International Paper Co (IP) 2013 Q3 法說會逐字稿

Good morning. My name is Tamika and I will be your conference operator today. At this time, I would like to welcome everyone to the International Paper third-quarter 2013 earnings conference call.

(Operator Instructions)

Thank you. Mr. Jay Royalty, Vice President, Investor Relations, you may begin your conference.

Thanks, Tamika. Good morning, everyone, and thank you for joining International Paper's third-quarter earnings conference call. Our key speakers this morning are John Faraci, Chairman and Chief Executive Officer, and Carol Roberts, Senior Vice President and Chief Financial Officer.

During this call, we will make forward-looking statements that are subject to risks and uncertainties, which are outlined on slide 2 of our presentation. We will also present certain non-US GAAP financial information. A reconciliation of those figures to US GAAP financial measures are available on our website.

Our website also contains copies of the third-quarter 2013 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, Jay, and good morning, everybody. During the next 15 to 20 minutes, Carol and I will review our third-quarter results on performance of individual businesses. Then I'll speak to our outlook and we'll open it up to your questions.

So for the quarter, International Paper delivered record operating earnings of $471 million, or $1.05 per share. That was driven by continued margin expansion and very solid operations around the world in our manufacturing businesses, in spite of much higher wood costs, due to the wettest weather we have had in the southeast in over 100 years. We got meaningful improvement in our North American industrial packaging business, and also price improvement as well in our North American coated board business.

We also got some price improvements in pulp, although it started a little bit later in the quarter than we expected but it's going to flow through into our fourth quarter. And we announced price increases in our North America paper business and expect to see implementation beginning in the fourth quarter. We successfully executed $80 million of outages and saw very significant process in the ramp-up of the new capacity and capabilities in our Ilim joint venture in two of the facilities where we made major capital investments.

And finally, in the quarter, we had late-breaking favorable development on the tax front, which resulted in a one-time benefit of $30 million, reducing our effective tax rate to 24%. But even without that tax adjustment, the third quarter, from an operating earnings standpoint, was an all-time record for International Paper.

Free cash flow continues to be generated at solid levels and we see good momentum going into 2014. The run rate free cash flow to the last two quarters, as Carol will talk about, was $1.8 billion. All in, another milestone quarter for International Paper, taking a big step on our journey to becoming a stronger and more valuable Company, to create value for our customers and our investors.

Let me just quickly go to the financial highlights on the next slide. Sales were up 6%. Margin has expanded by 160 basis points. EBITDA improvement of 12%, or $100 million, both quarter-over-quarter and year-over-year. And as I said, an all-time record, even without the tax benefits.

With that, let me turn it over to Carol to take a closer look at the quarter, and then I'll come back and talk about the outlook.

Thanks, John, and good morning, everyone. As John said, IP delivered its strongest EPS quarter in nearly two decades, with the highest EBITDA and operating earnings in our history. The quarter benefited from strong price improvement, solid operational performance, and good progress in the ramp-up of the Ilim project.

In the quarter, volume was slightly lower due to one less shipping day in North America and we did have seasonally lower demand in our North American industrial packaging business. Maintenance outages were a positive, as this was our lightest maintenance outage quarter in the year. Input costs were a headwind, particularly wood, due to the extremely wet weather in the southeast US, which did significantly impact our printing papers business, and it impacted also our coated board business.

On the corporate side, we saw a one-time benefit of $13 million due to the release of a tax reserve in the quarter, which as I said, helped interest. The tax benefit that John mentioned contributed $30 million or $0.08 to our results, and this tax benefit was associated with the recent US court case decision that involved another taxpayer similar to us and it provides for an increase in the tax basis for certain fixed assets.

John mentioned it -- the quarter-over-quarter improvement in the Ilim JV contributed very favorably to our results. The operations were better, and I'm going to talk about that, but we also did see a gain in the FX associated with the strengthening of ruble against the US dollar denominated debt on the JV's balance sheets.

So moving to input cost, we did experience a significant headwind relative to fiber cost increase, and that was mostly wood in our North American operation. On the second-quarter call, we mentioned that we expected some headwind on wood cost, although not nearly to the degree to which it did unfold. We updated this outlook at the UBS conference in September.

Fortunately, the weather situation has moderated since then. That said, it was still a big cost increase in the quarter, and we do expect carry-over into the fourth quarter as we enter what would be seasonably the normal higher cost winter months with somewhat relatively low inventory. Then we are attempting to rebuild those inventories as we go.

Now, turning to the businesses, let me first cover industrial packaging, which delivered record earnings, as well as the price increase in North American box came through, roughly $30 per ton on average for the quarter. Within this record performance, our EMEA packaging business did have weaker earnings due to a margin squeeze [there] experience, as box prices, which is they are increasing are trailing behind on some container board increases that have happened. And all in all, we like the container board increases and we'll take on the challenge of raising our box prices in Europe.

