International Paper Co (IP) 2014 Q2 法說會逐字稿

Good morning. My name is Patrick, and I'll be your conference operator today. At this time, I would like to welcome everyone to the second-quarter 2014 earnings conference call.

(Operator Instructions)

I'd now like to turn the call over to Vice President of Investor Relations Jay Royalty to begin the conference. Jay?

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

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 second-quarter press release and today's presentation slides. Lastly, slide 4 provides context around the Ilim joint venture, financial information, and statistical measures.

With that, I'll now turn the call over to John Faraci.

Thanks, Jay. Good morning to everybody. As we normally do, Carol and I are going to review the second-quarter 2014 results and the performance of our individual businesses. Then, we'll speak to the third-quarter outlook, and open it up for your questions.

So I'm going to start -- I'm on slide 5. International Paper delivered strong earnings performance in the second quarter, driven by very strong results in our North American industrial packaging business, and solid performance around the globe in other key businesses.

Our North American businesses saw an expected recovery from a weather-impacted first quarter, but we also continue to have higher-than-expected input costs. Additionally, we successfully executed almost $200 million of maintenance outages across the Enterprise; and importantly, we didn't let that get in the way of continuing to operate in a very solid fashion.

Ilim continues to be a good news story, with solid operational EBITDA attributable to benefits from the continued improvements at both projects -- Koryazhma and Bratsk. And despite some softness in the pulp markets in the second quarter, the joint venture also had a favorable FX gain, as the ruble strengthened against the US dollar. Think of that as a reversal from the opposite we had in the first quarter.

In early July, IP's Board of Directors approved an additional $1.5-billion share repurchase authorization, which expands the program implemented last September. And Carol is going to update you on second-quarter activity a little bit later on in the presentation.

On the people front, we announced the appointment of Mark Sutton as President and Chief Operating Officer of International Paper January 1. The Board and I are very pleased to have Mark in that role. He is an experienced, global leader and operator; knows IP and the industry well. He is with us here in the room today, and will participate in the Q&A portion of the call.

Finally, we completed the xpedx transaction on July 1. As IP spun-off the -- our North American distribution business, and merged it with Unisource to create a new, publicly traded company called Veritiv, which is now trading on the New York Stock Exchange. I want to wish all of our former colleagues and Mary Laschinger, the Chairman and CEO of Veritiv, a lot of success going forward, and wish the new company well.

So, let's move on to the financials; and that's slide 6. EPS was $0.95 a share, up almost 50% over the second quarter of last year. EBITDA was $1.1 billion, up from $920 million in the first quarter. Margins grew as well, up 90 basis points over last year, and 160 basis points over the first quarter. Free cash flow was $380 million, compared to $250 million in the first quarter.

With that, I'm going to turn it over to Carol, and let her walk through the details on the quarter and the business results. And then we'll get to the forecast, outlook, and your questions.

Thanks, John, and good morning, everyone. Let me turn to the sequential EPS bridge, where it shows that we earned $0.95 per share in the second quarter, versus $0.61 per share in the first quarter. The strong results were driven by price improvement across several of the businesses. We had higher volume, solid operational performance across the Enterprise, and a significant positive non-cash FX swing as the ruble recovered against the US dollar on Ilim's JV US-denominated debt.

These positive swings were partially offset by significantly higher outage costs, as planned in the quarter. And as John referenced, they went very well.

Some of the improvement in volume, operations and input costs, I can say, were attributable to moving past the weather disruptions in North America that did plague the first quarter. But beyond that, we experienced seasonal improvement in demand in North American industrial packaging, and solid operating performance on all fronts. The Courtland closure and transition costs were lower in the quarter, as expected.

Input costs moderated slightly. However, I would say that they remained high throughout the quarter, and we're going to talk about the outlook going forward. Corporate items were slightly favorable, but they were more than offset by a slightly higher tax rate of 32%, as expected, and higher interest cost due to a tax reserve that was established in the quarter.

Turning to slide 8, I want to take a look at the year-over-year input costs for the first half of 2014. And as you can see on the right-hand side of the slide, wood and energy have been significantly higher -- probably a bit higher than expected, and significantly higher than last year. While they moderated slightly in the second quarter, we are seeing continued pressure on wood, higher electricity costs, and higher chemical costs as we move through the third quarter.

Turning now to the businesses, industrial packaging delivered strong results, as prices held firm, volume increased, operations were solid, and input costs moderated slightly. Pricing was stable in North America, and up in Brazil. Volume was seasonally stronger in North America, and we also experienced significantly higher volume in our European packaging business, as year-over-year volumes were up 5% for the second quarter and 4% year to date. So a very strong performance out of our European packaging business.

Operations recovered following the weather-plagued first quarter, and we successfully executed peak maintenance outages of $91 million. Input costs were lower by $13 million, primarily natural gas and OCC.

So, if I move you to slide 10, and take a look at the North American margin comparison, IP and our team turned in another strong quarter, and continues to outperform our primary competitors. These margins are inclusive of the significant maintenance downtime that we took in the quarter.

Slide 11: I thought it would be good if we took a look at our volume results for the US corrugated business. As you can see, we were up a little over 5% sequentially and 1% year over year, right in line with the industry.

