International Paper Co (IP) 2014 Q4 法說會逐字稿

Good morning, and welcome to the fourth-quarter and full-year 2014 International Paper earnings conference call.

(Operator Instructions)

I will now turn today's call over to your host, Jay Royalty, Vice President - Investor Relations. Please go ahead.

Thanks, Stephanie. Good morning everyone, and thank you for joining International Paper's fourth-quarter and full-year 2014 earnings conference call. Our key speakers this morning are Mark Sutton, 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 fourth-quarter and 2014 earnings press release, and today's presentation slides.

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

Thank you, Jay, and good morning everyone, and thank you for joining our call. What I'd like to do as quickly go over the format that we will follow this morning. In the beginning, I'll review our full-year 2014 results, and then turn it over to Carol Roberts to speak to the fourth quarter and the performances of our individual businesses, and then we'll come back and cover the first quarter and 2015 outlook, before opening it up to questions.

So I'm on slide 5, looking at 2014 full-year results. International Paper completed a strong year in 2014. We delivered record cash flow from operations of $3.4 billion, along with free cash flow of $2.1 billion.

North American industrial packaging results were significant, with the business achieving $2.7 billion in EBITDA and margins of 24%. Return on invested capital was 9.2%, making this the fifth consecutive year that our returns have exceeded our cost of capital. And additionally, we saw margin expansion across all of our key businesses in 2014.

We conducted a successful debt restructuring program, in which we pushed out $1 billion of debt from 2018 and 2019, and we achieved more than $40 million in annualized interest savings as a result. In the fall, we increased our dividend by 14% to $1.60 per share, which was the third year in a row of double-digit dividend increases. For the year, we bought back roughly $1 billion of IP stock at a little over $47 a share.

We completed the closure of the Courtland, Alabama printing papers mill, which as we mentioned, was very difficult for us to do, especially with the impact on our employees, but we believe was necessary giving the ongoing decline in North American uncoated free sheet demand.

We completed the spinoff of our North American distribution business, xpedx, and received $400 million, as it became part of the new publicly traded company Veritiv. And the Russian JV, Ilim, which we own 50%, had a solid year, improving operational EBITDA by 126% to $470 million for the full year, and we received a dividend of $56 million in 2014 from Ilim.

Turning to the full-year financial results, IP achieved solid improvement across the board. Full-year earnings per share finished at $3 per share, and included in this figure is $0.63 of Ilim FX negative impact. Absent this impact, our EPS was up 20% year-over-year, and we'll talk more about that in a minute.

Turning to slide 7, which is a history of our return on invested capital, as I mentioned for 2014, our return was 9.2%, again the fifth year in a row that we're above cost of capital. We continue to deliver on our commitment to create value for our shareholders. I would also note that if you consider the impact to the equity earnings of the Ilim FX charge I mentioned earlier, which was a non-cash charge, our ROIC would've been over 10% for 2014, and that would have been a best ever mark for the Company.

Turning to slide 8, 2014's free cash flow of $2.1 billion continued a strong trend of free cash flow results since 2008. Beyond strong earnings for the businesses, our cash flow performance in 2014 benefited from strong working capital management in the fourth quarter. As we look to 2015 and beyond, we remain confident that IP can continue to deliver strong free cash flow in the years ahead.

And turning to the uses of that cash, we continue to do what we said we would do. In total, we returned $1.6 billion, or more than 75% of our free cash flow to shareholders throughout 2014, and additionally we finished the year with a cash balance of $1.9 billion. And with that overview of the full-year, I'll turn it over to Carol, and I'll return later to talk about the outlook, and then we'll open it up for questions. Carol?

Thanks, Mark, and good morning everyone. Turning to slide 10, looking at the year-over-year bridge for 2014, you can see year-over-year price improvement was significant at $0.89, with about 50% of this coming from our North American industrial packaging business, 30% from printing papers, and the balance came from our consumer packaging segment.

In aggregate, volume went down, and this was mostly due to the volume decline in North American printing papers, as Mark said, largely driven by the Courtland mill shut down. Overall, our operations performed well for the year.

Looking at input costs, they were $141 million higher, due to the stubbornly and consistently high wood costs that we saw throughout the year. Energy costs were higher as well, largely driven by the very low levels that we saw in 2013, and also impacted by the significant weather that we experienced in the first quarter of 2014, and the lingering impact that had on energy costs through the first half of the year. These were partially offset by lower chemical costs.

Taxes were higher in 2014 by about 5%, and that was due to fewer tax benefits in 2014 versus what we experienced in 2013.

And finally, we had a significant non-cash Ilim FX hit in 2014, as Mark pointed out, at $0.63 per share. But most importantly, we saw substantial improvement in the business, in the operations, as you can see in the callout box, and this is attributable to the continued post project ramp-up, as well as other efficiency improvements and margin expansion that resulted in operational EBITDA more than doubling from the prior year. So as Mark stated, when you exclude the Ilim non-cash FX charge, we enjoyed an EPS improvement of more than 20% 2014.

Turning to the results for the fourth quarter, as Mark said, IP delivered record free cash flow for the year, and it was no different in the quarter, with $739 million of free cash flow. And this came from solid performance across all our key businesses, as well as strong working capital management in the quarter. We benefited from stronger North American box demand, but this was muted by weaker global conditions in a number of our segments.

We did see some benefit from lower input costs in the quarter, and operating results at the Ilim JV were strong, although as we said, the JV did experience a large non-cash FX charge of $0.40 in the quarter itself, and this reduced our fourth-quarter EPS to $0.53 per share. Additionally, we repurchased $170 million of our shares in the fourth quarter, bringing the total purchases since September of 2013 to $1.44 billion.

Moving to slide 12, taking a look at the quarter-over-quarter bridge, I will highlight a few key items. On volume, results were better for the quarter, as the North American box volume exceeded our expectations, on stronger daily demand. Operations and costs were unfavorable quarter over quarter, largely due to some isolated issues at a few of our mills in the US, an issue we had at our mill in France, and an issue we had at one of our mills in Brazil.

Additionally the fourth quarter is typically a more expensive operating quarter, due to the onset of colder weather and some other seasonal costs that we see. Transportation rates across all our North American businesses were higher due to tight rail and truck markets, and year-end true-up expenses were higher in the quarter, as well.

