International Paper Co (IP) 2014 Q3 法說會逐字稿

Good morning. My name is Rachel and I will be your conference operator today. At this at this time, I would like to welcome everyone to the International Paper Third Quarter Earnings Call.

(Operator Instructions)

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

Thanks Rachel, and good morning everyone, and thank you for joining International Paper's third quarter earnings conference call. Our key speakers this morning will be Mark Sutton, Chief Executive Officer; along with Carol Roberts, Senior Vice President and Chief Financial Officer. During this call we'll make forward-looking statements that are subject to risks and uncertainties which are outlined on slide 2 of our presentation.

We'll also present certain non-US GAAP financial information. A reconciliation of those figures to US GAAP financial measures are available on our website. Our website also contains copies of the third quarter press release and today's presentation slides.

Lastly, slide 4 provides context around the Ilim joint venture's financial information and statistical measures. With that I'll now turn the call over to Mark Sutton.

Thanks Jay, and good morning everyone. We appreciate you joining our call today.

Regarding the format for today's call, it will be similar to what we've done recently. Carol and I will review our third quarter 2014 results and the performances of our individual businesses. We'll then take a look at the fourth quarter outlook and open it up for your questions.

I'm on slide 5 now. International Paper delivered a record quarter of EBITDA and free cash flow in the third quarter. We had strong performance from many of our businesses as our team continues to execute very well.

We announced a dividend increase of 14% from $1.40 to $1.60 per share, which is our third consecutive fourth quarter double-digit increase. We continued to opportunistically buy back shares, and have purchased more than $1.4 billion worth of shares since last September and through yesterday as of this call.

Additionally we received a dividend of $56 million from Ilim during the quarter, and the JV continues to ramp up post the major capital projects and had another good quarter of solid performance. Due to the devaluation of the Russian ruble, the JV took a large non-cash charge against its US denominated debt.

Moving to the financials on slide 6, I'd note that beginning this quarter, xpedx is reflected as a discontinued operation in all periods presented. And as you can see, International Paper delivered strong financial results across the board.

As mentioned earlier both EBITDA and free cash flow were at record levels, as was EBIT. Our EBITDA margins approached 20% for the entire Company for the quarter.

I'll now turn it over to Carol Roberts and ask her to discuss the details in the quarter as well as the results of the respective businesses. Carol?

Thanks Mark, and good morning everyone. Turning to slide 7, the sequential EPS bridge IP earned $0.95 per share in the third quarter versus $0.93 per share in the second quarter. This was a strong performance for the Company, particularly given the significant EPS impact of $0.25 per share sequentially from the FX on the Ilim debt that you see on the right-hand side of the slide.

We're talking about the business fundamentals. Pricing was relatively stable across the businesses, as was volume. Operational performance remained strong and contributed favorably to the results.

Maintenance outages were substantially lower as we expected. Input costs moderated very slightly, but in our view remained at relatively high levels, and if you take a look at slide 42 in the appendix, you'll see that input costs are actually $26 million higher than the same period last year, and this is mostly driven by wood costs.

Tax and interest expenses came in slightly lower than the second quarter so a sequential pick up. And as Mark mentioned earlier, all results have been revised to account for xpedx moving to discontinued operations.

Now turning to the individual businesses, Industrial Packaging delivered a really outstanding quarter. Record earnings driven by stable prices, solid operations and lower outage expenses. The modest softness we experienced in pricing was attributable to lower export pricing, contributed also due to the strengthening US dollar.

Our lower volume quarter-over-quarter was driven by reduced US exports -- they were down 44,000 tons -- and lower shipments in our European packaging business, which is really due to seasonal factors. Operations were very strong as our teams continue to run well, and as expected we had fewer outages. Relative to input costs, the benefit of lower OCC was offset by higher wood costs in the quarter.

Turning to the North American Industrial Packaging margin comparison, we turned in another really strong quarter and continue to outperform our primary competitors both for the quarter and the trailing 12 month period. Slide 10 is a slide that we used last quarter that we introduced to take a deeper dive relative to demand and volume for the US corrugated business.

And if I draw your attention to the map, you can see that for about 80% of our business, which is east of the Rockies, we actually outperformed the industry with a little over 2% year-over-year growth. This performance relates to the strong positions and superior value propositions we have with customers who are winning in their respective segments.

West of the Rockies, which represents about 19% of our business, we trailed the industry for the quarter. And this is primarily due to weakness associated with the agricultural business affected by drought and other weather-related circumstances. And for International Paper, this is a segment where we have a significant position.

Turning now to Consumer Packaging, we talked about a strong second-half story, and I would say that we clearly executed in that regard in the third quarter. On pricing we saw an increase in North America that was more than offset by what's going on in Asia and Europe, and let me speak to both of those for a moment.

In Europe, due to weaker demand in our home markets, we are exporting more and this business comes at more competitive prices and margins, which negatively impacts our mix. In Asia, due to the excess capacity of the industry, our margins have also declined. So that's the pricing and mix story.

On the volume side, we saw a nice increase in volume in North America coming out of the heavy outage quarter, and our Foodservice business had another record quarter with revenue up 15% year-over-year. Europe also saw improvement as we had a full production quarter at our Kwidzyn, Poland Mill following the extended outage we took to do some very nice work on our paperboard machine there. And finally, as you can see operations were much stronger throughout a steady third quarter and also in the absence of the heavy outages.