As I mentioned previously, volume was lighter due to one less shipping day in the quarter and it is a seasonally slower demand for us. The second quarter is a very big quarter for us with agricultural mix but still a very solid quarter.

Operations were very good, and some of those operations were offset by some one-time costs. And as I said, we did see some input cost headwinds in North America, as well, in the form of increased wood and OCC costs.

The next slide, slide 10, really shows a great story. We saw benefits on pricing improvement and solid operation, and that created further EBITDA margin expansion in our North American industrial packaging business, and we continue to fare very well against our key public competitors. We should continue to see strong results in this area as we finalize the full realization of the announced price increase in the fourth quarter and drive our optimization improvements into 2014 and beyond.

Moving to the pricing realization -- and so relative to the conclusion of the American, North American box price increase efforts, we continue to very strong results in this area and we actually exceeded the plan we laid out earlier in the year. As I mentioned earlier, we saw box price increases rise on average of $30 per ton in the third quarter, and we exited the quarter at a run rate in the high $40 range. We expect roughly $5 per ton more in Q4, and so as we move through the quarter, we will fully recover more than the $50 container board increase, so a very strong success in this area.

Turning to the next slide, when you look at our North American packaging business, we truly feel that we are uniquely positioned to continue to realize benefits and improvements. We have spoken to this opportunity before, and I want to emphasize it again -- that we have an opportunity to optimize this large scale business that we've built in a number of areas -- operations, supply chain, our commercial effort -- and this can contribute additionally about $200 million of EBITDA to the bottom line.

We are well-positioned with low-cost assets that can continue to improve. We have untapped capacity at our Valliant, Oklahoma mill that could ramp up quickly and very cost-effectively, at the right time. We have got a great portfolio, an attractive portfolio, of customers that we can continue to upgrade as we work our mix.

We have is a strategic mix of virgin and recycled mill capabilities that enable us to effectively serve a broad range of markets both domestically and across the globe. And we embrace a strategy to manage our supply to our customers' demand and that will allow us also to meet that demand at the lowest delivered cost.

And finally, we're also seeing the opportunity to leverage our global industrial packaging footprint, as we expand our reach into markets around the globe. That's everything from best practice sharing to global multi-national customers and segments, and that represents just a few of the potential opportunities that we have in front of us.

So moving from industrial packaging, let me talk about the consumer packaging business. As we look at our consumer packaging business, we saw some price improvement in our North American business, and we had a big step-up due to no outages in the third quarter. Our European business continues to perform well, and we continue to see good momentum in North America as backlogs remains strong and price increases continue to be implemented.

Relative to our foodservice business, turning to the next slide, there were some nice and important developments relating to this business in the quarter, as key customers and potential customers publicly announced intentions to move away from foam-based cup to paper cups. McDonald's announced their plan to convert to paper hot cups at all of their 14,000-plus locations in the US. A McDonald's representative cited customers' changing preferences and increased recyclability as the driver for this change, and they expect a multi-year transition that will extend probably through 2016.

In the case of Dunkin, they moved to paper in their Brookline, Mass stores, in response to anti-foam legislation and they say that they are looking for a solution to replace foam that meets the goals for cost, performance, and recyclability. These two opportunities alone would result in three to four billion cups in increased demand and that would translate to roughly 80,000 tons of paper cup stock, which is great for us as we're very well-positioned to benefit from these developments.

Additionally in this business, we received word that we'll be expanding our position to become the primary supplier to the leading gourmet coffee retailer. So all in all, the food service business continued to be an exciting place and important part of our consumer packaging franchise.

Moving on to printed papers, we had good quarter-over-quarter improvement as we saw a seasonal uptick in volume in Brazil and Europe, and operations were very favorable in North America. We have a weakening price here throughout the quarter, but that -- I want to comment -- that's largely driven by softness in the export markets and a little bit of pricing that we saw in Europe.

Additionally, in this business, we experienced lighter maintenance outages and a non-repeat of the bad debt issue that we saw in the second quarter. Input costs were higher in the form of wood, as I mentioned, and this was a big impact in our paper business, and we did see a negative impact from that FX in Brazil and Europe. Finally, as you're probably aware, we did announce in the quarter a $60 per ton increase for offset and cut-size paper that we expect to begin to implement in the first quarter.

Moving to the next slide, I wanted to take a minute and give you an update on our plans for the Courtland mill wind-down and the repositioning of our North American papers business. As we announced and discussed in September, we made the difficult decision to permanently close the Courtland mill. As I said this was a very tough decision for IP, and really for our very dedicated employees, but clearly the right decision for the Business.

Relative to the shut-down plan, we intend to permanently shut the first two machines by mid-November. This will result in our exit from the coated papers business and the elimination of capacity for export and selected, marginally profitable domestic business. The last two machines are scheduled to be shut down by mid-Q1 2014 and that will result in the elimination of the balance of the capacity at Courtland.