It's interesting to note that when you take a look -- a little deeper dive at our performance regionally, you can see that IP outperformed the industry, east of the Rockies. And east of the Rockies represents about 82% of our Business. We underperformed west of the Rockies, the remaining 18%. Our underperformance in the west is largely attributable to our heavy exposure to the agricultural box segment, which is having a tough growing season due to a number of unfavorable weather patterns.

When you look at the right-hand side of the slide, we show some of our larger segments and how we're performing versus the average. You can see that poultry, as well as shipping and distribution -- and shipping and distribution does include eCommerce -- are performing well.

While, as I mentioned, ag is down, processed foods and the beverage segment, which are a couple of the largest segments we have, are basically flat year to date. I think this explains a lot about the overall results for not only International Paper, but the industry. So, our success in industrial packaging is evidenced in both our margins, and our commercial and volume performance.

We bring a lot of value to our customers that we serve. We have a top-notch commercial team, manufacturing, and supply-chain organization. That is winning in the marketplace every day, and, importantly, helping our customers win.

So, moving on to consumer packaging on page 12: The consumer packaging business -- we're starting to see the benefits of our commercial momentum that we've been talking about, as we move past the last of the significant, not only North American outages, but European outages. Prices were up on average in our North American coated paperboard business -- about $20 a ton. Volumes in both North America coated paperboard and our food service business were up in the quarter, offset by lower volume in Europe, due to a significant maintenance outage in our Kwidzyn mill.

Our North American food service business had a record quarter on revenue -- up 11% year over year. Operations improved significantly, as we moved past the weather, and delivered solid performance for the quarter.

Moving to slide 13: As we've talked about previously, consumer packaging is really a second-half story. The first-half results have clearly been burdened with the weather, heavy maintenance outages, high input costs, and the construction and start up of our great enhancement project at our Kwidzyn, Poland, mill.

As we move into the second half of the year, most of our outage costs are behind us. Volume will be higher, due to less planned maintenance downtime, higher cupstock volumes due to the food service growth, and the growing shift from foam to paper cups, which is a real positive for us on both sides. Also, we expect to see additional benefits from the ramp up of the new grade, Alaska Plus, out of our Kwidzyn, Poland, mill.

And finally, we'll see continued realization of the previously announced North American SBS price increases. This is all going to translate into higher earnings for the Business for the balance of 2014.

Turning now to our global printing papers business: We experienced higher pricing in North America on uncoated freesheet and fluff pulp, as well as in Brazil on papers. Volumes were lower in North America, as well as Brazil. Operations improved as, once again, we moved past the weather and performed well. Maintenance outages were high, offsetting $30 million of segment earnings, and input costs moderated slightly.

As I have previously mentioned, we did have lower costs at Courtland, as expected. The positive swing in other is primarily related to some favorable FX impact that we saw in Brazil.

Looking at slide 15: We thought it would be instructive to take a closer look at the sequential earnings across the printing papers business on a regional basis. I would say that we feel the results were encouraging, really across the globe. As a reminder, we have a truly global paper business, and roughly two-thirds of what we sell is produced outside North America.

As this slide shows, North America was up solidly in both printing papers and pulp. Brazil was up as well, despite significant volume constraints attributable to the additional government-declared holidays around the World Cup event, and really, less-than-robust demand.

Europe was down, but that was entirely attributable to $23 million in higher outage expenses in the quarter. And for our Indian business, it was basically flat. So, all in, the Business performed well in the face of a mediocre global demand environment.

Touching on the Ilim JV, good to report that the JV had another solid quarter of operating performance, as we had continued progress with both the ramp up of Bratsk, and continued good performance out of the Koryazhma mill. And this largely offset on some lower pulp prices that we sold to China. Additionally, as John mentioned, we did have the positive swing to the JV earnings, as the ruble strengthened against the US dollar on the JV's $1.5-billion US-denominated debt.

The JV took a significant outage at the Bratsk mill at the beginning of the third quarter to address a bottleneck issue with the pulp digester, the cost of which will impact negatively our earnings in the third quarter. But the great news is: Productivity coming out of the outage is very encouraging, and should enable acceleration of the JV's progress towards the final ramp up to the original pulp mill project expectation.

So, let me pull it all together on slide 17, and take a look, moving forward, to the third quarter. As we see it, volume across the Enterprise will be relatively stable, with some improvement in North America consumer packaging, as I described earlier. Pricing will be largely stable as well, with some continued realization of the previously announced price increases on fluff pulp, and in our coated paperboard business in North America.

We expect solid operating performance to continue across the businesses, and maintenance outages will be lowered by a significant $135 million in the third quarter. We do expect input costs that will remain elevated, and, in some cases, will increase slightly as we've noted on the chart.

In North America -- our papers and packaging businesses -- we expect to see continued pressure on wood costs, particularly in Texas and the surrounding region, along with higher electricity costs and higher chemical costs. In Brazil, we expect to see higher energy and fiber costs as well.

At the Ilim JV, as always, we don't forecast FX movements, so the assumption is that that gain of $0.07 won't repeat. And also, we have the additional cost of the outage at Bratsk early in the quarter. The anticipation of continued operational benefits, post the outage, are offset by lower average pulp prices for the quarter. And finally, with the spin of xpedx at the beginning of the third quarter, there is a non-repeat of earnings, and additionally, an equivalent amount of transitional costs, much of which will work off over time.

