International Paper Co (IP) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the International Paper's first-quarter conference call.

(Operator Instructions)

It is now my pleasure to turn the call over to Jay Royalty, Vice President Investor Relations. Please go ahead.

Thanks, Vonda. Good morning, everyone. Thank you for joining International Paper's first-quarter earnings conference call.

Our key speakers this morning are John Faraci, Chairman and Chief Executive Office, and Carol Roberts, Senior Vice President and Chief Financial Officer.

During this call we will make forward-looking statements that are subject to risks and uncertainties, which are outlined on slide 2 of our presentation. We will also present certain non-US GAAP financial information. A reconciliation of those figures to US GAAP financial measures are available on our website. Our website also contains copies of the first-quarter 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. Good morning, everybody. As we usually do, over the next 15 to 20 minutes, Carol Roberts and I will review our first-quarter 2014 results and the performance of our individual businesses. Then, we'll speak to our outlook and then we'll open it up to the Q&A section.

Let me just start off. International Paper delivered solid operating earnings despite the unusual combination of multiple sever weather events, particularly in the Midwest and Southeast, where a big portion of our mills, box plants, and customers are concentrated. The earnings impact due to the weather, which fortunately is no behind us, was $60 million in the quarter. Quarter over quarter, we also experienced, and this is the positive part, higher prices in many of our global businesses, including Printing Papers in North America, Consumer Packaging, Industrial Packaging in North America, as well as the paper business in Latin America, particularly Brazil.

Despite the significant the weather impact, we had strong results in our North America Industrial Packaging business, with operating earnings at record levels for first quarter. We also successfully executed $120 million of mill outages at 13 mills and completed the Courtland closure and our transitioning activities are progressing. We've entered the final stages of the Courtland closure, but not all of the costs are behind us, but a big chunk of them are.

We made a lot of progress on the xpedx spin/merge with Unisource. We expect to close that transaction around the middle of the year. I'm also pleased to report that the Ilim joint venture had a solid quarter operationally, almost 2x, almost double the level of the fourth quarter, driven by the ramp up of the projects, which involves higher volumes, improved productivity, better quality at lower cost. We also got some pulp price increases.

These gains, however, were masked by a negative $0.10 non-cash charge associated with the devaluation of the ruble during the quarter against the joint venture's US dollar denominated debt. I think the progress on the Ilim ramp up just underscores International Paper's capability to operate and run global businesses that are in our core-business space.

Finally, we continued to make progress with our share buyback program in the quarter. I'll discuss those results a little later on the call.

Continuing with our financial results, EBITDA was $920 million for the quarter, down slightly for last year, but remember weather was $60 million of that. We also had $40 million of cash costs associated with the Courtland closure. Free cash flow was $254 million, but I think to really compare that to the first quarter of $300 million last year, you need to do two things. Take the weather impact of $60 million, the $40 million cash costs for Courtland, and the $60 million higher CapEx that we had in the first quarter that was planned, and our underlying free cash flow was closer to $380 million, but we show $250 million here for those other three reasons.

Let me turn it over to Carol Roberts, now, to talk about the business performance.

Thanks, John. Good morning, everyone. Looking at the sequential EPS bridge, IP earned $0.61 per share in the first quarter versus $0.83 in the fourth quarter. As you can see on the bridge, the $60 million weather impact is on the far right. As you think about that impact, it's about 50% operational disruption with higher costs associated with that, 25% lost volume, and 25% higher input costs in the quarter.

Outside of the weather impact, as John mentioned, we experienced favorable pricing. We did see seasonally weaker volume. We had good operations and the impact of the heavier maintenance outages hit us in this quarter. Additionally, we saw other increased input costs, a negative swing on corporate due to the non repeat of a favorable item from the fourth quarter, and the net unfavorable change in equity earnings at Ilim due to the non-cash effects impact, as John described earlier.

I think it is important, turning to the next slide, to put a little context around our results for the first quarter of 2014 versus the first quarter of 2013. When you compare our year-over-year results, the first quarter of 2014 was a strong quarter considering would have impact of the weather, a higher tax rate and the unfavorable non-cash Ilim effects impact of $0.08. Additionally, if you look into the ops line, $0.05 of the year-over-year impact was attributable to the Courtland shutdown costs. When you put all that together, those items represent a $0.32 per share headwind in the quarter yea over year.

Turning to the next slide, this shows our quarter-over-quarter global input cost impact. As you can see, we experienced significant headwinds, largely driven by the extreme weather condition across much of the US. This drove energy cost much higher and those costs, although seasonally improving, will remain relatively high as we work through the second quarter. We do anticipate that the gas markets will ease albeit slowly due to the current, pretty low level of gas inventory that exists right now.

We experienced seasonal wood cost increases as well. In addition to the weather impact, our wood costs are currently being unfavorably impacted by competition for fiber from OSB plant start ups and some new export pellet facilities. Although we do expect some improvement in North American wood costs throughout the year, we do expect the wood demand environment to remain under some pressure over the next couple of quarters.