So turning to slide 12, looking at our relative EBITDA margins in North America, you can see the significant improvement coming out of the second quarter and the first half of the year. And we do expect to carry this momentum through the fourth quarter and as we exit 2014.

Slide 13, turning to our global Printing Papers business, we experienced solid improvement in earnings, [produced] business as well. Prices were stable in North America and up in pulp, particularly fluff. In Europe we did experience some declines in our paper pricing.

Volume was stronger, particularly in North America, as we took advantage of all our channels to market including exports, and in Brazil we saw some improvement in volume although we would say that the fundamentals in Brazil do remain challenging.

On the operational front overall performance was solid. The Courtland closure and transition is complete, although there will be some minimal costs that will continue for facility maintenance and security. And we also saw an FX benefit due to our export positions in Brazil and Europe.

Looking at the North American margin comparison for the papers business, the Courtland shutdowns have been concluded and we had a solid quarter. And if you consider the impact of the shutdown and transition costs, this negatively impacted our margins over the last 12 months by roughly 200 basis points.

Slide 15, I think this is a great slide that tells a really good story relative to the state of the global paper business. This chart reflects the year-over-year earnings change by region for the third quarter. And in North America you can see even with Courtland out this year versus last year, earnings actually increased by $13 million.

In our pulp business, due to the continued performance and ramp up of the Franklin operation along with improved pricing, earnings increased by $17 million. And in Brazil, despite weakened economic conditions, earnings are up $13 million year-over-year.

In Europe, where I mentioned demand is down in our home markets, we have had to expand our export reach to compensate and there you can see earnings are flat to slightly down. In India, due to improvement on a number of fronts where we've executed well, earnings have also increased by $7 million. So all in all the business continues to move forward and produce improved results despite what we all would consider a challenging global environment.

Turning to Ilim on slide 16, the joint venture had another solid quarter of performance, turning in $100 million of operational EBITDA on slightly lower quarterly sales of $520 million due to the significant outage at the Bratsk Mill that was successfully executed and taken early in the quarter.

The Board of the JV elected to pay a dividend during the quarter, of which our share was $56 million, which that was a good thing. But due to the 17% devaluation of the ruble against the US dollar during the quarter, Ilim took a non-cash charge of $210 million on its US denominated debt.

Now just a reminder, on the flip side of the unfavorable non-cash FX impact on the JV's debt, earnings are favorably impacted by a ruble devaluation as, I'm going to give you a couple numbers here, as 95% of our costs are in rubles, but the vast majority of our exported products, which account for over half of the JV's sales, are sold in US dollars. So net-net, all in, the situation in Russia for us remains favorable.

And speaking of the favorable conditions, I wanted to take a minute to highlight the significant progress that we're making at the Ilim JV, particularly with regard to the productivity ramp up at the Bratsk Mill. As you can see on the chart on the right-hand side of the page, Bratsk came into the year at a run rate of a little over 60% of full production for the mill.

The team has been making steady progress throughout the year with an achievement of nearly 90% in the third quarter following the major outage that I said was very successfully taken early in the quarter. And the team expects to exit the year at full production averaging mid-90% levels for the fourth quarter, so this is on track with the JV's target for the new pulp line to be fully ramped up by year-end.

So let me turn now to the outlook for the fourth quarter. Volume will be lower, predominantly due to seasonality which is simply three less shipping days in the North American box business, which for us translates to roughly 120,000 fewer tons. This will be slightly offset by seasonally stronger conditions in Brazil.

Moving to pricing and mix, we do expect pricing and mix to be lower in our North American paper business, really due to some seasonal weakness. And we also expect lower average export pricing for our containerboard for our Industrial Packaging business, and I would also attribute this due to the normal seasonal weakness that we see this time of year combined with the continuing strengthening of the US dollar. And finally we do expect to see lower pricing and a less favorable regional mix in Europe and Russia.

We expect operations to continue to perform well in the fourth quarter. We don't expect overall input costs to moderate to any degree in aggregate, with anticipated higher wood costs likely offsetting any benefits from lower OCC and energy costs. Maintenance outages are forecasted to increase by about $60 million sequentially.

We expect to see a positive swing from the significant FX charge at the Ilim JV. However, as you all know looking at the ruble today, some of that could be offset by further devaluation that we've seen to date but as our practice has been, we don't attempt to forecast where the ruble will be at the end of the quarter.

And finally we assume the tax rate to normalize in line with our full-year outlook and for corporate expenses to come in around $15 million for the fourth quarter given the year-end true up. So with that, let me turn it back over to Mark.

Thanks, Carol. So let me just summarize our remarks and wrap it up.

IP had a very strong quarter, setting records on a number of fronts as we continue to run our businesses very well. While we expect this strong execution to continue, our outlook for the fourth quarter is impacted by fewer shipping days in North American box, and $60 million in higher planned maintenance outage expenses. We are leveraging our well-positioned businesses, particularly in the absence of any tailwinds in most markets.

Our teams around the globe are executing very well and are continuing to find ways to drive improved results and create value. Our free cash flow generation continues to be strong and sustainable, which is enabling IP to deliver on its capital allocation strategy. We have delivered three consecutive annual double-digit increases in the dividend, and today we are within $100 million of completing the original $1.5 billion share buyback program that was authorized back in September of 2013.