So finally, on 18, a couple more things to update on before I turn it back over to John. I think it's worth highlighting some of the significant developments in the quarter with regard to the Company's finances. As you know, IP is in an excellent position, and we continue to get stronger.

First, based on the consistency of our solid financial performance, Moody's upgraded our credit rating one notch. Additionally in the quarter, we executed a bond issuance and a tender offer that enabled us to address the upcoming debt towers in 2018 and 2019, and replace high-cost debt with lower-cost debt. We were able to take advantage of these historically low interest rates on 10- and 30-year debt, and take some risks off the table in the upcoming term.

As John mentioned earlier, we successfully executed the xpedx spin on July 1, and we received $400 million in cash. And additionally, our shareowners got 51% of the new company, Veritiv.

We also received an additional $1.5-billion share buyback authorization from the Board. In the quarter, we purchased $296 million of stock at an average price of just over $46. From the inception of the program through June 30, we've purchased approximately $1.1 billion of stock at an average price of $46 a share.

And finally, I want to mention that there's a potential Highway Trust Fund legislation that could have a positive impact on reducing future pension contributions, likely in the range of $800 million to $1 billion over the next few years. While there would be a corresponding loss of the tax deduction for these contributions, this would have a positive impact on cash available for reallocation. So, all in all, some very good developments and accomplishments in the second quarter.

With that, let me turn it back over to John.

Thanks, Carol. Summing up, the IP leadership team continues to find ways to build on our success, and improve the strength and, importantly, the performance of International Paper. In addition to the accomplishments that Carol spoke about, and as I've said before, we've got many levers to pull to improve and deliver strong results, despite a challenging global environment. We seem to come up with new reasons to have a challenging global environment every day, it seems.

But I'm pleased with the progress we're making, and the results we're posting along the way. We're generating strong, sustainable free cash flow, and we're deploying that cash with the objective of maximizing [return of] value. All in, as we look to the future, we like what's ahead.

With that, we'll be happy to take your questions now.

(Operator Instructions)

Gail Glazerman, UBS.

I guess, just starting with -- and I know there were some comments in the newsletters this morning. But can you talk a little bit about the alternative -- about the MLP potential and how you would think about that and what obstacles and opportunities you might see?

Sure.

Yes, Gail. This is Carol. First, let me say, very importantly, that we maintain a constructive and open dialogue with all our shareholders. And we're always open to new ideas and ways to increase shareholder value. We have been studying the MLP for some time. And for us, it just remains unclear as to whether this concept would really be value-creating for the Company.

Today, as I think everybody knows and has been written about, there is a moratorium on private letter rulings at the IRS. And there has been one prior favorable ruling on pulp, but as everybody knows, there's no precedent for containerboard or coated paperboard at this time.

All that said, even if we could get a private letter ruling from the IRS, we're not yet -- I would say we're somewhat far from convinced that this would be a good idea -- a good idea, on a number of fronts, that are unique to International Paper and the business we're in. The first issue that you have is the potential tax cost and the tax leakage, given that the assets involved here are fairly highly depreciated. The other consideration that we're looking at very hard is the operational, commercial challenges and some of the restrictions on how it would require us to run the business. And the third piece that really plays into an MLP is the capital considerations. As everybody knows, in our business, we're a capital-intensive industry. And sometimes the capital, particularly in these big and integrated mills, can be fairly lumpy.

So all that said, we're going to continue to evaluate it until we can reach a conclusion for ourselves and, importantly, until the IRS makes clear what their new requirements are going to be for MLPs. So in the interim, we'll continue to operate our business as is. And we expect to do so for the foreseeable future.

We'll continue to study it. And we'll look at it. And we're -- said, we're always looking for creative ways to unlock more value.

Okay. Thank you.

And can you just give some color on what you're seeing in terms of the demand trends in the third quarter? And maybe, how those transitioned from the second quarter into third quarter, in terms of key businesses as well as key global regions?

Bill, you want to the talk about the box business?

Going from the second quarter into the third quarter, we're not seeing much of a change in overall demand trend. We saw a weak first week of the quarter, with the holiday ending on a Friday. And you had a long weekend, there. That impacted shipments for a couple of days. But since then, the trend has been very much the same as we saw in June. So we're not seeing a lot of changes in boxes.

Anything else in particular, Gail, you want to hear about?

I guess, what you're seeing in China. And maybe a little bit in uncoated freesheet. And how the market may not have firmed up as I would've expected, given the magnitude of the closures.

Tom Kadien was just in China, so he (technical difficulty) that.

Hi, Gail. China's moving along. I'd say it's a slow growth. It's up a couple of percent -- 3% -- which is less than we would normally feel. I think -- and I'm speaking right now about our box markets over there -- there's a lot of capacity in all markets over there right now. And growth is positive but it doesn't feel like the reported 7% plus that they were talking about for GDP.

Yes. Hi Gail. It's Tim. Just on the uncoated freesheet front -- similar to Bill, we're seeing things, from second- to third-quarter so far, moving along sideways. Having said that, we normally see a seasonal pickup as we go into August and September. So we'll have to see how that plays out.

