. Strong operations, supported by energy savings associated the successful operation of the biomass boiler in Brazil, as well as lower planned maintenance outages drove the upside in the quarter versus the fourth quarter of '12.

Looking at slide 19, I mean, here's just another great example of how our global Printing Papers segment is truly differentiated from our competitors, both domestic and global. Having operations around the world in both mature and growing markets, we're able to shift supply regionally to continuously upgrade our mix and maximize our capacity utilization. This example is not unique and it's actually embedded in our '13 plan but I think it highlights how much we can use our footprint to gain an enterprise approach to margin expansion. So let me explain this one.

As you see demand grows in Latin America, we're able to repatriate exports produced at our mills in Brazil and sell those tons on the continent, a significant geographic mix premium versus, in this particular case, Europe. This allows the US to maximize capacity utilization and improve existing export mix by selling A4 cutsize in Europe versus, say, lower margin [on] offsets rolls. And finally, the steady supply of imports to Europe of commodity cutsize grades enabled our European mills to produce and bundle higher end premium grades for their customers, thus improving margins. So win, win, win and IP realized a $17 million in incremental profit annually on this internal mix upgrade alone.

And to see how that plays out, you can see it here in our IP Brazil Printing Papers business that achieved a 30% EBITDA margin in the first quarter of 2013, in what was otherwise a seasonally slow high export mix quarter due to seasonality. The margin expansion achieved in the quarter is structural and highlights the potential of this strategic region. The upside is being driven by excellent execution, lower cost associated with the biomass boiler and improved local pricing. And this is all enabled by our talented team that we have in Brazil.

One last slide on Brazil, slide 21, here you can see quarterly energy cost savings at Mogi Guacu post-start-up of their biomass boiler as well as the energy mix that drives these savings. Essentially, the new biomass boiler has reduced consumption of fossil fuels by virtually eliminating the need for high-cost gas, replacing it with lower cost sustainable forest biomass, so a real win for the business.

Moving on to xpedx. As I shared when speaking to the Company earnings bridge earlier, xpedx earnings were down by $9 million versus the fourth quarter on seasonally lower revenue per day. Despite these headwinds, the team remains focused on executing on their controllable cost savings initiative.

Moving to slide 23. On April 22, we disclosed we were in talks with Unisource Worldwide regarding a business combination between xpedx and Unisource. As we shared, we executed and are working within the terms of an exclusive non-binding letter of intent to explore a possible transaction. For the team at IP and throughout xpedx, we see this as a great opportunity to create value for our shareholders and customers. The proposed reverse Morris Trust transaction would be tax-free to IP and our shareholders and would create a stronger, more competitive distribution company that we believe will have significant merger benefit opportunity.

Turning to page 24. Given the entire process to close could take up to 12 months. We've included an illustrative view of the RMT process to highlight what may be ahead. In step one, International Paper would spin-off xpedx as a subsidiary of IP, place debt on the subsidiary, and just distribute those debt proceeds back to IP in the form of a dividend. In step two, IP would distribute shares of the xpedx subsidiary to our shareholders. Xpedx would become a public company through an IPO and immediately merge with Unisource Worldwide to create a new entity. Again, building what we believe will be a much stronger Company, better equipped to navigate in this space going forward. So as this evolves, with more to come.

And lastly, before I move on to the outlook, I wanted to provide a brief update on the progress being made on the expansion projects at our Ilim JV, as outlined on slide 25. While the second quarter will be the transitional quarter that we've been waiting for, the magnitude of the ramp-up at both Bratsk and Koryazhma will likely lead to start-up costs in the range of $20 million to $30 million on a consolidated basis in the quarter. The good news is that we expect full operational and commercial ramp-up of the pulp line in Bratsk and the paper machine and sheeting operations at Koryazhma over the six to eight weeks.

So looking ahead to the second quarter of '13 on page 26, we expect higher volumes across our global businesses as we move into a stronger seasonal demand period in North America and Brazil. Like I said earlier, while we will see some containerboard and box price realization in Industrial Packaging, increased prices on the containerboard purchases will partially offset this benefit in the coming quarter. And in Consumer Packaging, we will see some modest folding carton price increase in the quarter as we execute on the previously announced increases. Inputs in the coming quarter will be largely stable other than a continued upward bias for OCC and wood cost pressures that we're seeing in Russia.