We continue to look for value-creating opportunities for reinvestment, for example the recently announced restart project of our number 3 paper machine at Valliant for our containerboard business, the expansion of our Canton, Ohio Foodservice facility, and the coated paperboard enhancement project we completed and are in current ramp-up at our Kwidzyn Mill in Poland.

IP's financial state is very solid. We remain focused on the execution of the plans we've outlined, and going forward we expect to make continued progress toward our key goals.

Before we open it up for questions I'd like to give you a brief update on where we are with the master limited partnership opportunity. As we said at the UBS conference in September, we've moved to a more intensive evaluation phase. We've retained a team of external advisors and are actively working with them at this time.

As part of the process of our discovery, we are also talking to several companies in other industries. We have formed and are operating an MLP in an effort to better understand the process and their experiences. There's a lot of work going on to better understanding what an MLP structure might look like specifically for International Paper, and whether we would benefit from such a structure and whether we can create value for our shareholders.

I can tell you we're encouraged by what we're learning through this process. And as part of our continuing evaluation, it is our intention to file a request with the IRS for a private letter ruling, and we're working with our advisors to get ready to do so. And with that we'll be happy to open it up for your questions.

(Operator Instructions)

Mark Weintraub.

I hope this is a fair question for a quarterly earnings call, but Mark, since you've taken over, as IP's CEO and I just wanted to throw this question at you. What do you think are the key levers you can pull to take IP to the next level or put it a different way, what are the biggest opportunities that you're looking to act on in the next couple of years?

I guess it's a fair question, Mark. It's an obvious one as well.

I think we've got a strategy that we've embarked upon that we shared with the investment community, we've shared with our employees, and we've still got more runway on our current strategy, and so executing very well against our current plans, which is essentially advantaged positions in paper and packaging globally, creating value for our shareholders, that's still the important near-term task. And obviously, without being able to predict the future, as we go out beyond two years, we'll have to continue to evaluate where we can create value and I'm sure, I can't tell you what it will be, but I'm sure International Paper will evolve and will be different in five years than it is today.

But the bottom line is we're committed to a strategy of balanced use of the cash. We think we can continue to generate healthy cash flow, and we're going to look for ways in a balanced fashion to create value for the long-term.

And just as a quick follow-up, and how important is M&A to this strategy, and how -- and do you feel that you're somewhat constrained given the various market positions that you already have?

I think in general, M&A is obviously a tool in your strategy toolbox. I wouldn't comment on where we might be constrained or not, but I think IP's not a mergers and acquisitions story to create value going forward. As you mentioned we have strong positions in certain markets, but there are opportunities for us to improve what we have and I think M&A will come out where it comes out based on the opportunities we see in front of us, but all against the backdrop of creating value for the long term.

Okay. Thank you, Mark.

George Staphos, BofA Merrill Lynch.

Congratulations to everyone on their new endeavors. I guess the first question I had on MLPs, Mark, could you comment at all, or Carol, if you could comment on you're more encouraged by what you have found recognizing you still have more work to do. Relative to when you first examined the structure or thought about it to the current time, what has been the biggest source or biggest couple of sources of incremental encouragement or view on how it could create value?

George, I'll just make a general comment and I'll ask Carol to elaborate. I think what we talked about at the UBS conference I referred to is learning how this specifically would work, and for example our containerboard business, and whether or not our core principles of being able to run the business effectively can be maintained is what we are learning and most encouraged about. And as you remember IP had a master limited partnership in our Timberlands business years ago.

We are not -- we weren't worried about the complexity. We were worried about whether or not the specific application of this structure in this type of business and the way we need to run the business would work. I think we're learning more about that, that a lot of those issues are manageable and Carol, if you would --

I'll do it from the other side. The other part we've learned is why would IP specifically be attractive to investors in an MLP? And what would they be looking for and what is it that we offer that would be attractive to that investor base and what would that be worth to them?

Because that's what ultimately translates back to the value of International Paper. So just learning about the value drivers of MLPs. That's been -- we've learned a lot and we see some encouraging things from that.

If I could tag on, and again maybe this is preliminary and thus you can't really get to it. Would it be feasible in your view, given your work to date, for other portions of IP to be suitably dropped into the MLP, or have you not gotten to that point yet in terms of your valuation?

George, that's the type of detail that we aren't really prepared to go into. But I can tell you that we've got a holistic approach to this, and that's how we're going to continue with it. But specifics about the structure and all that is not the right time right now.

Understood. My last question, and I'll turn it over to the rest of the analysts. A couple years ago, you talked about the $5 billion EBITDA goal, the Drive for Five, so to speak.

Is it possible to comment in terms of how you gauge your prospects for reaching that given the current structure of IP and the current trends that you have both going for you and against you? Thanks, I'll turn it over.

George, that's a great question. We are committed, we laid it out there back in 2012 that we were shooting for a milepost of $5 billion in EBITDA and we're not ready to give up on that. It's harder to get to and we're getting there in a different way, and I think the biggest gap we have is what we've described as mid-cycle conditions, a mid-cycle cost and demand environment.