Now turning to the businesses on slide 10, let me talk about Industrial Packaging. As John mentioned, the Industrial Packaging business had a strong quarter driven by increased prices, favorable mix and stronger sequential volume in North America. Our year-over-year box volume was down about 2% on a per day basis and this is roughly in line with the industry. Outside of the weather impact, the operations performed well and the business successfully executed $69 million of outages. Wood and seasonally higher energy costs were partially offset by favorable OCP costs. In addition to our planned maintenance outages, the business did take a 60,000 tons of market related downtime in the quarter, as we continued to match our supply with our customer's demand.

Looking at the EBITDA margins in North American Industrial Packaging, on slide 11, the business continues to generate the best margins in the industry. Mark Sutton and his team are actively working initiatives across the business, which will drive further margin expansion over time.

Before leaving Industrial Packaging, I wanted to touch on what we are seeing on the demand front through April. As you can see on this slide, month to date, April 2014 shipments are up about 3% from the first-quarter levels and importantly are up 2% versus April of 2013. While this comparison only considers what we have seen so far this quarter, there is no doubt that demand has certainly picked up from the Q1 levels and particularly has picked up from the March levels. This is from the recovery from the weather of course, but also as we move into a seasonally stronger time of year.

Moving on to Consumer Packaging on slide 13, we exited the quarter with price momentum as we continue to implement our recently announced increases. Have to note for this quarter, volume was constrained by of five-year cold mill outage at Augusta. We did see sequentially softer demand around Chinese new year in our Sun JV, and we had a significant outage, a positive outage at our coated paperboard machine at our Kwidzyn, Poland mill as we did a significant capital project to enhance our product quality.

Other significant factors impacting results were escalating input cost, disruptions due to the severe weather and just consistency of our manufacturing operations. In the other category, which shows up on the bridge, that is primarily FX driven by the weakening currency in China.

I think it's important for our Consumer Packaging business to highlight a lot of the positive momentum that may be masked in the previous bridge that's going to result in the business having improved earnings in the second half of the year and beyond. It's important to note that 85% of our mill outages in the US business will take place in the first five months of the year.

We know the North American SBS backlogs remains strong at five weeks and we anticipate that will continue given the high outage schedule that I just mentioned. We saw record cup demand in the Q1, despite January and February's weather in much of the US. We expect full realization of the announced price increases in both our coated paperboard and food service grades in this business.

The real good news is we are continuing to see the positive momentum in the shift from foam to paper cups and that is benefiting both our coated paperboard and food service businesses. To ensure that we have the capacity to take advantage of this growing demand, we recently announced the expansion of our Kenton, Ohio facility which we will come to by mid-next year.

Finally, which is very exciting, is we have recently, very successfully, completed a significant capital project to our bleached board machine in Kwidzyn, Poland. We will realize the benefits from enhanced product quality and expanded margins as we ramp up and bring this new product to market over the next year.

On slide 15, let me move on to Printing Papers. In Printing Papers, we saw price improvement in North America and Brazil along with mix improvement as we exited lower priced positions as part of the Courtland transition. These were more than offset by lower volumes in North America, Brazil and Europe. The North American volumes were lower, of course, due to the Courtland shutdown.

For Brazil, the first quarter is just a seasonally slower quarter. I would want to note that volume and mix were adversely impacted by a slowing Russian economy. Consequently, there, we saw an increase in our export shipments. We do expect this trend to continue into the second quarter.

The higher costs that show up on the bridge are essentially results of the Courtland shutdown. Higher inputs, mainly wood and energy, unfavorable FX Brazil and weather were also negatives in the quarter. We realized $36 per ton in price improvement across all the grades in North American paper and that is slightly ahead of expectations on a weighted-average basis as that first price increase was applied to about 75% to 80% of our mix.

Turning specifically to an update on the Courtland shutdown on slide 16, things are progressing well and we're entering the final stages of the shutdown and transition. All production was ceased in the first quarter, and we're currently depleting all the transition inventory as really important work on the qualification trials for the retained business is nearing completion.

I want to take a moment on behalf of the entire senior leadership team at the Company to thank all our colleagues at the Courtland mill and across the North American Printing Papers business who have been involved with this really massive undertaking for a tough job that was done very well. Happy to report that a significant number of our Courtland colleagues have found employment opportunities, many of which were in other International Paper facilities where had openings and opportunities.

As we have talked about over the last couple of quarters, we are incurring closure transition costs as part of this initiative. The impact on operating results in the first quarter was close to $30 million. We expect costs in the second quarter to be about half that. Then, there will be some residual and transition costs that flow into the third and fourth quarter. They'll be the range of about $5 million to $10 million per quarter.

Moving on to Distribution, Distribution did experience a challenging quarter as supply chain disruptions due to the whether challenges certainly impacted operations and revenue. Lower costs did help our margins, but these benefits were more than offset by the weaker sales. As John mentioned, we are making very good progress with the activities related to completing the spin/merge transaction with Unisource.

Moving onto the Ilim joint venture, as John mentioned, the Ilim joint venture had a very solid quarter of progress with $115 million of operational EBITDA. That improvement was driven by better operations, better productivity, which led to higher volume, and increased pulp prices.