And relative to planned mill maintenance outages, the second quarter schedule is the heaviest of the year for the Company and will drive more than $110 million in incremental expense versus the first quarter. And finally, the Ilim JV expansion project start-up costs, which will hit the equity earnings line, will more than offset the non-repeat negative currency impact that we saw in the first quarter. So with that, now let me turn the call back over to John to summarize and wrap up.

Okay, Carol. Thanks. In closing, as I already shared at the front end, I feel good about our exit rate of earnings in March; they're much stronger than January or February. And our execution, we remain well after a couple of inconsistent months. The supply chain still remains tight, especially Industrial Packaging, but it's operating well. So we're back to normal and expected IP execution.

Looking ahead we see seasonal demand improvements in packaging, both in North America and in paper in Brazil. We're also going to start to realize some of the North American board and box price increase during the quarter. But the benefit is going to be partially offset higher cost from containerboard that we purchased as part of the settlement agreement with the DOJ related to the Temple acquisition that Carol talked about. I would just remind you that the volume that we are required to purchase by the agreement ramps down and at the end of second half of 2015, it goes to zero.

Further, we're going to have our peak outage quarter in the second quarter. That's going to be more than $100 million quarter on quarter. So it's a big system. We've got a lot of outages. The second quarter is going to be our big quarter. We've also got the bulk of the start-up costs associated with Ilim and I'd just remind you of two projects -- a $800 million project in Bratsk and a $300 million project, Bratsk's pulp line, Koryazhma, the paper machine; over $1 billion of projects now completed. Into the commissioning phase, that's not going to be cash to IP, but it is going to show up on our equity earnings and we expect to be making cutsize paper at Koryazhma, at the -- by the end of May. We're making sized offset now and we're just starting to make and sell pulp off the Bratsk machine.

We're also going to see a higher tax rate quarter-on-quarter as we go back to a normal rate that's in the 30%s -- low 30%s. So all things considered, we think the second quarter is going to look similar to the first quarter on an EPS basis but it is going to position us for a very strong second half of the year. So, four months into the year, we're now in the second quarter. What we see now, we're confident that we're going to deliver in the second half of the year. We ran well in April. In January, I shared with you when we had our fourth-quarter conference call, our free cash flow in 2013 moving into '14 was going to approach $2 billion.

We still see that. Actually, we have more line of sight on that now as we're four months into the year. We have a clear line of sight, in fact, a more clear line of sight on the $5 billion of EBITDA that we talked to you about for International Paper at Investor Day. We may get there in a different way, but I think importantly, International Paper has got the levers to pull and more upside with our global footprint. So with that, let me just turn it over to the operator for questions.

(Operator Instructions)

We'll pause for just a moment to compile the Q&A roster.

Gail Glazerman, UBS.

Maybe John, just starting with the last comment that you might get to that $5 billion EBITDA goal a different way. Can you maybe enumerate some of the positives and negatives? Is that pricing offsetting operations or something else?

I think we've got some tailwinds in our Industrial Packaging business. We've got some headwinds in from where we were back in 2011, and some headwinds from coated paperboard. The Asia, we have got excess capacity issue in Asia so we're going to see Asia, particularly in the joint venture over there, struggled for awhile with a lot of coated paperboard capacity coming on. We all know what's going on in the Chinese economy.

Europe, while our business in Europe is doing -- our paper business is doing really well, our box business is essentially] the same, is looks like [essentially] the same. So I think there are pluses and minuses. But by and large, we didn't have complete line of sight when we talked about reaching our potential, but we've got much better line of sight now. And I think you'll see that start to show up in some of the run rate EBITDA numbers we're going to be sharing with you in future calls.

Okay. And looking at Consumer Packaging, Carol, can you give maybe a little bit more detail on the operating headwinds you had in the first quarter and how to think about that moving into the second quarter as the machine shut and for something you're running better? And also, maybe give a little bit of color into the pick-up in backlogs, what you think is driving that? Is it inventory restocking or something more sustainable and are you using a similar trend in any of your other businesses?