Right now, we're in the process of running qualification trials at the four remaining mills, and we'll be transferring our most attractive business to these commodity and specialty mills to enable our best business to run at the lowest possible cost. We have more business than we have capacity. Therefore it will be necessary to exit the least profitable [grades].

While the end state that we'll reach later next year will be favorable, we are going to be in a transition mode for the next couple of quarters. In the fourth quarter this year, we expect cost and really inefficiencies of running the mill in a half -- with two machines -- that does create inefficiencies -- and that impact of that transition through the operating earnings line could be as much as $40 million.

In the end, we will be better-positioned for long-term success in our North American business. We're going to have two excellent world-class, low-cost commodity mills, two very highly-capable, well-equipped specialty mills, to serve our most attractive segments and customers.

Moving on to distribution, xpedx delivered a solid quarter, as we expected, driven by revenue improvement, and this was despite one less shipping day and also, importantly, continued improvements in their operational costs. We continue to work very diligently on the spin-off opportunity with Unisource and I would say we're making progress on reaching a mutually acceptable transaction.

Turning to Ilim, we talked about Ilim a little bit, and we did see significant progress on the ramp-up of the major capital projects at Koryazhma and Bratsk, along with some appreciation and move-up in pulp prices. This did result in an improvement in the operational EBITDA of $37 million over the second quarter. Additionally, the ruble strengthened against the US dollar, which did result in net favorable non-cash FX gain on the JV's $1.4 billion of US denominated debt.

Moving to the next slide, I wanted to update you on where we are with the project ramp-up. As I mentioned, and as we said we would, we saw significant progress in the third quarter, as the project benefits are beginning to show up and the start-up ramp-up costs are continuing to come down.

Ilim expects to make another big step forward in the fourth quarter, as operational efficiencies and equipment reliability continue to improve. Additionally, the team is working very hard on project qualification efforts as we speak. And as those products get qualified, we'll begin to sell those and that will show up in improved margins.

So while Ilim expects to see further improvement in results in the fourth quarter, some of this improvement will be offset by increased costs that are just associated with the season, wood cost issues that hit us this time of year, and other seasonal costs. But the way we feel, and we're very excited about it, is we have done the hard work, we're not done, but making great progress, and 2014 looks to be a great opportunity, as well as beyond.

So turning to free cash flow and the uses of cash, a lot happened during the quarter-- all good. As you recall, we closed on the sale of the Temple-Inland Building Products business early in the quarter, received $710 million in cash proceeds in July.

On September 10, we announced a 17% increase in our regular dividend to $1.40 per share, payable in December of this year. Additionally, we announced an authorization to buy back up to $1.5 billion in shares. We have been active with this program since receiving that authorization, and up to date, through yesterday, we have repurchased more than 2.6 million shares at an average price of $45 per share, for about $120 million.

Additionally, we continue to pay down debt and have reduced our debt balance by $457 million year-to-date, and we expect to pay down roughly $600 million for the full year. As you can see from the chart, and John mentioned this, we continue to track well on our path toward our stated goal of $2.2 billion in free cash flow, and if you take the last two quarters, we're at a run rate of $1.8 billion. We feel good about our ability to continue to grow the free cash flow as we move into 2014, and we feel very good about our capital allocation plan.

So moving to the fourth-quarter outlook before I turn it back to John. We see relatively flat quarter-over-quarter change on volume, as seasonal increases in Brazil and European package are offset by the decline in North American papers due to the restructuring, and there are two less shipping days in North American packaging.

Price will continue to improve in North American packaging as discussed earlier, and we will begin to see implementation of the announced price increases in North American paper. And we should also see pricing improvement in our European and our Brazilian packaging business.

On operations, the largest impact item will be associated with the Courtland transition and the wind-down, as previously discussed. We do expect some mild but continued impact from higher wood costs that we saw in Q3. Net-net on mill outages, they will be $10 million higher for the fourth quarter, and we expect taxes and interest to return to normal levels after the benefits we saw in Q3.

While we expect additional improvement at the Ilim JV, seasonal costs and increasing wood supply issues will offset a good portion of these gains. We're assuming no change in FX for the quarter so no repeat of the gain in Q4. So with that, John, let me turn it back over to you for the wrap-up.

Thanks, Carol. First of all, I would like to emphasize that while this was a record operating earnings and EBITDA quarter, we still get additional upside from here. We continue to build momentum in generating cash flow and our EBITDA results, and have line of sight for the $5 billion-plus EBITDA goal we talked to investors about 1.5 years ago.

In the fourth quarter, as Carol said, we expect to realize the full benefits of the box price increase that was announced in April and further price increases in North American coated paper board, North American papers, and Europe and Brazil box businesses. We're also going to see some volume improvement in Brazil and some improvement in both our European and Brazilian packaging businesses.