On IP's equity earnings, though, we were negatively impacted by the weakening ruble during the quarter and the resulting non-cash FX impact on the JV's US-denominated debt. The JV saw its operational EBITDA, as John said, increased by $54 million in the first quarter. That just shows the very significant progress we are making on the ramp up of our projects. While the JV expects operational performance to continue to improve, we have seen some decline in pulp prices from first-quarter levels and that will modestly impact second-quarter results unfavorably.

While the Russian economy has slowed considerably, that will impact our paper business to the west, it is important to note that much of our production, the majority of our production in the east is destined for China, and the China pulp demand for this business remains strong.

Turning to slide 19, I wanted to take a moment to give you an update on the two significant capital projects at the Ilim JV. On the left is the Bratsk mill and on the right is the Koryazhma mill that houses PM-7 that we have started up. The bar graphs represent the recent production ramp-up trends for each. If I look at Bratsk, you can see the production continues to ramp up. To put a number on this, we are showing that represents a 30% increase in output from the fourth quarter of 2013 to our outlook for the second quarter of 2014. The JV expects to achieve full production targets on the new fiber line by year end.

In the case of the paper machine at Koryazhma, the machine actually achieved full production and qualification on our uncoated free-sheet grades in March. So, great progress at the JV and to more to come as the year unfolds.

Before turning it back to John, let me move to slide 20 and give you an outlook into the second quarter. I want to note that at the bottom, we added a line on the chart to account for the first quarter weather impact, which is $60 million across our North American business. Remember, this into some volume, the operational impacts and the input cost escalation that occurred in the first quarter.

Outside of that broad weather impact, which included the items such as mentioned, we expect volume to increase in North America and Industrial Packaging by an incremental 1.5% to 2.5%. Volume should also modestly improve in North American Consumer Packaging and in Brazil Packaging. Given the economic slowdown in Russia, we do expect some modest unfavorable volume and price mix impact for the Paper business in that part of the world.

Paper pricing mix will continue to improve in North America and to some extent in Brazil. We should also see the benefit of higher pricing in fluff pulp. We will see some favorable pricing in North American Consumer Packaging as we implement our announced price increases. With the increase in volume in North American Industrial Packaging, that comes from a ramp up of some of the consumer package goods companies, we could and will likely see some modest offset as our customer mix normalizes. We do expect see improvement in prices in our Brazil Packaging business.

Operations should continue to perform solidly and will see the benefit of lower shutdown costs in Courtland, as I mentioned earlier. Outside of the whether, we expect overall input costs to be relatively stable with some puts and takes with some pressure on wood prices, a slight headwind in our European business. The second quarter is our heaviest maintenance outage quarter, with outage costs up $60 million versus the first quarter.

Finally, on the Ilim JV we expect solid operational performance to continue. However, pulp prices are declined slightly from the first quarter. We do have some planned maintenance outage in the quarter. As always for the purposes of this exercise, we're assuming no change in FX, so a non recurrence of that impact that we saw in the first quarter is planned for the second.

With that as an outlook for the second quarter, John let me turn it back to you.

Thanks, Carol. I am on, I believe, slide 21. Let me just summarize the major puts and takes as we move to the second quarter. Severe weather is behind us and we have moved on. We see, in April, increased volume, particularly in our Industrial Packaging business. We think that is both seasonal improvement but also related to some economic activity, which is a good sign. Price realization in boxes is solid. With year-over-year sequential box volume up. We have got a number of pricing initiatives underway in coated paperboard, fluff pulp, in North American Paper. We expect to see those benefits in the second quarter and the balance of the year.

The Courtland shutdown, as both Carol and I talked about, is nearly complete and the costs will be coming down but we've still got some costs with us. We're going to experience our heaviest maintenance outage quarter of the year, up $60 million from Q1. Our tax rate should be up from first-quarter levels to roughly 32% for the year, assuming no major changes. If extenders get past, they will be lower. Interest expense benefit we had in the first quarter won't repeat, but all in we expect a stronger earnings quarter ahead of us in Q2.

Let me shift gears here for a minute and step back and comment about what IP is doing with our cash. We've talked about IP as a cash flow story. We're running our businesses well, generating higher levels of sustainable free cash flow. We're consistently generating returns to the Company above our cost of capital. We've worked hard to strengthen the balance sheet, paying down $2.5 billion of debt since early 2012. We've met our leverage targets.

We've returned more cash to shareowners, increasing the dividend in each of the last two fourth quarters, that you have seen here on this slide. We have been executing against our share buyback authorization since initiating that last September. Simply put, we have done what we said we would do.

In terms of the dividend, you can see the recent history where we have made meaningful increases over the last couple of years. We've increased the dividend by more than 33% since outlining our plan in mid 2012, moving the dividend from $1.05 a share to $1.20 per share in the fourth quarter of 2012, then to $1.40 in the fourth quarter of 2013. We've been very clear saying we think there is more dividend runway ahead. We continue to increase the dividend as free cash flow grows, periodically, systematically, thoughtfully and importantly, sustainably.