I would say just globally, uncoated freesheet -- because of a lot of factors around the world -- has not had the year that we all thought it would from a demand standpoint, whether it's the Ukraine or the World Cup in Brazil. Our volumes in Brazil look pretty flattish and anemic through the first half of the year. We thought the World Cup would help. It really did not. It actually hurt.

So, I would expect that in the second half, there's an opportunity for things to pick up a little bit. But we'll just have to see how it plays out.

Anthony Pettinari, Citigroup.

Just a question on Ilim -- you have a slide that references $550 million to $600 million in fully-ramped potential. Can you just give us some color on what fully-ramped means, and what would be the timeframe to potentially hit that?

And maybe a related question -- the US and Europe put on a stricter round of sanctions on Russia. And I guess you'd expect the Russians to reciprocate. Did the sanctions have any impact on Ilim or how you operate the business or generate earnings from the business?

Well, let me take that in two pieces, Anthony, to give you a little bit more color on how we get to the $550 million to $600 million. A big piece of that is Bratsk. Before this outage, we were running the pulp mill at about 1,200 tons a day. Coming up out of the outage -- and it's only been 10 days -- we've been averaging 1,700 tons a day and hit over 1,900 tons a day in the first 10 days or so. So, dramatic increase.

The capacity of that pulp dryer is a little over 2,000 tons a day. That has a huge impact on the cost structure of the mill. Plus you've got the incremental volume. So that and then getting the coater up and running at Koryazhma so we can make both uncoated paper, which we're making a lot of now -- we're running that at design rates -- but coated paper -- we'll be the only supplier of coated paper in the Russian market -- are probably the biggest pieces of getting from where we are, which is a run rate of -- call it -- $450 million to the $550 million to $600 million.

In terms of what's going on in the Ukraine and sanctions -- we need to see the details of what this last round of sanctions that were in the paper that the US and the Europeans are putting on. I'd say, up to now, the impact on our business has primarily been felt in Eastern Europe. Obviously, Ukraine has been impacted a lot. That wasn't a big market for us, but the Eastern European markets have been impacted.

The Russian economy was already slowing down. And sanctions -- we wish we could resolve these issues, but up until now, there's been no impact on our business, other than the spillover of economic activity slowing down in Eastern Europe. And while this isn't a plus for the Russian economy, the Russian economy was slowing down well before the Ukraine issue got on the radar screen.

Okay. That's very helpful. And maybe just a quick follow-up on containerboard. Pulp and Paper Week recently lowered median prices by $10 a ton and has talked about weakness in recycled prices. And I was wondering if that price reduction was surprising to you? And if you could maybe characterize the impact to IP?

This is Mark Sutton. That's a great question.

Before I answer that question, let me take this opportunity just to make a statement about -- as I roll into my new role. I've met many of you on the calls. I look forward to spending more time with you in my new role. I've been spending time with our global business leaders and teams, getting up to speed. Not only on near-term issues and what we can do for the rest of 2014, but also on the strategic front.

I'm increasingly coming away with a better feeling and excited feeling about the opportunities we have as a Company. And also, a better feeling and confirming my belief that we have the best people in the industry, globally. So I'm excited about the new role. I look forward to working with all of you that follow our industry and cover us.

With respect your question, I think the median price changes that occurred -- we view it as an isolated event and somewhat of a regional event. We haven't seen much of an impact on our business at all. As we said earlier in Carol's part, our prices were firm through the quarter.

I think you've got some issues going on that we've talked about in prior calls. As new capacity comes on, it's quite common for products to be made, initially, at the lower end of the technical scale. I think some of that's probably been happening, which requires some pricing behavior to get people to try it. So we don't see it as a big impact on our business at all.

Okay. Thanks, and congratulations on the new role, Mark. I'll turn it over.

Chip Dillon, Vertical Research Partners

Congratulations to you, Mark. Good luck. And to all of you.

First question, I guess, is more directed to you, Carol, about the Highway Trust Fund bill. You mentioned that it would maybe allow you to avoid, I guess, $800 million to $1 billion in contributions. Could you give us an idea of when that would occur? And maybe said differently or asked differently, what are your current forecasts for contributions, say, for 2015, 2016, maybe 2017? And how would they differ?

Chip, yes. As you think about the things we've talked about, we said that we expected about $1.2 billion to $1.5 billion to go into the pension. And that was like 2013, 2014, 2015 -- 2014, 2015, 2016. So it was within that timeframe. We didn't put much in 2013. And as you can see through the cash flow statements so far this year, we put in a little under $300 million. And we actually made a another required payment in July. So we're up a little over $300 million this year.

Now, we have another required contribution in 2015 and 2016. That would be the balance of that $1.2 billion. So we were looking at, roughly, $1 billion of additional required contribution in 2015 and 2016. That's the contribution that we won't have to put in if indeed the bill gets passed and written into law as it's written today. And it's all around widening the corridor and pushing out the impact of these lower interest rates. So that's the impact we have. Now, what happens on that, of course, is you lose those tax deductions. So there's a cash tax implication.