Carol talked about the Courtland headwinds, about $40 million, but we like how this Business is going to look in 2014 with a four mill system. Box buying will be lighter in North America because we have got two less shipping days, and wood costs are going to continue to be a headwind but they say the southeast is finally drying out and inventories are getting a rebuild. And we have slightly higher maintenance outages in the fourth quarter and expect the tax rates to return to a normal level.

So what makes International Paper different and attractive? This last slide here, I'm on slide 23 -- we have strong leading positions in our primary North American markets and the best margins, with further upside potential. We have got a global footprint in our key businesses with attractive growth potential and we have the talent to lead the Business and execute against our plans.

We have transformed the Company and strengthened our position in our core platform business. We continue to manage the portfolio aggressively and have more upside to optimization, repositioning of our North American papers business, and strategic investments like Ilim that are ramping up with a lot of upside.

We have improved our free key cash flow generation and have plans to grow and sustain it, which leaves us in a good cash position and able to return better than cost of capital returns. At the same time, through a balanced use of cash, return some of that cash to our shareowners, as evidenced by last month's actions to both increase our dividends and authorize a share buyback program. So with that, I'll stop right there, and open it up to your questions.

(Operator Instructions)

Your first question comes from the line of George Staphos of Bank of America.

Thanks for all the details. And congratulations on the progress so far this year. My first question is on if you could provide any outlook on early fourth-quarter trends within industrial packaging.

And, John and Carol, I noticed on the slide in the Appendix, that you did see a little bit of market-related downtime in industrial, if I saw that correctly. Could you comment at all where perhaps some softness arose in the quarter that you might not have anticipated? Then I had a couple of follow-ons.

You want to take that?

Sure, I will. On the outlook as we enter into the fourth quarter in October, box demand is about where we thought it would be, still tracking like the market tracks, just slightly positive. And for us, we were behind the industry numbers, 300, 400 basis points earlier in the year; we've narrowed that to less than 100. In September, we were much less than 100 basis points behind. And that is what we're seeing going into the fourth quarter, so we don't anticipate any major changes in demand.

On the other two channels to market for our container board -- the open market, domestic, of course that reflects the US box business, and that will track about the same. And the export market, we the expect the normal fourth-quarter seasonal demand pattern.

With respect to your comment on the lack of order downtime, it was 70,000 tons -- as you know, a very large system. As we looked at how the quarter unfolded in the third quarter and we realized what orders we had and what basis weights and whether it's recycled and virgin, we made the paper we needed for the customer demand we had, as well as trying to position our inventories to the best way possible as we prepare for the beginning of next year and the maintenance outages we have. So, with all those considerations, we come up with 70,000 tons of capacity we didn't to employ.

Fair enough. And that's also a silver lining in terms of producing to market demand. One other question I had. Can you remind us what effect you think some of the increase in Asian box board capacity might have on your business, if at all?

And then, the last question and then I'll turn it over. Ultimately, how much market share do you think -- maybe it's a question for Tom Kadien -- do you think can get of the coffee cup market in paperboard? Thanks, guys, and good luck in the quarter.

Tom Kadien here. On the Asia box board, we really haven't seen a lot of impact here in North America. Where we see the impact is in the global export markets where pricing has come down. We are largely out of most of those difficult market segments and it really hasn't had a big impact on us in North America at all.

On the move from foam to paper, we're the largest cup stock producer in North America out of two of our bleached board mills, and we've got push in about a 50% market share there. So, if we got our normal share, that would be 50%.

We expect we'll do better than that. And we're also the largest supplier of paper cups and lids to the quick-service restaurant and coffee segment, and we think we'll do better than our share there as well, as we have been over the last couple of years.

George, the other thing I'd add about coated board is we don't see -- we produce coated board in Poland and in Russia. And we don't see any Asian impact [impacting] those core markets for us.

Most of it is staying somewhere in Asia. And if you look it up on our table, our coated board volume is up 48% year over year and, unfortunately, so are a bunch of others. That's got the [best of the] capacity situation it's got to work through.

Okay. Thank you for the comments, everybody.

Your next question comes from the line of Mark Weintraub of Buckingham Research.

Couple questions on industrial packaging, following up a bit more. Typically, would you expect that the fourth quarter seasonally to have a little bit more or a little bit less demand than you would see in the third quarter? And can one extrapolate from that on what expectations one might have for market downtime in that business?

And then, second, I think Carol had mentioned that you exited in the quarter in the high $40s in terms of the box pricing, and then I think she said you're expected to get another $5 as 4Q progresses. So is it fair to assume about a $10-per-ton price improvement 4Q v 3Q in box prices?

And then, lastly, is a flat demand outlook for next year, at this juncture, in corrugated, the most realistic? Or are there reasons why it might be better or worse than that? If you could help spell that out, that would be great?

Mark, before I let Mark Sutton answer all those questions, we're not going to forecast market downtime. We don't do that.