Our target of 30% to 40% of free cash flow reflects really a trough-tested analysis that we did because we intend whatever level we get the dividend to, to make it sustainable. That 30% to 40% of our free cash flow, which we outlined to many of you at Investor Day couple of years ago, really has the dividend potential to grow the dividend to $1.60 to $2 a share.

A quick update on the share buyback program. We continue to be in the marketplace, since our fourth-quarter call. We've purchased over $460 million in stock since our call on February 4 at an average price of roughly $46. This brings total purchases within the $1.5 billion authorization to nearly $1 billion in less than eight months. As I said before, with this authorization we continue to take advantage of the opportunity to buy back larger amounts of stock when the price is attractive relative to our view of intrinsic value.

Let me just wrap up by concluding. What makes IP different? I'm not going to read this final slide here, but I think it highlights what IP does that does make IP different. It enables us to generate strong free cash flow in today's economic environment, at the same time earn above its cost to capital returns. The economy is improving, albeit slowly. That is going to help everybody. The good news for International Paper and our share earners is that we have plenty of things to work on that will provide upside from where we sit today, both in North America and in key markets around the globe that matter.

With that, I'd be happy to take your questions and open it up right now.

(Operator instructions)

Philip Ng, Jefferies

It's good to see volumes in containerboard bounce back in April. What are you expecting for volume growth for the balance of the year?

In containerboard?

That's right, in containerboard?

Mark, do want to take that?

Sure. Hi, Philip.

We started the year thinking we would be looking at about 1% demand environment in box. That is just using our analysis around nondurable goods production. Of course, the first quarter did not start out that way.

With a more normal trend of economic activity, that is still a number we think is achievable for the balance of the year. It will all depend, really, and all driven by the production in nondurable goods in the US. April is only one month in the quarter, but we are seeing some underlying positive trends in customers and segments that really took a beating in the first quarter.

When I saw the GDP numbers that came out this morning for the first quarter, I wasn't surprised by what our box demand was. We were down, too, and GDP was basically flat.

Got you. That's helpful.

Then based on your demand outlook, how do guys you feel about inventory? Do you guys need to take any economic downtime going forward?

We don't forecast the economic downtime given the cycle of the business, but our inventories are in pretty good shape. If you notice, this is one of the first quarters in the last couple of years that we weren't talking about a lot of supply chain costs and disruptions in the first quarter largely related to our inventory position. We feel good about our inventories. We are going to, obviously, make the containerboard we need to serve the three channels that we are in, our box business that IP owns and runs first and then our domestic open market and export.

I think we will balance what we need in production. We've got a large flexible system. I think lack of supply chain issues indicate that we've got a pretty healthy quantity of inventory and the quality of our inventory is in good shape.

Got you. Just let me sneak one more in for Carol.

The potential dividend target you guys outlined, how quickly can we get to that midpoint? Is that a 2014 or a 2015 event?

Philip, we've said as we watch the free cash flow of the Company improve and we watch the business results come in, we will evaluate it. I would say that you have seen us raise it in the fourth quarter of 2012 and the fourth quarter of 2013, so that has been the pattern so far.

Think incremental and periodic.

All right, thanks. Good luck in the quarter.

Adam Josephson, KeyBanc.

One on OCC. John, obviously, many people have talked about their expectation that OCC prices are biased upward over the long term, but obviously that has not happened of the past couple of years. Has there been anything over the past couple of years that you consider anomalous, such that OCC should go up from here? How much depends on China?

A lot depends on China. At the end of the day, for China on the pulp side, China is 100% of the world's incremental demand. You could make an argument it's probably pretty close to that in terms of incremental OCC demand.

There's no question China is going to select more of their own OCC because they're box business to domestic markets is growing as opposed to box business for export. Remember China's close to a 50 million ton market, so if it's growing at 4% a year, that's 2 million tons a year and China is fiber short. It's hard to come to conclusion the OCC prices don't trend over time with the biggest box market in the world being basically fiber short and recycled linerboard driven.

Thanks for that. Just one on the additional capacity in containerboard.

How would you characterize the impact so far of the converted newsprint machines and of the new mills? What do you expect the impact to be of the capacity that has been announced that has yet to hit the market but will do so later this year and into next year?

Adam, this is Mark Sutton. On the new capacity that is actually running, our view is that the products that are being made are not all the same. They have different end uses.

In our own experience, given we are largely integrated and we export twice as much containerboard as we sell domestically, the impact directly to us has been pretty minimal. However, I think there are secondary impacts in the export market. If our market grows as we expect it to, modestly, there should be a market to support some capacity additions.

It's hard to tell how that's going to play out in the future given the range of quality and capability of these products. We are keeping an eye on it. It's hard, real hard to speculate on capacity that is being talked about but not yet here. We are just monitoring that.

I appreciate that, Mark. Good luck in the quarter. Thank you.

Steve Chercover, DA Davidson.

Just a couple of quickies. First of all on Ilim just to try and calibrate the model, absent the FX hit, should we see low double-digit contribution, perhaps the low teens in the first quarter?