Regarding corporate expenses, there was a non-cash FX charge for the administrative restructuring of an international entity, for which we took a one-time hit. As I said, Ilim operational results improved in the quarter, while we also experienced a large negative non-cash FX charge associated with the JV's US-denominated debt. As I mentioned on the prior slide, EPS for the quarter would have been $0.40 higher in the absence of this non-cash FX impact.

So turning to industrial packaging on slide 13, despite three fewer shipping days in the quarter, volume was flat, as the daily rate for box demand was at its strongest level of the year. Pricing in aggregate was down slightly, primarily driven by pressure on exports due to seasonality and a weaker Euro. Operations were unfavorable for the quarter, primarily driven by isolated issues at our Orange, Texas and Newport, Indiana mills. And as I mentioned, transportation costs were higher as well, as truck and rail rates increased due to very tight market conditions.

We also experienced higher benefit costs and other expenses due to some year-end true-ups, and we had several one-off expenses at our Brazil packaging business. Maintenance outage expenses were higher as well, but we had clearly expected that.

And then finally, on input costs, they were modestly lower as we saw lower expenses for energy, OCC and diesel, that were offset by some higher utility costs. We had a major event at the steam provider for our Newport, Indiana mill, that resulted in our need to pay some premium pricing for energy to sustain mill operations throughout the quarter.

I think slide 14 is just a great picture, which shows the track record of results that we've been able to achieve in our North American industrial packaging business for the last 10 years. In 2014, the business achieved $2.7 billion in EBITDA, 24% margins.

And we're very proud of this business and of all of our colleagues in the industrial packaging business, and the job they've done to achieve, sustain, and build on these industry-leading results. And this has really been done through delivering real value to our customers, great operating performance, and quite honestly, a commitment to excellence and to continue to improve.

Moving to consumer packaging, seasonally lower demand and solid operating performance and a desire to manage our inventories very closely resulted in the need for some market-related downtime in the quarter to match production to our customers' demand. Results were also impacted by higher maintenance outage expenses, and some unfavorable FX impact in our European and China business. The business did see some benefit from lower input cost for wood, energy, and fuel.

Moving on to printing papers on slide 16, volume was seasonally stronger in Brazil and Russia. Pricing and mix were slightly unfavorable for the quarter, as less favorable pulp mix and pricing pressure in Europe were partially offset by a seasonally stronger mix in Brazil. Maintenance outages were higher as expected, and operations were unfavorable due to higher operating expenses in North American papers, and higher costs associated with reliability issues at our Mogi Guacu mill in Brazil, and our Saillat mill in France.

Higher year-end benefit cost in Brazil impacted our results as well. And once again, as in the other businesses, input costs were favorable on our paper segment.

Slide 17 kind of highlights IP's year-over-year change in operating profit by region for the printing papers business. In North America, printing papers improved by $2 million, which you have to point out is significant, when you consider the $40 million charge of additional expenses that we incurred in 2014 related to the Courtland closure.

The North American pulp business had a good year, with improved earnings of $55 million driven by higher volume, improved operations, and improved pricing and a mix associated with a higher percentage of fluff pulp. Brazil was flat, really not surprising given the economic headwinds we've experienced there, and Europe was down $27 million on less favorable pricing and mix, higher input costs, partially offset by lower outage expenses. Earnings in India improved $10 million year-over-year, driven by improved pricing, and lower operational and maintenance outage expenses.

Now turning to the Ilim JV on slide 18, a good quarter of operating and margin performance, which was offset by the large non-cash FX charge related to the JV's US dollar denominated debt. Volume was up 12% for the quarter, operational EBITDA increased to $143 million. When looking at the full-year results, volume was up 19% to almost 3.2 million tons.

Operational EBITDA improved from $208 million in 2013 to $470 million in 2014. These improvements were largely attributable to the ramp-up of the major JV-funded capital projects both at the Koryazhma mill and the Bratsk mill, as well as other efficiency improvements made by the Ilim team.

Due to the significant devaluation of the ruble, which we saw late in the fourth quarter, the JV expects to see further margin expansion in the first quarter, and again, simply put, most of our costs, 95% of our costs are in rubles, and 65% of our sales are in dollars, which gives us this opportunity for margin expansion. It is worth noting that with that devaluation of the currency, we will see rising inflation in 2015, and that's -- also has the potential to create some pressure on pulp pricing, so it will be very important for the team at Ilim to closely manage operations and cost as they go into 2015.

As we step back and look at the many reasons we like our investment in Ilim, our partnership with Ilim, at the top of the list is how the JV is so well-positioned to serve the most significant and fastest-growing pulp market in the world, China. The JV's pulp operations in Siberia are uniquely located, with favorable access to the vast Russian wood basket, and importantly, with access to mainland China by rail, straight south from where the mill sits. The JV will benefit from the recent significant devaluation in the ruble, which has positioned the softwood pulp operation as the lowest cost on the globe, and there's more potential as we continue to improve the operational performance of the business.

Before I turn to the outlook, I'd like to give you an update on our balance sheet, and some of the impacts that we've had. Due to the lower discount rates, along with the change to mortality tables that came about last year and that we've implemented into our liability accounting, we did see our pension gap grow to $3.9 billion as of the end of 2014.

In the year, we made roughly $350 million in required pension contributions, and this contribution looks to be maybe about $100 million in 2015, not yet totally decided, but certainly much less than what we had previously anticipated. As you recall, we executed a significant bond issue, a tender offer that Mark mentioned, this year, that enabled us to move out about $1 billion of debt from 2018 and 2019, which was our largest towers, along with realizing roughly a $40 million annualized interest saving, and we ended the year with a cash balance of $1.9 billion.

So on 21, turning to the outlook for the first quarter, volume will be largely flat across most of our businesses, with the exception of Russia and Brazil, where there is a normal seasonal decrease. The seasonal decrease in Brazil is coming off of the strongest quarter of the year, which is the fourth quarter, and this typically will result in about a third less volume for Brazil domestically, so about a $30 million negative swing quarter over quarter.

We expect pricing to be fairly stable across most geographies, with the exception of Europe, where pressure continues in the paper side due to continued economic challenges. We expect improved operating performance in North American industrial packaging, as the isolated issues we experienced in the fourth quarter are behind us, and we have a similar expectation for improved performance at our Mogi mill in Brazil, as well as the Saillat mill in France. We do expect some modest offset from North American consumer package, as operations and costs move back to a more typical first-quarter level.