Gail, hi. This is Tom Kadien. Let me start on the operating issues. We had a digester plug in early January. That was already discussed, but that cost us several million. We also took, I think, 24,000 tons of lack of order January. We got Augusta 2 down at the end of February; that cost us some money. But we ran very well, really February through April, so operations, our system has settled down. If you look at the chart on downtime, we were taking [LLO] consistently every month for the last year. We've now got a full system. Our backlogs, to your point there, the industry backlogs are up. We're out five weeks on paper; our extrusion blogs are significantly longer out than that. They're out looking at 60 days on poly coated folding and cup stock and pricing is moving.

So it feels like an inflection point. I think there has been some restocking, I would say, in the converting channel. But it -- as we talk to our customers, they are seeing improved demand. So it's not just restocking. We're seeing that in the services as well as the consumer foods segments. So I would say it's feeling a whole lot more sustainable as opposed to just a short-term pick-up.

Okay and just one last quick one. Can you give any update on the sale of building products?

Yes, the sale of building products, we've got a second request from the Justice Department and second request takes some time to work through. We would expect we've got -- we're going to work through that just like we know how that works because we've been through it before. But I would expect sometime this summer. In the meantime, even though the building products is in discontinued operations, it's generating a lot of cash; it's doing quite well.

Mark Weintraub, Buckingham Research.

First, I just wanted to get a little color, if possible, on how the box price initiative is going and if it feels very similar to prior increases or what types of differences you might be seeing, different types of challenges in the market price, if any?

Hi, this is Mark Sutton. The box price increase, we're in the process of implementation now as we move through the second quarter. And I would say the only difference you might find is when you have a price increase in the middle of the quarter versus at the beginning or end of the quarter, There's just some structural issues around [openers] and when you can start moving. So that's really the only difference. Otherwise, we would probably expect to see a similar realization from past price increases.

Great. And also in -- on containerboard, are you seeing in the export markets, are you seeing any movement?

We've had consistent improvement in our export position from a demand standpoint. As you know, we are a strategic supplier in the export market so we're always there at some level and we've seen both volume and pricing moving up. In fact, from last year's first quarter, we're up about $80 a ton in the export market. So we still see pretty good solid demand; it's for the US kraft liner that the rest of the world needs.

Right. And then one real quick on xpedx and Unisource, I realize you're probably constrained to the extent you can talk about it, but what would be the biggest potential sources of synergies when you put those businesses together?

Well, there is a lot of overlap. What makes the synergies and we've seen this in acquisitions we have done in IP and most recently in Industrial Packaging. When there's a lot of overlap, there is a lot of redundant functional costs you can take out. There's going to be a lot of warehouse space that can be consolidated because Unisource and xpedx are in similar markets. I don't want to speak for the new co, what they're going to do, but when we got together and looked at xpedx management and Unisource management, you remember Unisource approached us so they've done some homework.

They showed us what they've done and we said, yes, we agreed that there is a lot of opportunity here to do things that are pretty much blocking and tackling. They take time and they're not easy. But it's not new stuff that creates a lot of upside for the two companies together that they couldn't get that upside individually.

And on the purchasing side, are they already sufficiently [big] both of them that there probably wouldn't be a lot on purchasing? And obviously, they're purchasing stuff more than just paper. Any thoughts on the purchasing side?

I think there are going to be best practices that Unisource has that xpedx has been working on other stuff that they can adopt and make the xpedx side better, and there are going to be best practices that xpedx has that Unisource can take advantage of that.

And that's a new company so there will be stuff that we're further along on in terms of responding to what's going in the marketplace, whether it's IT, whether it's purchasing, whether it's customer service, whether it's warehousing, whether it's transportation. It is a buy, handle and sell business, and we've already seen some of those differences. So there's a lot of stuff that we'll be implementing in one network that's not implemented in another network and it will cover all of that buy, handle and sell stuff.

Chip Dillon, Vertical Research.

It's interesting when you look at your Printing Papers business, how well it's done when you look at the domestic decline in consumption. And I noticed, I believe you all really haven't had -- felt the need to shut capacity in North America, I think, since Franklin three years ago. So my question is, as Carol showed on that one slide with the $17 million benefit from being global, is there more of that? And do you think we're going to come up on a time here in the next year or two where it might make sense where you will need to reduce your footprint in North America in that business?