But all in all, if you say, hey, we put $1 billion less in. We're going to have to pay taxes on that. You can see that you're going to net $600, $700 of positive cash over this period of time. That would have gone somewhere else. Now we can do something else productive with.

I hope that's helpful.

That's very helpful. Thank you.

Just as a quick follow-up -- I think you said something about, as we look at the third quarter, maybe you can quantify the Bratsk outage. I'm not sure you did. I think something was mentioned about lower pulp prices, and it seems like softwood has hung in there. I know it can be quite volatile from Ilim into China. So maybe you could talk a little bit about how you see the softwood pulp picture.

I could probably let Tim comment, but I think the softwood pulp -- and I use the word very deliberately -- average price. So it's average to average. While pulp prices are very stable now, and we feel good about the markets going forward, there was some movement down in the price through the second quarter. When you look at it average to average, it's lower.

And relative to the Bratsk outage, we did not comment on the specific cost of that outage. We don't really disclose that for the JV. But it was a fairly good-sized outage. But the good news is, as John said, we're coming out of it running very well.

And do you think that better running in August and September could offset that cost, or probably not quite?

Well, that has the potential. That's why we said we think that some of the good operations could offset the pulp price. And we'll have to see about how we run the rest of the quarter. But we've been running well, and so we've been pleasantly surprised the last couple of quarters, relative to Ilim's operational performance.

Alex Ovshey, Goldman Sachs.

Just a couple of questions for you. First, just going back to that MLP question. Would you be able to tell us how long you've been looking into this question? I know Carol provided some nice detail around some of the potential challenges around the tax leakage and restrictions on capital spend, and the time that is necessary to really be able to thoughtfully address those questions. From your perspective, outside what the IRS may or may not say, how long do you think it may take before IP has a better view on whether or not it could overcome those obstacles?

So again, we've been looking at it for quite a few months now. And as I said, we'll continue to evaluate that and also see where the IRS comes out on their requirements for MLPs. After the IRS decides, at that time, we'll have had enough time that we'll decide if we think that some proposed MLP structure has sufficient merit. And if that was the case, at that point, we'd pursue a private letter ruling.

If we will were to receive a private letter ruling and continue to think it's a good idea, that's when we would make a public statement, as such. But I think we're still a long ways from that, between both our evaluation and, really, where the IRS is. And so once again, as I said, we're going to continue to operate our business as-is and continue to evaluate and look at the complexities and the opportunities and see if there's really an opportunity for true value creation.

That said, if you look at IP's track record and the decisions we made over the last six, seven years, most recently the spin-merge with xpedx to Unisource, which was a transaction that, I think, we were the first ones to do -- take two private companies and make them public. We're ready, willing, and able to do things that are complicated. That we think create long-term value for the Company and its shareholders. So there's more work to do.

Right. Very helpful, John and Carol.

And just a question on containerboard. Looking at industry inventory levels, relative to a 5- or 10-year average, they do seem -- or they are higher than that. I was curious if you could talk about were IP's inventory levels sit and how you feel about them.

And then, maybe looking back to last year when we did have the inventory levels above the 10-year average, we saw the industry take some slow backs. So I'm interested in whether or not you're building in any slow back of production to your output for the back half of the year on containerboard.

Alex, this is Mark. I'll take the inventory question. I think, with respect to IP's inventories, we manage our supply chain very efficiently. And we like the shape that our inventories are in right now. We have been operating on some supply chain metrics at best-ever levels, in terms of having the right stock in the right box plants. Also, in a challenging transportation environment, managing our transportation costs the best we can. So we like where our inventories are.

I think, overall -- I'm not going to comment on overall industry inventories, and projecting slow backs and that part of your question. What I will say, though, is the way we run our business -- now I remind you, again, we look at our containerboard business as a global business. We have three main channels that we bring our product to market -- the biggest one, obviously, is our own box business. We also serve very important customers in the US open market. And then thirdly, we export a significant amount of our containerboard to parts of the world that need it and value it. A portion of that is our own box plants, internationally.

So when we look at how we run our containerboard system, we run it to the demand that we have from our customers through all three of those channels. And the float between the channels allows us to optimize the business at any given period in time and adapt to seasonal demand issues. That really drives our decision for how we run our system. And that is based on the demand of our customers.

Got it, Mark. Best of luck to you in your new role. I'll turn it over. Thank you, everyone.

Al Kabili, Macquarie Research Equities.

First question is for Tim on the uncoated freesheet. The transitional costs with Courtland closure -- do we get any additional sequential benefit from that in the third quarter? It didn't look like there was much explicitly indicated in the outlook.

Yes, it hasn't changed a whole lot, Al, since first-quarter when we updated everyone. But it will be less than 10 in the third quarter and probably around 5 in the fourth quarter. And then it pretty much just trails off. So we're down to final pieces at this point.

Okay. That' s helpful. And then the second question that I had is switching over to containerboard. Mark, it looks like you're talking about flattish -- no real change in volume trends in July. And if I look at the outlook, it sounds like you see -- on the volume end of things -- CPG improving in North America on slide 17. And I was wondering if you could clarify the flattish July trends, versus the commentary on the outlook. If there's some visibility there that things are getting better, or how are you thinking about what are you hearing from customers from a demand perspective on the outlook in the back half?