Input costs should trend favorably due to lower energy and fuel costs, but we're seeing some offset of that due to increasing transportation rates, due to the tight conditions both in the rail and the truck markets. And energy consumption in North America will be higher as well, due to the normal winter conditions. Maintenance outage expenses are expected to increase in the quarter, $14 million.

We assume operations at the Ilim JV will continue to perform favorably, and as usual, we are not attempted to forecast the ruble. The assumption of flat FX coming out of the fourth quarter would result in a $0.40 positive swing for the first quarter, but based upon what we've seen to date, there's likely some additional negative impact in the first quarter, depending on how the ruble ends the quarter.

And we expect the tax rate to increase modestly to 33%, on higher US earnings, in the absence of tax extenders which we saw in the fourth quarter of 2014. And finally, we expect corporate expense to return to the normalized rate of roughly $15 million in the quarter. So with that, let me turn it back over to Mark.

Thank you, Carol. I'm on slide 22 now, and what I'd like to do is make a couple of comments about how we see 2015 as we enter the year. I'd like to turn your attention to the slide, and it's a lot of information on the slide. But basically what we're trying to do here is take a look at growth rates, GDP rates in the regions that we operate, comparing them 2015 to 2014.

And as you can see from the chart, we see a few more headwinds than tailwinds, but a reminder 80% plus of our EBITDA is generated in the US, and we see a stronger US market, so that really helps a lot in North America. This is the market that drives our results, and we saw in a number of businesses some improved demand environment as we exited 2014. In the markets that are most challenged as we enter 2015, Carol spoke about Russia and the challenges domestically in Russia; however, with our leverage as an exporter, we think we can navigate that environment.

We didn't talk a lot about Brazil, but Brazil is in our difficult position right now. Again, our paper business in Brazil is well positioned to win in those markets. We provide product in Brazil but also in the region.

Our packaging business is mostly about Brazil, and of course, that will be more impacted, but we do see some improvement opportunities there. The bottom line is, we have built a company that's got exposure in a number of markets, we're nimble, we're ready and able to deal with a variety of macro conditions that might occur in any given year, and we'll work very hard to offset headwinds in one area with hopefully tailwinds in another.

As we turn to our expectations for 2015, we see continued progress and strong results despite the macro environment that I just described as remaining challenging. As we showed earlier in the presentation deck, we delivered consistently strong results in both ROIC and free cash flow for the last several years, and I believe we'll do the same again in 2015. We see the opportunity to grow our EBITDA by roughly 5%, by executing the plans we currently have in place for our key businesses.

Along with this expected increase in EBITDA, free cash flow is likely to be impacted by things like higher cash taxes as a result of higher earnings from the US operations I talked about. Also, as a result of changing and lower tax credits in a few non-repeat deductible events.

Relative to how we're thinking about CapEx, our target for 2015 is $1.5 billion. The intent is to continue to fund a higher percentage of our high return projects that will enable IP to continue to grow earnings, free cash flow, and our returns. Some recent examples of these higher return projects are our foodservice expansion in Canton, Ohio and the restart of our Valiant number three paper machine, which we shared with you in a prior quarter.

So thinking about the key levers of will enable the EBITDA growth for 2015, here are a few I'd like to highlight, and I'm on slide 24. We have a great opportunity to continue to optimize the North American industrial packaging system, with the ramp down of our DOJ required purchases from the mills that we divested as part of the Temple-Inland acquisition and the restart of the Valiant machine. Those two events allow us to optimize our system even further.

And again, we mentioned this before, but I'll restate, it's not about volume growth as much as it is about enhanced flexibility across a very large system, which will enable us to serve the customer needs we have at a lower total delivered cost. So we have opportunities to grow kraft liner throughout our international box system, we have talked about that in prior discussions. We still see opportunity there in specialty applications like paper, that's required for gypsum board, which we also make in our containerboard system, is growing and all this flexibility allows us to bring the best revenue stream in through the asset base we have.

The Courtland shutdown and transition are complete, and we'll realize the benefits of this repositioning for the North American printing papers business, while the costs are largely behind us from 2014.

There's a growing trend in demand for fiber-based food packaging that we see, and the move from foam to paper cups as an example, and growing plate segment, just to name a few. And we're well-positioned to benefit from these demand trends. We expect to see solid improvement in results in our Brazil industrial packaging business, and we are well-positioned to benefit from continued margin expansion that Carol outlined in our Ilim JV.

So before we go to questions, I'd just like to conclude by saying that 2014 was a strong year for IP. A lot was accomplished. I feel good about how we performed and the momentum we have going into 2015. We again delivered strong results and created value for our shareholders, and that's our commitment.

We're off to a good start in 2015, I'm excited about the prospects for another strong year. We have every opportunity to deliver on the outlook I just shared with you, and our team is engaged and committing to doing it. 2015 is all about execution, and that's something we pride ourselves on really continuing to improve on.

In addition, we intend to focus more resources on higher return capital projects within our core businesses, that can drive additional earnings growth. And finally, our team is committed to continuing to find ways to deliver the most value for shareholders, and as such, we'll continue to evaluate all of our businesses, as well as our capital allocation strategy. We feel good about where we have come from and what we've accomplished, but we're far from satisfied at this point. We expect to deliver more value in the future.

And on that note, I would like to give you a quick update on where we are with the master limited partnership evaluation process. We continue to work diligently on this project with our tax, financial, and legal advisors and the real question is evaluating whether the MLP structure is the best vehicle to create value for IP and our shareholders.

We continue to be interested in the opportunity. While we have said before it's complicated, we haven't seen anything that would say that we need to shut down the analysis or that it's a no-go. By the same token, we haven't reached a conclusion, either.

But since our last call, we have filed a request with the IRS to get a private letter ruling, and it remains a little unclear on how that might proceed, but we'll stay tuned. Our primary goal is to create value for our shareholders, and we're evaluating the MLP opportunity, because it has the potential to be part of our value creation strategy. As we have more information to share, we'll keep everyone informed. With that, I think we're ready for questions.

(Operator Instructions)

George Staphos, Bank of America.