Hi, Chip. It's Tim Nicholls. Yes, Carol represented just one piece of what we think the opportunity is in terms of leveraging the enterprise, that's all related to cutsize and how we continue to supply customers in three regions and manage supply chains. So that's a good opportunity. We haven't shut any capacity since Franklin.

But we're moving substantially more volume offshore, not only in cutsize, but in offset and forms rolls. And we're doing that in combination with our business in Brazil and making sure that we leverage both sets of assets to supply the customer base in the most efficient way. As far as capacity, longer term, goes, we're all about running the lowest-cost system we can. If we see an opportunity to run at a lower cost, we will, but for now, we like the options that we have running the assets we have.

Chip, I'd just add something that I think is really important. One is, when we're moving that volume around the world, we're not out trying to take market share because what we're doing, as Carol said, we're bringing volume back to Latin America where the market is growing. The other piece I think is unique to IP around how we manage our paper business is, in Russia, with Ilim and Svetogorsk. We've got a joint marketing agreement between Ilim and International Paper, so IP markets all of the paper that's going to come off this new paper machine that's in the Ilim joint venture. So we're going to market in Russia, CIS and countries as one, which again, is an excellent opportunity for us to take advantage of the global footprint to maximize the business in the markets that we serve.

And Chip, just one last thought that I would mention in that regard. Our organizations are completely connected so we know what we're doing in every region of the world on almost every time. We're not competing with one another. We're actually maximizing the effect of the organization so that we put very efficiently volume where we think it needs to go.

Got you. That's very helpful. And then secondly, when you take a step back and I'm certainly not asking you to endorse the Street's estimates or even disclose what you guys might be planning internally, but if you look at the second-quarter guidance and the first-quarter results, you would expect at least the consensus to be about $0.30 -- $0.25 or $0.30 less for the first half than what we had going into the day. However, just looking at pricing actions, the Consumer Packaging ramp in terms of orders and pricing and pulp going up, et cetera, et cetera, is there any reason that at least internally, if not externally, people should expect the second half to look any differently than you -- we would have thought before these numbers for both the first and second quarter?

Chip, this is Carol. I think you articulated that well and I think we have line of sight and remain confident that we're going to have a strong second half. We're positioned for that, we are poised for that and things are lined up that way. And what we said was we were going to see a significant improvement in IP from '12 to '13, and we still think on the whole, that's what we'll see. And John also said cash is the important part, too. The cash is going to be there.

When we put together the projects in Russia and again, I think this is the biggest capital project that IP has ever undertaken. Bratsk is the biggest project in Siberia in the industry in 40 years; we didn't know exactly when they were going to start-up. When we knew they did, there were going to be significant start-up costs because you don't start up a $1 billion of capital projects for free. We just didn't know when it was going to hit, so we now have line of sight on that and we're well into the commissioning and start-up. And it's going pretty well. So that's a piece we just need to move through and we'll move through that in the second quarter, not the second half of the year and not the first quarter.

Totally understand. Last quick one. I noticed that the total maintenance for the year had gone down a little bit from $510 million to $496 million. As you think about next year and with -- all the work you've done to simulate Temple-Inland and let's assume no footprint change, do you think that maintenance number is -- is that a good run rate, like around $0.5 billion? Or could that come down next year or would it have a reason to go up?

Yes, Chip. This is Tommy Joseph. As we look into 2014, I think the number that we're seeing in 2013 is about right. There is still some work that we've got to do we think in the Temple-Inland mills that will keep that number flat.

Phil Gresh, JPMorgan.

First, just the earnings runway drivers, the $350 million to $450 million that you talked about last quarter. Just want to get an update on how you're feeling about that today and some of the moving pieces underlying that?

Phil, this is Carol. I don't have that in front of me but I don't think that it's a significant change from where we were before and as we've talked about it, we feel very good about Temple-Inland and we felt very good about Orsa. We feel very good about Brazil and the boiler. I think we've talked about xpedx. I think we've talked about Russia. We feel very good about Franklin flux, the mill is ramping up and the key there is to get qualified with tier 1 customers appropriately and to continue to ramp that up. So all in all, I don't think there's much of a change to -- as we talked about that. John, do have anything to add on that?