Sure, Al. On the comment that Bill Hoel made about box market in July -- that was corrugated packaging. And on the outlook chart that you're looking at -- that's all of our packaging. And that CPG refers to our Consumer Packaging business, where we see slightly improving demand. And we have the capacity, with most of our outages behind us, to meet that. That's the difference there.

I think Bill covered some of it, and Carol had a piece on the slide that had our east and west breakout. A lot of our customers, inside a certain segment, are still seeing their business driven as a mirror image of the US economy and the behavior of the consumers. There's some movement within segments. In the protein segment, some of the poultry businesses -- as is well-known -- are doing better. And part of that's having to do with the challenges that the beef industry has had with corn prices. That tends to change over time.

So within segments, there are different customers who have a certain product that's winning in the marketplace. We obviously try to line ourselves up with those customers. But the segments are so large and our corrugated position is so large that, over time, some of these trends tend to offset themselves.

[Bill, one or two quarters back--]

Okay. That -- okay.

The order activity in boxes for the last few weeks has been fairly decent. I think one other point that can (technical difficulty) that in July, we have one more day than we had last year or last month. So the daily shipments are relatively flat. You do have one more day -- not only in the month, but in the quarter -- third quarter, versus second quarter. So that helps you out in overall, absolute volume. But our order activity has been pretty strong.

I think one of the other challenges we had in the second half of the year is the West Coast ag business. We're heavily involved in fresh fruits and (technical difficulty) West Coast. And with the drought conditions, it could be a little soft there. The rest of the segments that we serve, though, are relatively strong. So overall, they're more than making up for the weakness in the fresh fruit and vegetables in the second half.

Okay. I appreciate all of the detail. Thanks a lot, and good luck the rest of the year.

Mark Weintraub, Buckingham.

First, I was hoping -- could we get an update on your dealings with the mills you had divested as part of the Temple acquisition? I think the Indy paper -- I think that contract was potentially going to change at midyear.

Sure, Mark. The divested mills -- there were three mills that we divested -- just about 1 million tons. Two of them were to the creation of New-Indy Containerboard.

There was a three-year agreement to purchase tons from those divested mills, and with a mutually agreed upon ramp down. So we're just progressing through that. I think it's been working pretty well, in terms of where we started a couple of years ago. And it goes through the middle of next year.

So we're continuing to purchase from that mill and also the third one, which was purchased by Hood Container. And those are mostly making medium -- a product that we are obviously short of, after selling those mills. So we're continuing with the current plan of ramp down, and we'll get to the final year between this summer and next summer when the final 12 months of the agreement unfold.

Okay. So it's a ratable ramp down. That's the way we should think about it?

Yes. It's not a cliff -- drop-off in volume. That works, really, for all supply chains -- ours as well as the companies that we sold the mills to. So we designed a smooth ramp that allows us to perform at the most cost-effective way and the best service platform we can have to our converting plants.

Okay, great. Thanks. And--

The [DOJ] agreement expires in July of next year.

And second -- in prior calls, you've given some guidance indications on free cash flow. Would those be pretty much unchanged, as you're looking at 2014 right now, or any adjustments?

Yes. You know, I think we still feel good about our free cash flow generation capability. We've had some headwinds. We had headwinds in the first quarter relative to the weather. It's hard to see us getting that back. I feel like we've got a headwind around some input costs that seem to be trending a bit higher than maybe what we had expected.

But the businesses continue to run well. So it's going to be all-around second-half performance. So I feel good about that we're going to have another strong year of free cash flow performance that we've talked about.

Okay. Thank you.

George Staphos, Bank of America.

Congratulations to Mark and everyone on the team. And also, thanks for all of the details. You guys have, by far, the best handout in industry. So thanks for that.

I had a couple of questions, maybe for Carol or for Tom. Realizing that pricing is going to be a key driver of this, if we held pricing flat at today's levels or second-quarter average levels if you prefer that, what kind of ramp-up would you be having us think about, in terms of the consumer segment profitability versus the first half?

The second question I had is, could you update us on the thoughts at Orsa, Tim, given the performance. It's obviously been improving. What type of ramp and what type of [tactics] do you need to see to get Orsa back to a more profitable level? Thanks. I actually had one follow-on, if there's time.

George, this is Tom. On the pricing -- the first quarter announcement, I think we showed about $5 in the second -- at the end of the first quarter. I think our AGS is up another 21. I think that's the average in the second quarter. And as we exit rate out of the second quarter, we still have more realization to get in the third quarter off of that first-quarter increase.

So it's fully in. We announced 50. We'll net less than 50, but more than 40.

Okay.

It's Tim. On Orsa, yes, it's going slower than we want it to. But I think we have finally started getting traction. One of the things that hasn't helped has been the market. The market is actually slightly negative year-to-date, versus last year. And coupled with that, we've had a few customers that, because of market conditions and their position, they've struggled. And that's impacted us.

Having said that, I feel really good about what's started happening over the past couple of months on the commercial side. We've had some capital that has started going in and it's allowing us to automate some of the facilities and reduce headcount. So our costs are going to start coming in line. The mills are running well. We had a better quarter in the second quarter than in the first. And I would expect another -- we took a bit of a step up in the second quarter versus the first -- I would expect a more significant one between now and end of the year.