Right, thank you, John (laughter). Question number one, yes, Q4 typically would be seasonally a little lighter in demand. And that's a general statement about the market, but in particular about International Paper's segment mix.

And, as Carol mentioned, there's a couple of less shipping days, which is not really a seasonality issue, but just a reality. We're going to make the board we need to make for the business we have in all three channels -- the box business, the open market here in the US, and the open market globally.

The price question around exiting in the high $40s, we will recover, as John said, more than the $50 increase, which is compensating for some of the waste you have in the conversion operations. And so as we sit here today, we're up $101 from last third quarter and your $10 quarter over quarter is probably not a bad number.

And then, lastly, as we think about --?

I'm sorry, your third question -- growth for next year. I was writing them down and I didn't write that one down.

Growth for next year, flat. When you look at the people who are developing forecasts for box and looking at the macro indicators, there's a lot of energy around a slightly positive demand environment next year. It may be in the 1.5%.

And I think it's really going to be dependent on the US economy. Box demand is going to track; non-durables is going to be a bit behind GDP. So, as the consumer comes back in the market, we'll see good box command, and hopefully it's better than flat.

Okay.

If you look at box demand for the industry, relative to where we were prior to the recession and we are still 5% or 6% below the 390 billion square feet that were shipped in 2007. So, box demand is growing at GDP less 1 point and that's where we think it is. And we get 3% GDP growth, which we should get at some point in time, then we're going to get positive box demand, which is going to be a big tailwind.

And one more part to add to that is, we do care about global demand for boxes. So, global demand at 3% to 4% -- we all know there's a part of that global segment that we get to participate in, specifically for International Paper, exports are very strategic. For the industry they are strategic. So, if you think about that, that can add another 0.5 point to 0.7 point of gross in North America.

And I'd say just that if you look at the page, it shows our shipments year to date by volume, even though the box market is up 0.5% in the US, our shipments outside the US -- or outside shipments US and exports are up 5% for the first 9 months of the year.

Great. Thanks. Very helpful.

Your next question comes from the line of Philip Ng with Jefferies.

To continue on container board, can you give us a sense how you're thinking about inventory at this point and do you need to draw down any more inventory in Q4?

We like where our inventories are right now, from the standpoint of operating our large system at the lowest possible cost. We had to prepare for some of the outages we have coming up, maintenance outages at the beginning of next year, and inventories are in good shape from the quality of the inventory and turns. And we will operate our system really to the demand for more business and not anticipate to need to build any inventory.

Got you. And in your slide deck, you guys highlighted how there's some untapped, below-cost capacity for container boards. Could that represent an opportunity for you to take out some high-cost capacity down the road?

Well, all that depends on the demand profile. But the point in all of that is, we have opportunities, for very low cost, to make more container board if we have the demand for it and as we prepare in the future for how we view our current off-take agreements with the mills we had to divest. So, all of that will play into a decision we make on capacity. It's out there if we need it and it's low cost.

Got you. And just one last question for Carol.

Glad to see you guys buy back some stock, current quarter and year to date. Could there be an opportunity for you guys to take a more aggressive stance this year, or is that more of an opportunity going into 2014?

Well, as we said, we've got authorized a $1.5 billion share buyback that we said was a 2- to 3-year program. So, we'll continue to monitor our options, but we'll probably stick to that path of that $1.5 billion, 2 to 3 years. So you can do the math on that.

Okay. All right, thanks, guys.

[We've got a lot of] flexibility though in terms of how we go ahead and complete that share buyback.

Okay.

Your next question comes from the line of Philip Gresh of JPMorgan.

A couple of questions -- first one, again, on industrial packaging. If we think about the downtime that you took in the quarter, coming into the quarter, you were talking about building some inventories, so is it fair to assume that the downtime was maybe weighted more towards the end of the quarter, when we saw a little bit of the softer demand?

Phil, this is Mark. I would say it really evolves through the quarter, as we look at the actual demand from all three channels that we send container board through and the inventory that we need. And inventory is not inventory -- there's recycled, there's virgin, there's heavyweight, lightweight. And knowing what our seasonal demand is going to be for the upcoming few months all weighs into it.

So, the science behind it is, it's balancing that system and making the board at the lowest possible marginal cost. So it's not a wait and see what happens and slam it in at the end. It's really an organized process to really make our product at the lowest marginal cost.

Fair enough. Okay.

Second question is just on Courtland, appreciate the color around the $40-million incremental in the quarter. As we think about how that progresses through 1Q and into 2014, Carol or John, any color as to whether that would step up again sequentially in 1Q, or do we level off here? And then at what point do we step back down, do you think?

Phil, it's Tim Nicholls. We're going to update that as we go.

The important point to make here is the process is well underway. We're trying to do it at the lowest possible cost.

We'll have two machines down in the middle of November. When we announced, we said the other two would come down by the end of the first quarter. We now have moved that up to mid-quarter and the goal is to keep pulling that forward as rapidly as we can.