In terms of EPS?

Well in terms of the line item swinging from, I think, a loss of $31 million back towards $10 million to $15 million positive?

I think the way to look at that would be to take the FX out. That operational EBITDA that we mentioned of the $115 million, while we see good momentum on the production of the two projects in the mills, we see a little pressure on pulp pricing. We have an outage that we will take at the end of the quarter, so I would expect that we would see the operational EBITDA to be down a bit from the first-quarter level.

Okay. I recognize the sanctions are against individuals in Russia as opposed to corporations. Are you concerned, or do you have any contingency plans if things get worse?

Well, at this point in time, Steve, business conditions are not worse as relates to what is going on in the Ukraine. Actually, the weakening ruble is helping us in our competitive position, because we have so much pulp we export to China.

The Russian economy was slowing going into the fourth quarter, there's no question. It slowed a little more because of what was going on in Eastern Europe and the Ukraine. The weaker ruble is also helping of us on our paper experts, because if you ramp up the paper machine in Ilim, combined with the paper machine we have an IP Russia, we are exporting more paper out of Russia. The markets of the currency is helping us.

We have got contingency plans. We have taken on quite a bit of debt to fund those projects. Not all of that is long-term debt, and we have good contingency plans in place through all over that debt regardless of what happens in the financial market. Like every other business, we are watching the situation closely. With people on the ground over there, we're getting input from people on the ground as what is happening and also following the news here.

Great, thanks. Just on the containerboard inventories, every company seems to be comfortable with their levels, yet collectively they seem kind of high. Should we recalibrate are concern threshold?

Well, I think that's possible. I think when you look at the way that you can really leverage a well-run supply chain in these containerboard systems, and I only know ours, of managing to some arbitrary number of inventory can actually cost you a lot more money. I think that is something we are looking at, what is the best inventory for what we need.

Again, I mentioned this before, not only is our demand seasonal but our capacity is seasonal largely through our maintenance outages. That's not exactly the same every year, so we have got to prepare through inventories to get through maintenance outages.

Thank you very much.

Anthony Pettinari, Citi.

On the last call, I think you guided to 10% improvement in full-year EBITDA and free cash flow of roughly $2 billion. Apologies if I missed this, but is that still intact given the weather hit that you experienced in 1Q? Or, are there big moving pieces that impact that guidance as we are one quarter through the year?

We said approximately, we said a significant improvement in EBITDA, approximately 10%. There's no question we're starting off with a $60 million whole. We still see the year shaping up with strong free cash flow and a meaningful improvement in EBITDA.

We have got some tailwinds we can create, and I think if we continue to see the April box data is beginning of a trend, that's a positive sign. We've got no reason at this point to change what we said on that last call.

Okay that's helpful. Just shifting gears to Brazil, in the quarter you increased your stake in Orsa and market conditions in Brazil have been a little bit soft. I'm just wondering if you could talk a little bit about the progress that you have seen internally at Orsa, the expected growth in margins that you hope to achieve in 2014, 2015?

And just generally the market conditions there? There has been some talk about maybe power rationing. Is that something that's potentially could impact you or your customers? Or any thoughts you had there?

Hi, it's Tim. Let's start with the last piece on energy.

Energy costs are up, primarily because Brazil and the whole country is living through, for the industrialized parts, a pretty significant drought at the moment. We are taking steps to mitigate any risk we might have around operational performance both on the paper side and the packaging side, but we don't know what the weather is going to do. It's a week-by-week situation.

In terms of Orsa, we had a disappointing quarter. Volume was lighter than we expected it to be. The good news is, it was isolated around a handful of customers that are experiencing their own challenges in the market.

We have taken steps and are taking steps to replace that volume. We saw a continuation of OCC going up. Margins are not where we wanted them to be in the first quarter, which includes December through the February period, because we report on a one-month lag. The good news is that is the seasonally weakest quarter of the year and we're expecting a significant improvement in results as we go into the second quarter.

We don't forecast earnings, but I have stated before we think we can get the business into the mid 20%s for EBITDA margins and I still think that's true.

Okay, that's helpful. I'll turn it over.

Paul Quinn, RBC Capital Markets.

Just a question on North American paper price realizations. I think, Carol, you mentioned $36 a ton in your commentary.

I'm just taking a look at slide 43 in your deck and there's a $56 a ton quarter-over-quarter change. Just wondering which ones which or is there a difference between the two?

It's Tim again. Actually, they are both correct.

On the slide that you are looking at, we did average to average realize $56 a ton. We think about $20 of that was mix.

And so when we look at the first price increase across all of our tonnage, you have to keep in mind that the announced price increase from the fall was only on about 75% to 80% of our volume. We think we got a fairly normal realization on that. It was $36 average to average. We actually exited the quarter $3 or $4 above that, so we felt pretty good about how we wrapped up the first price increase.

Okay, so essentially you got $36 out of that first price increase and then the extra $20 comes through mix?

Right. We have got $36 average to average. We actually exited in the quarter $3, $4 above that, so probably $39, $40 a ton across all of the tons.