We're not sure we've seen that yet, but obviously as I step into my role, we are rejuvenating our efforts to find additional ways with what we have today to try to get as close to that and look at reaching that target. So that's our approach. We've made a commitment and we're focused on trying to find a way to get there.

We knew it would be different than we laid out. We just didn't know what the actual path would look like. So aspirational a little bit but we think we have the Company today, that with the right conditions, we can achieve that level of performance.

Thank you.

Mark Connelly.

So we're starting to see more capacity announcements in India, from local players mostly, and you said you're looking more -- have you come to the conclusion that in India's a big opportunity? I think in the past, IP has described it as sort of its investment as a learning experience.

Mark, I'll make a general comment about how I kind of personally view India and then I'll ask Tom Kadien to elaborate given he's been running and will continue to be responsible. I think you're right, we said India has maybe the potential for the future, and we wanted to start to learn how to do business there. I think we've learned some things in the last three years.

I wouldn't say our view has changed dramatically, that we see something that we didn't see two or three years ago, but we do see the potential, we see the potential in the packaging area. And so we'll be very measured and very careful with what we do in India, but it is still a market that is intriguing, and again it's for the future, not for tomorrow. And Tom, if you would maybe add some comments?

Yes, Mark, not a lot more to add to that, but it's three years for us in the paper business over there. We've made a lot of strides that have been covered up by wood cost and slowing economy. But I would say we're as optimistic about the fundamental opportunity in India as we were when we bought our way into a PPM.

And I think the capacity announcements that you're talking about are really on the containerboard side. We think that's also an opportunity for the future but we've got to earn our stripes in the paper business first.

Okay, that's helpful. And second, in the second quarter John Faraci said that his target was to buy back your stock below intrinsic value.

I'm wondering whether you apply that same basic metric to acquisitions with maybe intrinsic value plus expected synergies. I was wondering if Carol could remind us how you do think about acquisition value.

Yes, Mark, clearly, our goal on acquisitions is to create value, which comes quite simply to we use our methodology is discounted cash flow model, trying to look at all the cash in for what we can get out of the base business plus synergies. And we want a nice spread between what we view our cost of capital against what the return on that project could be. And that's all around the assumptions you make, and you can make those numbers tell you lots of things.

So what we try to do really hard is we look at cost of capital by region, we don't use one number for the Company. And we pressure test the assumptions real hard. And quite honestly, to make IP more valuable we need a nice spread between our cost of capital and the potential return out of those projects.

And we have a very robust review process here where we debate it and we talk about it and John always encourages us to have multiple points of view and I think we'll continue on that path. So I think you would find us to do the work much like you would expect.

Very good. Thank you.

Gail Glazerman.

Could we just start, maybe a little bit on the demand environment, kind of puts and takes, gas prices are down. Are you seeing that flow through to some of your business that might be tied closer to the consumer? Just generally speaking, maybe touch on what you're seeing in Brazil and China as well in paper versus board?

I think maybe the best way to do that is to have maybe Tim Nicholls talk a little bit as he enters into the Industrial Packaging role which is obviously the best bellwether we have for general demand environment from the economy and then we'll kind of touch on the other parts.

Sure. Thanks, Mark. Good morning everyone.

I think demand's been pretty stable. We saw our box demand in the quarter just slightly behind where the overall market was. And Carol pointed out the factors between East and West.

If you look at the East we performed fairly well, both in absolute and on a relative basis. So I think demand feels okay here in the US. It's actually been pretty good.

Export markets, we did see some seasonal weakness but I think beyond the seasonal I think it's just more of new capacity pushing out some suppliers from North America into other parts of the world, and we bump up in a lots of parts of the world because of the size of the system we are. So you probably got hit by that just a little bit more than maybe others.

If you look at Brazil, Brazil is -- on the paper and on the box side, has struggled given the economic environment. They're technically in a recession the first two quarters of this year. And it's been exacerbated on the packaging side of Brazil just because of how some of our biggest customers have been impacted in their markets.

They've lost share to local suppliers which is filtered through the supply-chain to us. We'll see what happens now.

It kind of felt like Brazil had taken a bit of a pause. It was hurt by the World Cup and then it went into a pause waiting on the outcome of the election.

The election's behind now. We'll see what impact that has on balance of the year. Fourth quarter tends to be a seasonally stronger quarter both for paper and packaging.

In the paper markets there, the domestic markets have been weak. The export markets around Latin America have been a little more robust, but not the kind of strength that we've seen in prior years. But still from how we've performed, we're better than market on domestic paper in Brazil and we're kind of flattish on export volume to Latin America.

Gail, I'll wrap up the demand comments with China. Our demand probably reflects the Chinese economy. It slowed down.

We still have pockets of positive demand growth but it doesn't mirror the 7% plus GDP number that gets published, mainly because our demand is really dependent on one component of that GDP and that's the consumer and/or exports and both of those were a bit sluggish in China right now, so we don't see it getting a lot worse right now. It's just not the level of demand growth that we were accustomed to.

Okay, and then just on the MLP, I guess you said one of the considerations that you've learned about is the value drivers and what investors would be looking for. Can you give a little bit of insight? Certainly one thing investors look for typically is yield-driven and how you're thinking about a more normalized interest rate environment might impact the success of an MLP?