Part of what we're doing is we're working through qualifications [and] other facilities for various products and customers. So, you can think of the first two machines, that capacity coming out fairly quickly.

You can think about the machine time used on the other two machines as being -- to do two things. One, cover for those qualifications; and number two, to help us build some inventory around unique products, like our colors -- uncoated free-sheet -- where we need to build a little bit of inventory to manage the transition. So those machines are not fully available for current customer demand.

Okay. And then, last question for Carol just on the free cash flow with respect to working capital, et cetera. You talked about the past two quarters, you run rate that -- you are talking $1.8 billion in free cash. The first quarter was a little lower than that; I assume the fourth quarter is going to be higher as you draw some of that working capital down.

Is that $1.8 billion number a fair number to think about this year? And, assuming that you do still have some working capital headwinds this year that maybe you don't have next year, how should we think about that?

Well, Phil, you make a great point. I think $1.8 billion is a good number, and if the working capital headwinds because we're raising prices and expanding margins, we'll take those headwinds all day long. So it's hard to speculate on what next year might bring.

And, yes, this year, the headwind -- sales are up and because pricing is up so that has been a headwind that will level out. But I think is $1.8 billion is a good normalized level for where we're operating today and we think it should go up from there.

And do you have a thought as to specifically what working capital headwind you might end up with this year in that $1.8 million number?

No, I wouldn't speculate on where the working capital will go in the fourth quarter. There's so many moving parts to that. And there's also a piece of that working capital that's at corporate -- accruals and other things that aren't directly tied to ops so we'll see where the fourth quarter comes out, but it should be helpful.

Got it. Thanks. I'll turn it over.

Your next question comes from the line of Gail Glazerman of UBS.

Not to belabor the point in industrial packaging, but industry inventory has rose fairly sharply in June through August, and I'm just wondering, do you have any sense if that was intentional or did you see the market get more competitive at all or anything that changes your view on the market? And also maybe if you could address some of the capacity expansion news that has come out over the last month or so.

Okay, Gail, this is Mark, good morning. On inventory, and I can only speak for International Paper on the inventory front, and for us it was just running our business for, as I said, balancing the near-term needs and making sure we have the lowest possible supply chain cost as we go into what we know is going to be a maintenance outage season.

And, quite honestly, we weren't as prepared in this past first quarter and second quarter as we would have liked to have been and we spent some money. We don't want to do that again.

So, for us, it was about really having our system be the most efficient from a service platform and a cost standpoint. From the rest of the industry, every company, obviously, has its own issues with how they view inventory.

Capacity, we are seeing, as everyone has recognized, some new capacity coming into market. We haven't seen any, I would say, direct impact, but the thing that will unfold over time is some of this product will probably find a home in certain segments.

And then, in the secondary impact would be that we may see some additional suppliers showing up in some of the export markets. But so far, the new capacity coming on -- it's not all the same type of product and it's not all completely applicable to every segment we compete in. So we're monitoring that like we would in any other business issue.

Okay. And Pulp & Paper Week over the weekend reduced the premium on West Coast medium. Do you see that as anything significant?

Is it attributable to maybe some of the excess supply in the East? Is there any comment you can make there?

No comment on that right now.

Okay. You talked about, Tom, the US coated-board market and how there's not been an impact from Asia. Last quarter, you talked about China maybe bottoming out. Is that still your view, or is it still getting incrementally worse?

Gail, I would say it's moving along on the bottom. It hasn't gotten materially worse. Pricing is about where it was.

We were starting to see some of the high-cost capacity come out and be shut down, at least temporarily. So, I would say that is offering a bit of an offset to some of the new capacity that's come online. But I would call it bouncing along the bottom.

And demand is actually getting a little bit better over there in Asia right now. We're seeing that as well as we're seeing some mix improvement for ourselves.

Okay, thank you. One last question.

There was a reference on the slide in terms of pension about $1.5 billion on 100 basis points. Is that meant to just be a sense of what the sensitivity is, and if so, could you just give a sense of, based on what you're seeing today, what your pension deficit would look like entering 2014?

Yes, Gail, that is illustrative, so 100 basis points equates to about that. And interest rates of the last few days have come down a little bit, so going the other direction. And if you look at the total accounting funding -- we do that at the end of the year and it's a combination of how did our assets perform versus what's the liability math tell us -- but directionally, it should be moving in the right direction for us. So it should be better at the end of this year than it was at the end of last year, unless something changes dramatically between now and year end.

Okay, but you can't put a number to that?

No, I couldn't. Because I'd have to be trying to predict what are assets going to do between now and the end of the year and where are interest rates between now and the end of the year. And that would be -- if I could do that, I would probably be doing something else. (laughter)

Thank you.

Your next question comes from the line of Chip Dillon of Vertical Research.

If you could talk a little bit about the Brazilian container board and India operations. I noticed India had a little bit of a step back from the second quarter in terms of its performance.