Congratulations on the year, and thank you for all the details in the presentation. A few questions. Mark, you mentioned that -- or the Company mentioned that you expect to grow EBITDA this year about 5%, and we wish you well in that regard. And you talked to some of the drivers of that performance on slide 24. Would it be possible to perhaps parse how much of that growth comes from those drivers, when considering in 2014, looking at your slides, you didn't grow EBITDA quite 5%, and that was a year where you had much more pricing tailwinds then you are likely to have in 2015, at least given current trends. So if you could talk to those points, and I have a couple of quick follow-ons.

Okay. Hi George. I think the outline on slide 24 are the key drivers. I part of it, as I mentioned, internal execution. We still don't have a robust volume outlook in our plan, but I think we've got the opportunities and the points I made on that slide, that gives us a good chance to grow that EBITDA, and really internal initiatives, and some of the execution issues we have in front of us. And there's a long list of high return capital projects that improve our quality and lower our cost that we have discovered in a number of businesses, most recently in our North American investment industrial packaging business that we plan on working on.

Okay, but other than that general comment, we appreciate you might not want to get into the details, at this juncture not willing to parse that any further on this call?

I'd rather not, thank you.

Understand. Understand. Secondly, on pension, I think you mentioned that funding is now $100 million for 2015, and we understand why, obviously with the growth in the pension gap. At this juncture, Carol, is it possible to talk about what the implications are going forward past 2015, so simplistically, should we extrapolate $100 million into the future, or could there be some offsets that we should consider as we model out?

George, actually, the honest the truth of it is, you really don't know your total cash required contributions until June, because there is some more work that has to be done. And so as we sit, it's not really much of a change from where we were before, it's in that range, and it all comes back to very close to your funding target attainment number, and you're right around 100%. A little below that, you have to put a little bit more money in. If you're above it, you don't. So it's just that we're very close to that edge is why I qualify it with $100 million, but there's no real change, even with the growing gap in the liability.

Okay. My last question, and I'll turn it over, I noticed I think from the slide deck, that you are projecting maintenance spending to be up around $60 million in 2015 versus 2014. Can you comment to what the drivers are there, and how important is that in terms of the overall execution imperative, if you will, in 2015, in terms of how you get the 5% EBITDA growth? Thanks, and good luck in the quarter.

Yes, George, this is Carol. I'll take that. Actually what's happening in 2015 and it will happen again in 2016 is there are some significant outages for the Boiler MACT implementation, that require some extra work, and so if you look at -- I think the numbers that are in there is $444 million of outage expense in 2014 increasing to about $500 million. The biggest driver of that increase is a very specific work that has to go on around some of the mills, that's more extensive than we normally would see.

Okay. Thank you. I'll turn it over.

Mark Weintraub, Buckingham Research.

Thank you. I had two questions. First, I just wanted to know, are you continuing to see the strength in corrugated demand domestically as we go into January that you were seeing in the fourth quarter? And do you have any visibility as to how sustainable it is at this point?

We are seeing January starting off with a continuation of the trend we saw in November and December. So across a number of segments, we're in every segment given our scale, but we do see that continuing. I wish I could answer your second question. I would say we hope so. Some of it seems to be underpinned by the behavior of the American consumer, and everything we read about with respect to the impact of lower fuel prices and consumer sentiment in general being better, but a couple of months, maybe not a trend yet, but we are cautiously optimistic.

Thank you. And then if I could try and just translate if there's 5% growth in EBITDA, in terms of thinking about EPS, is it fair for us to take the $3, and presumably, hopefully we don't have the Ilim FX issue, so we're really starting at $3.63. And then if we think about 5% is roughly $200 million, that's about another $0.30. I guess there's some movements and tax rate and interest expense and corporate, but is that kind of directionally the way to think about translating the EBITDA to an EPS number, or are there other significant variables to be keeping in mind?

Mark, I think that's it. Of course, we have the Ilim FX issue, so that's in both -- it's in 2014 and it will be something in 2015, and you hit it, we gave some information on where we view the tax rate going and also the interest expense, so yes, you are directionally thinking about it correctly.

Thank you.

Gail Glazerman, UBS.

You took another big charge in Asia this quarter, and you took a big one in India within the last year. I'm just wondering, does that have any -- to what extent does that reflect how you are viewing the business potential moving forward, and also, how it may or may not impact your thinking in terms of further growth and investment in the region?

Yes, Gail, I'll just comment on the charge. As it is listed in our special charges, we did take the write-off of the goodwill that was associated with our Asian box business, the converting business. And as you pointed out, we wrote off the goodwill associated with India in the prior year. So relative to the comments about the business and the portfolio, I'll turn it over to Mark.

Thanks Carol. Good morning, Gail. The charges are really as Carol described. Our view on the businesses in any of these emerging markets is a long view, it's a difficult time in Asia right now, for a number of reasons, namely capacity issues.

We're very small in India, we still see some potential there. So I think we do have a long view on these markets, but as we've said before and I said in my earlier comments, we'll continue to evaluate as time goes on, almost on a continuous basis, the portfolio we're in and geographies and businesses, all against a backdrop of trying to do the things that create the most value long-term. So we're going to continue to look at our emerging markets. Sometimes you have to weather some storms, and I think that's what we're going through right now.

Okay, and in terms of coated paperboard business, can you talk about where you think we are in that process of conversion away from foam? Are we in the third inning, the eighth inning? And just taking kind of a broader global view, you referenced some of the challenges in Asia, but anything else as you look at the business globally, that gives you any concern?

Mike Amick is here, and he leads our consumer packaging business and our printing papers business, and I'll let Mike take a shot at your question, and then see if we get everything you were looking for. Mike?

Good morning, Gail. Good question, I like the analogy to baseball. I'm not sure exactly what inning, I would say we're probably early in the process. We continue to see very strong momentum in the space.

We had a good year in foodservice and the overall demand associated with that business, but I would probably characterize it as we're early on in this game, and probably in the first three innings. We expect to see continued improvement in this space as a result of the sustainability story associated with our product line.

I think, Gail, on the global part of that question, we have seen a lot of customer acceptance of higher-grade fiber-based packaging, so we make this new product at our Kwidzyn mill, it's been very well received. We're in segments of the consumer packaging market from a board manufacturing standpoint, not every segment, and the ones that we are in we think still have some runway, and still have a lot of interest by customers.