So sure, Gail, so yes, it's MLP 101. So I'll be brief, but it's about the yield but it's about the growth rate and it's about the longevity. And when you think about International Paper, with the size and scale of the system we have, we've got a lot of EBITDA, a lot of cash flow, and so you've got growth and you've got longevity.

And then if you look at the value to the International Paper shareholder, the value comes from your general partner stake and your incentive distribution rights state. So you've got some drivers that could be valuable to International Paper.

So then it comes back to what Mark said. Given those things, if you believe those are real, and you've got enough experience to see actual examples of that, what would it take to run it in the business we're in and with the Company we have and the structure we have, to not violate our True North goals of how we know we want to run the business?

So that's kind of where our learnings have taken us. I hope that helps.

Sure. Thank you.

Philip Ng.

One of your competitors just reported that and he sounded a little more upbeat on demand for October. Based on Tim's tone, it sounds like more of the same, so just want to get some color on that front.

Yes, we're looking at our October, we came out about where we thought we were going to. And kind of in line with what we saw in September.

So I would say that it's fairly consistent. Not a big direction one way or the other.

Okay, that's helpful. And then on the MLP front, if you guys do elect to move forward, Carol, can you provide some color on how you're thinking about using the cash proceeds and you commented on why you would move forward to be creating value for shareholders, so can you help us understand strategically what's the game plan on an MLP if you guys do move forward?

Yes, Philip, that's a great question. And I'm not sure this is the right forum to answer it, but clearly one of the things that happens if you went down that path is you would be getting a big influx of cash to International Paper.

Now what we do with that cash and where we take that, that's a question that we continue to think about here with Mark and the team. So I'm not prepared to answer that question, but the multiple arbitrage is really the key thing that enables the flow of that cash in.

Okay, that's helpful. And then just switching gears to Ilim, you saw some price slippage in the quarter. Is that starting to stabilize and how should we be thinking about the cadence of the EBIT progression of that business, especially considering that the ramp-up for -- of production is going to be pretty close to full production year-end?

This is Carol. I think on the appendix slide, where we have Ilim in there, and I'm going to go to it pretty quickly if I can, I think what you see there is you see some pulp price down quarter over quarter, there's a lot of mix in that for Ilim. It's got hardwood in it, it's got a different grades of the softwood, different quality grades, so I would not react to that too strongly.

I think the markets are pretty strong and pretty stable. And we feel pretty good about the outlook for softwood pulp.

Okay, alright. Thanks, guys.

Chip Dillon.

Just first question is on your view toward what, maybe, CapEx looks like in 2015. I know you probably haven't finished your budgeting but at least maybe directionally, as you look at some of the projects that are in the pipeline, how could that look versus this year?

Well, Chip, I would say that it is a little early to predict that. When we do the fourth quarter results, and we talk about those in late January, we'll give some color on that. But I would say that, generally speaking, we have a pipeline of really good ideas that we need to think about, how do we want to fund those ideas that are really some good value-creating opportunities and when the time comes, we'll speak to those.

Okay, and at least versus our expectations and modeling, we need to give the white paper business a little bit of credit this quarter. It looked very good, and I had a question on that segment.

One concern a lot of investors have had has been the impact of imports. That seemed to have stopped some of the pricing momentum this year.

And some of the import increases, of course, have come from Brazil and we were just kind of wondering, it would make a lot of sense that you guys might have sent a lot of paper up from your operations down there with the Courtland closure, and maybe with the benefit of hindsight not all of those tons were necessarily needed or customers had made other arrangements. Do you see the import situation changing at all, especially given the freight costs and distances involved from other countries?

Hey Chip, it's Tim. Let me just tackle imports in general first and I'll come back to Brazil. Imports in general, if you go back and you look at 2013 data quarter by quarter and month by month, imports had started coming in the first half of last year.

And as we were making decisions about our system and our footprint here, we were taking into account what imports were doing and what customers were telling us their intentions were about additional imports. Having said that, you referenced freight costs and they're definitely up and that has a big impact on the viability of imports, especially if they go up and they stay there for a long period of time, as does currency.

But the other piece of it is just supply chain. It's not uncommon to be managing a supply chain that might be four or five months long, given imports and where they have to come from and the planning that goes into it versus 30 days or 40 days from the domestic supplier like ourselves.

With regards to Brazil, we do not import paper into the US for distribution in the US from Brazil. We do send paper here to traders that take it back out and distribute it for us in the Latin American region. And the reason we do that is because of customer mix in some cases, and because of quantities that are ordered.

So it's just more efficient for us to ship it into Miami and have it redistributed back out into the region, because our partner manages a very efficient supply chain, than it is for us to try to do all that ourselves. We have some direct shipments into the South American region but we also go through distribution as well.

Okay, that's helpful, and one last quick one. I think, Mark, you mentioned that you had done all the first original authorization in terms of the buyback except for $100 million. And just a clarification, was that as of September 30 or as of, for example, today?

If I could before that question is answered, just on the imports into Miami, you should keep in mind that there are other imports that come into that part of the US for redistribution as well. So everything that comes in to say, the Port of Miami, or on the West Coast into some of the southern ports, it doesn't I'll stay here necessarily.

And I guess those would both be shown in the AF&PA data as imports and exports.

Not always. No, that's the problem. Because of the way reporting is done.

I see.