Thanks, Tim. Tom, just a quick one, if I could. Is there a way to size what kind of improvement, overall, the segment should be if you hold your pricing where it is? And if it's not possible to guide in that way, should we assume that most of the benefit you see second half versus first half is pricing?

And then a quick one on MLP. You can answer this, yes or no. How significant is the question of integration of the box plants with the mills, in terms of understanding the complexity in terms of whether MLP structures make sense for you are not? Thanks guys.

I'll take the last one first. Yes.

Okay. Thanks, Carol.

In terms of the coated paperboard business here in North America, the third quarter is going to be a significant ramp-up. We'll get price realization, as I outlined, but we had significant outages.

We've had a tough first half, frankly. We had weather in the first quarter. We had outages in just about every month up through May. And we finally start to see our stride in the June month. We've got good backlogs coming out of the quarter. Pricing is headed up.

So we'll show the earnings power of the business that we used to enjoy a year or two ago before we had to shut down Augusta 2. So we'll have a good third quarter.

Thank you very much.

Steve Chercover, D.A. Davidson.

My question was also on bleached board. So the momentum that we've just been discussing -- that's the final implementation of the April price hike? Is it safe to assume that the July 1 hike had no impact? But we've got one pending for September 1, and that's presumably more of a Q4 event as well?

Yes. We're talking -- I've been talking about our first-quarter announcement that we implemented in the second quarter. And there's a tail of realization in the third quarter. Some of our competitors have announced increases either in June or more recently, and I'm not going to really speak to that on this call.

But we see strong backlogs. Our backlogs are five weeks coming out of the Fourth of July holiday. And we feel pretty good going into the third quarter.

Great. Thanks. And then, also on the MLP -- I guess it's more of an observation -- it's safe to say that this is definitely a big-brainer as opposed to a no-brainer. But you guys won't proceed without a private letter ruling?

Yes. Private letter ruling is required.

Okay, because I think you could assume the risk. But then, if you have an adverse decision, then it's on you. But okay. Thanks for all of your commentary on that, Carol.

[Will it fit] back together again?

Mark Wilde, Bank of Montreal.

John, I wondered if you or Carol would want to comment on timing of the share repurchase, particularly the new program? Because you've moved through that first program so much more rapidly than the targets you'd laid out last year.

Yes, Mark. I think this is a clear example of we embarked on something and we said, hey, we got a great opportunity to provide cash back to our shareowners. We'd like to do it opportunistically. Our key tenant is we prefer to buy stock, obviously, at intrinsic value or below. When we see a good opportunity to buy back stock, we've done so.

Continuing to generate strong cash, so we feel like it's an important part of our capital allocation strategy. I think, looking backwards, you can see our actions. And getting the next $1.5 billion authorized is about being ready to continue to move in that direction. We're in a strong cash position. So we'll continue to work in this direction. And I think it's become an important part of International Paper's more strategic capital allocation program.

Okay. And then if I--

If I could just emphasize what Carol said at the end. If you think about balanced use of cash and where we are with the balance sheet and our dividends -- it's not policy, but we told shareowners about the dividend 30% to 40% of free cash flow. You've got to think of share buybacks as part of the way IP deploys cash and returns cash to shareowners.

Okay. The follow-on I had was just around bulk margins in containerboard and uncoated freesheet. On the containerboard side, you talked a while back about $200 million in further optimization in that business. Maybe you can give us update on where you're at with that and what the timing is. And also, what the target would be, ultimately, for margins in the North American printing paper business.

Mark, hi. This is Mark Sutton. On the containerboard piece of that question -- and then I'll turn it over to Tim on printing papers -- we called it an optimization plan, and we never planned to report in the detail that we did on synergies. But we are making really good progress. If you think about the performance of the business, in light of this flattish environment that we've had for demand, a good bit of those results are internal improvements that are part of the optimization plan.

We've seen a big step up in our ability to get our converting operations ready to perform at their full capability. I'll give you a couple of examples. Once we put the newly acquired mills we got from Temple onto our common supply chain system, we were really able to take costs out of our supply chain on the freight and logistics side, but also in the performance inside of our converting operations.

So we are operating -- almost on a monthly basis, we're setting new best-evers for waste management. And the throughput and other metrics we use to measure productivity are now a much steeper ramp of improvement. A lot of that has to do with running this large mill system in the most efficient way possible, from a total delivered cost standpoint, not just a mill cost standpoint.

So we're pleased with the progress against that $200 million. Not a lot of it was based on a great market, so the volume not materializing isn't really hurting us. It was based on running better and reducing cost in our mills.

We've one full set of outages that we'd done on the new mills, and we have implemented some of the changes. We've got to do another round of that to get some of the cost reduction projects fully implemented. And I think we'll be definitely on track to meet and probably exceed our optimization target.

I'll turn it over to Tim.

On the printing paper side -- it's probably difficult to forecast margins in a declining market. Having said that, we feel pretty good about where we are. We've got two specialty mills that we're still working on cost optimization opportunities as well as mix opportunities. We got two large commodity mills where were doing the same thing. The bulk of it's going to come from cost and mix.