Okay and maybe that's a little bit of my segue to my last question. Obviously earlier in this week, we saw a big deal announced, particularly perhaps in the consumer packaging space. Do you think it's important for you, or would you consider expanding beyond, into other substrates? Is that something that you feel is holding you back at all in your business?

That's a great question, and it's something we evaluate constantly around whether or not a fuller line of products, and really in any of our business, brings value to customers. And sometimes the best place to ask that question is where the customer sits. It's something, Gail, we always evaluate, and you will probably see from time to time that we expand our offering. We did it in our corrugated packaging business. But I don't see that we are in a particular disadvantaged spot right now, but it is definitely something we continue to look at, as we should, as a value-creating opportunity for the Company.

Okay. Thank you.

Philip Ng, Jefferies.

Can you talk a little bit about inventory levels in containerboard? November was pretty lean and demand trend from most of the public companies that have reported suggested pretty strong flow-through on the demand side in the early part of the year, so can you give us a little color on that front?

Philip, I would be happy to. Demand in a quarter expected inventory needs to service customers in the next quarter. In the case of the first quarter, you start getting in annual outages, and just how we ran and operate all factor into where our inventories end up, despite our best efforts on planning where we want them to be. I'd say, with all that said, I believe we are in good shape from an inventory standpoint. Going into 2015, our inventories went down in the quarter, and we believe we've got the systems in place to operate in the first quarter without any interruptions, because our inventory is too low.

The one dynamic that we are dealing with, and I think a lot of people are dealing with, is the transportation network continues to be a little less flexible than it has been in the past, so that influences where we might need to see inventory levels, that might be different from what they were in the past, but I think we like where we are right now.

Okay, and Mark you referenced part of that constant on 5% type EBITDA growth for 2015 is partly driven by some of the high return projects that you have going forward. Can you talk about if it's mostly cost takeout, is it more growth related, is it domestic, is it international? Can you give us some color on that front?

I think it's some of the projects definitely -- some projects that we already started in 2014 that will benefit us in 2015, and I think it's a mix across domestic and the outside the US businesses, but given the scale of our business, obviously most of the driver is coming from some opportunities in our North American system. There's a little bit of volume -- or growth, I would say, in there, and it's areas where we think we have the ability, because of our customer portfolio, to grow even in a flat market environment. But the big driver is the first thing you mentioned, which is improving our cost structure and cost takeout.

Okay, and then just one final question for Carol. Can you give us some color on how you are thinking about free cash flow? I know you gave us some moving pieces on CapEx and D&A and pension contribution, but directionally should we expect free cash flow to be roughly flat, up, down? Some color on that front would be helpful.

I think [when we've got] the EBITDA number out there, I think the area you are going to see more cast use is in cash taxes. We had a number of one-off events that happened in 2014 that helped lower the cash taxes that are not repeatable, so I think we'll see more there. And then we talked about the CapEx going from [$1.4 billion] to [$1.5 billion], but again if you step back from it, will be another strong year of free cash flow for the Company.

Okay, thanks.

Al Kabili, Macquarie.

A question for Carol, or maybe even Tim if he's there. You mentioned some operational issues in the industrial packaging side at the mill in Texas and I think Indiana, and I was just wondering if you maybe can quantify or help us out with the extra costs related to that, that hopefully don't repeat there?

Yes, this is Carol. Unfortunately, Tim is home sick, so we've got the flu running around here in Memphis, but I will take a shot at it, and then I will see if my colleagues can add to it. So if you think about Orange, Texas, we had an outage in December. We found some issues that we chose to spend a little extra money on, and then we had a little difficulty coming up out of the outage, which cost us a little production, so we have that item.

And then you take our Indiana mill, where we had our supplier, our steam supplier there, had a catastrophic failure at their facility, which meant that we had to pay more for both electricity and steam, and that problem was with us most of the fourth quarter and is moderating. I'm looking at my colleagues, I think the swing on all of this is about $10 million to $15 million, should be a pick up we get heading in from the fourth to the first.

Okay, thank you, Carol, I appreciate that. And also in the context of the 5% EBITDA growth that we are targeting for 2015, how is inflationary expectations embedded in that? Do you see low oil prices materially factoring in that, and helping on the inflationary front?

That's a great question, and we take a look at a year like 2014 that we would say felt like a moderately low inflation year, and yet we still saw $141 million headwinds. So it's a big system, and small moves can matter a lot. So the things that are helping us, of course our energy, pull through into chemicals, diesel, wood cost is stubbornly high, but we've got our fingers crossed maybe we will see a turn there and OCC will depend on global economic conditions.

The headwinds we have though are, our transportation costs are going up, so we have puts and takes. So it's hard to say if it's going to be $100 million headwind or a $100 million tailwind. It's hard to predict how it will turn out. If the economic conditions stay strong, the likelihood of it being a little bit of a headwind is probably more likely, and that would be a good problem, so we'll just have to see. So that's a round answer, but that's about what it feels like right now.

Okay. All right. I appreciate that Carol and I'll turn it over. Thanks, and good luck.

Mark Wilde, Bank of Montreal.

Mark, I wonder just a broad question here, but I wonder if we can get your thoughts on the impact of FX across your portfolio, as we move into 2015?

That's a great question, Mark, and I think what I will do is I'll ask Carol to give you a high level puts and takes across the Company.

Yes, Mark, if you look at the business, and you know us well, the primary impact of FX is going to be less around the accounting, conversion of profits from euros to dollars, all of that stuff. It's going to have, the bigger impact is going to be around really the economic implications of what it does to trade flows, cost competitiveness, and where people sell their product and what we can charge for our products in different regions. If you step back from it, clearly the biggest impact is the strengthening US dollar.

For us, a stronger US dollar net-net will cost us -- it will lower our earnings, and I don't know that we have given this number out before, but if you think about a 10% depreciation in the dollar, it could be a $50 million-ish round number just from the accounting side of it. That doesn't speak to any of the economic implications of it. So we're hedged in a lot of places. We have weakening currency in Brazil and Russia, but we have a lot of dollar sales. But the biggest impact of course is, as we export a lot from a lot of places, and it will be trade flows that have the biggest impact.