Okay, great. Then just over on Bratsk, I like the 30% improvement from Q4. The key is to forecast in Q2 2014, but what is the current operating rate or what was the operating rate for Bratsk in Q1 2014?

We came out on the new pulp line at about 1,400 tons per day, which was about 70% of capacity. Carol, talked about the outage we have coming in the second quarter, late in the second quarter, will enable us to take the next big step and get that up closer to design levels as we go into the third and fourth quarters.

What is the current bottleneck at that mill?

We have a couple of modifications to make on equipment. There is no major bottleneck. Like with any -- the biggest soft with pulp line in the world, the biggest continues digester, and we have got to go in and do some not-significant modification that the vendors going to do for us. (multiple speakers) at Bratsk, because we can sell all we can make.

Yes I suspect so. Great, thanks very much.

Alex Ovshey, Goldman Sachs.

John, in the US containerboard business, in the first quarter your volumes were down 2%, the industry was flat, if I'm comparing apples to apples. I think we had talked about, in previous quarters, that your volume should be more consistent with the industry numbers going forward? So maybe just for the first quarter, can you talk about what was different for you versus the industry? Then, going forward, how do see your performance versus the industry in the volume side?

Alex, this is Mark. The industry was actually down about 1.6%. We were down 2%. We were roughly in line with the industry on a comparable basis.

We still believe, and we've stated this before, we should and we plan to try to grow with the market. That's the type of customers we have at the segments we participate in. We have a broad-based business and our expectation is, over the long term, to grow at the market rate. We were relatively close to that in the first quarter.

We have narrowed the gap from about a year and a half ago, we were as much as 300 to 400 basis points behind the market. We talked about why we have consistently narrowed that gap to the point where we are very close now.

Thank you, Mark. So my mistake, the 2% was in the per day basis not absolute? Okay. That clears it up, thank you.

On the optimization in containerboard in the US, we talked about previously I think a potential $100 million per year over the next couple of years. Can you just update us how you guys performed in the first quarter? I'm assuming it was probably challenging given the weather. How do see yourself being able to perform relative to that $100 million target as you move through 2014?

You're right, it was challenging in the first quarter. A lot of the optimization items we've highlighted are internal improvements, not really market improvements. That is in supply chain and in how we run our manufacturing operations. There's couple of areas I'd point to, John mentioned one of them earlier, in our converting facilities, in our box business, we ran very well.

We not only had a record first quarter in earnings, but we had a best-ever performance in waste and performance in our converting operations and our supply chain across a number of metrics. How we used transportation, how we spend money moving our product from our mills to our box plants, making sure we're making products in the right mill for the right end location, all improved in the quarter.

I think we made a good step. Obviously, the interruptions in the first part of the quarter made it more difficult.

I think the observation is we're driving a race car around the track. The more laps we get around the track, the better the race car gets. That's really what optimizing a business is all about. It's a brand-new business for us, it's three times the size it was five years ago.

That's helpful, John and Mark, thank you.

Scott Gaffner, Barclays.

I just wanted to dig into your comments a little bit on the April containerboard volumes. You mentioned some pickup in underlying customers in end markets. Can you talk about a little bit more specifically what types of customers are we talking about and which end markets you are seeing recovery in?

Scott, I would say in general, given the month is just ending today, two things I would say, in customers it is broad based but it is mostly in the customers that were most impacted in the first quarter. You would think about the large consumer packaged goods companies that took maybe a disproportionate hit based on the type of products they sell and where they're located. Then, I would say geographically, we are seeing broad-based improvement, from March especially.

No single place. A lot of what we're saying is with existing customers. Obviously, you don't win business in a 30-day period necessarily, so a lot of it is with existing customers that we were off with in the first quarter and we're regaining with those customers. I would say across the board, segment and geography.

Okay. Within Industrial Packaging you noted on slide 38 that European container was actually up 2% year-over-year. Looks pretty strong to me, but how is that versus your expectations?

Are you seeing some acceleration in the economy over there? What are the underlying trends there?

Think of our European box business having two pieces. There is Turkey and Morocco. Both countries had good volume growth. Morocco was the strongest country in the European box portfolio last year, principally driven by fruit and vegetable exports to Europe.

Then, we have got the France, Italy, Spain business. Frankly, volumes, consistent with Western Europe, coming out of a slump later than the US did, it is starting to, I wouldn't say it's sharply growing, but it is coming back to life. We're seeing some better box activity, particularly in the industrial segments. As I said, our box volume was up 4% quarter-over-quarter.

We expected to have a rebound year over year. The good news is we are seeing that.

Thank you.

Al Kabili, Macquarie.

Just a question for Tim on just he uncoated free-sheet business. How in North America, how you're feeling about the second price hike at this juncture? Any concern with some of the additional input activity at Staples at this point?

Well, to be honest, we have lost a little bit of position due to imports on cut size. We will see how long that holds up.

There's a few things you need to know about imports, at least the way we think about it. First, they fluctuate dramatically over various periods of time. It's really driven by FX and by supply chain logistics costs. It's a pretty long pipeline to supply from one region of the world to another and not without disruption.