And then also, the Brazilian acquisition. I know it's early days, but that really has not contributed either.

So, what kind of ramp do you think we could expect for those as we go into 2014? And do you expect each of them -- certainly Brazil should be profitable -- but do you think India will also turn the corner?

Chip, it's Tim Nicholls. I'll talk about Brazil and then turn it over to Tom for India.

In Brazil, we have been squeezed this year. OCC has gone up dramatically. Not precedent setting, because we have seen these cycles before, but we stepped into the operation right as OCC was taking off and we saw our margins squeeze.

We've seen the worst of it. I expect margins to improve quite dramatically as we go into the fourth quarter. And I think the business has done a nice job recovering price to cover the OCC increase.

We're still going to like the business a lot. We have no change in view on what we think the margin potential is.

Even in a slower economic year, we still feel good about the growth this year going into next year. So, it's unfortunate that we have margin compression, but I think we're on the road to recovery.

Chip, regarding India, the quarter that you see on -- what is it -- page 33, that's all about an annual outage at Rajahmundry. We had to get into the recovery boiler and do a lot of work. We were down for almost 25 days in the quarter.

Frankly, we had a pretty good September. 20,000 of the 40,000 tons that we sold in the quarter were sold in September and we're set up for a good fourth quarter.

The issue that we have been fighting, and the industry has been fighting over there -- wood costs have run up as some competitors have added pulping capacity. So pricing has been chasing wood cost increases for the better part of the year and we're finally, at this point I would say, catching up. So we had a pretty good September and we expect a much better fourth quarter.

Tom, you might talk about the optimization of the pulp mill -- there's some upside there, as well.

Yes, we're running at about 500 tons a day in the Rajahmundry pulp mill. We have capacity to do more than that and we're, frankly, waiting on consents from the government to allow us to do that. So we have got some upside on cost, as well as productivity, that we're just waiting on and we hope that to come through by the end of the year.

Got you and then -- oh, okay?

(Multiple speakers) all we can make. So we're going to like it as we figure out how to make more.

Got you. And then one last quick one for Carol. Just as a follow-up on the pension issue.

If we, let's just say that, who knows what happens between now and year end, but let's say that interest rates were 100 basis points higher, with the corporate rate -- just so I read this correctly -- and the stock market stays up for the year. I don't think we would be remiss to, first of all, expect that shortfall to fall below $3 billion. I can't imagine that wouldn't happen.

And then, if that did happen -- and I know it's different for accounting versus what the government requires -- but if we did see, at least from an accounting standpoint, that net number come down, could we see your planned contribution number that you have been talking about for the next 2 years maybe come down as we look at 2015 or 2016?

Yes, Chip. Good questions. You're right. The math on your first part is if the 100 basis points stays in the market, stays around where it is, there's going to be a significant reduction in the unfunded liability, and what you said is very accurate.

So you're right also relative to accounting versus funding, there are two completely different sets of math. From the funding, the 2014 funding and 2015, because there's a smoothing element to that, those are pretty well -- I want to say locked in.

The thing that could change that would be policy in DC. Law changes could change that, and that happened a couple of years ago. It could happen again, but I'm not saying that or speculating -- but the first 2 years, 2014, 2015 are locked in.

Where a higher interest rate would help us is -- you're also correct -- that it would start to feather in to what we would have to put into the plan, in the 2016 and 2017 time frame, and it would reduce any monies we might have to put in there. Net-net, higher interest rates would be great; it would be -- help us on the accounting and, ultimately, it would support us on the funding as well.

Very helpful. Thank you.

Your next question comes from the line of Mark Wilde of Deutsche Bank.

Start off on the Courtland side. I wonder if, either Tim Nicholls or Carol, can you give us some sense of just the EBITDA impact of that closure as we work forward? What's the hit look like from just not running that tonnage?

It's Tim, Mark. The way I would say it is this -- we operate a system and we have a mix of customers that we use the system to support.

We had grown exports. We had grown some marginally profitable tons to fill up machine time over the past couple of years. And as we looked at the system that we had, we said -- We can run a smaller system and do it better.

So, we're not going to forecast what earnings are going to be, but you can be assured that we looked at the economics of how we were going to run a system and we have, in the four mills, a low-cost commodity set of assets. And even with [tie] in Georgetown for the products they produce, we have a very low-cost system for specialty and value-added. So it's a combination of getting the right amount of capacity for the business that we want for the long term and not, from a capital allocation standpoint, keep investing in a system that's sized larger than we need.

Okay. And just one other question on Courtland, Tim. This is the third mill you have taken out of the white paper business, now having shut down and then restarted part of Franklin, and having converted Pensacola. I just wonder whether all of this affects your thinking about investing in another new paper machine down in Brazil?

Well, it's a great question, Mark, and the way we think about these options is based on the dynamics of the business. We view the uncoated free-sheet markets around the world as very much regional markets. They have regional supply/demand dynamics and margin dynamics.