Okay. Just another question on a couple of the foreign operations. I wondered if you are able to give us some time line on improvement down at Orsa, and I wonder over at Ilim, whether it's possible to give us a longer-term EBITDA margin target in that business?

Mark I think on Orsa, what I mentioned earlier is we made a lot of operational improvements, as we went through the year, and we expect to continue that. Where we have been challenged really is the on the commercial side, and so I think we're going to take advantage of whatever the market gives us, but we expect a difficult commercial environment in the box business in Brazil through 2015, at least with what we can see now.

But there are opportunities, continued opportunities to improve the operation of our recycled mills there and our box plants. And so I think when and I know it will happen, when the market improves, we will be well-positioned to take advantage of it. So I think you'll see internal improvements through 2015, and commercial improvements as the economy improves.

To Ilim, we still target and believe that under normal conditions, $600 million EBITDA is the target for the footprint of the platform we have built out, and depending upon the marginal match, probably in your upper 20% to 28%-ish approximately.

Okay, that's helpful. The last question I had, any updated thoughts on Courtland, and whether there's any potential to repurpose any portion of that mill, maybe similar to what you did of Franklin a few years ago?

Mark, as we always do, looked exhaustively at different opportunities for that asset, and there's nothing major that has come out of that work there. Maybe a couple of small opportunities that are still alive, but I don't see anything right now on the scale of Franklin.

Okay, that's really helpful, and good luck first quarter and through the year.

Alex Ovshey, Goldman Sachs.

Mark, first on the EBITDA guidance improvement of 5%, I think you had mentioned that it doesn't reflect much [volume] improvement. Would you be able to clarify for us what you are factoring in for your volumes in the North American industrial business, within your guidance for 2015?

I think what we've been looking at in terms of our plan and the backdrop against what I was talking about our earnings growth was about a 1% North American box market growth rate.

Got it. And on the cost side, a lot of talk about the inflationary pressure in freight. Can you just size the total cost for the Company for securing rail and truck? And what is the inflationary percentage that you are seeing on that cost base in 2015 versus 2014?

Tom's here, Tom Kadien, and he can take that question.

We look across our transportation spend. Really from rate increases we're looking at about a $40 million year-over-year cost increase, and then we obviously go and look to -- that's about somewhere in the 3% to 5%, whether you're talking rail or truck, and we are looking at ways to optimize supply chain systems, to chip away at that. So we usually typically don't experience the full impact of the rate increases. We are able to compensate, but $40 million is probably the number that we would plan for this year.

Okay, I appreciate that, very helpful. And last one from me on Ilim. Can you say how much free cash flow the business has generated in 2014, and what the uses were? I know you guys picked up a $56 million dividend which is great to see, but just wanted to know what the total free cash flow generation was? And maybe in terms of 2015 if you put up $600 million EBITDA in that business, how much free cash flow does that equate to, and how much could come back to the Company?

Let me give you a couple numbers, and I am going to let Jay look for it, and so this is more of a pro forma than it is an actual number right now. But if you think about a business that has $600 million of EBITDA, think about sustained CapEx as around $200 million. And then you've got taxes, and I think taxes in Russia were actually 20%-ish, and then you've got to service your debt. And so that's the question of how that will come over time, and how much leverage do we want to keep on the business? You can see that it's going to be a very nice cash flow generator if you do that math. The interest in 2014 was $70 million, so a lot of nice cash. And then the question is what you want to do with that cash, the dividend, to shareholders, or further reinvestment in the business are the options.

Got it. Great. I appreciate it, very helpful, thank you.

Adam Josephson, KeyBanc Capital Markets

A couple questions on the containerboard export situation, Mark or Carol. One, exports are obviously up substantially in the December quarter, despite the strengthening dollar and weakness in economies elsewhere. Do you have any thoughts as to why that happened, and can you shed any light on how much of that export surge was attributable to your sending board to European box plants?

Adam, I think the real driver of why the exports are up is most of what is exported is kraft liner, and that's what we export. And we saw actually improved demand for our kraft liner segment. So at the macro level some of the markets were soft in some of the kraft liner segments, which tends to be in some of the fresh food and humidity-proof segments. We saw improvement, so we had more customer demand, and a good percentage of that goes to our own box business in Europe.

Okay and just along similar lines, Mark, the trade press talked about the gap between domestic prices and export prices to Europe being unusually wide at the moment, about $170 a ton. Do you think that gap is sustainable, or would you expect a convergence over time between the two, for whatever reason?

I think the gap between a dollar pricing between domestic containerboard and export containerboard does have a normal control range, a lot of it's based on FX effects, and how containerboard is sold in different parts of the world. So in Latin America, for example, it's sold in dollars. No big change.

In Europe, some of it's sold in euros, but I think our view is, we've been doing this for a long time before the euro even came into existence. We've sold containerboard successfully $0.84 and we have sold it successfully at $1.45, and we're in it for the long-term. So I think that gap will move around, but it seems like it's in the normal band that you would see when currency moves around. And the bottom line is the customers that we have need kraft liner and we're going to supply it to them for those needs, and we'll make more money in some periods of time, we'll make less money in other periods of time, but it's a strategic segment for us.

Thanks a lot, Mark. I appreciate it.

Chip Dillon, Vertical Research Partners.

First question -- I was having trouble with my phone, is really more for Carol. And it's interesting, I noticed the tax rate going up from 26% to 31% to 33%, and I would suppose that increase has a lot to do with the mix of earnings, especially with the weaker currencies overseas. Is there anything going on that would make us think that tax rate will continue to move up in future years, or do you think this is a fair place to be? Or in fact, could it be lower in future years if, let's say, Brazil comes back?

I think the 26% was unusually low because we had the double year of two helpings of extenders and legislation. The 31% was more normal, as you would expect, and then the 33% goes up, because as you stated, we're going to have more US earnings. And with more US earnings the marginal rate on that's higher, so it's just going to change the ratio. I think for us, 33% is probably a good number to plan against, and of course, we will work well within the bounds to manage our ETR and our taxes, and do the things we can best to pay what we need to pay.

And a quick one, on Ilim I think before, we were using $1.5 billion of net debt, and now you're saying $1.3 billion, and I might be wrong on that. Did you pay off some of the debt that had been accrued there during the project?

No, that's around the dollars that we've got flowing in because these great operations and margins we've got, so we've got dollars that are sitting in the bank.