The other thing on imports, even though we have seen significant growth coming into North America in the first quarter, our belief is not all of that is staying in North America. Because of the way the reporting is done, we see it coming in. You don't see it going back out.

We believe that a portion of what's come in has come in for the purpose of redistribution back out to central and South America. We don't think that it's to the degree that the reported numbers state.

In terms of the business going forward, it's difficult to predict demand. First quarter was, no doubt, soft, especially in the January timeframe and we think, in part, due to weather. The good news was that it improved all the way through the quarter and we exited March, from a demand standpoint in a better place than we started, for sure, and April looks okay so far.

People aren't going to work, they're not using a lot of copier paper.

No.

Okay. I think the volumes you indicated were down, I think 19% overall. Can you give us a sense or flavor, how that parsed out domestically versus exports? Because I imagine export was significantly a big driver of that.

In addition, I know part of the strategy with Courtland was to improve the mix. Where you are on that? You mentioned the transitional costs there, but are we still very early in the process for mix improvement in that business that we should see improve in the coming quarters as well?

As we talked about just a minute ago, we realized $56 per ton of averaged price realization, incremental increase in price quarter-to-quarter, and about $20 of that we think was mix. It's not a precise science, but we think that is a good number.

What was the other part of your question? I'm sorry.

I was just wondering if there is additional mix improvement that we should see beyond just what we saw in the first quarter?

Some of the mix improvement would be driven by seasonality, so there could be some, especially as we get into the stronger season of Q2 and in latter summer and the first part of the fourth quarter. The August, September, October timeframe is generally a strong seasonal period as well. Some of the cut size promotions that we have run around either tax season our back to school. I would say what you should take away from it is, we feel like we are on track for the mix improvement that we wanted to get.

Okay, great. Thank you.

Gail Glazerman, UBS.

Going back to the OCC question, given that it is driven by China. Can you talk a little bit about what you are seeing in your Chinese box business?

Also as someone who buys a fair amount board in China. When you look at the quality of the board you're buying do you have any sense that there has been a change in the mix of where OCC in China is coming from our domestic etc?

Gail, it is Tom Kadien. To the latter part, we buy probably a dozen different grades of different kinds of test liner. So we would not see a change in the quality of what we are buying based on I'll call it the mix of domestic versus imported OCC.

Now that said, the Chinese, our view on it, the box demand was flat to down. Export oriented box business in China is off. If you look at the Chinese economic data, exports were down double digits in February. They were down high-single digits in March, so the export oriented box business is down.

Domestic is growing but not fast enough to make up for the exports. It's a pretty soft market. Chinese new year was pretty slow coming out of that.

In the first quarter box demand was certainly not what we had hoped for. Now, we have seen an improvement, I would say, in the month of April.

Okay, thank you. Just again international box, last quarter you talked about, perhaps a bit of a struggle, to pass through price increases on board into box. With some of the recycle prices in Europe rolling over, has that become a non event and not even a question at this point? Or are you still expecting to get some box price improvement over there?

There's been some slippage in board prices and that is helping us on our, called Delta P. It is still a very competitive market in the market places for boxes, so we haven't gotten much price lift at all. We are getting some relief on the buy side, because we're a net buyer of all of our board over there. Some of it does come to the US on the virgin side.

Okay. If I could maybe just throw on one last quick one, staying on international boxes. Just the overall export market for your US board?

Gail, the US board that we export I would say that I characterize the market on volume as stable. We are not seeing any significant changes in demand pattern in the major markets that we serve, including the board that goes through our own IP box plants.

And pricing?

Pricing I would say is also stable. It will show in the data chart down quarter-over-quarter, but that is partly because of the way we entered the fourth quarter. We have seen some recovery in isolated markets, but overall I would say it's a stable environment for the board we export, which is cracked linerboard.

Thanks.

Chip Dillon, Vertical Research.

Looking at the uncoated free-sheet situation, I know in the past sometimes when we would see a price increase announced we wouldn't actually see the full amount. Maybe it was some customers would pay the full amount but some might not.

And as we think about the second round of increases of $50 to $70, could you just clarify what percentage of your mix in North America, the US, is subject to that? Is it your intention to pretty much show the full amount, eventually I guess, by the third or fourth quarter?

Chip, it's Tim. It affects roughly 85%, depending on how mix plays out, 85% to 90% of our volume.

What I would say about the second increase, we've had all of the conversations, for the most part, that we needed to have with customers and we have settled all of those discussions. What you are going to see is price, the increase will play out through the second quarter. There's probably going to be a little bit that bleeds over into the first part of the third. I think -- we don't forecast price so, but that's how I see it playing out

Okay. Shifting gears a little bit, when we look at the containerboard market in North America -- well, the box business, I'm sorry, in April, you mentioned it was up year-over-year after being down in the first quarter. One of your competitors was suggesting it might not be up for them.

Do you think some of what you are seeing is share gain? Or maybe asked differently, could it also involve some catch up with the first-quarter issues? Or do you think there might be something more underlying going on in the marketplace?