We'll have to see what demand does. But clearly, with Courtland behind us, we move up to mid- to slightly-above-mid-teens. And then we'll have to see where that goes for 2015, as we look at market declines for the rest of the year. But, there's still good opportunities around changing what runs through our mills and continuing to refine that. And there's very good opportunities on the cost side.

Okay, good. That's helpful. Thanks, Tim, and thanks, Mark.

Debbie Jones, Deutsche Bank.

I was wondering if you could comment on the 430,000 tons or so at Valliant that you [could hypothetically] bring back on-line and the decision-making process around that? And then what the costs associated would be, and the benefits that you would expect.

Hi, Debbie. This is Mark. First of all, on Valliant -- we haven't made a decision on Valliant. We've talked about it on prior calls as a way to potentially optimize our capacity. As I mentioned earlier, Valliant's a very valuable asset.

As we look at our overall business -- we talked earlier on the call about the divestiture of 1 million tons of containerboard. We don't talk about it a whole lot, but our European and other international box businesses use over 2.5 million tons of containerboard. And that's part of that global channel selection I talked about.

We have increased, over the last four years, by over one-quarter million tons our shipments from our IP mills in the US to our international box plants -- there's more opportunity there. We still purchase over 1 million tons in the international market from third-party producers.

We've also got grades inside of our containerboard system that are very attractive. They're not containerboard, and that business has grown. Most of those products go into the building materials market.

So when you look at all the moving parts, a machine like Valliant in a mill that's already running with an efficient use of fixed cost would be a potential winner for our system. So when and if we make a decision, we'll definitely come out and communicate it. But it's all wrapped around making the containerboard and some of these other specialty products that we need to serve our customers.

So Valliant's an existing machine, as you know. So the cost to bring it back up is part getting things maintained and back in shape to run and then part the shutdown several years ago. And there's some cost efficiency that we can do if we were to start it up to run it at a lower cost, better energy usage, and so forth.

So stay tuned on that. We definitely are looking at Valliant, but not only Valliant. There's other opportunities we have in our system to continue to optimize it.

Okay. My follow-up relates to Europe, which you referenced. I was wondering if you could comment on the unit's overall health [of demand] in the regions where you compete. And then, I think there have been some pricing increases for containerboard. And whether or not you expect that to roll through on your corrugated box pricing?

On regional corrugated box demand, I think we've made some earlier comments. John mentioned the European business. We're outperforming the market in our European business which, again, is western European industrial markets and then the Mediterranean region for agricultural markets. And we're seeing a slightly better demand in that region for the market. And we're doing a little bit better than that.

There has been some price announcements and movements on recycled linerboard in Europe. That's still yet to be determined. Some of those were just announced.

But overall, we've seen stable pricing. Some isolated cases of prices moving up and down in a specific country or a specific region. And that tends to be directly related to more or less supply showing up at any moment in time.

But overall, I'd say demand in our global regions -- I think Tom mentioned, was happening in Asia -- grows, but not quite as much as we have seen in the past. And Tim talked about Orsa. But stable demand in most of the regions, and pricing is relatively stable.

So, corrugated packaging business is, obviously, one we like. And we're looking forward to seeing further improvements.

Okay, great. That's helpful. I'll turn it over. Thank you.

Adam Josephson, KeyBanc.

Carol, just one more follow-up on the MLP issue. Setting aside the other issues you discussed, which I know are important which you can't practically set aside, do you have a view regarding the multiple uplift that would come from dropping some of your virgin mills into an MLP structure? And whether the MLP multiple premium, over your current multiple that exists today, is likely to persist for years into the future?

So, as we think about what really is a multiple expansion, it really has to be something underneath that's value creating, that changes the value of the business. And the one that is clear is the tax advantage. If you can capture it and hold it, and you don't lose it in some other way.

So clearly, in a partnership arrangement, it's a pass-through, so you eliminate one level of taxation. So that's a price that's specific, that you can quantify. Once again, the key issue is, can you maintain that price and not lose it to other complexities or other places that the price is lost? Outside of that, I probably wouldn't comment on relative to multiple or margins or multiple expansion in the rest of the business.

Right. No, sure. Thank you.

Mark, just one on containerboard export markets. I know you were just talking about Europe specifically. But can you characterize the state of your export markets? And are they appreciably different than they were three months, six months, nine months ago?

I would say, not appreciably different. We have seen some additional supply, mostly from the US, in some markets, which is not uncommon. I think we've mentioned it before, probably related to a little bit of the capacity start ups. So other than that, we see pretty stable markets.

Most of what we export is Kraft liner. And those segments have done most of the switching between recycled and virgin that they can do. They tend to buy because they need it. And so, not a big significant difference in any of those time increments you mentioned.

Thanks a lot, Mark, and congrats.

Thank you, Adam.

Let me wrap up here. We had a solid quarter. We feel good about the quarter. We think of success as a journey at International Paper. We're far from done.

Were generating strong, sustainable free cash flow. And importantly, for all of our shareowners, we're deploying that cash in a way to maximize shareowner value. As I said before the Q&A, all-in, as we look at the future, we like what's ahead. We're ready for both the opportunities and the challenges. 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 are on slide 20 of the presentation. Have a great day.

Thank you. This does conclude today's conference call. All lines may disconnect at this time.