On your question about the share buyback, the $1.4 billion actual against the $1.5 billion authorization's through today.

Thank you.

Steven Chercover.

First question, the margins in North American containerboard are really terrific and you've said you intend to maintain that. I want to know, A, how much runway do you have on that optimization plan, and B, is it possible that it gets too good because folks with lower margins can still earn their cost of capital?

Stephen, it's Tim. Too good, I think it depends on how -- where the improvement comes from. So we said earlier this year that optimization was going to take us a couple of -- maybe two to three years.

If it's internal improvement, then I think it's probably more sustainable than if it comes from other places. Having said that, you look at -- just take a broader chunk of time, because third quarter was light on outages. You can still see margin expansion and I think that's coming from how we run the box system, how we're managing supply chain.

What's not coming through just yet, but I think it's coming over the near-term, is the mill system. We're better in the mills and we did perform well in the quarter, but some of the mills that were acquired we know have reliability issues.

And those reliability issues cost us and we're underway correcting those but it also has an impact on supply chain too, because when you can't produce product in the middle of choice based on geography, it causes you to suboptimize the system. So I see it playing out just as we characterized it in the past over the next couple years.

Okay, and switching gears, I imagine you've got to be rather frustrated with what's going on in Asia, or China specifically. I mean, year in year out there's really no contribution, so I'm wondering how long you tolerate that or is there a means by which you could maybe extract your capital?

So Steve, you're right, it's frustrating especially for our team on the ground there to deal with difficult market conditions, but we're in these businesses for the long term. And if and when we would make a decision that we don't think we could get to a position that we like, then we'd be prepared to talk about strategic changes but I think this is a time where, as leaders of a company you have to have perseverance and you have to take the long view and we have a company that's, not everything is going to be hitting on all cylinders that the exact same time. So I think we will continue to evaluate our businesses around the globe and in North America and that's just part of our role to make sure that we continue to stay flexible and nimble and position the Company for the future.

And the Asian markets are in a little bit of a downturn right now, but there's a lot of future potential in those markets for paper and forest products companies and a lot of other industries. So we have a modest position there by all measures, and we'll continue to evaluate.

Okay, and just forgive me, it's terrific that you've executed as you have on the repo. Did you re up that? I think you did.

Yes, Steve. We did. The Board authorized an additional $1.5 billion in July.

I thought so. Thanks for assisting my senior moment. Thank you.

Alex Ovshey.

Wanted to come back to the MLP point. Obviously the IRS and the moratorium, but once that's lifted, if hypothetically you were to get a favorable ruling on the PLR, do you think you've done enough work around what the structure would look like operationally, where you could say that you're comfortable that if you did give a favorable PLR from that the IRS you would move towards an MLP structure for the containerboard business?

Alex, I think it's probably premature to get into that. As I said at the beginning and Carol elaborated on, we're still working through it. So I think at the appropriate time in the process, we would be able to talk more about that.

That's fair, Mark. And then would you be able to tell us what your box shipments were in October? And just a follow-on to that question, if I look at last year there was a meaningful step-up in the downtime for the North American industrial business in the fourth quarter versus the third quarter. Can you give us a sense of how we should be thinking about that number this year?

Alex, it's Tim. On October shipments we're still wrapping up the months so if we just look at daily cutoff and how we performed in our box plants, I think it feels a lot like September, and we finished on a little bit stronger note in September than the rest of the quarter.

In terms of outage, we don't forecast going forward. We have to look and see what our demand signal looks like and then we plan accordingly.

Appreciate the color, Tim. Thank you.

Anthony Pettinari.

I had a question on input costs. You took a hit from higher wood costs, but OCC prices have been really weak. And understanding that you're not giving guidance, as you look forward, do you think that we could be -- do you expect OCC to pick up or could we be looking at another six months, twelve months, where OCC is $100 or below $100, and is the price of OCC something that concerns you from the perspective of potentially incenting new containerboard capacity in the US?

Anthony, this is Carol. I think, speaking for the team, I think the OCC, it'd be very difficult for us to predict where OCC is in six months because it's going to be really all around global demand and global economic activity. So I think what you're seeing there is just a sheer result of the demand for OCC, but over time we're convinced that it costs more in the future than it costs today.

So we think it goes up higher through time, and if you're making a decision on a containerboard machine, recycled containerboard machine, you're not going to make it on a spot price on OCC. You're going to make it over a long-term decision around what do I have to pay for my input materials?

When am I going to sell my product line? Importantly, who am I going to sell it to? And that's the strategic question that any investor would have to make around a new containerboard machine.

And I think I answered your question but if there was another one in there I've had my own senior moment. I can't recall it.

No, that was -- I think you covered it. That was helpful.

And then just maybe following up on North American box markets and specifically box prices, you saw stable box prices in the quarter and talked about October looking good. Some trade publications have talked about discounting in boxes and I'm just wondering if you've seen any of that kind of discounting in the marketplace in a real way or if you could just talk about competitive conditions in North American box markets, maybe how they've changed, if they've changed in the last three, four months?

Hi, it's Tim. We were relatively flat in the quarter and we don't forecast price going forward but this is a seasonally slower period of time and it's a competitive market. So we'll update you when we get through the fourth quarter.

Okay. That's helpful. I'll turn it over.

Adam Josephson.