All right. I will just continue. So in terms of how you're thinking about the free cash flow or the run rate coming out of this year and into next year with the box price increase coming through, it would seem to me, and you talked about the $5 billion in EBITDA run rate we should be getting also close to the $2.2 billion in free cash flow even potentially with higher pensions. So wanted to see if you could confirm that, if that math is essentially right? And if that's right, how are you thinking about the allocation of that cash particularly around the dividend at this stage?

So I think that math is still right on point and accurate and that's where we are heading. As we've talked about our capital allocations, we said that as the free cash flow grows, we would take a look at the dividend targeting the 30% to 40% of free cash flow for the dividend. We said that we would look at that annually. We did look at that in the fourth quarter of '12 and we made an increase, so we will do that. We're still in the process of bringing down some debt, mainly around our commitments on our credit metrics and we're doing that. As we talked about from a pension contributions, the mandatory pension contribution for '13 is very modest. It's $30 million to $40 million, and then we'll see how the math works out for '14.

But we know that there will be more and we talked about putting about $1 billion in there over the '14, '15 and '16 timeframe. And that still leaves more cash. And then we'll look at that cash, of course, how we can create value. We will continue to look at opportunities but we'll also look at how can we get some of that cash back to our shareholders in another way. So I think all in all, we're approaching the inflection point where we get to returning cash and that feels pretty good.

That 30% to 40% of free cash flow back to shareholders in the form of dividends is an important priority for us and you just did the math and you take 35%, take the midpoint and there is room for the dividend to grow. We've talked about investors to doing that in a methodical, consistent, periodic and sustainable way.

Is there any reason to think we couldn't get to the 35% by 2014 if a normalized cash flow was there?

I -- it depends on what you're going to view 2014. We're a little far out but I think we're going to get there. We're not going to get there in one step and we're not going to take 10 years to get there. So the -- our objective is to move in that direction. We want to have the dividend be sustainable. So we don't want to get out in front of our skis here but we've got significant runway, we think, to move the dividend up.

George Staphos, Merrill Lynch.

I actually just want to take it back, first, perhaps off of Phil's line of questioning. So if we look at the free cash flow generation you should do this year, more or less, around $2 billion. And we look at the credit metrics that you'd like to get to by the end of the year, could you remind us how much debt and pension funding you're likely to do this year? it would seem, if I do my math right, suggest that you will see in total maybe about $1 billion, $1.5 billion of debt in pension, paydown and funding, if you will. And assuming that, that's correct and you look at the dividend later on in the year, perhaps with some upside there, is there room perhaps in your thinking, John and Carol, for there to be perhaps buyback maybe in '14?

I will comment on your math. You're right; we targeted about $1 billion of debt repayment in '13 and the pension was only a small piece. And the other thing that we've got to remember is we have proceeds from building products that are going to come. And then depending upon how the xpedx transaction turns out, cash proceeds from the dividend there. So we're going to be in a very good position. And you got to -- we talked about the dividend, the other option that we need -- you need to consider, as you said George, is share buyback. And I think you're looking at it correctly that the cash will begin to accumulate really in 2014 because when we get beyond our debt paydown.

Okay. Thanks for that, Carol. Second question on consumer and just a quick one here. Has there been any pick-up in your market share in recent weeks and months in the consumer business and specifically within bleached board that's leading also to your pickup in backlog? I realize, obviously, if that's -- you took that down and that -- prices are looking to head higher so maybe that's helped your backlog as well, but anything in terms of market share gains?

Yes, George, this is Tom. If you look at last year, throughout the year, we took close to 180,000 tons of lack of order downtime and ran really to what our customers were demanding and not chasing prices. So I think we probably lost some market share through the year last year. I think as we turn the corner on this year, I'd say we probably, on the upside, we're covering some of that and not only in our coated board business, but also our food service business, which is our largest customer. They continue to gain market share. So clearly, we did in the 2012 year, but I would say since the beginning of this year, I would say we're probably doing better than market.

Okay. And one of your peer companies was saying not too long ago that they had lost some share within consumer. I was just trying to see if there's any relation there or not. To your knowledge, is there?

I'm not going to comment on that.

Okay, I appreciate that. Carol, a market question for you. Congratulations on the integration success with Temple-Inland. I seem to recall from our research that ultimately, there's still a lot of upside on the mill optimization side, maybe multiples of the, I think the $90 million. I don't have the page in front of me right now but the $90 million you've targeted. Could you comment as to what the longer-term upside is in terms of mill optimization? And maybe how quickly you might be able to achieve that over time?