I got you. Okay. And then on the leverage, I noticed that with the pension and the adjustments for the operating leases, its 3.3 times, which is a bit above your long run target with the ratings agencies. Do you think that's going to necessarily cause you to slow down your share repurchases in 2015, all things being equal, or not?

I don't think so. I think we've got a great reputation with the rating agencies, and we've got really incredibly low discount rates, so rates go up, we'll mark that liability, we'll mark it again at the end of 2015, so we'll be talking to the agencies about our situation. But I don't think it will cause any significant shift in our strategy or our capital allocation at this point.

One last quick one. I think there was -- and I don't know who -- if this was accurate, but I saw a quote somewhere this morning that seemed like, Mark, you had suggested that growing in containerboard internationally is something that is important to IP, or certainly a potential avenue of growth. And I don't know if you could just talk a little bit about how you view the paperboard segment broadly defined in the US, and containerboard not outside the US, in terms of how those could be opportunities for IP to grow through acquisition?

Sure, Chip. I think what you saw was I think an interview, we were talking about opportunities to grow our packaging business, and the question was about North America. And I said in North America, our primary opportunities are in our box business, given where our position is in containerboard. And then I used the example of Orsa as a containerboard and box move, in a market where we can do that.

And obviously, as we've said, we're interested in generating shareholder return by doing what we do well, and that may include growing our packaging business globally. So that was the context of what I think you are referring to, and I think consumer packaging is definitely interesting for us, which I think is what you are talking about when you said paperboard, and industrial packaging, of course, is our driver for the company right now, and those are businesses we believe we have more opportunity in, and we'll continue to evaluate those opportunities.

Great. Thank you.

Chris Manuel, Wells Fargo.

Congratulations on a strong cash year. Wanted to ask a question, and I'll try to be careful how I ask this, but if we look at and dissect what you have laid out here thus far on the call, as I look at where you have outlined significant amounts of inflation or headwinds, both what you had in 2014 and looking forward to 2015, I think you mentioned wood inflation, wages, regulatory costs with Boiler MACT. Healthcare, utilities, transportation, et cetera. It strikes me that it's been almost two years since we've had any sort of recovery for inflation or any components.

As you sit today, how do you feel about the potential environment? We have demand that's seemingly much better, with opportunity to potentially recover some of these higher costs that you are seeing, and have to work through the system?

Chris, that was very carefully asked, but obviously, we never speculate on what we might do on pricing to recover cost. It's obviously a fundamental in business that you need to think about those things, and talking about what we might do in the future, what we've always talked about is the conditions that would need to be present for, it's much more complicated than just demand.

Okay, fair enough. Let me flip gears for a second to the paperboard business. It looks like you took almost as much down time in 4Q as you have over the last couple of years. Can you talk a little bit about where you are set up today there? Do you feel that you have got your inventory levels, or are you comfortable that got what you need done there, and you can operate more maybe in line with demand on a go-forward basis?

Chris, this is Mike Amick. Good question. We took some LLO in Q4, but we typically see a seasonal downturn in Q4, and obviously, we're working to match our supply to our customer demand. Overall, we feel good about our inventory levels. You can see what's happening with the industry inventory levels as well from the publications. So we feel pretty good about that. We have seen, as we expect to see in the first quarter, a little bit of a pickup in demand over the course of the last couple of weeks, and so we'll continue again to manage our supply to our demand, but feel pretty good right now.

Okay, thank you very much. Good luck.

Steve Chercover, D.A. Davidson.

I know it's hard to call a bottom on a currency or stock for that matter, but does it make sense to maybe hedge the ruble impact at some stage on the joint venture debt, or is the natural hedge of your operations sufficient?

It's a natural hedge, Steve, and the way we say it is we borrowed dollars and they are still the same dollars, so it's a non cash. So when you start hedging non-cash accounting things, you are incurring the cost without an economic benefit.

That's fine I suppose your JV partners of never been happier to get US dollar dividends.

Yes.

And then similarly I see that China, this has been touched on, but that's not listed as something that's going to be getting better in 2015, at least not on page 24. How long are you going to tolerate that, or is it much of a distraction to management?

That's such a good question, Steve. We've got a good team in China. They manage the business. It's not a distraction to management at all. And again, we wouldn't speculate on what we would do in all of our businesses. We evaluate them for the near-term, mid-term and long-term, and we look at China beyond what we just have in China. We view China as an important market for IP.

Carol talked about a big portion of the rationale for Ilim is all about China. We import products from the US to China that they need, like fluff pulp and containerboard, and we have operations in China. Think about China, we think about from the IP side, (technical difficulty) we think about all those activities and it's an important market, and we try to address it in different ways so I think we'll continue to look at that in all of those kinds of ways to serve that market and continue to evaluate as we go forward.

Thank you, and then one other perhaps oddball question. We're well aware that styrofoam cups are being phased out, and it appears that all kinds of styrofoam products are actually on the wane. So I'm wondering beyond bleach board are there other substrates where you can win perhaps even molded pulp for take-out containers?

Well I think to my earlier answer to a similar question, extending our products and know-how into new uses is something we look at constantly, to see if we can create value, and then going into adjacent spaces, where maybe we look at combining materials like fiber and something else, to make a better product. Again, most of those markets have valid competitors who are really good at what they do. So if we think about doing it, we think about it because we believe we can have a competitive advantage and that maybe complementary offerings with what we already do, would be a better solution for the customer. So yes it's on the table almost on a continuous basis, as part of our business planning and strategic inputs to our strategic plan that we do from the marketing teams.

Great, thanks for taking my questions.

Scott Gaffner, Barclays.

Mark, just looking at the EBITDA guidance for 2015, talking about 5% growth off of the $4.1 billion in 2014. If we compound that in getting to $5 billion of EBITDA for the Company, you were talking about four to five years until you actually reach, if you maintain growth at that 5% rate so you can get to $5 billion. Is there something in the next few years where you see the potential for acceleration in EBITDA growth within any of the businesses that could shorten that timeframe?