Congratulations on your performance on the quarter. And Mark best of luck on your new role.

One on exports. In terms of the export price weakness that you're guiding to in the fourth quarter, how much of that would you say seasonal versus reflective of current conditions, and how would you characterize export conditions at the moment given the recent strength in US dollar and the weakness in a number of economies as I think Carol talked about earlier?

Hi, It's Tim. It really depends on what products you're talking about. If it's containerboard, there is an element of seasonality in that, there's how regions are producing around the world and then there's, as I mentioned earlier, some capacity that's probably left North America and it's finding its way to other parts of the world.

So probably half and half. On the paper side, this is a seasonally slower period of time and we usually do see some export price erosion as we go through the fourth quarter, and in certain parts of the world, as I mentioned in Brazil, fourth quarter tends to be a seasonally stronger period so overall it's probably going to be down, but I don't expect big decreases.

Thanks, Tim. And just one on the capacity, the containerboard capacity additions in North America. How would you characterize the impact that they've had both on your business and on the market?

Obviously your margins in North American Industrial Packaging are as high as they've ever been but we continue to read about pricing pressure, both domestically and in terms of export containerboard prices. Thanks very much.

I wouldn't comment on how it's impacted the market. I can tell you how it's impacted us. We haven't seen a big impact on volume.

And I think you have to keep in mind that all of this capacity's not the same. You've got different levels of quality in some cases. And you've also got basis weights that are fit for use, not necessarily more broadly applicable to all segments.

And you've got to geographies in some cases that come into play as well. So we haven't seen a big volume impact. We run a very large system that has a lot of channel access across different channels with a lot of different products so we bring a different type of value proposition to our customers that some of this new capacity starting up just can't because of what they have to offer.

Thanks, Tim.

Debbie Jones.

My first question, I'd just like to talk about OCC for a minute, just recognizing it's difficult to predict this. Do you have any thoughts on the trajectory for recycled fiber pricing?

I know in recent calls you mentioned China having less of a reliance on the US has been an issue. What kind of trends should we be thinking about over the near-term on OCC pricing?

Well Carol gave an answer a minute ago that I would be hard to contradict. She said it's really hard to point where OCC goes over a longer period of time, and I think that's right. It depends on what the level of demand in China is going to be and other parts of the world.

Debbie, let me see if I can help. Maybe a more satisfying, a little more satisfying -- there is a cost curve for OCC, collection cost curve. And you start getting into below $100 and you start to take supply out of the marketplace because it costs more to collect it than it does with selling price.

And so I think if you think about where it is today, the trajectory ought to be up with any kind of economic improvement across the world. So there is that sort of bracket of when it becomes uneconomical to collect the high-cost OCC.

Okay, thanks. Apologies I guess for my senior moment in the repeat question. I guess my follow-up I guess would be on MLPs.

And it's more of a process question. If you could comment on this and you submit the application and I'm assuming you're trying to get -- have them review various craft assets and whether or not they have MLP qualifying income.

Does the IRS -- what type of due diligence do they do when you submit the PLR? Are they actually coming out and visiting your operations or do they tend to look at industry definitions and things like that?

Debbie, this is Carol. I'm not aware that they would come do a visit; I don't think that's what they would do. I think they would base it upon your submission of the facts as you represent it and they could always research those facts and verify those or form their point of view.

Okay, great, thank you. That's helpful. I'll pass it over.

Scott Gaffner.

Just looking at your corrugated shipments in the quarter, I realize west of the Rockies, you're more heavily exposed to the agricultural market. But I think I recall before that you are going to try to maybe mitigate some of that by moving it to some other end markets.

One, are you making any progress moving into other end markets and two, as we go into 2015, it looks like some of those issues in the ag markets aren't going to abate. Are there any measures you could take to change your customer mix there to mitigate some of those issues?

Hi, It's Tim. I'm not sure about the question around market segment shifts and whatnot. We're talking about a lot of volume, we're talking about a big market in California.

So it's really hard to impact that in a meaningful way in the short term. And I don't know how long the drought is going to last. And you would think that at some point, the drought situation will reverse itself and then we'll see some uplift on a comparable basis, but what we're doing is we're competing in all the segments that we play in.

We've got big protein segments. We've got big segments in processed foods. And so we're working all of those segments hard across the country and we're faced in the West with a situation where there just is not as much demand because the product's not there to be packaged.

Okay. But looking at your shipments there versus the industry, you were down 3.7%, industry up 1%. Is that purely the overweighting towards ag or is there something else going on?

Sorry, I missed that part of your question. Maybe my senior moment.

But yes, there's more than just ag in the West. There's industrial business but we tend to be overweighted to the ag segment in that part of the country.

Right. Is that something where maybe an acquisition would help you to balance out the end market exposure there?

I don't think you look at acquisitions for situational factors that impact demand. We're running our business and we would look at it the way Carol talked about it, if there was one that made sense and we thought it drove intrinsic value, but we're running the business day to day and trying to optimize what we have.

Okay.

Scott, the biggest lever we have, Tim mentioned it earlier, is the channel distribution strategy that we have. Domestic containerboard in the open market where we have top-notch customers our own box business, and of course our export markets, and that allows us to move containerboard through channels so if the West Coast ag business is difficult for a while we've got other outlets and that's what we do on an ongoing basis, is really maximize our flow-through to different channels to market because all of those channels are permanent channels for IP that we view strategically.