Chip, this is Mark. What I mentioned earlier is, what we are seeing mainly in our business is rebounding with existing customers. In that short of a period of time, not a lot of business changes hands in terms of share.

It's really, and I think, part of it a snapback and part of it underlying economic improvement. The majority of what we sea is in our existing customer base.

Thank you.

Mark Weintraub, Buckingham Research.

Question on use of capital. In particular, given in the last five years or six years, it seems a lot of evidence there is reduced volatility in your cash flows, much more stability. Does that incline you potentially to move to the top end of the 30% to 40% return through dividend range?

No, I think, Mark, that that is an excellent point. We do view that our business as definitely less cyclical, and I think that view that it is less cyclical is also what has driven to the stable cash flows. Stable cash flows then lead to the dividend view of 30% to 40%. I think they all tie together.

Certainly, we feel that cash flow sustainable and we feel that those targets are appropriate. We'll just keep monitoring and pushing it. I think John laid out a pretty clear number of that $1.60 to $2.

Okay. On the same topic, you noted in the slide 25, John spoke to. Under global it says leveraging global platform for profitable growth.

And, John, you also made an allusion to Ilim working out pretty well here and increased confidence in our ability to make core businesses successful overseas. Is that signaling a little increase in desire to seek out global growth? Or is it more a reference to Orsa, the acquisition there? I'm just trying to read whether there is a little bit of an enhanced conviction on growing overseas are not?

Don't read anything into it, Mark, other than we are doing what we said we would do. We spent $1.5 billion in Russia on big capital projects, not on our balance sheet put on the Ilim balance sheet. We are starting to deliver the results.

We have gone through a project that is very complicated, very difficult, took longer than we thought. We're going to start to see the benefits from those come through.

We will get the same thing Orsa. Tim said we are little bit behind there, but if we know anything that's how to run an industrial packaging business just about anywhere. We will get it right in Brazil.

Great, thank you.

George Staphos, Bank of America Merrill Lynch.

I know we are late here. Two things. One on North America, then the other one on Orsa for Tim.

In North American Industrial Packaging, if you look at the controllable factors, obviously the weather had an effect in your ability to analyze this. Where do ultimately think you did better? Because from our vantage point you had a very solid quarter versus our model. It sounded like it came more from converting relative to the mills, but could you confirm that?

The related question, good managements that have a lot of experience in their businesses know how to adapt. Given market conditions, certainly you had a big curveball in terms of the weather. Where any levers that you pulled in the first quarter that might have been pulled more in the second quarter from optimization standpoint that means that sequentially or later in the year you don't have quite the same hiccup?

Then the question for Tim. On Orsa recognizing that you are confident in our ability to improve the margin as to your target goal, what gives you the most conviction in getting to that goal, Tim, in the next couple of years? Thanks and good luck in the quarter.

George, on the first part for North American Industrial Packaging, I think the way -- you are right it's hard to analyze the quarter in terms of what went well or better than. I'm not sure what was in your model. What went better than you might of expected.

Your comment about converting, we definitely ran our converting business very well. We expected to as we have been optimizing and moving business around and it is bearing fruit on a number of fronts, on the cost side, on the service to customers, in both cases.

I think other than the early start to the quarter, where we did have some -- couple of our mills got into some of freeze issues. We ran very well in our mill system, which is a big part of our optimization plan.

It only takes a couple of our large mills to have a problem to show you a poor average. Out of 17 mills, or 16 mills in the US, we ran very well in most of them. I think it was across mills and converting.

As far as the levers on optimization, I wouldn't say we pulled anything in the first quarter that we took from another quarter. It was a lot of blocking and tackling and executing in the supply chain in how we run our mills from a reliability standpoint. And in the choices made relative to some of the reaction and response to what was happening on demand.

We took some economic downtime partly because of the demand environment not being where we thought it was, and we have a pretty sophisticated model of how to do that and do it at the lowest marginal cost. We're getting better at that each quarter. We are not done. We're still improving that process.

George, it's Tim. Just on Orsa around the conviction on the margins. John said it, we have a lot of experience around industrial packaging businesses, and we're taking full advantage of that and leveraging that know-how across the business.

Just locally, it is a market we know. It's a market that we believe in long term. We've got a lot of talent there. Getting the right talent in the right spots is a critical part of our success.

Lastly, we like our customer base. We think we are aligned with a really good set of customers and have been for a long time. We had a couple of customers who struggled in their own markets in the first quarter and they will probably struggle as we go through part of this year. Overall, I think people -- we got a lot of cost improvement opportunities and we got a great customer base.

Okay, thank you for the thoughts, guys.

I think we're done. Let me just say to wrap it up, we continue to see this year shaping up as a good one for International Paper with a meaningful improvement in EBITDA and with strong free cash flow. We look forward to giving you a further update on that when we report our second-quarter results late in July. Thank you.

Thanks, John, and thanks again to all of you for taking the time to join us this morning. As always, Michele and I will be available after the call and our phone numbers on slide 26 of the presentation. Have a great day.

Thank you. This concludes today's conference call. You may now disconnect and have a wonderful day.