Scott, that's obviously what we work on every day, and we are not satisfied with our path toward our $5 billion. And we have talked about this before, one of the biggest misses we had a slightly better economic environment during that period, and we called it a mid-cycle target, mid-cycle demand, mid-cycle cost, and we probably haven't seen the demand side really. So a small amount of demand improvement really ratchets that performance up pretty quickly. And then, we've got more opportunities and some internal improvements that we can pull forward, but we really probably need a little bit better economic set of conditions to accelerate it in a meaningful way, lacking changing the Company in some way. What we have today is what we said we were focused on, getting $5 billion with the IP we have today.

Sure and a couple questions on the corrugated business. Specifically, you talked about the FX impact on exports. Sounds like minimal impact to your export business, or within the normal range. But when you look back historically FX, and the impact potentially on imports, is there a dollars shrink level where you actually start to see imports incentivized into the US, potentially disrupting some of the supply-demand balance that we have today?

Imports of containerboard have a lot more issues to manage than just the economic piece, so the US market, given the way it's constructed, who makes the boxes and those types of things makes importing containerboard a bit of a challenge. I don't know if there's a number. I guess there's always a number, but I don't think we see imports of containerboard in the US being a major issue.

Okay, and then just lastly, around e-commerce and the impact on the box business in North America. Any sort of additional work you've done to measure the impact of e-commerce? How that might have impacted the fourth quarter? Where it is as a percentage of sales, et cetera? Thanks.

As a market, that segment is still pretty small. As a segment of the US box market, I think it's 2% to 3% or something in that range, but it's growing at an impressive rate. Our business in that segment has been one of our high points, in the 15% to 20% growth range, and I think that's how much the segment is growing as well, in addition to our numbers. But I believe that's going to continue, but again, there are so many boxes in the US used for other things, and it will be a while before it's maybe a major segment. But the growth rate is exciting and corrugated gets to show its full value to the market in that supply chain, and so we're excited to be participating in that segment.

Thanks. Good luck in 2015.

Thank you, Scott.

Paul Quinn, RBC Capital Markets.

Two easy questions. One wondering if you can comment on last week there was a filing by four of your competitors, looking for anti-dumping duties, if you could comment on that. And you referenced the fluff pulp mix improvement, just if you could give a couple comments on your outlook for fluff, as well as NBSK for Ilim going forward?

Paul I will take the question from the anti-dumping case and I will ask Mike Amick to update you on pulp business. He has the pulp business in our paper sector. On the anti-dumping case, obviously we're aware of it. Our set of conditions are different than a lot of the other players. We have a global footprint in uncoated free sheet, and we rely on the flexibility of that network. So our view on that is probably a little different than some of the other companies that have remained in the complaint. But largely we make the printing papers around the world that we make for the local market or the regional market and import virtually nothing to the US, that's not made in the US, from our own operations.

Paul, this is Mike Amick. On your second question on fluff pulp, obviously you saw from the slide that the pulp business had a nice year-over-year improvement, and we feel pretty good about the pulp business. The mix has been a large part of that lever, as we've taken our mix up too close to three-quarters of our pulp, and we'll continue to drive that improvement lever, and feel pretty good about 2015.

Great, thanks. Best of luck.

Debbie Jones, Deutsche Bank.

If we can go back to your Brazil business, you are pointing to stable pricing and cost in Q1. I was just curious if there's a concern however that electricity prices could impact your paper and packaging business down there in the region for 2015?

That's definitely -- Debbie, it's definitely something we're watching. The electricity prices are very dependent on rainfall and water reservoir levels, and we dealt with those issues throughout 2014, it's not completely behind us by any stretch of the imagination. So it's a potential, we don't plan for everything that could go wrong going wrong, but we are watching it and putting contingency plans in for that exact potential.

Okay, and there has been discussion on the call about further expansion into new packaging outside the US, and I'm just wondering if Brazil, you did mention this before, if there are any opportunities down there for you, that you would see, that might be attractive?

We like what we have started in Brazil. It's not performing to our expectations, but we think we know how to fix it, and I think if we can show that we can do that, we would like to look at opportunities. Brazil is an interesting packaging market. There's opportunities to do organic moves, and there's opportunities to potentially make small acquisitions. There are no large, large players or anything like that so you have to build the business in a different way. But it is something we have interest in, and we'll only do it if we think we can create value doing it.

All right, thank you, and good luck in the quarter.

Anthony Pettinari, Citigroup.

Just a couple quick questions on domestic box markets. You know we saw some consolidation by independent corrugators last year and early this year, and some capacity coming online. I guess my first question is, are you seeing increased competitive pressure in any of the regional box markets where you compete? And then a related question, given price declines in OCC, are customers coming to you in any meaningful way and saying that they want more test liner and less kraft liner or are you seeing any kind of mix shift there?

Anthony, I think on the first part of your question, we've seen a normal level of competitive activity regionally as you mentioned, based on some new capacity being absorbed. I don't think anything's really changed third-quarter, fourth-quarter. We just kind of navigated through that process and obviously pushed some products probably to the export markets from the US. But we see that as kind of stable, and no real change as the year went on.

Again a little bit of growth probably helped in the fourth quarter, and would definitely help get that capacity to market in the 2015 period. There's no discussions about normal input cost like OCC, that would drive our customers to test liner. Our customers really talk to us about working collaboratively on what the best solution is, and sometimes, I wouldn't call it test liner in the US as much as I would call it a recycled blend of paper, but the performance specs are really what matter, and that's what the customers are interested in.

Okay, that's very helpful. And then maybe one follow-up. OCC prices have been weak for maybe a little bit longer than some of us had expected, and as you think about your 2015 internal projections, do you expect OCC to stay at these levels for the year, or do you expect some kind of recovery in OCC?

Well Anthony, that is obviously an important question. Every time we try to answer it, we're like everyone else, we are wrong, so we really don't know. We'll monitor it.

I think Carol mentioned earlier, OCC is going to be a function of global economic conditions, based on where the primary OCC containerboard is made. So Asia getting better would probably firm up OCC, and other markets like that. So I think we're going to watch it and be prepared for whatever happens, but we really have no way of knowing, generation is part of the impact, collection rates have improved throughout the world, so we'll probably be looking at a -- and I will say this and I will be wrong, a stable OCC year in 2015.

Okay. Fair enough. Thanks again.

And now I will turn the call back to Jay.

So we took a few extra questions this morning, so we will go ahead and wrap it up, we'll thank everyone for joining us and being on the call. And as always, Michelle and I are available after the presentation. Our phone numbers are on page 26. Have a great day.

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