Sure, George. We talked about total optimization in the business of about $200 million. We still think that's a good number. We obviously have a strategy of having the optimization and our total system, the new and the legacy system of, at a minimum, offsetting inflation and that's the target we're shooting for. But that $200 million in additional optimization beyond synergies that we shared at Investor Day last year, we haven't found any reason to back off of that.

Timing, we don't have a precise timing on it. Some of it takes some small amount of capital; some of it takes better operating and getting the right grades in the right mills. We are long way on our path to doing that, but we do have to complete our supply chain systems which will happen this year. And then we'll really be ready to fully optimize our mills and our box plants and our mills to our open market, both domestic and export.

George, I would just add there, what makes this really powerful to International Paper is a big system. But what makes it unique to International Paper is every good competitor is trying to optimize their business every year and they do. But we've taken a business that was 4 million tons and tripled the size of it, more than tripled the size of it. It's now 12 million tons and we've got opportunities that no one else has because no one else has more than tripled the size of their business over the past five years. If you think about it, we really never had an opportunity to optimize the warehouse or IT system because once we integrated it, we were back into Temple, doing another integration. So we really got the optimization of a much bigger footprint that we have ahead of us which is great news.

Last question, John, and I'll turn it over. There's obviously been day-to-day improvement or decreases in people's outlook in terms of the global environment. When we look at your key regions and your key businesses, briefly, do you think marginal trends have been improving as we're getting into the second quarter across your key businesses or have things weakened? Can you discuss it by region? Thank you. Good luck in the quarter.

I think there are pluses and minuses, George, on the macro outlook. China probably is a little weaker but it's still a bigger economy, growing at 7%. The issue there probably isn't the growth rate, it's the excess capacity that got added. Europe looks like it's going to be struggling to get out of recession a little bit longer but it doesn't seem to be falling, in aggregate, deeper into one.

I think the US economy feels to us like it's more like 1.5% to 2% GDP growth, not 2.5%. But if it gets revised and it's a solid 2.5%, we're wrong, but it feels like 1.5% to 2%. So the -- overall, I think things are playing out. We're growing a lot slower than the world should be growing, or we're certainly growing a lot slower than the US economy is capable of and I believe eventually will grow at 3% to 4% which is where we should be.

Paul Quinn, RBC Capital.

Just a couple of things. Just -- if you could give us a little bit more detail on the operational losses in both India and market pulp, I see India is slightly better, but pulp is slightly worse. I'm not really seeing that in the pricing.

Tom, do want to talk about India first?

Yes. India is a complex place. The biggest headwinds we have over in India right now; we have had a run-off in wood costs by -- in order of 60% between, say, the fourth -- middle of the fourth quarter and the end of the first quarter. And pricing has trailed, catching up with that, so that's probably the biggest headwind, along with all of the other things that you get along with doing business in India.

Pricing is now, I'll say, caught up and we'll see improving results out of India. But the market is still growing and on an IP -- on an APPM basis, on an India basis, the business still looks very good. We have a separate legal entity there; we're making some other investments in the market that don't -- that pulled down the numbers. But the APP investment is still much improving and a long way to go.

By investing, you mean people investment.

Yes, people investments. I'm sorry.

Hi, Paul. This is Tim Nicholls. Just on market pulp, the biggest difference from the fourth quarter to the first was heavy maintenance outage in one of our largest pulp mills, the Georgetown mill where we produce a lot of fluff-pulp. And everything else was moving sideways from where we were in the fourth quarter. We did see price start picking up early in the first quarter and we're seeing that continue now. So as we look forward, we're going to get a better mix of product. We were selling some hardwood rolls to balance out the system that we're not going to be selling. And we will see softwood prices, the effect of those to continue to go up.

Great. And just an overall question on the coated free-sheet North American markets. We've had worse data, at least, so far year to date. I noticed that Boise is shutting; it looks like two machines at International Falls is one of these. Is that enough to reverse the acceleration in the decline in North America? Or how are you feeling about that market?