And as I mentioned, we don't expect ag segment on the West Coast to be down forever. It will come back.

Right, I hear you on that argument. We've just been waiting for above average harvest around food cans for three or four years now. So --

Right.

That's where the concern is coming from there. Just moving over to consumer for a minute, on cupstock can you talk about any continued improvement in the uptake there on, I think maybe you were adding some capacity but also from a consumer, from a customer demand perspective are you seeing any continued switch from foam to paper?

Yes, Scott, this is Tom Kadien. We see robust demand growth in our Foodservice business, and we are -- I think our volumes are up high single digits year-over-year and we still have customers who are moving geographies and moving products out of foam and into paper and that's driving our volumes. That's why we are expanding the Canton, Ohio plant to add capacity for the back half of next year because we still see that trend moving in our direction and it's pulling through a lot of cupstock through our coated board business as well.

Great. Thanks for all the color.

Al Kabili.

Carol, just housekeeping question for you is on pension. If you've had any preliminary thoughts around what the lower discount rate and changing mortality tables might mean for your pension expense next year? More broadly and also as how you define operational pension expense?

So Al, good morning. So on pension, let me just comment from a -- clearly the discount rate as of December 31 will impact the accounting side of the pension. It will not impact the cash required contribution side.

The law that got passed legislation of the summer will trump all of that. And the required contribution that we're looking at now for 2015 and 2016 is in aggregate probably round number $100 million in total-ish. So it's a very small amount.

So the impact on the discount rate will be a balance sheet and a credit metric issue by itself. Relative to the mortality table, that they will come in. Not sure of the exact date when all that hits but I think it's 2016 or 2017, something like that.

And clearly, when the lifespan's longer, the liability will go up from that but I'm not prepared to give any preliminary math on that. And then the operating pension expense which you referred to that flows through the business P&L, operating pension expense is really the cost of providing that benefit, taking out the kind of swings that come from the accounting, so it's a benefit that we provide to our employees, there's a cost associated with that and that flows through the businesses. On the nonoperating, it's the kind of things like the change in liability, the change in interest rates, all that kind of stuff that's really accounting-driven and that's why we separated the two, not to distort our operating performance.

Right. And understanding you're not prepared to give the change in mortality table update just yet as far as quantifying, but it sounds like it's probably not going to have that much of an impact on the operating pension expense if I understand it correctly, Carol.

To tell you the truth, we've done it more from an overall liability perspective. We have not moved it back through, through the operating line, but it certainly won't be an impact in 2015 and I think it would become an impact in 2016 and 2017.

Okay, appreciate it, understood. Okay.

And then just last question, just on more broadly to the team and just the emerging markets and clearly the macro has been a struggle but if we look at India and we look at Brazil, Orsa, those businesses have been challenged by cost inflation the last few years. And I wanted to get a sense of the pulse on the opportunity just to improve the performance next year on those businesses irrespective of the macro and just catching up to some of this cost inflation, what the outlook is there.

Hi, it's Tim. Just on Brazil and I'll pass it off to Tom Kadien for India, Orsa, yes, the environment is challenging. But even with the challenging environment this past quarter, we were still getting price increases.

The big lever for us is really around cost structure, especially in the box plants. We're spending low capital dollars for significant automation opportunities that takes out headcount so we'll end up taking out this year, probably, the better part of 160 people across the system and we think there's more opportunity as you go into 2015.

On the volume side, if you look at the business absent these three multinational customers that we have that have lost share, we're kind of holding our own. We're just faced with the additional challenge of, in a soft market trying to replace the tons that we've lost through those customers but I think we're making headway on it.

So I expect an improved fourth quarter from a margin standpoint, third quarter was very heavy to outages which impacted us. And expanding margins of (technical difficulties).

And on the in India side, there's a lot of optimism in India right now with the change in government. And we've seen some tangible signs that give us optimism as well about the macro environment. We expect demand -- GDP to drive demand and GDP's going to increase next year over this year so 5.5% or so.

Fiber prices, which have been an issue, are coming down. So that spells good for earnings, and we've also gotten with this new government, we've gotten some consents approved on additional capacity that will help us grow the business next year. So we feel really pretty upbeat about our paper business in India.

Okay. Terrific. And good luck the remainder of the year.

Okay. I think that will wrap us up here. I'd just like to make a couple of closing comments.

At IP we expect to continuously improve. We hold ourselves, as leaders, accountable for that. We're going to focus on our customers; it's even more important and slow economic times to really redouble our efforts to be better and better with customers.

We'll continue to focus on improvement in how we operate. You saw a lot of the evidence of being able to do that and bring it to the bottom line in the third quarter.

Our focus on good sustainable cash flow will remain. And balanced use of that cash that rewards our shareholders will be the principles that we continue to operate going forward.

We have a great group of employees that are engaged in winning and winning with customers and in outperforming the competition all over the world and it's a privilege for me to have the opportunity to lead International Paper. And I look forward to speaking with all of you on a regular basis going forward.

Thanks Mark, and thanks again to all of you for taking the time to join us this morning. As always, Michelle and I will be available after the call.

Our phone numbers are on slide 20 of the presentation. Have a great day.

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