So part of the complication around -- and we see this in Brazil, as we have told everyone. We're trying to grow into the region as fast as possible.

Supply chains are long; you tie up cash and inventory; you have FX exposures. And, depending on where you're trying to supply, you have different environmental certifications and forestry certifications that are required.

It's very hard to supply from one region of the world to the other for the long term. It will be made on a case-by-case basis, region by region.

Okay. And then, just a couple of industrial packaging questions. Mark Sutton, was there any impact in the third quarter from some of those West Coast contracts starting to roll off?

Mark, you're speaking of the off-take agreement?

Yes, exactly.

Just to remind you, the off-take agreements go for 3 years and there's a decreasing step-down. So, it's going to, over time, have an effect. But we don't expect any sharp effect.

We have got to manage that as part of our supply chain. And in the first year, and even the second year, it is a pretty big part of our supply chain. I would say it had to affect the plans and we organized that step-down so that it works for us and our customers and our supply chain.

Okay. Another question I had was just with some of this new capacity -- the machine conversion, some of these -- the discussion of new lightweight recycled mills, I just wondered whether there is anything you could do with that idled 400,000-ton machine at Valliant to look at making lightweight recycled on that machine? And what would it take for you to restart or retool that machine?

Carol mentioned it in her comments, that's one of the options we have for some very low-cost capacity that is available for us if we need it. We look at the whole system, Mark, and based on that and our demand of our customers, we'll decide what type of products we actually need to make, because as you know, every container board mill is not the same.

So we haven't -- not prepared to talk about an estimate or anything and what it would take capital-wise to change the grade output of that machine. But, rest assured, all of that is in our consideration. But the main thing is, we'll bring capacity on if we need it for the demand of our customers and for improving and getting at this optimization that Carol talked about in this new industrial packaging system.

All right. And the last one is in the industrial packaging, down in Brazil, you did a 7% margin this quarter.

Klabin is up in the low to mid-30%s, but they own forests so that presumably helps them. MeadWestvaco's Rigesa business is somewhere in between. What is a reasonable target do you think for an EBITDA margin at Orsa?

Well, it's like we said when we acquired the business. We think it could be solidly in the mid-20%s. Our view on margin opportunity has not changed, Mark.

Okay, that's really helpful, Tim. Thanks. Good luck in the fourth quarter.

Mark, I'd add just a comment about capacity. Our objective in all our businesses is to make what our customers require with the minimum amount of assets.

So fewer machines, fewer facilities, and so we'll run our system as hard as we can. We've got to make the right products. And only start up more capacity if we absolutely need it.

Okay, that's helpful, John.

Your final question comes from the line of Anthony Pettinari of Citi.

Just a couple of questions on industrial packaging. Carol outlined the $200-million optimization opportunity and I was wondering if there was any sense of the timing to realize that opportunity or if you are counting on any real improvement in the container board markets over the next couple of years to realize that.

And then, switching to EMEA, you referenced a margin squeeze with box prices lagging container board increases. Is this a normal lag or are you seeing increased competitive pressure in boxes, or how should we think about that going into 4Q?

Anthony, this is Mark. On the optimization, the optimization that we are talking about, that $200 million, really isn't about the market dynamic.

It was about internal initiatives in our mill system -- optimizing the 16 mills and getting a lower average cost across those mills and including in the supply chain. The other part was on the commercial side and really just looking at the new box system and making sure we are making the right products in the right box plants and that we upgrade the segments and the customers within those segments.

We're already underway on some of that and that's an ongoing process that I think will take -- we originally said post-synergy period of the 24 months -- we're not waiting to get started on that. But I would say that's over the next couple of years. And if you could repeat the second question?

It was the EMEA box margins.

I can talk to that, Mark. What's happening is, you have got to remember, Europe is just coming out of a huge recession, so there's a lot of pressure on market demand.

So, it's more difficult with demand being negative year over year, certainly in the industrial segments, to get box prices up as board prices are coming up. Absent that, if we'd had a more normal economic environment, you'd see a perfect flow through.

But to add on to that, John is exactly right. It does ebb and flow there. So if you look at the margins as an independent converter in Europe, they go up and down a little bit. But we feel pretty confident that as board goes up, it will ultimately -- box prices will go up as well. And we're just in the trough part of that. We hit the trough part of that in the third quarter.

So, let me wrap up and just say, it was a very good quarter for International Paper. We performed to record levels.

We have got more to come in 2014. We're going to generate a lot of cash. We're going to use it in a balanced way that creates value for our shareowners.

That's the story and we'll be talking more about it as we revisit with you for the fourth quarter in January. Thanks.

Thanks, John. And thanks all of you for taking the time to join us this morning.

As always, Michele and I will be available after the call and look forward to speaking with you. Our phone numbers are on page 24 of the Appendix. So, have a great day.

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation. You may now disconnect.