You just made news around the table. I hadn't seen that on I-Falls. I think we're running at the upper end of what we think the normalized range is. You got to remember when we talk about a secular decline but there's also an economic impact. And when we're -- when the economy is not running at what we think is more of a normalized rate, say around 3%, it has an impact on demand. Having said that, the first quarter, when we came into it, we knew it was going to be soft because we had two less days to work with. I think we'll see it solidify as we go through the second quarter and who knows where the second half of the year will be. But we've said 3% to 4%; it looks like it's running at the upper end of that range right now.

Steve Chercover, D.A. Davidson.

A couple of quick ones. First of all, with respect to the $5 billion EBITDA that's going to be achieved a different way, is xpedx $220 million objective in that new line of sight?

No. Some of the places -- I think Phil asked a question earlier, I was perplexed as to what he was referring to. I think he was referring to a chart we had in the last presentation that went through a whole bunch of initiatives that added up $350 million to $450 million. We're going to be short on that, but I would say the way our shareholders are going to benefit is the combination of xpedx and Unisource potentially has got far more earnings potential than that. And with the structure of the transaction, the way it is, IP share owners will own more than 50% of the new co and so they'll have the opportunity, if they choose to benefit from that.

Actually, I did have a question on the xpedx-Unisource combination. I think you guys have 75 or 80 facilities sprinkled across the country and I think Unisource has about the same amount. How many of those facilities does IP own within xpedx?

I couldn't tell you. I don't know. We lease a majority of them but we do own some.

Okay. And I think GP used to own most of their facilities so there might be some real estate there. And then finally, this should be a softball. But the shut of the machine at Augusta, does that free up some pulp that we should be adding into our market pulp capacity?

No; that will not result in any more market pulp sales.

Al Kabili, Macquarie.

Just Carol, a question on the corporate costs. It looks like the outlook went up on those. If you could just elaborate a little bit more on what's driving that?

Yes, sure. This year, a part of this fourth quarter, we pulled out the non-operating pensions costs. So what gets left behind are some miscellaneous corporate expenses really related to supporting general IP-level programs. And there are things that, Al, we just really can't and probably shouldn't allocate back to the businesses.

Like an example, captive insurance, foreign and domestic organizational structures for foreign headquarters, financing tax purposes and there's just some small remaining administrative pension costs. So, if you actually look back over time, it was like $100 million, I think in '11, and for -- same [state] was $51 million in '12, and it's -- we are estimating $60 million this year. So I think that's just part of making that changeover of pulling out that non-operating pension that we leave behind this small piece.

Okay. And that's a good annual run rate to assume going forward?

Yes, I think so.

Okay. And on the inflationary outlook, Carol, are we still thinking about $200 million of raw material and other inflation?

Yes, I think so. I think, of course, we all know that the big mover there is going to be if there's a change in the OCC going forward. But I think now we still see that, that input [headwind] costs that we see for the year.

In the (multiple speakers), our Company with 70,000 employees, you've got your costs rising and you've got to offset that with productivity, improvement and cost reductions. So that inflation, even though inflation is lowest there.

Okay, yes, fair enough. And then just final one, Tom, on just following up on some earlier questions on the machine shut at Augusta. Do we see a sequential benefit from that in the second quarter? And if so, can you just help us with the order of magnitude there?

Well, you have to remember we were taking the system down to the tune of about 180,000 tons last year, taking [LLO] and shutting down Augusta 2 is a more cost-effective way of taking the capacity out. It's going to take awhile to work through some of the manpower, I'll say, bumping around the mill and shifting of folks. And to the enterprise, it will end up being a benefit, but I'd say it's going to show up in the back half of the year more than in the second quarter.

Okay. And any sense for how much we should be thinking about there in the back half?

It's about $10 million across the enterprise both -- it will show up in both coated paperboard and in pulp.

Great. Okay, thank you very much. Good luck.

We've been going for a little over an hour now so I know we may not have gotten to all of your questions. But we'll -- let me just wrap it up by saying we feel pretty good, very good about the cash flow story in International Paper. It's still going to be in the $2 billion range as we exit the year. So just remember, IP is a cash flow story. We're going to be generating a lot and we're going to use it in a balanced way, which means, that some of it's going to go back to our share owners.

Well, thanks, John, and thanks again for all your time this morning. As always, Michele and I will be available after the call. The numbers are on page 28 of the Appendix. And have a good rest of the day. Thanks all.

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